HB-3-3560

Table of Contents

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION ............................................................................................ 1-1

SECTION 1: INTRODUCTION TO THE PROJECT SERVICING HANDBOOK...........................1-1

1.1 ABOUT THIS HANDBOOK.........................................................................................................1-1

1.2 COMPANION MULTI-FAMILY HOUSING HANDBOOKS .....................................................1-1

1.3 USING THIS HANDBOOK ..........................................................................................................1-2

A. Citations and Text Boxes..........................................................................................................1-2

B. Attachments and Appendices....................................................................................................1-2

C. Terminology .............................................................................................................................1-2

SECTION 2: OVERVIEW OF THE AGENCY’S MULTI-FAMILY HOUSING PROGRAMS.......1-5

1.4 GOALS OF RHS MULTI-FAMILY HOUSING PROGRAMS.....................................................1-5

1.5 SECTION 515 PROGRAM—OVERVIEW...................................................................................1-5

1.6 SECTION 514/516 PROGRAMS—OVERVIEW.........................................................................1-5

A. Section 514 Loans and Section 516 Grants for Off-Farm Housing ..........................................1-6

B. Section 514 Loans for On-Farm Housing .................................................................................1-6

SECTION 3: GENERAL PROGRAM REQUIREMENTS...................................................................1-7

1.7 CIVIL RIGHTS [7 CFR 3560.2]....................................................................................................1-7

A. Nondiscrimination ....................................................................................................................1-8

B. Reasonable Accommodations for Persons with Disabilities .....................................................1-8

C. Limited English Proficiency [7 CFR 3560.2]...........................................................................1-8

D. Civil Rights Impact Analysis....................................................................................................1-8

1.8 REVIEWS AND APPEALS [7 CFR 3560.9]................................................................................1-9

A. Informing Program Participants of Their Rights ......................................................................1-9

B. Adverse Decisions That Cannot Be Appealed ..........................................................................1-9

C. Informal Review.....................................................................................................................1-10

D. Mediation or ADR..................................................................................................................1-10

E. Appeal.....................................................................................................................................1-13

1.9 CONFLICT OF INTEREST [7 CFR 3560.10].............................................................................1-13

A. Borrower Disclosure...............................................................................................................1-14

B. Agency Employee Disclosure.................................................................................................1-14

C. Disposition of Real Estate Owned Properties..........................................................................1-14

1.10 OTHER FEDERAL REQUIREMENTS .....................................................................................1-15

A. Environmental Requirements [7 CFR 3560.3 and 3560.4].....................................................1-15

B. Construction Standards...........................................................................................................1-15

C. Lobby Restrictions..................................................................................................................1-15

D. Administrative Requirements.................................................................................................1-15
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1.11 EXCEPTION AUTHORITY [7 CFR 3560.8] ...........................................................................1-16

ATTACHMENT 1-A: EQUAL CREDIT OPPORTUNITY ACT (ECOA)

ATTACHMENT 1-B: ATTACHMENT TO LETTER NOTIFYING CUSTOMERS OF AN 

ADVERSE DECISION THAT IS APPEALABLE

ATTACHMENT 1-C: ATTACHMENT TO LETTER NOTIFYING CUSTOMERS OF AN 

ADVERSE DECISION THAT CANNOT BE APPEALED

ATTACHMENT 1-D: ATTACHMENT TO LETTER NOTIFYING CUSTOMERS OF 

UNFAVORABLE DECISION REACHED AS A RESULT OF AN 

INFORMAL REVIEW

ATTACHMENT 1-E: ATTACHMENT FOR NOTIFYING CUSTOMERS THAT REQUEST 

MEDIATION IN STATES WITH A USDA-SPONSORED MEDIATION 

PROGRAM

ATTACHMENT 1-F: ATTACHMENT FOR REQUESTING MEDIATION OR ALTERNATIVE 

DISPUTE RESOLUTION (ADR) SERVICES

ATTACHMENT 1-G: ATTACHMENT FOR NOTIFYING CUSTOMERS THAT REQUEST 

MEDIATION OR ALTERNATIVE DISPUTE RESOLUTION (ADR) OF 

SERVICE PROVIDER

ATTACHMENT 1-H: ATTACHMENT FOR NOTIFYING CUSTOMERS THAT REQUEST 

MEDIATION OR ALTERNATIVE DISPUTE RESOLUTION (ADR) OF 

POTENTIAL SERVICE PROVIDERS

ATTACHMENT 1-I: ATTACHMENT FOR NOTIFYING CUSTOMERS THAT MEDIATION OR 

ALTERNATIVE DISPUTE RESOLUTION (ADR) DID NOT RESULT IN 

RESOLUTION OF ISSUES

CHAPTER 2: MULTI-FAMILY HOUSING PROGRAMS AND LOAN SERVICING ... 2-1

2.1 INTRODUCTION..........................................................................................................................2-1

SECTION 1: SECTION 515 PROGRAM ...............................................................................................2-1

2.2 OVERVIEW...................................................................................................................................2-1

2.3 TYPES OF PROJECTS..................................................................................................................2-1

A. Family Projects.........................................................................................................................2-2

B. Elderly Projects.........................................................................................................................2-2

C. Congregate Projects..................................................................................................................2-2

D. Group Homes ...........................................................................................................................2-2

E. Rural Cooperative Housing.......................................................................................................2-2

F. Mixed Projects...........................................................................................................................2-3

2.4 TYPES OF LOANS .......................................................................................................................2-3

A. Initial Loans..............................................................................................................................2-3

B. Subsequent Loans.....................................................................................................................2-4

C. Assumed Loans.........................................................................................................................2-4

2.5 AGENCY RENTAL ASSISTANCE..............................................................................................2-4

2.6 PREFERENCE FOR PROJECTS THAT LEVERAGE OTHER FUNDS.....................................2-5

SECTION 2: SECTION 514/516 PROGRAM........................................................................................2-7

2.7 TYPES OF PROJECTS..................................................................................................................2-7

A. Off-Farm Labor Housing..........................................................................................................2-7
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B. On-Farm Labor Housing...........................................................................................................2-7

2.8 LOANS AND GRANTS ................................................................................................................2-7

A. Farm Labor Housing Loans......................................................................................................2-7

B. Farm Labor Housing Grants.....................................................................................................2-8

2.9 RENTAL ASSISTANCE .............................................................................................................2-8

2.10 PREFERENCE FOR PROJECTS THAT LEVERAGE OTHER FUNDS...................................2-8

SECTION 3: OVERVIEW OF MULTI-FAMILY PROJECT SERVICING ......................................2-9

2.11 KEY PROJECT SERVICING ACTIVITIES AND THIS HANDBOOK.....................................2-9

2.12 PROJECT SERVICING PROCEDURES FOR MULTI-FAMILY HOUSING PROJECTS .......2-9

A. Automated Systems (Chapter 3)..............................................................................................2-9

B. Account Servicing (Chapter 4) ..............................................................................................2-10

C. Ownership and Organizational Changes (Chapter 5).............................................................2-10

D. Determination of Project Suitability (Chapter 6)....................................................................2-10

E. Transfers of Project Ownership (Chapter 7)..........................................................................2-10

F. Security Restructuring Requests (Chapter 8).........................................................................2-10

G. Unauthorized Assistance (Chapter 9) ....................................................................................2-10

H. Compliance Violations, Defaults, and Workout Agreements (Chapter 10)............................2-11

I. Loan Restructuring (Chapter 11) ...........................................................................................2-11

J. Account Foreclosure and Liquidation (Chapter 12)...............................................................2-11

K. Other Special Cases (Chapter 13)..........................................................................................2-11

L. Management and Disposal of Real Estate Owned Property (Chapter 14)..............................2-11

M. Project Preservation (Chapter 15)..........................................................................................2-11

CHAPTER 3: AUTOMATED SYSTEMS. ............................................................................. 3-1

3.1 INTRODUCTION..........................................................................................................................3-1

3.2 MANAGEMENT INTERACTIVE NETWORK CONNECTION.................................................3-1

A. Background...............................................................................................................................3-1

B. Purpose and Capabilities...........................................................................................................3-2

C. Staff Responsibilities ................................................................................................................3-2

D. Benefits of MINC.....................................................................................................................3-3

E. Staff Training and Certification Requirements .........................................................................3-4

3.3 AUTOMATED MULTI-FAMILY HOUSING ACCOUNTING SYSTEM ..................................3-4

A. Purpose and Capabilities...........................................................................................................3-4

B. Staff Responsibilities ................................................................................................................3-4

C. Staff Training and Certification Requirements.........................................................................3-5

3.4 MULTI-FAMILY INFORMATION SYSTEM..............................................................................3-7

A. Purpose and Capabilities...........................................................................................................3-7

B. Major Components of MFIS.....................................................................................................3-8

C. Staff Responsibilities ................................................................................................................3-9

3.5 PREPAYMENT TRACKING AND CONCURRENCE ................................................................3-9

3.6 FURTHER INFORMATION .......................................................................................................3-10
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CHAPTER 4: ACCOUNT SERVICING ................................................................................ 4-1

4.1 INTRODUCTION..........................................................................................................................4-1

4.2 OVERVIEW...................................................................................................................................4-1

SECTION 1: ACCOUNT SERVICING REQUIREMENTS

[7 CFR 3560.403 AND 7 CFR 3560.404]...........................................................................4-1

4.3 LOAN PAYMENTS.......................................................................................................................4-1

4.4 LATE FEES (PASS ACCOUNTS ONLY)....................................................................................4-2

4.5 LATE FEE WAIVERS...................................................................................................................4-2

4.6 PAST DUE ACCOUNTS...............................................................................................................4-2

A. Past Due Payments...................................................................................................................4-2

B. Interest on Past Due Payments (PASS Accounts Only)............................................................4-3

C. Special Servicing Action ..........................................................................................................4-3

4.7 CONVERSION FROM DIAS TO PASS .......................................................................................4-3

4.8 FINAL LOAN PAYMENTS..........................................................................................................4-3

SECTION 2: PROCESSING TENANT CERTIFICATIONS ...............................................................4-5

4.9 OVERVIEW.................................................................................................................................4-5

4.10 REQUIREMENTS OF THE RULE .............................................................................................4-5

4.11 GENERAL PROCEDURES.........................................................................................................4-5

A. Timely Submission and Overage Charges for Late Submissions..............................................4-5

B. Waivers of Overage ..................................................................................................................4-5

C. Verification and Processing of Certifications............................................................................4-6

D. Approval of Subsidy.................................................................................................................4-6

SECTION 3: LOAN PAYMENT PROCESSING...................................................................................4-7

4.12 OVERVIEW.................................................................................................................................4-7

4.13 NOTIFICATION TO BORROWERS OF PAYMENTS DUE.....................................................4-7

A. Factors Used to Determine Payment Amount ..........................................................................4-7

B. Calculating Payment Amount...................................................................................................4-7

C. Borrower Verification Of Payment Data...................................................................................4-8

4.14 PAYMENT DUE DATES............................................................................................................4-8

4.15 PROCEDURES FOR PROCESSING PAYMENTS....................................................................4-9

A. Overview ..................................................................................................................................4-9

B. Borrower Submission .............................................................................................................4-10

C. Application of Payments.........................................................................................................4-12

4.16 ASSESSMENT OF LATE FEES ...............................................................................................4-13

A. Agency Approval of Waivers Procedures for Granting Late Fee Waivers .............................4-13

B. Required Submissions from Borrower to Receive a Waiver...................................................4-14

C. Notification upon Granting A Waiver ....................................................................................4-14

D. Denying Waivers....................................................................................................................4-14
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4.17 SPECIAL CIRCUMSTANCES.................................................................................................. 4-14

A. Reapplication of Payments ..................................................................................................... 4-14

B. Overpayments and Refunds.................................................................................................... 4-14

C. Recoverable and Nonrecoverable Cost Items......................................................................... 4-15

SECTION 4: ACCOUNT TRACKING AND SERVICING ................................................................4-15

4.18 OVERVIEW............................................................................................................................... 4-15

4.19 ACCOUNT TRACKING PROCEDURES................................................................................. 4-15

A. Conditions for Conversion from DIAS to PASS..................................................................... 4-15

B. Procedures for Conversion from DIAS to PASS .................................................................... 4-15

C. Account Reviews.................................................................................................................... 4-16

4.20 SERVICING ACCOUNTS THAT ARE 30 DAYS PAST DUE................................................ 4-16

4.21 SPECIAL CIRCUMSTANCES.................................................................................................. 4-16

A. Same Terms Transfers............................................................................................................ 4-16

B. Overpayments and Advance Regular Payments..................................................................... 4-16

SECTION 5: FINAL LOAN PAYMENT [7 CFR 3560.404]................................................................4-17

4.22 OVERVIEW............................................................................................................................... 4-17

4.23 PROCESSING FINAL LOAN PAYMENTS............................................................................. 4-17

A. Payment Amount Determined................................................................................................ 4-17

B. Funds Shifted from Supervised Bank Account. ..................................................................... 4-17

C. Forms Processed .................................................................................................................... 4-18

D. Payments Applied.................................................................................................................. 4-18

E. Security Documents Released................................................................................................ 4-18

F. Release of Interest in Insurance ............................................................................................. 4-18

G. Special Circumstances........................................................................................................... 4-19

H. State Supplements.................................................................................................................. 4-19

I. Redelegation of Authority...................................................................................................... 4-19

CHAPTER 5: OWNERSHIP AND ORGANIZATION CHANGES [7 CFR 3560.405] ..... 5-1 

5.1 INTRODUCTION.......................................................................................................................... 5-1 

5.2 OVERVIEW OF CHANGES REQUIRING PRIOR AGENCY CONSENT................................. 5-1 

5.3 REQUIREMENTS FOR OBTAINING AGENCY CONSENT..................................................... 5-1 

A. Overview ................................................................................................................................. 5-1 

B. Written Request ........................................................................................................................ 5-2 

C. Assumption of All Applicable Responsibilities by New Interests............................................ 5-3 

D. Assumption of Liability by Substitute General Partner............................................................ 5-3 

E. Satisfaction of Eligibility Requirements .................................................................................. 5-3 

5.4 BORROWER REQUESTS FOR CONSENT ................................................................................ 5-3 

5.5 AGENCY REVIEW OF BORROWER REQUESTS..................................................................... 5-3 

A. Overview .................................................................................................................................. 5-3 

B. Loan Servicer and State Director Actions................................................................................. 5-4 
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5.6 DOCUMENTATION OF CHANGES............................................................................5-4 

CHAPTER 6: PORTFOLIO AND PROPERTY ASSESSMENT...........................................6-1 

6.1 INTRODUCTION...................................................................................................6-1 

6.2 KEY STEPTS TO COMPLETING PORTFOLIO ASSESSMENT...........................................6-1 

A. Evaluation Tools and Asset Data Collection .....................................................................................6-2 

B. Property and Marketing Factors.................................................................................6-4 

C. Categorize the State's Properties..............................................................................6-12

D. Servicing Strategies...........................................................................................6-13

6.3 IMPLEMENTATION PLAN TO REMOVE PROPERTY FROM PROGRAM........................6-14

ATTACHMENT 6-1 Property Categorization Worksheet

CHAPTER 7: TRANSFERS OF PROJECT OWNERSHIP [7 CFR 3560.406] ......................7-1 

7.1 INTRODUCTION....................................................................................................7-1 

SECTION 1: OVERVIEW...........................................................................................7-3 

7.2 RDOBJECTIVES AND GUIDING PRINCIPLES........................................................7-3 

A. Objectives................................................................................................................................ 7-3 

B. Responsibilities ....................................................................................................................... 7-3 

C. Guiding Principles .................................................................................................................... 7-4 

D. Preliminary Transfer Thresholds.................................................................................................... 7-7 

7.3 KEY ANALYTICAL CONCEPTS.............................................................................................7-10 

A. Eligibility................................................................................................................................ 7-11

B. Feasibility ............................................................................................................................... 7-11

C. Improve or Maintain Risk Levels ........................................................................................... 7-11

7.4 DEFINITIONS ............................................................................................................................. 7-12

A. Transfer... ........................................................................................................................... ..7-12

B. Non-Program Transfers [7 CFR 3560.406(l)]... .................................................................... 7-13

C. Underwriting ......................................................................................................................... 7-13

D. Related Definitions .................................................................................................................. 7-13

7.5 CONDITIONS FOR TRANSFERS 

A. Conditions When a Transfer May Occur............................................................................... 7-15 

B. Types of Transfers.................................................................................................................. 7-16 

C. Coordination between RD Headquarters and State Offices..................................................... 7-16

7.6 PROCESSING A TRANSFER REQUEST.................................................................................. 7-17

A. Key Steps to Process a Transfer ............................................................................................. 7-18

B. Procedure for Incomplete Transfer Requests.......................................................................... 7-26
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C. Denial of Transfer Request.................................................................................................... 7-27

D. Payments Received while Transfer Pending... ...................................................................... 7-28

E. Uncompleted Transfer............................................................................................................ 7-29

SECTION 2: POLICY CONSIDERATIONS......................................................................................... 7-31

7.7 RENTS ......................................................................................................................................... 7-31

A. Budget/Reasonable Rents [7 CFR 3560.406(d)(2)]................................................................ 7-31

B. Conventional Rents for Comparable Units ("CRCU") Limitation

[7 CFR 3560.406(d)(2)]......................................................................................................... 7-32

C. Increased Basic Rents Because of New Debt Service ............................................................. 7-34

7.8 SALES PRICE ............................................................................................................................. 7-34

A. Limitations............................................................................................................................. 7-34

B. Equity Pay-Out (General) ....................................................................................................... 7-35

C. Equity Pay-Out During the Term of an Existing RUP ............................................................ 7-37

D. Non-Equity Compensation Payments ..................................................................................... 7-38

7.9 RETURN TO OWNER (RTO)..................................................................................................... 7-38

A. RTO in General ...................................................................................................................... 7-38

B. RTO Based on Low Income Housing Tax Credits (LIHTC)

Equity [7 CFR 3560.68] (Paragraph 5.12 of HB-1-3560)....................................................... 7-38

7.10 FEES TO DEVELOPER ........................................................................................................... 7-40

A. Developer Fees in General.................................................................................................... 7-40

B. Deferred Developer Fee......................................................................................................... 7-40

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7.11 LOW INCOME HOUSING TAX CREDITS (LIHTCs) .......................................................... 7-41

A. Relationship between Basic Rents and LIHTC Rents (General) ........................................... 7-41

B. Tax Credit Rents in LIHTC Transactions [7 CFR 3560.202(g)] .......................................... 7-42

C. Financial Viability When Basic Rents Exceed Maximum LIHTC Rents ... ......................... 7-42

7.12 OTHER POLICY CONSIDERATIONS................................................................................... 7-42

A. Principal and Interest during Construction............................................................................ 7-42

B. Transactions with Multiple Sources of Funds....................................................................... 7-43

SECTION 3: PRELIMINARY ASSESSMENT.................................................................................... 7-47

7.13 PRE-REQUEST CONSULTATION WITH BORROWER AND TRANSFEREE.................... 7-47

7.14 INITIAL RD REVIEW FOR COMPLETENESS...................................................................... 7-47

7.15 CONSULT WITH PDLD REGARDING UNUSUAL TRANSACTIONS................................ 7-47

SECTION 4: EVALUATING THE TRANSFEREE............................................................................. 7-49

7.16 DETERMINE TRANSFEREE ELIGIBILITY......................................................................... 7-49

A. U.S. Citizenship/Qualified Alien Status Requirements ... .................................................... 7-49

B. Organizational Requirements................................................................................................ 7-49

C. Legal Capability..................................................................................................................... 7-50

D. Additional Requirements for Existing Borrowers.................................................................. 7-50

E. Identity-of-Interest.................................................................................................................. 7-50

F. Insurance ................................................................................................................................ 7-51

G. Site Control........................................................................................................................... 7-51

H. Eligible Transferee................................................................................................................ 7-51

7.17 FINANCIAL REQUIREMENTS ............................................................................................... 7-51

7.18 MANAGEMENT CAPACITY .................................................................................................. 7-52

SECTION 5: EVALUATING THE PROJECT

[7 CFR 3560.406 (c) and (d)]............................................................................................ 7-53

7.19 DETERMINE PROJECT SUITABILITY................................................................................ 7-53

7.20 DETERMINE PROJECT ELIGIBILITY... .............................................................................. 7-53

A. Civil Rights Impact Analysis................................................................................................ 7-53

B. State Historic Preservation Office..........................................................................................7-53

C. Flood Hazard Determination................................................................................................. 7-54

D. Design Review...................................................................................................................... 7-54

E. Prohibited Conditions ............................................................................................................ 7-54

F. Other Project Eligibility Requirements.................................................................................. 7-54

7.21 CIVIL RIGHTS AND DISABILITY COMPLIANCE............................................................... 7-54

7.22 PHYSICAL INSPECTION......................................................................................................... 7-55

A. CNA Requirements............................................................................................................... 7-56

B. State Office Review of CNA...................................................................................................7-57

C. Finalize Detailed Repair and Rehabilitation Plans and Costs [7 CFR 3560.406(d)(7)]........... 7-57
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D. Required Repairs and the Repair Agreement.......................................................................... 7-58

E. Environmental Review [7 CFR 3560.406 (d)(4)]...................................................................7-59

F. Advance RD Approval Required for Third Party Funded Repairs... ...................................... 7-60

G. Reserve Must Be Adequate to Meet 20-Year Capital Needs Based on CNA.......................... 7-60

SECTION 6: EVALUATING FEASIBILITY (STEP 4)......................................................7-61

7.23 EVALUATE FEASIBILITY..............................................................................7-61

A. Analytical Template.....................................................................................7-61

B. Compliance Issues......................................................................................7-61

C. Repair Related Issues............................................................................................................ 7-61

D. Third Party Funding Issues................................................................................................... 7-61

E. Tenant Impact... ................................................................................................................... 7-62

F. Rents and the Proposed Operating Budget ............................................................................ 7-62

G. Sales Price/Equity Pay-Out.................................................................................................. 7-63

H. RD Loans............................................................................................................................... 7-63

I. Other Feasibility Issues.......................................................................................................... 7-64

SECTION 7: EVALUATING RD LOANS AND OVERALL RISK .............................................7-66

7.24 EXISTING RURAL DEVELOPMENT LOANS..................................................................... 7-66

A. New Terms or Same Terms (7 CFR 3560.406 (j))................................................................ 7-66

B. Existing Loans/New Terms-Amortization Period and Loan Term ........................................ 7-66

C. Existing Loans/New Terms-Interest Rate .............................................................................. 7-66

D. Closing Out an Existing Loan That Will Not be Assumed in Full........................................ 7-67

7.25 SUBSEQUENT RD LOANS [7 CFR 3560.406 (h) and (i)]..................................................... 7-67

7.26 VERIFY ADEQUATE SECURITY VALUE [7 CFR 3560.406 (d)(3)]................................... 7-68

7.27 ASSESS THE OVERALL RISK AND IMPACT ON RD

AND TENANTS....................................................................................................................... 7-68

A. Is the Potential for Financial Loss to RD Better or No Worse

Than With the Existing Borrower?........................................................................................ 7-68

B. Will Any Financial Impact on Current and Future Tenants be Reasonable? .......................... 7-68

C. Will Housing Conditions be Better or No Worse Than under the Current Borrower? ........... 7-70

7.28 COMPLETE AND VERIFY APPLICABLE FORMS.............................................................7-70

7.29 OBTAIN PDLD CONCURRENCE ...........................................................................................7-71

A. Equity Payout to Seller......................................................................................................... 7-72

B. Increased Debt Service Built Into the Basic Rents................................................................ 7-72

C. Increased Return to Owner... ................................................................................................ 7-72

D. Section 515 Loan Modified............................................................................7-72

E. Basic Rents Increase More Than $25 Per Month, and There Are Unassisted Tenants........... 7-73

F. Non-Equity Compensation.................................................................................................... 7-73

G. Exceptions to Regulations ..................................................................................................... 7-73
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H. Transfers Not Meeting Viability Criteria ("Transfers with Workout")............................. 7-73

I. Multifamily

Portfolio Revitalization (MPR) Program Tools................................................................. 7-74

J. Authorization .................................................................................... ...7-74

SECTION 8: MAKING THE DECISION........................................................................................ 7-75

7.30 OVERVIEW [7 CFR 3560.406 (k)]...................................................................................... 7-75

7.31 MAKING THE DECISION.................................................................................................. 7-76

A. Determine Current Loan Balances for Transfer................................................................ 7-76

B. Prepare the Closing Package............................................................................................. 7-76

C. Review Applicable Requirements with the Transferee ..................................................... 7-77

D. Determine New Restrictive Use Period Requirement... ................................................... 7-77

E. Prepare the Draft Letter of Conditions .............................................................................. 7-78

F. Prepare to Close the Transfer and Obligate the Subsequent Loan... ................................. 7-78

G. OGC Review.................................................................................................................... 7-78

H. Approve the Transfer........................................................................................................ 7-78

SECTION 9: IMPLEMENTING THE TRANSFER ...................................................................... 7-81

7.32 CLOSING THE TRANSFER............................................................................................... 7-81

A. Overview .......................................................................................................................... 7-81

B. Release the Seller from Liability...................................................................................... 7-81

C. Assign Leases to Transferee............................................................................................. 7-81

D. Assign Rental Assistance Agreement to Transferee......................................................... 7-81

E. Assign Other Agreements to Transferee............................................................................ 7-82

F. Shift Accounts, Funds, and Assets to Transferee (General) .............................................. 7-82

7.33 POST-CLOSING.................................................................................................................. 7-82

A. Inform Borrower of Administrative Responsibilities ....................................................... 7-82

B. Schedule a Follow-up Servicing Visit.............................................................................. 7-82

C. Monitor Rehabilitation Work ........................................................................................... 7-82

D. Reporting.............................................................................................7-82

E. Tenant Certifications ..............................................................................7-83

F. Identification of All Creditors.....................................................................7-83

G. Verify All AMAS/MFIS Data.....................................................................7-83

ATTACHMENT 7-A: REVITALIZATION GUIDANCE 

ATTACHMENT 7-B-1: TRANSFER APPLICATION DOCUMENTS 

ATTACHMENT 7-B-2: MFH TRANSFER & ASSUMPTION APPLICATION 

SUPPLEMENT ATTACHMENT 7-B-3: MFH TRANSFER & ASSUMPTION 

FINANCIAL STATEMENT CERTIFICATION 

ATTACHMENT 7-B-4: MFH TRANSFER & ASSUMPTION CERTIFICATION FOR 

CONTRACTS, GRANTS AND LOANS 

ATTACHMENT 7-C: TAX CREDIT RENTS IN TRANSFER TRANSACTIONS 

ATTACHMENT 7-D: TRANSFER REQUEST CHECKLIST 
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CHAPTER 8: SECURITY RESTRUCTURING REQUESTS. ............................................ 8-1 

8.1 INTRODUCTION.......................................................................................................................... 8-1 

SECTION 1: SUBORDINATIONS AND JUNIOR LIENS [7 CFR 3560.409].....................................8-1 

8.2 OVERVIEW................................................................................................................................... 8-1 

8.3 REQUIRED CONDITIONS........................................................................................................... 8-1 

8.4 EVALUATING BORROWER REQUESTS FOR SUBORDINATIONS

AND JUNIOR LIENS.................................................................................................................... 8-2 

8.5 PROCEDURES FOR AUTHORIZATION OF SUBORDINATIONS AND JUNIOR LIENS...... 8-4 

A. Borrower Requests ................................................................................................................... 8-4 

B. Processing Borrower Requests.................................................................................................. 8-4 

C. Recommendations to State Director.......................................................................................... 8-5 

D. Final Decision........................................................................................................................... 8-5 

E. Appraisal Procedures ................................................................................................................ 8-5 

8.6 POST-APPROVAL OF JUNIOR LIENS....................................................................................... 8-5 

SECTION 2: PARTIAL DISPOSITION OF SECURITY PROPERTY [7 CFR 3560.407] ...............8-7 

8.7 OVERVIEW ................................................................................................................................ 8-7 

8.8 ALLOWABLE ACTIONS INVOLVING THE PARTIAL DISPOSITION

OF SECURITY PROPERTY....................................................................................................... 8-7 

8.9 ALLOWABLE USES FOR PROCEEDS FROM PARTIAL DISPOSITION

OF SECURITY PROPERTY....................................................................................................... 8-8 

8.10 REQUIRED CONDITIONS FOR AGENCY CONSENT........................................................... 8-8 

8.11 PROCESSING BORROWER REQUESTS................................................................................. 8-8 

A. Borrower Submission ............................................................................................................... 8-9 

B. Agency Review......................................................................................................................... 8-9 

C. Agency Decision and Notice to Borrower .............................................................................. 8-10

8.12 AGENCY RELEASE OF SECURITY....................................................................................... 8-10

SECTION 3: LEASING OF SECURITY PROPERTY [7 CFR 3560.408].........................................8-11

8.13 OVERVIEW............................................................................................................................... 8-11

8.14 LEASES TO PUBLIC HOUSING AUTHORITIES .................................................................. 8-11

8.15 LEASE OF A PORTION OF THE SECURITY PROPERTY ................................................... 8-11

8.16 MINERAL LEASES .................................................................................................................. 8-11

SECTION 4: OTHER LIENS AGAINST A PROPERTY OR OTHER ASSETS

[7 CFR 3560.409 (d)]........................................................................................................8-13

8.17 OVERVIEW............................................................................................................................... 8-13

8.18 REQUIRED CONDITIONS....................................................................................................... 8-13

8.19 AGENCY PROCEDURES......................................................................................................... 8-13

CHAPTER 9: UNAUTHORIZED ASSISTANCE ................................................................. 9-1 

9.1 INTRODUCTION.......................................................................................................................... 9-1 

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SECTION 1: TYPES OF UNAUTHORIZED ASSISTANCE.............................................................. 9-1 

9.2 OVERVIEW.................................................................................................................................. 9-1 

9.3 ADDRESSING UNAUTHORIZED ASSISTANCE......................................................................9-2 

SECTION 2: IDENTIFYING UNAUTHORIZED ASSISTANCE [7 CFR 3560.703] ....................... 9-3 

9.4 OVERVIEW.................................................................................................................................. 9-3 

9.5 REQUIREMENTS FOR IDENTIFYING UNAUTHORIZED ASSISTANCE .............................9-3 

9.6 METHODS OF IDENTIFYING UNAUTHORIZED ASSISTANCE........................................... 9-3 

9.7 DOCUMENTATION OF UNAUTHORIZED ASSISTANCE..................................................... 9-4 

9.8 NOTICE TO RECIPIENT............................................................................................................. 9-4 

A. Agency Notice to Borrower..................................................................................................... 9-4 

B. Borrower Notice to Tenant ...................................................................................................... 9-5 

SECTION 3: CORRECTING UNAUTHORIZED ASSISTANCE...................................................... 9-7 

9.9 OVERVIEW ............................................................................................................................... 9-7 

9.10 ACCOUNT ADJUSTMENTS – AUDIT CASES ...................................................................... 9-7 

A. Unauthorized Loan ................................................................................................................. 9-7 

B. Unauthorized Subsidy Benefits Received Through Use of Incorrect Interest Rate ................. 9-8 

C. Unauthorized Interest Credit or Rental Assistance ................................................................. 9-8 

D. Unauthorized Grant Assistance............................................................................................... 9-8 

E. Cases Where Recipient Has Both Authorized and Unauthorized Loans Outstanding..............9-9 

F. Liquidation Pending................................................................................................................ 9-9 

G. Liquidation Not Initiated......................................................................................................... 9-9 

9.11 ACCOUNT ADJUSTMENTS – NONAUDIT CASES............................................................... 9-9 

SECTION 4: RECAPTURE OF UNAUTHORIZED ASSISTANCE TO BORROWERS ...............9-11

9.12 OVERVIEW...............................................................................................................................9-11

9.13 REQUIREMENTS FOR COLLECTING UNAUTHORIZED ASSISTANCE

[7 CFR 3560.705].......................................................................................................................9-11

9.14 AGENCY RECAPTURE OF UNAUTHORIZED ASSISTANCE ........................................... 9-12

A. Overview ................................................................................................................................9-12

B. Procedures for Collection of Unauthorized Assistance.......................................................... 9-13

9.15 REPAYMENT METHODS........................................................................................................9-18

9.16 FULL PREPAYMENT...............................................................................................................9-18

SECTION 5: RECAPTURE OF UNAUTHORIZED ASSISTANCE TO TENANTS.......................9-19

9.17 OVERVIEW...............................................................................................................................9-19

9.18 REQUIREMENTS FOR COLLECTION OF UNAUTHORIZED

ASSISTANCE TO TENANTS [7 CFR 3560.708] ....................................................................9-19

9.19 PROCEDURES FOR COLLECTION OF UNAUTHORIZED ASSISTANCE

TO TENANTS............................................................................................................................9-20

SECTION 6: REFERRAL OF DEBT TO THE UNITED STATES DEPARTMENT OF

TREASURY (TREASURY).....................................................................................................................9-23

9-20 GENERAL TREASURY REFERRAL REQUIREMENTS.......................................................9-23 

9.21 GENERAL TREASURY REFERRAL PROCESS ....................................................................9-23 
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SECTION 7: CONTINUATION OF LOAN ACCOUNTS. ................................................................. 9-25

9.22 OVERVIEW...............................................................................................................................9-25

9.23 REQUIREMENTS FOR CONTINUATION OF LOAN ACCOUNTS [7 CFR 3560.707]......9-25

9.24 AGENCY DECISION TO CONTINUE SERVICING ACCOUNT ......................................... 9-25

9.25 SERVICING OPTIONS IN LIEU OF LIQUIDATION OR LEGAL

ACTION TO COLLECT............................................................................................................9-25

A. Agency Actions......................................................................................................................9-26

B. Notice of Determination When Agreement is Not Reached ...................................................9-26

C. Reporting to OIG ....................................................................................................................9-26

D. Quarterly Reporting to the State Office ..................................................................................9-27

SECTION 8: ENFORCEMENT.............................................................................................................9-29

9.26 OVERVIEW...............................................................................................................................9-29

9.27 AGENCY ACTIONS FOR ENFORCEMENT AGAINST RECIPIENTS OF 

UNAUTHORIZED ASSISTANCE AND FOR IMPOSING CIVIL MONETARY

PENALTIES AGAINST BORROWER ENTITIES AND RELATED PARTIES .....................9-29

A. Liquidation .............................................................................................................................9-29

B. Legal Action to Enforce Collection ........................................................................................9-29

C. Double Damages.....................................................................................................................9-30

D. Equity Skimming....................................................................................................................9-31

E. Civil Monetary Penalties.........................................................................................................9-31

F. Money Laundering ..................................................................................................................9-38

G. Obstruction of Federal Audits ................................................................................................9-38

ATTACHMENT 9-A: GUIDE FOR CMP ASSESSMENT AND RECOMMENDATION

CHAPTER 10: COMPLIANCE VIOLATIONS, DEFAULTS, AND WORK-OUT 

AGREEMENTS [7 CFR 3560.453] ......................................................................................... 10-1 

10.1 INTRODUCTION......................................................................................................................10-1 

10.2 ADDRESSING COMPLIANCE VIOLATIONS AND DEFAULTS ........................................10-1 

SECTION 1: TYPES OF DEFAULTS [7 CFR 3560.452] ....................................................................10-3 

10.3 OVERVIEW...............................................................................................................................10-3 

10.4 MONETARY DEFAULT ..........................................................................................................10-3 

10.5 NONMONETARY DEFAULT..................................................................................................10-3 

SECTION 2: CONDITIONS OF CONCERN, COMPLIANCE VIOLATIONS,

AND DEFAULTS ............................................................................................................10-5 

10.6 AGENCY CLASSIFICATION SYSTEM................................................................................ 10-5 

10.7 FINDINGS ................................................................................................................................10-6 
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10.8 VIOLATIONS...........................................................................................................................10-6 

10.9 KEY STEPS IN ADDRESSING COMPLIANCE VIOLATIONS AND DEFAULTS.............10-6 

10.10 NOTIFICATION TO BORROWER OF SERVICING PROBLEMS .......................................10-7 

A. Preliminary Notification .........................................................................................................10-7 

B. Borrowers with Multiple Servicing Issues..............................................................................10-8 

10.11 EVALUATING THE PROJECT..............................................................................................10-9 

10.12 MEETING WITH THE BORROWER.................................................................................... 10-9 

10.13 SELECTING SERVICING OPTIONS.................................................................................... 10-9 

A. Poor Management and Noncompliance with Program Requirements.....................................10-9 

B. Acceptable Management, but Marketability and Cash Flow Problems.................................10-10

C. Acceptable Management, but Lack of Project Demand........................................................10-10

10.14 THE PROBLEM CASE REPORT .........................................................................................10-11

10.15 ENFORCEMENT ACTIONS ................................................................................................10-11

A. Liquidation ...........................................................................................................................10-11

B. Debt Settlement.....................................................................................................................10-12

SECTION 3: DEVELOPING A WORK-OUT AGREEMENT [7 CFR 3560.453].......................... 10-13

10.16 OVERVIEW OF WORK-OUT AGREEMENTS...................................................................10-13

10.17 CONDITIONS WARRANTING A WORK-OUT AGREEMENT........................................10-13

A. Financial Deficiencies...........................................................................................................10-13

B. Physical Deficiencies............................................................................................................10-13

C. Fair Housing Deficiencies.....................................................................................................10-14

D. Occupancy Deficiencies .......................................................................................................10-14

10.18 ELIGIBILITY FOR WORK-OUT AGREEMENTS..............................................................10-14

A. Program Property..................................................................................................................10-14

B. Owner Evaluation .................................................................................................................10-14

10.19 CONTENT OF A WORK-OUT AGREEMENT....................................................................10-14

10.20 CONDITIONS PLACED ON THE BORROWER.................................................................10-14

10.21 PRIORITIES IN MEETING EXPENDITURES ....................................................................10-15

10.22 LENGTH OF TERM AND AUTHORITIES .........................................................................10-16

A. Term of Work-Out Agreement .............................................................................................10-16

B. Authority to Approve Work-Out Agreements.......................................................................10-17

10.23 AGENCY REVIEW AND APPROVAL [7 CFR 3560.453(b)].............................................10-17

A. Evaluation of Work-Out Agreement.....................................................................................10-17

B. Procedures Following Approval of Agreement ....................................................................10-18

10.24 CANCELING A WORK-OUT AGREEMENT .....................................................................10-18

SECTION 4: SPECIAL SERVICING ACTIONS ............................................................................. 10-19

10.25 SPECIAL SERVICING ACTIONS THAT MAY BE A PART OF A WORK-OUT 

AGREEMENT........................................................................................................................10-19
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A. Servicing Actions to Change Project Operations..................................................................10-19

B. Changes to the Loan Account...............................................................................................10-23

SECTION 5: MONITORING THE WORK-OUT AGREEMENT AND

SUBSEQUENT SERVICING.......................................................................................10-25

10.26 MONITORING WORK-OUT AGREEMENTS ....................................................................10-25

10.27 SUBSEQUENT SERVICING AND IMPACT ON FUTURE LOANS ................................. 10-25

SECTION 6: SPECIAL NOTE RENTS (SNR)...................................................................................10-27

10.28 OVERVIEW OF SPECIAL NOTE RENTS [7 CFR 3560.210] ............................................10-27

10.29 SNR ELIGIBILITY REQUIREMENTS.................................................................................10-27

A. Required Project Conditions................................................................................................. 10-27

B. Borrower Requirements. .......................................................................................................10-27

10.30 SUBMITTING AND PROCESSING SNR REQUESTS.......................................................10-28

10.31 CHANGES TO AND TERMINATION OF SNRS................................................................10-28

10.32 RESTRICTION ON NEW UNITS.........................................................................................10-29

SECTION 7: ENFORCEMENT...........................................................................................................10-31

10.33 MULTI-FAMILY HOUSING ENFORCEMENT TEAM......................................................10-31

10.34 REQUESTING ENFORCEMENT TEAM SERVICES.........................................................10-31

CHAPTER 11: LOAN RESTRUCTURING ......................................................................... 11-1 

11.1 INTRODUCTION......................................................................................................................11-1 

SECTION 1: ALLOWABLE TYPES OF RESTRUCTURING ..........................................................11-1 

11.2 OVERVIEW...............................................................................................................................11-1 

11.3 LOAN AGREEMENT OR LOAN RESOLUTION

CONSOLIDATION REQUIREMENTS [7 CFR 3560.410]......................................................11-2 

11.4 LOAN CONSOLIDATION REQUIREMENTS [7 CFR 3560.410]..........................................11-2 

11.5 REAMORTIZATION REQUIREMENTS [7 CFR 3560.455 (b)] .............................................11-2 

11.6 LOAN ADJUSTMENT (WRITEDOWN) REQUIREMENTS [7 CFR 3560.455(c)]................11-3 

SECTION 2: LOAN AGREEMENT OR LOAN RESOLUTION/LOAN CONSOLIDATION .......11-3 

11.7 OVERVIEW...............................................................................................................................11-3 

11.8 BORROWER SUBMISSIONS ..................................................................................................11-3 

A. Loan Agreement or Loan Resolution Consolidation...............................................................11-3 

B. Loan Consolidation.................................................................................................................11-4 

11.9 AGENCY PROCESSING OF BORROWER SUBMISSIONS..................................................11-4 

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A. Loan Agreement or Loan Resolution Consolidation...............................................................11-4 

B. Loan Consolidation.................................................................................................................11-5 

SECTION 3: LOAN REAMORTIZATION..........................................................................................11-7 

11.10 OVERVIEW.............................................................................................................................11-7 

11.11 ACCEPTABLE USES OF REAMORTIZATIONS ................................................................. 11-7 

A. Allowable Conditions for Reamortizations.............................................................................11-7 

B. Requirements for Obtaining a Reamortization........................................................................11-8 

11.12 BORROWER SUBMISSIONS ................................................................................................11-8 

11.13 AGENCY REVIEW AND APPROVAL..................................................................................11-8 

A. Field Office Actions...............................................................................................................11-8 

B. Evaluating Borrower Requests ...............................................................................................11-8 

C. Approval Recommendation and State Office Review ............................................................11-9 

D. National Office Exception ......................................................................................................11-9 

E. OGC Guidance......................................................................................................................11-10

F. Agency Denial of Request.....................................................................................................11-10

11.14 ADDITIONAL EVALUATION FOR REQUESTS INVOLVING

DELINQUENCIES OR COMPLIANCE VIOLATIONS.......................................................11-10

A. Project Feasibility .................................................................................................................11-10

B. Property is Adequately Maintained.......................................................................................11-10

C. Housing Remains Affordable................................................................................................11-11

D. Compliance with Agency Regulations is Maintained ...........................................................11-11

11.15 PROCESSING REAMORTIZATIONS .................................................................................11-11

A. Complete Reamortization Agreement..................................................................................11-11

B. Obtain Form RD 3560-52 and Assumption Agreement.......................................................11-11

C. Establish End of the Reamortization Period ........................................................................11-11

D. Establish Interest Rate..........................................................................................................11-12

E. Address Delinquent Reserve Accounts................................................................................11-12

F. Obtain OGC Guidance As Needed ......................................................................................11-13

G. Execute New Interest Credit Agreement..............................................................................11-13

H. Close the Reamortization.....................................................................................................11-13

I. Meet Other Procedural Requirements..................................................................................11-13

SECTION 4: LOAN WRITEDOWNS................................................................................................. 11-15

11.16 OVERVIEW...........................................................................................................................11-15

11.17 ALLOWABLE USES.............................................................................................................11-15

11.18 BORROWER SUBMISSIONS ..............................................................................................11-15

11.19 AGENCY REVIEW AND APPROVAL................................................................................11-16

A. Appraisal ..............................................................................................................................11-16

B. OGC Advice .........................................................................................................................11-16

C. Approval...............................................................................................................................11-16

11.20 PROCESSING WRITEDOWNS............................................................................................11-16
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CHAPTER 12: ACCOUNT LIQUIDATION [7 CFR 3560.456] ......................................... 12-1 

12.1 INTRODUCTION......................................................................................................................12-1 

SECTION 1: MAKING THE DECISION TO LIQUIDATE................................................................12-1 

12.2 AN OVERVIEW OF LIQUIDATION OPTIONS .....................................................................12-1 

A. Voluntary Liquidation.............................................................................................................12-1 

B. Foreclosure .............................................................................................................................12-2 

C. Acquisition of Chattel Property...............................................................................................12-2 

12.3 NET RECOVERY VALUE........................................................................................................12-2 

A. Establishing Market Value......................................................................................................12-3 

B. Environmental Considerations................................................................................................12-3 

C. Ordering an Appraisal.............................................................................................................12-4 

D. Holding Period........................................................................................................................12-5 

E. Deductions from Market Value...............................................................................................12-5 

F. Additions to Market Value ......................................................................................................12-6 

12.4 BASIC SECURITY LOSS .........................................................................................................12-6 

12.5 ACCOUNT LIQUIDATION......................................................................................................12-6 

A. Making the Decision to Liquidate ..........................................................................................12-6 

B. Possible Outcomes of Agency’s Decision to Liquidate ......................................................... 12-7 

SECTION 2: LIQUIDATION PROCEDURES .................................................................................... 12-9 

12.6 OVERVIEW...............................................................................................................................12-9 

12.7 VOLUNTARY CONVEYANCE...............................................................................................12-9 

A. Payment of Liens....................................................................................................................12-9 

B. Required Components of an Offer of Voluntary Conveyance. ...............................................12-9 

C. Appraisals.............................................................................................................................12-10

D. Decisions..............................................................................................................................12-10

E. Closing of Conveyance .........................................................................................................12-11

12.8 FORECLOSURE......................................................................................................................12-11

A. Making the Acceleration Decision.......................................................................................12-11

B. Acceleration.........................................................................................................................12-12

C. Review of the Acceleration Decision...................................................................................12-13

D. Transfers and Subsequent Loans During Foreclosure..........................................................12-13

E. Foreclosure Notice...............................................................................................................12-13

F. Determining the Government’s Bid at Foreclosure Sale ......................................................12-14

G. After Foreclosure .................................................................................................................12-14

12.9 ACQUISITION OF CHATTEL PROPERTY ......................................................................... 12-14

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SECTION 3: DEBT SETTLEMENT....................................................................................................12-17

12.10 BORROWER ELIGIBILITY .................................................................................................12-17

12.11 APPLICATION REQUIREMENTS.......................................................................................12-17

12.12 COMPROMISE AND ADJUSTMENT .................................................................................12-18

A. Secured Debts.......................................................................................................................12-18

B. Unsecured Debts...................................................................................................................12-18

C. Handling Payments...............................................................................................................12-19

D. Delinquent Adjustment Agreement ......................................................................................12-19

12.13 CHARGE-OFF .......................................................................................................................12-19

12.14 CANCELLATION .................................................................................................................12-19

A. Cancellation with Application ..............................................................................................12-20

B. Cancellation without Application..........................................................................................12-20

C. Processing and Approving Cancellations..............................................................................12-20

12.15 REFERRAL TO THE DEPARTMENT OF TREASURY .....................................................12-20

ATTACHMENT 12-A: NET RECOVERY VALUE WORKSHEET

CHAPTER 13: OTHER SPECIAL CASES [7 CFR 3560.458 through 3560.459] ............ 13-1

13.1 INTRODUCTION......................................................................................................................13-1

SECTION 1: PROPERTY ISSUES .......................................................................................................13-1

13.2 OVERVIEW OF PROPERTY ISSUES .....................................................................................13-1

13.3 ABANDONMENT.....................................................................................................................13-2

A. Indicators of Abandonment ....................................................................................................13-2

B. Contacting Prior Lien Holders................................................................................................13-2

C. Making Emergency Health and Safety Repairs......................................................................13-2

D. Appointing a Caretaker or Management Agent ......................................................................13-3

E. Addressing the Agency’s Relationship with the Borrower .....................................................13-4

13.4 VALUELESS LIENS.................................................................................................................13-4

A. Declaring a Valueless Lien.....................................................................................................13-4

B. Documenting Valueless Liens ................................................................................................13-5

13.5 OTHER SECURITY ..................................................................................................................13-5

13.6 OBTAINING ADDITIONAL SECURITY TO PROTECT AGENCY INTERESTS................13-5

A. State Director Authorization...................................................................................................13-6

B. OGC Advice ...........................................................................................................................13-6

13.7 SECURITY ISSUES INVOLVING PROJECTS WITH PARTICIPATION LOANS...............13-6

SECTION 2: BORROWER ISSUES .....................................................................................................13-7

13.8 OVERVIEW OF BORROWER ISSUES...................................................................................13-7

13.9 REQUIREMENTS FOR ADDRESSING BORROWER ISSUES.............................................13-7

A. Bankruptcy .............................................................................................................................13-7
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B. Divorce ...................................................................................................................................13-7

C. Membership Liability Agreements .........................................................................................13-8

CHAPTER 14: MANAGEMENT AND DISPOSAL OF REAL ESTATE OWNED 

PROPERTY ................................................................................................. 14-1

14.1 INTRODUCTION......................................................................................................................14-1

14.2 OVERVIEW OF THE CHAPTER.............................................................................................14-1

SECTION 1: MANAGEMENT OF CUSTODIAL AND REO PROPERTY ......................................14-3

14.3 OVERVIEW...............................................................................................................................14-3

14.4 MANAGEMENT METHODS AND CONTRACTS .................................................................14-3

A. Selecting a Management Contractor.......................................................................................14-3

B. Management Contract Requirements......................................................................................14-4

C. Management Costs..................................................................................................................14-4

D. Project Funds..........................................................................................................................14-4

14.5 TAKING POSSESSION ............................................................................................................14-4

A. Taking Custodial Possession ..................................................................................................14-4

B. Acquiring an REO Property....................................................................................................14-5

14.6 INSPECTING AND SECURING CUSTODIAL AND REO PROPERTY ...............................14-6

A. Inspecting and Classifying the Property .................................................................................14-6

B. Securing Custodial and REO Property....................................................................................14-7

14.7 DISPOSITION OF NONSECURITY PROPERTY ...................................................................14-7

A. Custodial Property..................................................................................................................14-7

B. REO Property..........................................................................................................................14-8

14.8 TAXES AND INSURANCE......................................................................................................14-8

A. Taxes......................................................................................................................................14-8

B. Insurance.................................................................................................................................14-9

14.9 PHYSICAL MAINTENANCE AND REPAIR......................................................................... 14-9

A. Vandalism and Theft ............................................................................................................14-10

B. Off-Site Repairs or Improvements........................................................................................14-10

14.10 SPECIAL USES OF REO ......................................................................................................14-10

A. Transitional Housing for the Homeless ................................................................................14-10

B. Mineral Leases......................................................................................................................14-11

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SECTION 2: DISPOSITION OF REO PROPERTY [7 CFR 3560.503]............................................14-13

14.11 OVERVIEW...........................................................................................................................14-13

A. Sale Methods and Pricing .....................................................................................................14-13

B. Financing ..............................................................................................................................14-13

C. Warranty ...............................................................................................................................14-13

14.12 PRICING AND SALES SCHEDULES..................................................................................14-13

A. Appraisals.............................................................................................................................14-14

B. Sales Schedules and Administrative Price Reductions .........................................................14-14

14.13 MARKETING AND ADVERTISEMENT.............................................................................14-15

A. Fair Housing and Affirmative Fair Housing Marketing Plan................................................14-16

B. Truth in Lending Requirements............................................................................................14-16

C. Advertising and Marketing Methods.....................................................................................14-16

D. Review of Marketing for Unsold Properties.........................................................................14-17

14.14 SPECIAL MARKETING TECHNIQUES .............................................................................14-17

A. Buyer Incentives...................................................................................................................14-17

B. Broker Incentives..................................................................................................................14-17

C. Acquisition of Land, Easements, or Rights-of-Way to Effect Sale........................................14-18

14.15 REO PROPERTY NOT MEETING PHYSICAL STANDARDS..........................................14-18

A. Notice of Occupancy Restriction..........................................................................................14-19

B. Quitclaim Deed Restrictive Covenant...................................................................................14-19

C. Release of Restrictive Covenant ...........................................................................................14-20

14.16 DISPOSITION BY PUBLIC DRAWING..............................................................................14-20

A. Listing the Property ..............................................................................................................14-21

B. Submission Requirements.....................................................................................................14-22

C. Receiving and Considering Offers........................................................................................14-22

D. Cancellation of Sales Contracts............................................................................................14-23

14.17 DISPOSITION BY SEALED BID OR AUCTION................................................................14-23

A. Establishing the Minimum Acceptable Offer .......................................................................14-23

B. Publicizing the Sale...............................................................................................................14-23

C. Sealed Bid Procedures..........................................................................................................14-23

D. Auction Procedures...............................................................................................................14-25

14.18 NEGOTIATED SALE............................................................................................................14-26

14.19 DISPOSAL OF PROPERTY FOR SPECIAL PURPOSES....................................................14-26

14.20 DISPOSAL AS CHATTEL OR SALVAGE..........................................................................14-26

SECTION 3: ENVIRONMENTAL REQUIREMENTS ....................................................................14-27

14.21 OVERVIEW............................................................................................................................14-27

14.22 PROPERTY LOCATED WITHIN A SPECIAL FLOOD OR MUDSLIDE

HAZARD AREA OR CONTAINS WETLANDS .................................................................14-27

14.23 COASTAL BARRIER RESOURCES SYSTEMS.................................................................14-28
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14.24 NATIONAL REGISTER OF HISTORIC PLACES...............................................................14-28

14.25 UNDERGROUND STORAGE TANKS (UST).....................................................................14-28

14.26 MANAGEMENT OF HAZARDOUS SUBSTANCES AND PETROLEUM PRODUCTS.14-28

14.27 LEAD-BASED PAINT............................................................................................................14-29

14.28 PROTECTIVE COVENANTS RESTRICTIONS AND EASEMENTS .................................14-29

SECTION 4: PROCESSING AND CLOSING ...................................................................................14-31

14.29 OVERVIEW...........................................................................................................................14-31

14.30 SPECIAL NOTICES AT SALE..............................................................................................14-31

14.31 INSPECTION.........................................................................................................................14-32

14.32 PRORATING REAL ESTATE TAXES AND/OR ASSESSMENTS....................................14-32

14.33 COMMISSIONS ....................................................................................................................14-32

14.34 TRANSFERRING TITLE......................................................................................................14-32

14.35 REPORTING SALE...............................................................................................................14-32

SECTION 5: PROCESSING CREDIT SALES ON NON-PROGRAM TERMS ...........................14-33

14.36 OVERVIEW...........................................................................................................................14-33

14.37 TERMS OF A NON-PROGRAM CREDIT SALE................................................................14-33

14.38 ACCEPTING OFFERS ..........................................................................................................14-33

14.39 APPROVAL...........................................................................................................................14-34

14.40 CLOSING SALE....................................................................................................................14-34

14.41 SERVICING THE NON-PROGRAM LOAN........................................................................14-35

ATTACHMENT 14-A: LEAD-BASED PAINT DISCLOSURE FORM

CHAPTER 15: PROJECT PRESERVATION..................................................................... 15-1

15.1 INTRODUCTION......................................................................................................................15-1

15.2 OVERVIEW OF THE CHAPTER.............................................................................................15-1

SECTION 1: PRESERVATION AND ELIGIBILITY FOR PREPAYMENT ...................................15-3

15.3 OVERVIEW .............................................................................................................................15-3

15.4 BORROWERS ELIGIBLE TO REQUEST PREPAYMENT [7 CFR 3560.652].....................15-3

15.5 MEETING WITH THE BORROWER .....................................................................................15-3

15.6 TENANT NOTIFICATION REQUIREMENTS [7 CFR 3560.654] ........................................15-4

15.7 REQUIREMENTS FOR PREPAYMENT REQUESTS [7 CFR 3560.653].............................15-5

15.8 RECEIPT OF PREPAYMENT REQUESTS............................................................................15-6

15.9 COMPLETENESS REVIEW....................................................................................................15-6

15.10 DETERMINATION OF PREPAYMENT FEASIBILITY........................................................15-7

A. Borrower’s Funds...................................................................................................................15-7

B. Third-Party Lender .................................................................................................................15-8

C. Sale .........................................................................................................................................15-8

15.11 ELIGIBILITY DETERMINATION.........................................................................................15-8
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SECTION 2: LOANS CLOSED BEFORE 1979 OR LOANS WITH NO RESTRICTIVE 

AGREEMENTS.................................................................................................................15-9

15.12 PREPAYMENT WAITING LIST............................................................................................15-9

15.13 MAKING THE INCENTIVE OFFER—OVERVIEW.............................................................15-9

15.14 GENERAL INCENTIVE OFFER............................................................................................15-9

15.15 SPECIFIC INCENTIVE REQUIREMENTS [7 CFR 3560.656] .............................................15-9

15.16 TYPES OF INCENTIVES [7 CFR 3560.656(c)]...................................................................15-10

A. Rental Assistance..................................................................................................................15-11

B. Increase in Annual Return ....................................................................................................15-11

C. Excess HUD Section 8 Rents................................................................................................15-11

D. Project Conversion or Modification of Interest Rate ............................................................15-11

E. Agency Equity Loans............................................................................................................15-11

F. Third-Party Equity Loans......................................................................................................15-12

15.17 DEVELOPMENT OF THE INCENTIVE OFFER ................................................................15-12

15.18 AGENCY OFFER OF INCENTIVES....................................................................................15-12

15.19 BORROWER ACCEPTANCE OF INCENTIVES AND SUBSEQUENT ACTIONS

[7 CFR 3560.657]...................................................................................................................15-13

A. Borrower Acceptance ...........................................................................................................15-13

B. Closing the Incentive Offer...................................................................................................15-13

C. Transfers...............................................................................................................................15-14

15.20 INSUFFICIENT FUNDING FOR INCENTIVES..................................................................15-14

15.21 BORROWER REJECTION OF INCENTIVE OFFER AND SUBSEQUENT ACTIONS

[7 CFR 3560.658]...................................................................................................................15-14

15.22 DETERMINATION OF PREPAYMENT IMPACT..............................................................15-16

A. Prepayment Impact on Projects without Rental Assistance ..................................................15-16

B. Prepayment Impact on Projects with Rental Assistance .......................................................15-17

C. Processing the Prepayment ...................................................................................................15-18

D. Monitoring Compliance with the Use Restrictions...............................................................15-18

SECTION 3: LOANS CLOSED BETWEEN 1979 AND 1989 WITH A RESTRICTIVE 

AGREEMENT.................................................................................................................15-19

15.23 APPLICABILITY...................................................................................................................15-19

15.24 REQUEST BORROWER TO REMAIN IN PROGRAM. .....................................................15-19

15.25 SALE TO A NONPROFIT OR PUBLIC BODY [7 CFR 3560.659].....................................15-19

15.26 ESTABLISHING THE PROJECT VALUE...........................................................................15-20

15.27 MARKETING REQUIREMENTS.........................................................................................15-20

15.28 SELECTING AN OFFER ......................................................................................................15-21

15.29 LOANS MADE BY THE AGENCY OR OTHER SOURCES TO NONPROFIT 

ORGANIZATIONS AND PUBLIC AGENCIES...................................................................15-22

15.30 POSTSALE REQUIREMENTS.............................................................................................15-23

15.31 REQUIREMENTS FOR BORROWERS IF AN ACCEPTABLE PURCHASER IS

NOT FOUND .........................................................................................................................15-24

SECTION 4: SPECIAL CIRCUMSTANCES.....................................................................................15-25

15.32 PROPERTIES UNDER BANKRUPTCY OR FORECLOSURE...........................................15-25

15.33 ADVANCE PAYMENT OF ACCOUNTS........................................................................... 15-25
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ATTACHMENT 15-A: OVERVIEW OF PREPAYMENT PROCESS

ATTACHMENT 15-B: EXPLANATION OF INCENTIVE OFFERS

ATTACHMENT 15-C: SAMPLE LETTER TO TENANTS - Initial Tenant Notification of Owner’s 

Intent to Prepay and Voucher Availability

15-C-1: TENANT NOTICE OF PREPAYMENT REQUEST WITHDRAWAL

15-C-2: SAMPLE LETTER TO TENANTS – Final Tenant Notification of 

Prepayment Acceptance Notice to Owner’s

15-C-3: RURAL DEVELOPMENT (USDA) VOUCHER INFORMATION –

ELIGIBILITY AND VOUCHER AMOUNT DETERMINATION

15-C-4: Intentionally Left Blank

15-C-5: NOTIFICATION OF ACCEPTANCE OF INCENTIVES TO AVERT 

PREPAYMENT

15-C-6: NOTICE OF OFFER TO SELL TO A NONPROFIT

15-C-7:Intentionally Left Blank

15-C-8: PREPAYMENT REQUEST FOR [NAME OF PROPERTY]

ATTACHMENT 15-D: INCENTIVE CALCULATION WORKSHEET AND DIRECTIONS

ATTACHMENT 15-E: RESTRICTIVE-USE PROVISIONS AND AGREEMENT MATRIX

ATTACHMENT 15-F: BORROWER PREPAYMENT APPLICATION CHECKLIST

ATTACHMENT 15-G: LEASE ADDENDUM

 ATTACHMENT 15-H: PREPAYMENT AND DISPLACEMENT PREVENTION GRANT 

 AGREEMENT

 ATTACHMENT 15-I: SUBORDINATION AGREEMENT

APPENDICES

Appendix 1: Text of 7 CFR Part 3560

Appendix 2: Text of 7 CFR Part 11

Appendix 3: Forms Referenced in this Handbook

Appendix 4: Handbook Letters Referenced in this Handbook

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CHAPTER 1: INTRODUCTION 

SECTION 1: INTRODUCTION TO THE 

PROJECT SERVICING HANDBOOK 

1.1 ABOUT THIS HANDBOOK 

This handbook provides Loan Servicers with guidance about the Agency’s procedures for 

servicing actions involving borrowers receiving loans or grants for Multi-Family Housing 

projects. Its goal is to help Loan Servicers in Field Offices perform consistent, effective 

servicing of projects financed by the Agency to ensure that they are operated in accordance with 

applicable regulatory and administrative requirements. 

This handbook presents the Agency’s project servicing procedures for: 

• Section 515 Multi-Family Housing projects: 

◊ Rural rental housing (including congregate housing and group homes); and 

◊ Rural cooperative housing. 

• Section 514/516 Farm Labor Housing projects: 

◊ Off-farm labor housing; and 

◊ On-farm labor housing. 

The guidance provided by this handbook is intended to be consistent with all applicable 

laws, Executive Orders, and departmental regulations, including other Agency regulations. 

Nothing contained in this handbook should be construed to supersede, rescind, or otherwise 

amend such laws, Executive Orders, and regulations. 

1.2 COMPANION MULTI-FAMILY HOUSING HANDBOOKS 

This handbook is the third in a series of three handbooks that describe the requirements 

and procedures for the Agency’s Multi-Family Housing direct loan and grant programs. The two 

companion handbooks are: 

• HB-1-3560: Loan Origination. This handbook covers the requirements and 

procedures for processing loan and grant applications for Multi-Family Housing 

projects, selecting projects for Agency funding, and closing the loans and grants for 

these projects. 

• HB-2-3560: Asset Management. This handbook covers the requirements and 

procedures regarding the ongoing management of Multi-Family Housing projects and 

the Agency’s oversight of borrower performance. 

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1.3 USING THIS HANDBOOK 

The handbook is organized to allow the reader to look up information on specific topics 

easily. Several graphic tools and conventions have been used to make information easier to find 

and understand. 

A. Citations and Text Boxes 

• Regulatory citations. The regulation for Agency Multi-Family Housing programs is 

provided in 7 CFR Part 3560. The text of that regulation is included in Appendix 1. 

To help readers locate the regulatory authority for procedures described here, 

references to this regulation in paragraph headings appear in italicized brackets, for 

example: [7 CFR 3560.51]. Other regulations or RD Instructions are simply 

referenced. 

• Form references. Agency forms and Agency guide, form, and system letters are 

shown in italics. All forms referenced in this handbook can be found in Appendix 3

and all letters can be found in Appendix 3. 

• Examples and exhibits. Text boxes labeled as examples provide a specific 

illustration of a concept described in the text. Exhibits illustrate key points and are 

numbered in sequence, using the chapter number and a sequence number; for 

example, Exhibit 3-1 is the first exhibit in Chapter 3. 

B. Attachments and Appendices 

• Attachments. Attachments at the end of each chapter contain technical information 

that is specific to the topics covered in the chapter. Attachments are referenced in 

sequence using the chapter number and a sequence letter; for example, Attachment 4-

A is the first attachment in Chapter 4.

• Appendices. Appendices at the end of the handbook include forms and other 

reference materials that relate to multiple chapters. 

C. Terminology 

Because terminology may vary from State to State and may change over time, this 

handbook uses certain standard terminology to provide consistency. 

• Agency. The term “Agency” is used throughout this handbook to refer to the Rural 

Housing Service (RHS) within the U.S. Department of Agriculture (USDA) that is 

responsible for administration of the Multi-Family Housing programs. 

• Approval Official. This term is used whenever someone other than the Loan 

Servicer must approve an action. 

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• Borrower. The term “borrower” refers to one or more individuals who are receiving 

Agency assistance through a Multi-Family Housing program in the form of a loan or 

a grant. 

• Field Office. Because the number of offices and the nature of the work conducted in 

each office may vary from state to state, the term “Field Office” is used throughout 

this handbook to refer to the office that is originating or servicing the loan. 

• Loan Servicers. This term refers to Field Office Staff with responsibility for 

ensuring that multi-family housing borrowers comply with program requirements and 

for servicing loan accounts. 

• Management Agent. A “management agent” is an entity that contracts with the 

borrower to perform the management functions necessary to effectively operate a 

multi-family housing project. 

• State Director. This term is used to refer to the Director of the State Office or the 

Agency staff person to whom the State Director has delegated decisionmaking 

authority for a specific aspect of the program. Unless otherwise specified, each State 

Director may determine which actions may be approved at the Field Office and which 

must be approved at the State Office. 

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SECTION 2: OVERVIEW OF THE 

AGENCY’S MULTI-FAMILY HOUSING PROGRAMS 

1.4 GOALS OF RHS MULTI-FAMILY HOUSING PROGRAMS 

The purpose of the Agency’s Multi-Family Housing programs is to provide adequate, 

affordable, decent, safe, and sanitary rental units for very low-, low-, and moderate-income 

households in rural areas. In providing this service, the Agency strives to meet several goals. 

• Customer service. The Agency is committed to providing customer-friendly, 

streamlined service. The Agency will administer its programs fairly and in 

accordance with both the letter and the spirit of all equal opportunity and fair housing 

legislation and applicable Executive Orders. 

• Partnerships. The Agency seeks to enhance its ability to serve eligible households 

by working with its partners, such as borrowers, property management agents, 

tenants, other lenders, nonprofit organizations, and State and Local agencies. 

• Effective use of resources. As publicly funded initiatives, the Agency’s MultiFamily Housing programs must use tax dollars efficiently. The Agency aims to 

minimize administrative costs, underwrite loans responsibly, and leverage funding 

with private sources of credit to the extent possible. 

1.5 SECTION 515 PROGRAM—OVERVIEW 

The Section 515 direct loan program [7 CFR Part 3560] provides financing to support 

the development of rental units in rural areas that need housing affordable for very low-, low-, 

and moderate-income households, and where this housing is unlikely to be provided through 

other means. 

Section 515 loans can be used to build, acquire and rehabilitate, or improve dwellings in 

rural areas. The term for loans is tied to the expected useful life of the property, and the standard 

term for an initial Section 515 loan is 30 years with a 50-year amortization period. However, the 

term for subsequent loans and loans for special types of properties, such as manufactured 

housing, may be made for a shorter term based on the project’s expected useful life. 

Each loan is made at a note rate established by the Agency as prescribed in 

RD Instruction 440.1. Borrowers approved for initial and/or subsequent loans receive interest 

credit that reduces the effective interest rate for the Agency’s financing, thereby lowering the 

property’s rents. In return for this below-market rate financing, the borrower agrees to lease the 

project’s rental units to income-eligible households at rents approved by the Agency. 

1.6 SECTION 514/516 PROGRAMS—OVERVIEW 

Section 514/516 direct loan and grant programs provide funds to support the development 

of adequate, affordable housing for farmworkers that is unlikely to be provided through other 

means. 

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A. Section 514 Loans and Section 516 Grants for Off-Farm Housing 

Section 514 loans and Section 516 grants can be used for the same purposes as 

Section 515 loans to finance rental housing for farmworkers. Unlike Section 515 

projects, off-farm labor housing projects may be built outside rural areas, as long as the 

project addresses a need for affordable housing for farmworkers. These projects are 

eligible for financing at terms comparable to Section 515 loans, a grant to cover a 

significant share of the development cost, or a loan/grant combination finance package. 

Tenants not only must be income-eligible, but also receive priority based on the 

proportion of their income received from farmwork. 

B. Section 514 Loans for On-Farm Housing 

Section 514 loans can also be used to finance the development of adequate housing 

for farmworkers involved in a specific farm operation—On-Farm Labor Housing 

projects. These projects are treated as part of the farming operation, and the occupants do 

not pay shelter cost (rent & utilities) unless the shelter cost is approved by the Agency 

Labor housing borrowers who are providing shelter for domestic farm housing that is 

restricted for use by eligible residents supporting the borrower’s farming operation may 

choose to provide that housing to residents without imposing charges for rent or utilities 

or may choose to impose charges for rent, utilities, or rent and utilities subject to Agency 

approval. All other labor housing borrowers who are providing shelter in support of 

farming operations in the community at large are expected to operate the program in 

accordance with Agency regulations governing the approval of charges for rent, utilities, 

or rent and utilities subject to Agency approval. 

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SECTION 3: GENERAL PROGRAM REQUIREMENTS 

1.7 CIVIL RIGHTS [7 CFR 3560.2]

The Agency will administer its programs fairly and in accordance with both the letter and 

the spirit of all equal opportunity and fair housing legislation and applicable Executive Orders. 

The civil rights compliance requirements for the Agency are contained in RD Instruction 1901-E. 

Exhibit 1-1 lists the applicable Federal laws and Executive Orders and highlights their key 

aspects. 

Exhibit 1-1 

Major Civil Rights Laws Affecting the 

Multi-Family Housing Loan and Grant Programs

• Equal Credit Opportunity Act (ECOA). Prohibits discrimination in the 

extension of credit on the basis of race, color, religion, national origin, sex, 

marital status, age, income from public assistance, and exercise of rights under 

the Consumer Credit Protection Act. 

• Title VI of the Civil Rights Act of 1964. Prohibits discrimination in a Federally 

assisted program on the basis of race, color, and national origin. 

• Title VIII of the Civil Rights Act of 1968 (also known as the Fair Housing Act 

of 1988, as amended). Prohibits discrimination in the sale, rental, or financing of 

housing on the basis of race, color, religion, sex, national origin, familial status, 

or disability.

• Section 504 of the Rehabilitation Act of 1973. Prohibits discrimination in a 

Federally assisted program on the basis of disability.

• Age Discrimination Act of 1975. Prohibits discrimination in a Federally

assisted program on the basis of age. 

• Title IX of the Education Amendments of 1972. Prohibits discrimination on

the basis of sex in education programs and activities receiving Federal financial 

assistance from Rural Development. 

• Executive Order 11063 as Amended by Executive Order 12259. Prohibits 

discrimination in housing or residential property financing to any Federally

assisted activity against individuals on the basis of race, color, religion, sex, or 

national origin.

• Executive Order 11246. Prohibits discrimination in employment by

construction contractors (and subcontractors) receiving Federally assisted 

construction contracts in excess of $10,000. Provides for equal employment 

opportunity without regard to race, color, religion, sex, and national origin. 

• Executive Order 12898. Requires each Federal agency to make achieving 

environmental justice a part of its mission by identifying and addressing 

disproportionately high and adverse human health or environmental effects of its 

programs, policies, and activities on minority and low-income populations. 

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A. Nondiscrimination 

The various civil rights laws prohibit the denial of loans, grants, services, and benefits 

provided under the Section 515 and 514/516 programs to any person on the basis of race, 

color, national origin, sex, religion, marital status, familial status, age, physical or mental 

disability, or source of income, or because the applicant has, in good faith, exercised any 

right under the Consumer Credit Protection Act (15 U.S.C. 1601). Discrimination in 

employment practices also is prohibited. These same requirements also apply to program

participants. Agency oversight of borrower compliance with civil rights laws is covered 

in Chapter 4 of HB-2-3560. Civil rights complaints filed by tenants are handled by the 

Agency in accordance with RD Instruction 

2000-GGG. Key Civil Rights Issues

for Project Servicing 

• Access; 

• Consistency and fairness of treatment; 

• Disparate impacts, intended or 

unintended; and 

• Record keeping. 

Effective management and consistent 

procedures are good business practices that help 

ensure that all applicants are treated fairly. 

Poor program implementation, whether 

discrimination is intended, has possible civil 

rights consequences. 

B. Reasonable Accommodations for Persons with Disabilities 

In addition to avoiding discrimination, the Agency and loan and grant recipients must 

make reasonable accommodations to permit persons with disabilities to apply for and 

benefit from Agency programs. Reasonable accommodations may include providing 

modifications to the dwellings and facilities so that they are physically accessible. 

Reasonable accommodations may also include effective communication and outreach 

tools so that all applicants can obtain program information (e.g., a Telecommunications 

Device for the Deaf [TDD]). 

C. Limited English Proficiency [7 CFR 3560.2]

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 assist them in fulfilling their responsibilities 

to LEP persons under Title VI of the Civil Rights Act, as amended, and implementing 

regulations. 

D. Civil Rights Impact Analysis 

Agency employees will conduct civil rights impact analyses in accordance with 

RD Instruction 2006-P, to determine whether proposed policy actions, if approved and 

implemented, will negatively and disproportionately affect employees, program

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beneficiaries, or applicants for employment or program benefits due to race, national 

origin, or other protected basis. 

1.8 REVIEWS AND APPEALS [7 CFR 3560.9]

Decisions that are not made in favor of a program participant (applicant or borrower) are 

known as adverse decisions. Adverse decisions must be based upon regulations that are 

published in the Code of Federal Regulations (CFR). For the direct Multi-Family Housing 

programs, any adverse decisions must be based upon 7 CFR Part 3560 and not the administrative 

guidance contained in this handbook. Adverse decisions include: (1) administrative actions taken 

by Agency officials, and (2) the Agency’s failure to take required actions within timeframes 

specified in statutes or regulations or within a reasonable time if no deadline is specified. 

Appendix 2 of this handbook contains 7 CFR Part 11, which is the regulation of the National 

Appeals Division (NAD) and provides procedures that both Agency officials and program

participants must follow when an appeal is made. Handbook Letter 101 (3560), Standardized 

Adverse Decision Letter, will be used for all adverse decisions unless another format is 

prescribed in this handbook. 

A. Informing Program Participants of Their Rights 

Whenever an Agency official makes a decision that will adversely affect a program

participant, the official must inform the participant in writing that an informal review 

with the person who made the decision may be requested. If the decision is appealable, 

the participant will also be informed of their rights to seek mediation or Alternative 

Dispute Resolution (ADR) and to request a hearing with NAD; Attachment 1-B is used 

for this purpose. If the decision cannot be appealed, participants will be informed of their 

rights to have NAD review the accuracy of the Agency’s finding that the decision cannot 

be appealed; Attachment 1-C is used for this purpose. Mediation or ADR rights are not 

provided on decisions that cannot be appealed. Attachment 1-C is used for this purpose. 

Letters notifying participants of adverse decisions must contain the required 

information regarding an informal meeting, mediation or ADR, rights to NAD, and civil 

rights. Attachment 1-A includes only the specific civil rights language that must be 

contained in any adverse decision letter. Attachments 1-B through 1-I contain, as 

necessary, the civil rights language and include information on requesting an informal

review, mediation or ADR, and rights to NAD. The attachments are all titled to assist 

Field Office Staff in selecting the correct attachment for the decision being made. The 

attachments do not need to be used when a form, handbook letter, or other document 

already includes the appropriate participant rights. 

B. Adverse Decisions That Cannot Be Appealed 

Certain decisions made by the Agency cannot be appealed. In these cases, the 

participant is still provided the opportunity for an informal review; however, rights to an 

NAD appeal and rights to mediation or ADR are not offered. Participants will be 

informed through the use of Attachment 1-C that they may request an informal review 

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and write to NAD for a review of the accuracy of the Agency’s determination that the 

case cannot be appealed. Decisions that cannot be appealed include: 

• Decisions made by parties outside the Agency, even when these decisions are used as

a basis for Agency decisions (such as when an applicant disagrees with a private 

lender’s decision not to provide credit for a leveraged loan); 

• An official’s refusal to request an administrative waiver under the provisions of 

Paragraph 1.12 of this handbook, or a waiver authorized by any applicable regulation; 

• Denials of credit due to lack of funds; and 

• Rural area designations. 

When one or more of the reasons for an adverse decision are reasons that cannot be 

appealed, the adverse decision cannot be appealed. In these cases, the letter containing 

the adverse decision will include only the items that cannot be appealed as the reason 

why the decision cannot be appealed. If other reasons also exist for the adverse decision, 

they will be listed separately in the decision letter as other reasons the assistance could 

not be granted. 

C. Informal Review 

Participants who want to request an informal review with the person who made the 

decision must do so within 15 days of the date of the Agency’s letter notifying the 

participant of the adverse decision. The participant must make a request for an informal 

review in writing, and the request will be retained in the participant’s case file. The 

informal review can be conducted, at the discretion of the Agency, by telephone or 

through a face-to-face meeting. The informal review can also be conducted by a 

representative of the person who made the decision. The purpose of the informal review 

is to further explain the Agency’s reasons for the adverse decision, listen to why the 

participant feels the decision may be incorrect, and obtain any further information from 

the participant to support their request. The review must be completed within 45 days of 

the request, and the participant is notified in writing of the results. The State Director 

may require that the decision be reviewed by the next-level supervisor or other 

designated Rural Development Staff before the participant is notified of the decision. 

Attachment 1-D will be used if the adverse decision is not reversed as a result of the 

informal review. If the decision is reversed, a letter will be sent to the participant 

notifying them of the decision and next steps. 

Participants may skip an informal review and, if applicable, request mediation or 

ADR, or an NAD appeal. In doing so, participants automatically waive their rights to an 

informal review. 

D. Mediation or ADR 

Adverse decisions that are appealable to NAD also require that the participant be 

given the opportunity to seek mediation or ADR prior to having a hearing with NAD. The 

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purpose of mediation or ADR is to resolve disputes through the use of a neutral mediator. 

State Directors may wish to consider issuing a State Supplement, outlining the 

coordination required between the Field Office and State Office on handling mediation 

and ADR requests. 

Participants may skip mediation or ADR and request a NAD appeal. In doing so, they 

automatically waive their rights to mediation or ADR. 

1. Requests for Mediation or ADR 

After receiving Attachment 1-B or 1-D, a program participant may request mediation 

or ADR services. Upon receipt of the program participant’s request for mediation or 

ADR, Attachment 1-E, 1-G, or 1-H is sent to the participant to start the process. The 

Attachments used depends upon whether the State in which the action applies is covered 

by a USDA-sponsored mediation program. These Attachments are generally sent by the 

State Director since costs are involved; however, they can be sent directly by the Field 

Office at the discretion of the State Director. 

2. Cost of Mediation or ADR 

There are generally costs associated with participation in mediation or ADR. When 

there are costs, they will be shared equally between the Agency and the program

participant, if Agency funds are available. Where Agency funds are not available, the 

Agency will participate in mediation or ADR if requested by the program participant; 

however, the program participant will be notified in advance of the portion of the cost 

that the Agency will pay (if any) and their estimated cost for this service. The State 

Director will ensure that all participants requesting mediation or ADR in their State are 

treated consistently and pay the same percentage of the cost toward this service. The 

State Director may also consent to pay a larger percentage (up to 100 percent) of the cost 

of mediation or ADR for participants with incomes below the poverty level. The Agency 

will notify the mediation or ADR sources of how the cost of such service will be paid. 

Attachments 1-E, 1-F, 1-G, and 1-H include language to meet this requirement. 

3. Mediation in States with a USDA-Sponsored Mediation Program 

Many States have a USDA-sponsored mediation program. These programs are 

funded, in part, by USDA and were established primarily to mediate cases originating 

from the Farm Service Agency (FSA). If program participants are unsure if a USDAsponsored mediation program exists in their State, they should contact their State 

Director. In States with a USDA-sponsored mediation program, program participants 

who are provided appeal rights generally will be referred to the USDA-sponsored 

mediation program. ADR is not applicable in these States. Attachment 1-E may be sent 

to the program participant to acknowledge their request, and Attachment 1-F may be 

used to refer the case to the USDA-sponsored mediation program. In States where 

alternative mediation sources are readily available at a lower cost than the USDAsponsored mediation program, the State will follow the guidance for States without a 

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USDA-sponsored mediation program, and include the USDA-sponsored mediation 

program on the list of acceptable providers. 

4. Mediation or ADR in States without a USDA-Sponsored Mediation Program 

In States without a USDA-sponsored mediation program, Agency officials are 

responsible for maintaining a list of mediators or ADR providers. The State Office will 

generally maintain this list as program participants are referred to the State Director to

initiate mediation or ADR. FSA can generally provide a list of acceptable mediation or 

ADR sources in a State. Other contacts include the American Association of Arbitrators 

(AAA) or State bar association. When making contacts with these sources, the Agency 

must request the services of a mediator and not an arbitrator. (A mediator resolves 

disputes by negotiating a resolution through mutual agreement; an arbitrator resolves 

disputes through hearing both parties and then rendering a binding decision and should 

not be used.) The list of mediators will contain the approximate cost of each service 

provider, if known. States may handle the list of mediation and ADR sources as follows: 

• The State may select a mediator or ADR provider from the list, provided there is not a 

significant variation in the cost of service providers. The list will be maintained 

alphabetically and sources selected in sequential order. Attachment 1-G may be sent 

to the program participant to acknowledge their request for mediation or ADR, and 

Attachment 1-F may be used to refer the case to the provider. States will need to 

maintain documentation to ensure that mediators and ADR providers receive and 

equal number of referrals. If there is a significant variation in cost among service 

providers, this option will not be used. 

• The State may provide the list of mediators or ADR providers to the participant and 

request the participant to select the source or provide the name of another acceptable 

source of mediation or ADR. The list will contain the approximate cost of each 

service provider, if known. Attachment 1-H is used for this purpose and provides the 

participant with 10 days to select a service provider. After selection, Attachment 1-F

will be used to refer the case to the mediator or ADR provider. If the program

participant does not provide the name of a mediator or ADR provider within 10 days, 

their request for mediation or ADR will be considered withdrawn. Withdrawal or 

cancellation of mediation or ADR does not extinguish the participant’s right to an 

appeal with NAD. 

 5. Timing of Mediation or ADR 

Mediation or ADR must be completed within 45 days after the case is referred to the 

mediation or ADR source, unless the complexity of the case warrants a longer timeframe 

and all parties agree to a specific timeframe. A mediator or ADR provider will generally 

conduct a teleconference between the parties prior to accepting a case to determine if the 

case can be mediated. The Agency encourages the use of a pre-mediation conference 

since many adverse decisions in the Multi-Family Housing program may not lend 

themselves to mediation. Regardless, the Agency will not refuse to participate in 

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mediation or ADR if requested to do so by the program participant. 

Mediation or ADR occurs prior to having a hearing with NAD. Requests for 

mediation or ADR made prior to filing an appeal with NAD stop the clock on the 30-day 

period during which a participant may appeal to NAD. After mediation or ADR has 

concluded, any days that remain from the 30-day period are available to the participant to 

request an appeal to NAD. Attachment 1-I is used for this purpose. The person 

completing Attachment 1-I will need to determine the number of days the participant 

took to request mediation or ADR. Hearing dates for participants who request mediation 

or ADR after filing an appeal must be selected with 45 days of the conclusion of 

mediation or ADR. Participants may also request mediation or ADR after filing an appeal 

with NAD but prior to the hearing. 

E. Appeal 

Participants who wish to appeal an adverse decision must submit a written request to 

NAD within 30 days of receiving notice of an adverse decision. The request must be 

signed by the participant and include: (1) a copy of the adverse decision to be appealed, 

and (2) a brief statement describing why the participant believes the decision is wrong. 

Upon receiving a notice from NAD that an appeal has been filed, the Field Office will 

promptly provide NAD with a copy of the Agency record, specific references in 

7 CFR Part 3560 to support the adverse decision, and any other pertinent information. A 

copy will also be provided to the program participant. 

In accordance with NAD regulations, the program participant has the right to a faceto-face hearing in the participant’s State of residence. The program participant also has 

the right to request that the hearing be handled by teleconference. An adverse decision 

made by the Agency may result in an appeal hearing and require a face-to-face hearing. 

In these cases, the Appeal Coordinator may request the State Director to provide Field 

Office Staff to attend the hearing and represent the Agency. The Appeals Coordinator 

will provide sufficient documentation and phone resources to the person selected by the 

State Director to adequately represent the Agency in the case. 

NAD will notify the participant and the Agency once it has made a final 

determination. If NAD reverses the Agency’s decision, the next loan processing action 

that would have occurred had no adverse decision been made must be taken within 30 

days after the effective date of the notice from NAD; unless the Agency requests a review 

of the case by the Director of NAD. See Appendix 2 for more guidance on Director 

Reviews and other information regarding appeals. 

1.9 CONFLICT OF INTEREST [7 CFR 3560.10]

All Agency employees must strive to maintain the highest levels of honesty, integrity, 

and impartiality in conducting their activities on behalf of the Agency. The Agency’s conflict of 

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interest requirements are described in RD Instruction 1900-D. To reduce the potential for 

conflicts of interest, all processing, approval, servicing, or review activity must be conducted by 

Agency employees who: 

• Are not the recipient (applicant or borrower), a recipient’s family member, or a close 

known relative of the recipient; 

• Do not have an immediate working relationship with the recipient, the Agency 

employee related to the recipient, or the Agency employee who would normally 

conduct the activity; and 

• Do not have a business or close personal association with the recipient. 

A. Borrower Disclosure 

Borrowers must disclose any known relationship or association with Agency 

employees. 

B. Agency Employee Disclosure 

Agency employees must disclose any known relationship or association with a 

borrower, regardless of whether the relationship is known to others. 

C. Disposition of Real Estate Owned Properties 

Agency employees and members of their families are precluded from purchasing real 

estate owned (REO) property, assumptions from Agency borrowers, or security property 

sold at a foreclosure sale. Closing agents and members of their families are precluded 

from purchasing properties in which they have been professionally involved. 

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HB-3-3560

1.10 OTHER FEDERAL REQUIREMENTS 

A. Environmental Requirements [7 CFR 3560.3 and 3560.4]

The Agency considers environmental quality equally with economic, social, and other 

factors in its program development and decision making processes. Both the Loan 

Originators and Loan Servicers are responsible for effectively integrating Agency 

environmental policies and procedures with loan and grant origination and servicing 

activities. It is particularly important for Loan Servicers to be aware of environmental 

requirements concerning sites, especially during the liquidation process, when the 

Agency needs to ensure that it will not acquire property with an environmental liability. 

The Loan Servicer should also be aware of mitigation measures contained in the 

Agency’s environmental review. Where mitigation measures require an on-going effort 

of owner and management (such as maintaining the condition of a historic building or not 

building on portions of the site) these should be a part of servicing. Agency 

environmental policies and procedures and historic preservation requirements can be 

found in RD Instruction 1940-G and 1904-G. Agency-assisted properties must meet 

current Agency guidance on lead-based paint requirements and 1904-G. 

B. Construction Standards 

Sites and dwellings developed or rehabilitated with Section 515 or Section 514/516 

funds must meet the construction standards described or referenced in RD Instructions 

1924-A and 1924-C. Existing dwellings must be decent, safe, and sanitary and must 

meet all applicable State and Local codes. Certain state construction codes and 

requirements may influence RD Instructions 1924-A and 1924-C. 

C. Lobby Restrictions 

RD Instruction 1940-Q prohibits applicants and recipients of Agency assistance from

using appropriated funds for lobbying the Federal Government in connection with a 

specific award. This instruction also requires that entities that request or receive loans or 

grants must disclose the expenditure of any funds, other than appropriated funds, for 

lobbying activities using Exhibit A-1 from RD Instruction 1940-Q. 

D. Administrative Requirements 

Agency employees must comply with Agency and departmental administrative 

requirements. 

1. Procurement 

Goods and services procured to support Agency activities such as appraisals, 

inspections, broker services, and property management services must conform with the 

policies and procedures of RD Instruction 2024-A. 

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HB-3-3560

2. File Management 

Files and other Agency records must be maintained in accordance with 

RD Instruction 2033-A. Additional information is provided in Chapter 9 of HB-2-3560. 

3. Handling Funds 

Project funds must be handled in accordance with RD Instruction 1902-A.

1.11 EXCEPTION AUTHORITY [7 CFR 3560.8]

Exceptions to any requirement of this handbook or 7 CFR Part 3560 may be approved in 

individual cases by the Administrator if application of the requirement or failure to take action 

would adversely affect the Government’s interest or conflict with the objectives and spirit of the 

authorizing statute. Any exception must be consistent with the authorizing statute and other 

applicable laws. 

Requests for exceptions are submitted to the Administrator, through the Deputy 

Administrator, Multi-Family Housing, and may be initiated by the State Director; the Deputy 

Administrator, Multi-Family Housing; the Director, Multi-Family Housing Processing Division; 

or the Director, Multi-Family Housing Portfolio Management Division. 

The exception request must provide clear and convincing evidence of the need for the 

exception. At a minimum the request must include: 

• A full explanation of the circumstances, including an explanation of the adverse 

effect on the Government’s interest; 

• A discussion of proposed alternatives considered; and 

• A discussion of how the adverse effects will be eliminated or minimized if the 

exception is granted. 

Requests to the Administrator for exceptions regarding architectural and engineering, 

environmental, or civil rights issues will include the review and comments of the appropriate 

National Office Technical Staff. 

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HB-3-3560

Attachment 1-A 

Page 1 of 1 

ATTACHMENT 1-A 

EQUAL CREDIT OPPORTUNITY ACT (ECOA) 

The Federal ECOA prohibits creditors from discriminating against credit applicants on 

the basis of race, color, religion, national origin, sex, martial status, age (provided the applicant 

has the capacity to enter into a binding contract); because all or part of the applicant’s income

derives from any public assistance program; or because the applicant has in good faith exercised 

any right under the Consumer Credit Protection Act. The Federal agency that administers 

compliance with this law concerning this assistance is the Federal Trade Commission. If a 

person believes he or she was denied assistance in violation of this law, they should contact the 

Federal Trade Commission, Washington, D.C. 20580.

The Fair Housing Act prohibits discrimination in real estate related transactions or in the 

terms of conditions of such a transaction, race, color, religion, sex, disability, familial status, or

national origin. The Federal agency that is responsible for enforcing this law is the U. S. 

Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777. 

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1-18
HB-3-3560

Attachment 1-B

Page 1 of 3 

ATTACHMENT 1-B 

ATTACHMENT TO LETTER NOTIFYING CUSTOMERS OF AN 

ADVERSE DECISION THAT IS APPEALABLE 

The decision described in the attached letter did not grant you the assistance you requested or 

will terminate or reduce the assistance you are currently receiving. If you believe this decision 

or the facts used in this case are in error, you may pursue any or all of the following three 

options. 

Option 1 - Informal Review 

If you have questions concerning this decision or the facts used making it and desire further 

explanation, you may write this office to request an informal review. There is no cost for an 

informal review. This written request must be received no later than 15 calendar days from the 

date of the attached letter. You must present any new information, evidence, and possible 

alternatives along with your request. You may also have a representative or legal counsel 

participate in the process, at your cost. The informal review may be conducted by telephone or in 

person, at the discretion of the Agency. Please include a daytime phone number in your request 

to arrange for the review. You may skip this step in the informal process and select one of the 

following two options. If you do, you will automatically waive your right to an informal review. 

Option 2 - Mediation or Alternative Dispute Resolution (ADR) 

You have the right to request mediation or other forms of ADR for the issues that are available 

for mediation. You will have to pay for at least 50 percent of the cost of mediation or ADR.

Rural Development will pay for the other 50 percent of the cost, provided the Agency has 

sufficient resources from its appropriated funds. If the Agency does not have sufficient 

resources, you will be advised how much, if any, the Agency can contribute to the cost of 

mediation or ADR. If you need the information to assist you in deciding whether to seek 

mediation or ADR, you may contact the Rural Development State Director listed below. 

If you elect to seek mediation or ADR, your written request for this service must be sent to the 

Rural Development State Director listed below and must be postmarked no later than 30 days

from the date of the attached letter. The Rural Development State Director will advise you of the 

estimated cost of mediation or ADR, the extent to which the Agency can contribute to the cost, 

and the process and procedures for this service. In states with a USDA-sponsored mediation 

program, you will generally be referred to such service. In states without a USDA-sponsored 

mediation program, you will be provided with the name or names of mediators. You will be 

advised directly by the mediation or ADR source if they can mediate your case. Once you 

request mediation or ADR, it stops the running of the 30-day period in which you may request an 

appeal (described in Option 3). If mediation or ADR does not result in resolution of these issues, 

you have the right to continue with a request for an appeal hearing as set forth in Option 3. 

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Attachment 1-B

Page 2 of 3 

When mediation or ADR is concluded, you will be notified of the result and the number of days 

remaining to request an appeal, if applicable. If you request mediation or ADR prior to filing for 

an appeal, the number of days you will have to request an appeal will be 30 days from the 

adverse decision minus the number of days you took to request mediation. Mediation or ADR 

does not take the place of, or limit your rights to, an appeal to the NAD; however, an NAD 

appeal hearing would take place after mediation or ADR. You may skip mediation or ADR and 

request an appeal hearing. However, in doing so, you will automatically waive your rights to an 

informal meeting, mediation, or ADR. 

Rural Development State Director address: 

Option 3 - Request an Appeal 

You may request an appeal hearing by the NAD rather than an informal review, mediation, or 

ADR. There is no cost for an appeal. Your request for an appeal must be made no later than 30 

days from the date you receive the attached letter. You must write the Assistant Director, NAD, 

for your region at the following address: 

NAD Assistant Director address: 

Your request for an NAD hearing must state the reasons why you believe the decision is wrong, 

be personally signed by you, and must include a copy of the attached letter. A copy of your 

request must also be sent to the Rural Development State Director at the address listed under 

Option 2. 

You have the right to an appeal hearing within 45 days of the receipt of your request. You or 

your representative or counsel may contact this office anytime during regular office hours in the 

10 days following the receipt of your request for a hearing to examine or copy relevant nonconfidential material in your file. Photocopies will be provided to you. Your representative or 

counsel should have your written authorization to represent you and review your file. 

The NAD Hearing Officer will contact you regarding a time and place for the hearing. You may 

also request a teleconference hearing in lieu of the face-to-face hearing. At any time before the 

scheduled hearing you may also request that the Hearing Officer make a decision without a 

hearing. If you do, the Hearing Officer's decision will be based on the Rural Development file, 

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HB-3-3560

Attachment 1-B

Page 3 of 3 

any written statements or evidence you may provide and any additional information the Hearing 

Officer thinks necessary. 

The Federal ECOA prohibits creditors from discriminating against credit applicants on the basis 

of race, color, religion, national origin, sex, marital status, age (provided the applicant has the 

capacity to enter into a binding contract); because all or part of the applicant’s income derives 

from any public assistance program; or because the applicant has in good faith exercised any 

right under the Consumer Credit Protection Act. The Federal agency that administers compliance 

with this law concerning this creditor is the Federal Trade Commission. If a person believes he 

or she was denied assistance in violation of this law, they should contact the Federal Trade 

Commission, Washington, D.C. 20580 

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

of conditions of such a transaction, because of race, color, religion, sex, disability, familial 

status, or national origin. The federal agency that is responsible for enforcing this law is the U. S. 

Department of Housing and Urban Development (HUD). If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

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1-22
HB-3-3560

Attachment 1-C

Page 1 of 1 

ATTACHMENT 1-C 

ATTACHMENT TO LETTER NOTIFYING CUSTOMERS OF AN 

ADVERSE DECISION THAT CANNOT BE APPEALED

The decision described in the attached letter did not grant you the assistance you requested or 

will terminate or reduce the assistance you are currently receiving. 

If you have questions concerning this decision or the facts used in making it and desire further 

explanation, you may write this office to request an informal review. This written request must 

be received no later than 15 calendar days from the date of the attached letter. You must present 

any new information, evidence, and possible alternatives along with your request. You may also 

have a representative or legal counsel participate in the process, at your cost. The informal 

review may be conducted by telephone or in person, at the discretion of the Agency. Please 

include a daytime phone number in your request to arrange for the review. 

Applicants and borrowers generally have a right to appeal adverse decisions, but decisions based 

on certain reasons cannot be appealed. We have determined that reasons for the decision cannot 

be appealed under our regulations. You may, however, write the Assistant Director, NAD for a 

review of the accuracy of our finding that the decision cannot be appealed. Your request must be 

made no later than 30 days from the date you receive the attached letter. 

NAD Assistant Director address: 

The Federal ECOA prohibits creditors from discriminating against credit applicants on the basis 

of race, color, religion, national origin, sex, marital status, age (provided the applicant has the 

capacity to enter into a binding contract); because all or part of the applicant’s income derives 

from any public assistance program; or because the applicant has in good faith exercised any 

right under the Consumer Credit Protection Act. The Federal agency that administers compliance 

with this law concerning this creditor is the Federal Trade Commission. If a person believes he 

or she was denied assistance in violation of this law, they should contact the Federal Trade 

Commission, Washington, D.C. 20580. 

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

of conditions of such a transaction, race, color, religion, sex, disability, familial status, or 

national origin. The Federal agency that is responsible for enforcing this law is the U. S. 

Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

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1-24
HB-3-3560

Attachment 1-D 

Page 1 of 3 

ATTACHMENT 1-D 

ATTACHMENT TO LETTER NOTIFYING CUSTOMERS OF 

UNFAVORABLE DECISION REACHED AS A RESULT OF AN 

INFORMAL REVIEW 

We appreciated the opportunity to review the facts relative to your request for assistance. We

regret that the decision in the attached letter did not grant the assistance you requested or will 

terminate or reduce the assistance you are currently receiving. If you believe that facts used in 

this case are in error, you may pursue any or all of the following two options. 

Option 1 - Mediation or Alternative Dispute Resolution (ADR) 

You have the right to request mediation or other forms of ADR for the issues that are available 

for mediation. You will have to pay for at least 50 percent of the cost of mediation or ADR. 

Rural Development will pay for the other 50 percent of the cost, provided the Agency has 

sufficient resources from its appropriated funds. If the Agency does not have sufficient 

resources, you will be advised how much, if any, the Agency can contribute to the cost of 

mediation or ADR. If you need information to assist you in deciding whether to seek mediation 

or ADR, you may contact the Rural Development State Director listed below. 

If you elect to seek mediation or ADR, your written request for this service must be sent to the 

Rural Development State Director listed below and must be postmarked no later than 30 days

from the date of the attached letter. The Rural Development State Director will advise you of the 

estimated cost of mediation or ADR, the extent to which the Agency can contribute to the cost, 

and the process and procedures for this service. In states with a USDA-sponsored mediation 

program, you will generally be referred to this service. In states without a USDA-sponsored 

mediation program, you will be provided with the name or names of mediators. You will be 

advised directly by the mediation or ADR source if they can mediate your case. Once you 

request mediation or ADR, it stops the running of the 30-day period in which you may request an 

appeal (described in Option 2). If mediation or ADR does not result in resolution of these issues, 

you have the right to continue with a request for an appeal hearing as set forth in Option 2. 

When mediation or ADR is concluded, you will be notified of the result and the number of days 

remaining to request an appeal, if applicable. If you request mediation or ADR prior to filing for 

an appeal, the number of days you will have to request an appeal will be 30 days from the 

adverse decision minus the number of days you took to request mediation. Mediation or ADR 

does not take the place of, or limit your rights to, an appeal to the National Appeals Division 

(NAD); however, an NAD appeal hearing would take place after mediation or ADR. You may 

skip mediation or ADR and request an appeal hearing. However, in doing so, you will 

automatically waive your rights to an informal meeting, mediation, or ADR. 

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Attachment 1-D 

Page 2 of 3 

Rural Development State Director address: 

Option 2 - Request an Appeal 

You may request an appeal hearing by the National Appeals Division (NAD) rather than an 

informal review or mediation. There is no cost for an appeal. Your request for an appeal must 

be made no later than 30 days from the date you receive the attached letter. You must write the 

Assistant Director, NAD, for your region at the following address: 

NAD Assistant Director address: 

The request for an NAD hearing must state the reasons why you believe the decision is wrong, 

be personally signed by you, and must include a copy of the attached letter. A copy of your 

request must also be sent to the Rural Development State Director at the address listed under 

Option 1. 

You have the right to an appeal hearing within 45 days of the receipt of your request. You or 

your representative or counsel may contact this office anytime during regular office hours in the 

10 days following the receipt of your request for a hearing to examine or copy relevant nonconfidential material in your file. Photocopies will be provided to you. Your representative or 

counsel should have your written authorization to represent you and review your file. 

The NAD Hearing Officer will contact you regarding a time and place for the hearing. You may 

also request a teleconference hearing in lieu of the face-to-face hearing. At any time before the 

scheduled hearing, you may also request that the Hearing Officer make a decision without a 

hearing. If you do, the Hearing Officer's decision will be based on the Rural Development file, 

any written statements or evidence you may provide and any additional information the Hearing 

Officer thinks necessary. 

The Federal ECOA prohibits creditors from discriminating against credit applicants on the basis 

of race, color, religion, national origin, sex, marital status, age (provided the applicant has the 

capacity to enter into a binding contract); because all or part of the applicant’s income derives 

from any public assistance program; or because the applicant has in good faith exercised any 

right under the Consumer Credit Protection Act. The Federal agency that administers compliance 

1-26
HB-3-3560

Attachment 1-D 

Page 3 of 3 

with this law concerning this creditor is the Federal Trade Commission. If a person believes he 

or she was denied assistance in violation of this law, they should contact the Federal Trade 

Commission, Washington, D.C. 20580 

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

of conditions of such a transaction, race, color, religion, sex, disability, familial status, or 

national origin. The federal agency that is responsible for enforcing this law is the U. S. 

Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

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1-28
HB-3-3560

Attachment 1-E 

Page 1 of 2 

ATTACHMENT 1-E 

ATTACHMENT FOR NOTIFYING CUSTOMERS THAT REQUEST 

MEDIATION IN STATES WITH A USDA-SPONSORED MEDIATION 

PROGRAM 

This replies to your request for mediation or alternative dispute resolution services. The state in 

which you requested assistance has an impartial USDA-sponsored mediation program available. 

Your request for mediation has been sent to: 

You will be contacted directly by the USDA-sponsored mediation program to determine if they 

can mediate the issues in your case. 

As indicated in our adverse decision letter, there may be a cost for mediation services. The cost 

estimated for this service is: 

$ _________ You will be advised directly by the USDA-sponsored mediation program of 

the full cost of mediation. This is only an estimate and may vary depending on the issues 

and complexity of the case. If you decide not to pursue mediation, you must immediately 

contact this office and the USDA-sponsored program to cancel your request 

Rural Development will: 

_______ Contribute 50 percent towards the cost. The balance of the cast will have to be

paid from your own resources. 

_______ Cannot contribute towards the cost as the Agency does not have financial 

resources for these services. You must pay the full cost of mediation from your own 

personal resources. 

_______ Contribute _____ towards the cost. The balance of the cost will have to be paid 

from your own personal resources. 

When mediation is concluded, you will be notified of the results and the number of days 

remaining to request an appeal, if applicable. If you request mediation prior to filing for an 

appeal, the number of days you will have to request an appeal will be 30 days from the adverse 

decision minus the number of days you took to request mediation. Mediation does not take the 

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Attachment 1-E 

Page 2 of 2 

place of, or limit your rights to, an appeal to the NAD; however, an NAD appeal hearing would 

take place after mediation. 

Remember, if you decide not to pursue mediation, you must immediately contact this office and 

the USDA-sponsored mediation program to cancel your request. You will be responsible for any

costs incurred by the mediation or ADR source up until the time of your cancellation. Canceling 

your request for mediation does not affect your rights to seek an appeal with the NAD as 

discussed in our original decision letter.

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HB-3-3560

Attachment 1-F 

Page 1 of 2 

ATTACHMENT 1-F 

ATTACHMENT FOR REQUESTING MEDIATION OR ALTERNATIVE 

DISPUTE RESOLUTION (ADR) SERVICES 

 TO: 

 FROM: 

SUBJECT: Request for Mediation or ADR Services 

 CUSTOMER: 

The above-subject Rural Development customer has received an adverse decision from our 

Agency and has requested mediation or ADR services. Attached is a copy of the adverse decision 

letter and the customer’s request for your service. 

Informal Review: 

___ The customer was provided with the opportunity for an informal review with the Agency; 

however, chose not to exercise this option. 

 ___ An informal review was conducted; however, the Agency did not reverse its decision. 

 ___ This case is under the jurisdiction of our State Office. 

Payment for Service: 

___ The customer and Agency will split the cost of this service 50/50. 

___ The customer will pay the full cost of mediation or ADR. 

___ The Agency will pay ________ towards mediation or ADR. The customer will pay the 

balance. 

If the Agency is paying for any portion of the cost of this service, the bill for the Agency’s 

portion should be submitted to this office. The customer is solely responsible for their portion of

the cost of this service and should be bill directly. 

Jurisdiction of case: 

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Attachment 1-F 

Page 2 of 2 

___ The adverse decision in this case was made by the following office. You should contact this 

office for further information on the case: 

___ The adverse decision in this case was made by the ___[insert appropriate name]___. You 

may contact the Appeals Coordinator for further information on the case and to arrange for 

mediation or ADR: 

USDA, Rural Development 

Appeals Coordinator 

ATTN: __________ 

__________, _______ _______ 

(___) ___-____, extension _____ 

Mediation or ADR must be completed within 45 days; unless the complexity of the case requires 

a longer time frame and all parties agree to a specific time frame. We also request a 

teleconference prior to your acceptance of this case to determine if the adverse decision lends 

itself to mediation or ADR.

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HB-3-3560

Attachment 1-G 

Page 1 of 2 

ATTACHMENT 1-G 

 ATTACHMENT FOR NOTIFYING CUSTOMERS THAT REQUEST 

MEDIATION OR ALTERNATIVE DISPUTE RESOLUTION (ADR) OF 

SERVICE PROVIDER 

This replies to your request for mediation or alternative dispute resolution services. Your request 

has been sent to: 

You will be contacted directly by the above to determine if they can mediate the issues in your 

case. 

As indicated in our adverse decision letter, there may be a cost for these services. The estimated 

cost for this service is: 

$ _________ You will be advised directly by the mediation or ADR source of the full 

cost of this service. This is only an estimate and may vary depending upon the issues and 

complexity of the case. If you decide not to pursue mediation or ADR, you must 

immediately contact this office and the above-mentioned mediation or ADR provider. 

Rural Development will: 

______ Contribute 50 percent towards the cost. The balance of the cost will have to be 

paid from your own resources. 

_______ Cannot contribute towards the cost as the Agency does not have the financial 

resources. You must pay the full cost from your own personal resources. 

_______ Contribute ______ towards the cost. The balance of the cost will have to be paid 

from your own personal resources. 

When mediation or ADR is concluded, you will be notified of the result and the number of days 

remaining to request an appeal, if applicable. If you request mediation or ADR prior to filing for 

an appeal, the number of days you will have to request an appeal will be 30 days from the date 

you received notice of the adverse decision minus the number of days you took to request 

mediation. Mediation or ADR does not take the place of, or limit your rights to, an appeal to the 

NAD; however, an NAD appeal hearing would take place after mediation or ADR. 

Remember, if you decide not to pursue mediation or ADR, you must immediately contact this 

office and the mediation or ADR provider to cancel your request. You will be responsible for 

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Attachment 1-G 

Page 2 of 2 

any costs incurred by the mediation or ADR source up until the time of your cancellation. 

Canceling your request for mediation does not affect your rights to seek an appeal with the NAD 

as discussed in our original decision letter.

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HB-3-3560

Attachment 1-H 

Page 1 of 2 

ATTACHMENT 1-H 

ATTACHMENT FOR NOTIFYING CUSTOMERS THAT REQUEST 

MEDIATION OR ALTERNATIVE DISPUTE RESOLUTION (ADR) OF 

POTENTIAL SERVICE PROVIDERS 

This replies to your request for mediation or ADR services. Attached you will find a list of 

mediation and ADR providers. You will need to select one of the sources from the list, or you 

may provide the name of another independent mediation or ADR source. You must provide this 

office, in writing, with the name of the provider within 10 days. Rural Development will then 

contact the source and provide photocopies of the adverse decision letter and any other relevant 

information. We will also request that the mediation or ADR provider conduct a teleconference 

between the parties. 

If we do not receive your selection of a mediator or ADR provider within 10 days, we will 

consider such inaction to be your notice to cancel your request for mediation or ADR. You may 

continue to pursue an appeal to the NAD as outlined in our original adverse decision letter. 

As indicated in our original adverse decision letter, there may be a cost for these services. The 

estimated cost for this service is: 

$ _________ You will be advised directly by the mediation or ADR source of the full 

cost of this service. This is only an estimate and may vary depending upon the issues and 

complexity of the case. If you decide not to pursue mediation or ADR, you must 

immediately contact this office and the above-mentioned mediation or ADR provider. 

Rural Development will: 

______ Contribute 50 percent towards the cost. The balance of the cost will have to be 

paid from your own resources. 

_______ Cannot contribute towards the cost as the Agency does not have the financial 

resources. You must pay the full cost from your own personal resources. 

_______ Contribute ______ towards the cost. The balance of the cost will have to be paid 

from your own personal resources. 

When mediation or ADR is concluded, you will be notified of the result and the number of days 

remaining to request an appeal, if applicable. If you request mediation or ADR prior to filing for 

an appeal, the number of days you will have to request an appeal will be 30 days from the date 

you received notice of the adverse decision minus the number of days you took to request 

mediation. Mediation or ADR does not take the place of, or limit your rights to, an appeal to 

NAD; however, an NAD appeal hearing would take place after mediation or ADR. 

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Attachment 1-H 

Page 2 of 2 

Remember, if you decide not to pursue mediation or ADR, you must immediately contact this 

office to cancel your request. Canceling your request for mediation does not affect your rights to 

seek an appeal with the NAD as discussed in our original decision letter.

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HB-3-3560

Attachment 1-I 

Page 1 of 2 

ATTACHMENT 1-I 

ATTACHMENT FOR NOTIFYING CUSTOMERS THAT MEDIATION OR 

ALTERNATIVE DISPUTE RESOLUTION (ADR) DID NOT RESULT IN 

RESOLUTION OF ISSUES 

We regret that we are unable to grant the assistance you requested or will terminate or reduce the 

assistance you requested. Mediation or ADR did not result in resolution of the issues. 

If you believe the decision or facts used in the case are in error, you may pursue your right to an 

appeal by the NAD. There is no cost for an appeal. The number of days in which you have to 

request an appeal depends upon whether you previously requested an appeal to NAD prior to 

entering into mediation or ADR. Please follow the guidance in the paragraph indicated with an 

“X”. 

___ You requested an appeal hearing to NAD prior to entering into mediation or ADR. You must 

write to the Assistant Director of NAD at the following address to schedule the appeal hearing: 

NAD Assistant Director address: 

___ You did not request an appeal hearing to NAD prior to entering into mediation or ADR. You 

must write to the Assistant Director of NAD at the following address. Your request must be 

postmarked within ____ days from receipt of this letter. This represents the difference between 

30 days and the number of days you took after the adverse decision to request mediation or 

ADR. Use the NAD Assistant Director address is listed above. 

Information regarding appeals 

You have the right to an appeal hearing within 45 days of NAD’s receipt of your request. You or 

your representative or counsel may contact this office anytime during regular office hours in the 

10 days following the receipt of your request for a hearing to examine or copy relevant nonconfidential material in your file. Photocopies will be provided to you. Your representative or 

counsel should have your written authorization to represent you and review your file. 

The NAD Hearing Officer will contact you regarding a time and place for the hearing. You may 

also request a teleconference hearing in lieu of the face-to-face hearing. At any time before the 

scheduled hearing you may also request that the Hearing Officer make a decision without a 

hearing. If you do, the Hearing Officer’s decision will be based on the Rural Development file, 

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Attachment 1-I 

Page 2 of 2 

any written statements or evidence you may provide, and any additional information the Hearing 

Officer thinks necessary. 

The Federal ECOA prohibits creditors from discriminating against credit applicants on the basis 

of race, color, religion, national origin, sex, marital status, age (provided the applicant has the 

capacity to enter into a binding contract); because all or part of the applicant’s income derives 

from any public assistance program; or because the applicant has in good faith exercised any 

right under the Consumer Credit Protection Act. The Federal agency that administers compliance 

with this law concerning this creditor is the Federal Trade Commission. If a person believes he 

or she was denied assistance in violation of this law, they should contact the Federal Trade 

Commission, Washington, D.C. 20580 

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

of conditions of such a transaction, race, color, religion, sex, disability, familial status, or 

national origin. The federal agency that is responsible for enforcing this law is the U. S. 

Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777. 

cc: NAD Assistant Director 

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 CHAPTER 2: MULTI-FAMILY HOUSING 

PROGRAMS AND LOAN SERVICING 

2.1 INTRODUCTION 

This chapter introduces key aspects of the Section 515 Rural Rental Housing and Section 

514/516 Farm Labor Housing programs. Under these programs, the Agency provides direct 

loans and grants to support the development of affordable rental housing that serves rural areas. 

The Section 538 Multi-Family Housing Guarantee program—the Agency’s third Multi-Family 

Housing program that guarantees loans made by private lenders—is covered in a separate 

regulation [7 CFR Part 3565] and HB-1-3565. 

This chapter also describes the key project servicing procedures that the Agency uses to 

administer the terms of the Agency loan or grant agreement for the program. These procedures 

provide Loan Servicers with a consistent basis for conducting servicing actions and assisting 

borrowers in meeting their responsibilities. 

Section 1 of this chapter introduces the types of loans and other forms of assistance 

available through the Section 515 program and the Agency’s objectives in providing this 

assistance. Section 2 of this chapter describes the loans, grants, and other assistance available to 

increase the supply of affordable housing specifically targeted toward farm labor. The chapter 

concludes with Section 3, which introduces the major project servicing activities, as well as the 

key parties involved. 

SECTION 1: SECTION 515 PROGRAM 

2.2 OVERVIEW 

The Section 515 program offers direct loans to eligible borrowers to provide 

economically designed and constructed housing and related facilities for very low-, low-, and 

moderate-income households; elderly households; and persons with disabilities living in rural 

areas. This section of the chapter describes: 

• The types of projects allowed; 

• The types of loans available; and 

• Rental assistance available from the Agency. 

2.3 TYPES OF PROJECTS 

There are four basic types of rental projects that can be developed using Section 515 

loans: 

• Family projects; 

• Elderly projects; 

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• Congregate projects; and 

• Group homes. 

In addition, Section 515 loans can be used to finance rural cooperative housing projects. 

The Agency also allows mixed projects that contain both family and elderly units. 

The housing must be economical and must not include elaborate features, but it must be 

adequate to meet tenants’ needs. The project should be of average quality and cost. With the 

exception of off-farm labor housing, all projects must be developed in locations that qualify as 

rural areas. 

A. Family Projects 

A family housing project is a rental property developed for occupancy by eligible 

very low-, low-, or moderate-income households. 

B. Elderly Projects 

An elderly project is a rental property that is developed for occupancy solely by 

eligible elderly households that include a tenant or cotenant that is disabled or age 62 

years or older. 

C. Congregate Projects 

Congregate projects are rental properties developed for occupancy by eligible very 

low-, low-, and moderate income elderly households that need meals or other services to 

assist them in performing activities of daily living. Congregate projects consist of private 

apartments and central dining facilities in which a number of allowable preestablished 

services are provided to tenants. These projects are not designed to be nursing homes 

and, therefore, are not allowed to pay for the cost of medical- or healthcare-related 

services. 

D. Group Homes 

A group home is housing that is occupied by eligible very low-, low-, or moderateincome elderly persons or individuals with disabilities who share living space within a 

rental unit and in which a resident assistant may be required. 

E. Rural Cooperative Housing 

Section 515 loans may be used to finance rural cooperative housing projects operated 

by nonprofit consumer cooperatives for the benefit of eligible very low-, low- and 

moderate-income members. 

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F. Mixed Projects 

Mixed projects are properties developed with a portion of the units designated as 

family units and the remainder of the units established as elderly units. At the time the 

project is developed, the borrower must designate the units that will be operated as family 

units and those that will be operated as elderly units. NOTE: Rural Development no 

longer finances mixed projects. 

2.4 TYPES OF LOANS 

The rules governing the origination of Section 515 loans differ slightly, depending upon 

the type of loan being made. The types of loans available under Section 515 include: 

• Initial loans; 

• Subsequent loans; and 

• Assumed loans. 

This section describes the three types of loans and how they differ. The first two types 

are discussed in further detail in HB-1-3560. The requirements and procedures for assumed 

loans and equity loans are covered in Chapter 7. 

A. Initial Loans 

Initial loans are made to projects with no existing Agency loan. Most initial loans are 

made to build new properties. However, the Agency makes initial loans for the 

rehabilitation of existing properties when it is in the Agency’s best interest. 

The interest rate for these loans is set at the note rate established by the Agency in 

RD Instruction 440.1. The Agency then provides interest credit assistance, which 

reduces the effective interest rate to 1 percent1

. Interest credit is only provided for units 

occupied by eligible tenants paying at least 30 percent of their income for rent. The 

administration of interest credit is covered in this handbook and HB-2-3560. 

The Agency establishes the term of these loans to correspond to the expected useful 

life of the property. The maximum term is 30 years with an amortization period not to 

exceed 50 years. Generally, initial loans are made for a term of 50 years, with the 

exception of properties where the expected useful life is a shorter period (e.g., 

manufactured housing). 

 

1

 Some existing projects do not receive interest credit, while others receive interest credit that reduces the interest 

rate to three percent. However, all initial loans made by the Agency following the publication of this handbook will 

receive interest credit as described here. 

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B. Subsequent Loans 

Subsequent loans can be issued during the term of an Agency loan to help an existing 

borrower pay for repairs or improvements to the property or in conjunction with the 

transfer of a property where the purchaser is assuming the initial Agency loan. The key 

differences between processing requirements for subsequent and initial Section 515 loans 

are discussed in Chapter 10 of HB-1-3560. Guidance regarding the requirements and 

procedures for processing project transfers is covered in Chapter 7. Subsequent loans 

may also be used to finance equity to avert prepayment of the project. 

C. Assumed Loans 

Section 515 loans may be assumed in conjunction with the transfer of ownership of 

the property. The terms and conditions of the assumption depend upon the needs of the 

project at the time of the transfer. The procedures for processing transfers and 

assumptions are presented in Chapter 5. 

1. New Rates and Terms Assumption 

Most assumptions of Section 515 loans are new rates and terms assumptions—that is, 

the purchaser assumes responsibility for all or a portion of the remaining debt. To 

conserve the Agency’s budgetary resources, the transaction does not involve paying off 

the old loan and issuing a new initial loan. Instead, the purchaser assumes the 

outstanding debt, which is reamortized at new rates and terms. New rates and terms 

assumptions are used when the purchaser will experience financial difficulties under the 

terms of the initial loan or when a change in rates and terms is necessary to facilitate the 

transfer. Purchasers may apply for subsequent loans to make up the difference between 

the amount of debt assumed and the purchase price or to address physical needs at the 

project. 

2. Same Rates and Terms Assumption 

Transfers may also take place in conjunction with a same rates and terms assumption. 

Under this type of assumption, the existing note terms, including the interest rate and the 

remaining repayment period, do not change. 

2.5 AGENCY RENTAL ASSISTANCE 

Owners of projects located in areas where prospective tenants are likely to be rent 

overburdened or existing tenants are already overburdened can apply for rental assistance 

administered by the Agency. This rental subsidy assists tenants by allowing them to pay 30 

percent of adjusted income for rent, thereby reducing the financial burden on the household. The 

Agency pays the difference between the tenant contribution and the approved shelter costs for 

the unit through the rental assistance contract with the borrower. 

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2.6 PREFERENCE FOR PROJECTS THAT LEVERAGE OTHER FUNDS 

To maximize the number of units produced with Section 515 loan funds, the Agency 

gives preference to project applications for new loans that leverage other funds, thereby reducing 

the amount of Section 515 loan funds needed to develop the project. The greater the leveraging 

proposed in a project application, the greater the preference for funding. Examples of funds that 

count as leveraged funds include borrower resources beyond the minimum required amount, 

equity generated by the sale of low-income housing tax credits (LIHTCs), a second loan from 

another lender, or a grant from a State or Local public agency or other source. 

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SECTION 2: SECTION 514/516 PROGRAM 

2.7 TYPES OF PROJECTS 

The Section 514/516 Farm Labor Housing program provides funds to support the 

development of housing for farm labor. Section 514/516 assistance differs from the Section 515 

loans in the following ways: 

• The objective of the program is to provide housing for farmworkers; 

• There are no rural restrictions; and 

• Agency grants are available to support the development of these projects. 

Section 514/516 assistance may be used for off-farm labor housing projects and Section 514 

assistance may be used only for on-farm labor housing projects. Only Section 514 assistance 

may be used in conjunction with Federal LIHTCs. 

A. Off-Farm Labor Housing 

The Agency is authorized to make loans and grants for financing off-farm labor 

housing to broad-based nonprofit organizations; nonprofit organizations of farmworkers; 

Federally recognized Indian tribes, agencies, or political subdivisions of State or Local 

Government; and public agencies, such as local housing authorities. Section 514 loans 

can be made to limited partnerships in which the general partner is a nonprofit entity. 

B. On-Farm Labor Housing 

On-farm labor housing is designed to provide adequate housing for farmworkers 

involved in a specific farming operation. Individual farmers, family farm corporations or 

partnerships, or associations of farmers may develop these projects but must operate them 

on a nonprofit basis. To qualify for occupancy, an individual or a household must simply 

be employed as part of the farming operation. There is no income restriction governing 

occupancy. However, immediate family members of individuals with an ownership 

interest in the farm are prohibited from living in this housing. 

2.8 LOANS AND GRANTS 

The Agency offers loans and grants to finance Farm Labor Housing projects. Chapter 12 

of HB-1-3560 provides more information about the origination process for these loans and 

grants. 

A. Farm Labor Housing Loans 

Section 514 loans for farm labor housing projects are very similar to Section 515 

loans, but they differ in two important ways: 

• These loans carry a 1 percent effective interest rate (i.e., there is no interest credit). 

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• The maximum term for these loans is 33 years. 

These loans can be used to finance either Off-Farm or On-Farm Labor Housing projects. 

At one time, loans for both types of projects were processed on a first-come, firstserved basis. Today, lending decisions regarding loans for off-farm labor housing 

projects are handled through a competitive Notice of Funding Availability (NOFA) 

process, while loans for on-farm labor housing projects are still processed in the order 

that they are received. 

B. Farm Labor Housing Grants 

Section 516 grants may only be used to support the development of off-farm labor 

housing projects. These grants may be used for the same purposes as Section 514 loans 

when there is reasonable doubt that the housing would not be provided without the grant. 

2.9 RENTAL ASSISTANCE 

Applicants for Section 514/516 assistance for off-farm labor housing projects may also 

apply for rental assistance administered by the Agency. The requirements for obtaining rental 

assistance are the same as for Section 515 projects. On-farm labor housing projects are not 

eligible for this rental assistance. 

2.10 PREFERENCE FOR PROJECTS THAT LEVERAGE OTHER FUNDS 

Like the Section 515 program, the Agency gives preference to applications for off-farm 

labor housing projects that leverage other sources of funds. There is no leveraging preference for 

on-farm labor housing applications. 

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SECTION 3: OVERVIEW OF MULTI-FAMILY PROJECT SERVICING 

2.11 KEY PROJECT SERVICING ACTIVITIES AND THIS HANDBOOK 

The goal of the Agency’s servicing efforts is to ensure that projects fulfill the terms of 

their loan or grant agreement and provide fair, consistent processing of servicing requests. 

Project servicing involves the following activities: 

• Account servicing; 

• Reviewing requested changes in the ownership entity; 

• Evaluating and processing project transfer requests; 

• Addressing security restructuring requests; 

• Identifying and recapturing unauthorized assistance; 

• Addressing borrower defaults and evaluating workout agreements; 

• Processing loan restructuring requests; 

• Foreclosing and liquidating projects in default; 

• Managing and disposing of inventory property; and 

• Evaluating and processing prepayment requests. 

This handbook presents the program requirements in each of these areas and describes 

the Agency’s procedures for fulfilling its responsibilities. 

In addressing each topic area, the handbook first presents the requirements and 

procedures for Section 515 rental projects and then discusses differences or additional 

requirements for other types of projects (e.g., congregate housing, farm labor housing, 

cooperatives). 

2.12 PROJECT SERVICING PROCEDURES FOR MULTI-FAMILY HOUSING 

PROJECTS 

Chapters 3 through 13 describe the program requirements for Section 515 projects. 

A. Automated Systems (Chapter 3) 

This chapter describes the Agency’s four primary automated information 

management systems—Industry Interface, the Automated Multi-Family Housing 

Accounting System (AMAS), the Multi-Family Integrated System (MFIS), and the 

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Prepayment Tracking and Concurrence (Pre-Trac)—including their purpose and 

capabilities, staff responsibilities, and training and certification requirements. 

B. Account Servicing (Chapter 4) 

This chapter covers routine transactions involving the borrower’s repayment of the 

loan obligation, including payment processing, tracking project accounts, and final 

payments. 

C. Ownership and Organizational Changes (Chapter 5) 

Changes in the borrower entity require Agency notification and, in specific cases, 

Agency consent. This chapter outlines the requirements regarding borrower requests 

involving these changes and the procedures for addressing these changes. 

D. Determination of Project Suitability (Chapter 6) 

When there are loan repayment or compliance problems with a project and the 

Agency is considering special servicing actions, or prior to making a subsequent loan, the 

Loan Servicer must determine that the property remains suitable as a program property. 

This chapter is designed to assist the Agency and the Loan Servicer in particular, to make 

an analysis of a project’s suitability and to determine that it meets the principles and 

objectives of the Agency. 

E. Transfers of Project Ownership (Chapter 7) 

When borrowers seek to transfer their projects to a new ownership entity, the transfer 

must be performed in a manner consistent with the program requirements to ensure that 

the project continues to address program objectives and the Agency’s security interests 

are protected. This chapter explains the requirements and procedures for completing 

project transfers. 

F. Security Restructuring Requests (Chapter 8) 

As project conditions change over time, it may become necessary to request a 

restructuring of the security for the loan. The Agency’s requirements and procedures for 

filing these requests are covered in this chapter. 

G. Unauthorized Assistance (Chapter 9) 

If borrowers or tenants receive assistance for which they are ineligible, the Agency 

will take steps to recapture this unauthorized assistance. This chapter discusses the 

Agency’s requirements and procedures for identifying and collecting unauthorized 

assistance. 

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H. Compliance Violations, Defaults, and Workout Agreements (Chapter 10) 

The Agency will monitor borrower performance using the procedures presented in 

Chapter 9 of HB-2-3560. Borrowers who fail to comply with program requirements will 

be notified of compliance violations and the need to correct the deficiencies. This 

chapter describes the servicing actions in response to compliance violations and the 

additional servicing actions taken by the Agency in the event violations go uncorrected 

and the borrower falls into default. 

I. Loan Restructuring (Chapter 11) 

When borrowers encounter changes or difficulties beyond their control that affect the 

financial viability of the project, they may ask for the Agency to approve restructuring of 

its financing as one course of financial relief for the project. Also, borrowers with more 

than one Agency loan may be able to request restructuring changes that simplify 

administration of the loans. This chapter presents the requirements and procedures for 

Agency review and approval of these requests. 

J. Account Foreclosure and Liquidation (Chapter 12) 

When borrowers go into default under the terms of their loan agreement, the Agency 

will review the case and determine whether to accelerate the loan and initiate foreclosure 

proceedings. The procedures for making this determination are covered in this chapter. 

K. Other Special Cases (Chapter 13) 

There are a number of special circumstances that borrowers may face during the life 

of a loan that require special servicing actions by the Agency. The special cases covered 

in this chapter include bankruptcy, death of a borrower, abandonment, and valueless 

liens. 

L. Management and Disposal of Real Estate Owned Property (Chapter 14) 

Real estate owned (REO) property consists of projects where the Agency has 

assumed ownership as a result of foreclosure. This chapter presents Agency procedures 

for managing and disposing of these projects in a manner that is in the best interest of the 

government and of any tenants of the projects. 

M. Project Preservation (Chapter 15) 

Borrowers receiving loans prior to December 15, 1989 may prepay their loan 

obligations under the terms of their loan agreements. In an effort to preserve such units 

as affordable housing, the statute for the program directs the Agency to make reasonable 

efforts to extend the low-income use of the project. This chapter presents the 

requirements and procedures for borrower requests and Agency evaluation of such 

requests. 

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CHAPTER 3: AUTOMATED SYSTEMS 

3.1 INTRODUCTION 

Many of the Agency’s account servicing activities are dependent on data submitted to the 

Agency by tenants and borrowers. These data are tracked by Loan Servicers using the Agency’s 

automated systems. This section describes the Agency’s four primary automated information 

management systems—the Management Agent Interactive Network Connection (MINC), the 

Automated Multi-Family Housing Accounting System (AMAS), the Multi-Family Information 

System (MFIS), and the Prepayment Tracking and Concurrence (Pre-Trac)—including their 

purpose and capabilities, staff responsibilities, and training and certification requirements. 

It is important to understand that while this section identifies the specific activities that 

may be accomplished using the various automated systems, many of the activities listed for a 

particular system cannot be accomplished without inputs from one or more of the others. For 

instance, monthly loan payment amounts are tracked using AMAS, but those amounts cannot be 

determined without inputs from MFIS. Similarly, while MFIS is used to identify and track the 

status of borrower noncompliance, the standards by which compliance is measured come from

AMAS. 

Every Rural Housing Service (RHS) employee is required to be familiar with each of the 

Agency’s automated systems. This includes gaining familiarity with not only the basic

information in this chapter, but the more detailed user manuals for each system and periodic 

training offered to staff. 

3.2 MANAGEMENT INTERACTIVE NETWORK CONNECTION 

MINC is a database used by the Agency to reduce the cost of compliance and increase the 

effectiveness of supervisory actions in the Multi-Family Housing program. 

A. Background 

Before a borrower can submit a payment to the Agency for review and processing, 

the Agency needs to determine and inform the borrower of the correct payment amount. 

Before the payment amount can be determined, the borrower needs to collect and submit 

to the Agency the tenant data that is used in the calculation of rental assistance, interest

credit, and ultimately, the “net” payment amount that must be submitted by the borrower. 

To make the required calculations, tenant data are entered into MFIS, and the outputs 

from MFIS are ultimately entered into AMAS for tracking. It is crucial that tenant data 

be correct, because about $1 billion in tenant subsidy is awarded annually based on each 

tenant’s status. 

Traditionally, borrowers have submitted tenant data to the Agency by mailing paper 

copies to the Servicing Office each month to reflect current occupancy status. In recent

years, the Agency has been moving away from paper submissions toward electronic 

submissions through an automated interface with borrowers—MINC. 

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B. Purpose and Capabilities 

MINC enables management agents to transmit tenant data electronically, via the 

Internet. In addition to tenant data, management agents can transmit Form RD 3560-7, 

Multiple Family Housing Project Budget/Utility Allowance, and Form RD 3560-10, 

Borrower Balance Sheet. Data that are transmitted correctly, and contain changes that 

are within the allowable parameters, are automatically uploaded into MFIS. Data that are 

transmitted incorrectly, or that does not comply with Agency regulations, are “rejected”

by MINC. Questionable data transactions, containing changes requiring review by the 

Loan Services, are held in a “pending” status in the MFIS electronic transmission web 

page. Borrower mail is sent to the management agent, detailing the result of each 

transaction transmitted such as accepted, rejected, pending, etc. The Loan Servicer 

reviews all transmitted transactions, through the use of a “Daily Report,” to determine if 

there is any action necessary on the Agency’s part. MINC provides the capability or

Borrowers to view, approve and submit their Form RD 3560-29 to the Agency. If the 

borrower discovers any discrepancies in the report, a correcting transaction is transmitted 

or the Servicing Office is contacted for guidance. Once the report is determined to be 

correct, the borrower approves and submits the payment. 

C. Staff Responsibilities 

In accordance with 7 CFR Part 3560, all borrowers are required to electronically 

transmit their tenant and financial data and process their payments, for projects with eight 

units or more. The Servicing Office Staff should contact all borrowers/management 

agents, and provide them with instructions for accessing and using MINC. The steps 

involved in this process are as follows: 

• Contact the borrower/management agent, and verify that the taxpayer identification 

number on file with the Agency is correct for the management agent; 

• Validate that all projects for said management agent are associated to the taxpayer 

identification number; 

• Inform the borrower/management agent to access the MINC Web site at 

https://usdaminc.sc.egov.usda.gov, and print a copy of the training handbook; and 

• Instruct the borrower/management agent to follow the step-by-step instructions 

contained in the training handbook to obtain a MINC access code and password. The 

help manual should be consulted for any problems they encounter while completing 

this process. In the event that questions still exist after having consulted the help 

manual, the borrower/management agent should then contact the Servicing Office for 

assistance. 

The borrower/management agent will be required to electronically accept an 

automated version of the Trading Partner Agreement (TPA) while obtaining their MINC

access code and password. The date of acceptance is stored within the system should this 

information be needed at a later date. 

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 The Servicing Office goals are to: 

• Maintain project information on MFIS, completing primary processing of 

submissions of changes to tenant data between the first and tenth days of each month; 

• Provide MFIS reports in a timely manner, or as requested by the 

borrower/management agent; and 

• Confirm the receipt of data transmission when asked. 

The Servicing Office should refer borrowers/management agents to vendors to 

troubleshoot software as needed. Some borrowers/management agents with small 

projects do not use vendor software; instead, they transmit through MINC using the “Filla-Form” option and may need more assistance from the Servicing Office. Any 

automation or program-related issues that are discovered by the Servicing Office should 

be reported to the State Office. 

D. Benefits of MINC 

MINC benefits all parties involved. Electronic submission of data saves borrowers 

the burden and cost of generating and mailing paper documentation to the Agency. The 

Agency saves the burden and cost of handling mail, sorting and copying paper 

documentation, and reentering tenant data by hand. Freeing staff from clerical tasks 

allows them to focus on analytical responsibilities, such as reviewing occupancy patterns 

to uncover civil rights violations, tenant fraud, unacceptable management practices, and 

warning signs of occupancy problems. 

In addition, MINC allows borrowers more time to meet deadlines. Changes 

submitted through MINC are required to be filed by the tenth of the month, an extension 

of 10 days. For borrowers, this provides more time to ensure that their information is 

assembled properly, and is complete and accurate. More accurate information results in 

fewer mistakes to correct with the borrower. Even if there are mistakes, MINC allows 

for next-day response by the Agency. As a result, corrections can be made while the 

borrower’s memory is still fresh. 

MINC also reduces the chance that borrowers will be charged overage for late 

certifications, which can result in a substantial penalty for borrowers, management 

agents, and site managers. Extended submission deadlines and faster turnaround on 

submission reviews reduce the possibility of overage being charged for late data. 

MINC reduces the chance that borrowers will be charged a late fee due to the receipt 

of their mortgage payment being delayed by delivery issues such as mail routing errors 

and incorrect postage. Borrowers have the ability to review the accuracy of their Form 

RD 3560-29 online, making any corrections and approving it for processing. Borrowers 

who are required to submit a payment with their Form RD 3560-29 can sign up for PreAuthorized Debit (PAD), which electronically transfers the funds owed from the 

borrower’s bank account to Rural Development. Borrowers who receive an RA check 

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must be signed up for Electronic Funds Transfer (EFT), whereby the RA due to the 

borrower is transferred from the Agency to the project’s operating account. 

E. Staff Training and Certification Requirements 

Beyond gaining familiarity with the functions of the system, there are few formal 

training or certification requirements for Loan Servicers using MINC. 

3.3 AUTOMATED MULTI-FAMILY HOUSING ACCOUNTING SYSTEM 

A. Purpose and Capabilities 

AMAS maintains loan account information, tracks loan status, and disburses project 

subsidy. AMAS has been operational since 1985 and is located on the U.S. Department 

of Agriculture (USDA) Kansas City mainframe. The Systems Development Division in 

St. Louis administers AMAS. 

AMAS is the Agency’s primary financial accounting system. Any data relating to a 

borrower’s account (e.g., payment amount, payment due date, account status) are tracked 

using AMAS. In addition, payment entry, verification, and reconciliation are 

accomplished using AMAS. 

B. Staff Responsibilities 

Loan Servicers using AMAS are responsible for the following activities: 

• Closing loans, including reamortized loans; 

• Disbursing loan funds; 

• Determining note, rental assistance, and interest credit payment amounts; 

• Determining payment due dates; 

• Verify loan payment processing; 

• Converting accounts from Daily Interest Accrual System (DIAS) to Predetermined 

Amortization Schedule System (PASS); 

• Determining current loan balances for transfer; 

• Obligating loan funds; 

• Adjusting accounts in response to unauthorized assistance; 

• Processing recaptured unauthorized assistance; 

• Adjusting accounts for interest rate changes; 

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• Tracking rental assistance; 

• Tracking inventory property status and acquisitions; 

• Tracking Servicing Office and overall Agency loan and subsidy totals; 

• Tracking and correcting account discrepancies; and 

• Tracking account payment history. 

C. Staff Training and Certification Requirements 

Loan Servicers must be certified by the State Director to process payments in AMAS. 

The AMAS Coordinator in each State is responsible for the payment processing 

certification process and will make recommendations to the State Director, based on 

certification examination. Each Field Office should have at least two certified staff who 

can process payments. Uncertified staff may access the view-only screens within the 

system, but cannot alter any of the data. 

1. Basic Skills Required

The basic areas a Loan Servicer must master to receive certification include the 

following: 

• The employee must successfully review and process payments for three call dates; 

• The employee must understand the process for verifying that payment processed in 

MFIS is updated correctly in AMAS; and 

• For offices on the wholesale lockbox system, the employee must properly prepare the 

Field Office Remittance Reconciliation Report and all related forms for submission to 

the wholesale lockbox. 

2. Procedures for Certification Training 

The procedures for certification training are as follows: 

• The employee will be trained by the AMAS Coordinator, or by a qualified State 

Office or Field Office employee. The training must cover the following areas: 

◊ Release Form RD 3560-29 for borrower’s review; 

◊ Reviewing and processing the borrower’s payment transmittal; 

◊ Establish and maintain PAD accounts; 

◊ Understanding the payment logic; 

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◊ Signing onto the AMAS Cash System (AMAS-CSH); 

◊ Inputting regular payments and special collections into MFIS; 

◊ Handle any pending transactions in AMAS; and 

◊ Submitting checks, cash, and accounting data to the Finance Office. 

• The trainee will make copies of all the records related to preparing the test collections

and will include them in an envelope as if they were being mailed to the Finance 

Office. The envelope will be marked “Payment Certification for (trainee name)” and 

submitted to the AMAS Coordinator.

3. Recommendation of Certification 

The AMAS Coordinator will review the balanced blocks and the accounting data 

envelope prepared for the examination. When the employee has demonstrated an 

understanding of the payment process and proficiency in all steps listed above, the 

AMAS Coordinator will recommend certification to the State Director. The State 

Director will: 

• Instruct the IRM to notify the Security Officer in the Finance Office to add AMAS 

payment process to the employee’s user identification number; and 

• Notify the Loan Servicer and employee, by letter, of the employee’s certification to 

process payments. The letter must list the possible reasons for withdrawal of 

certification.

4. Monitoring Payment Processing

After certification, the AMAS Coordinator will periodically monitor Field Office 

payment processing activities to ensure that payments are being input properly and 

verified. For newly certified employees, monitoring should be daily for a 30-day period. 

For experienced employees, monitoring should be no less than monthly, provided 

monitoring reports do not indicate any of the problems that could lead to withdrawal of 

certification.

A log of each monitoring activity should be kept by the AMAS Coordinator for 

documentation using Form RD 3560-64, Online Payment Certification Monitoring Log. 

5. Withdrawal of Certification and Recertification 

Certification may be withdrawn from an employee if the effective date of the 

payment and the call date differ by more than 3 days and there is not sufficient 

justification (e.g., office was closed on the regularly scheduled work day that the payment 

was received; weekend and holidays caused a 3-day delay before the payment could be 

processed). 

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After the third occurrence of any of the above errors in a 12-month period, the State 

Director will notify the Loan Servicer and employee in writing that certification may be 

withdrawn. The notice will include plans and requirements for remedial training. 

The State Director will withdraw certification after the fourth occurrence in a 12-

month period of any of the above errors. The State Director will notify the Loan Servicer 

and employee in writing, with a copy to the IRM for the State. The IRM will notify the 

Security Office in the Finance Office to remove online payment authority from the 

employee’s identification number. 

6. Retraining 

An employee should be retrained immediately when a payment processing problem

occurs as a result of an employee error. This training should cover the areas causing 

problems and should prevent recurrence of the error. After certification has been 

withdrawn, the State Director must determine whether it is desirable for the employee to 

process payments. If so, the retraining should be performed immediately. The employee 

may be recertified if retraining has been completed, the employee demonstrates the 

necessary skills to process payments, the AMAS Coordinator recommends 

recertification, and the State Director concurs. 

3.4 MULTI-FAMILY INFORMATION SYSTEM 

A. Purpose and Capabilities 

MFIS assists Servicing Offices in monitoring the Multi-Family Housing program, 

maintains data on clients, and provides comprehensive and flexible reporting. MFIS was 

designed to improve management and supervision routines in Servicing Offices. It is the 

monitoring and scheduling systems being used by the Servicing Offices and provides the 

analytical tools to review budgets and financial information. MFIS has a classification 

system that uses information entered during normal supervisory activities to identify 

projects needing additional servicing attention. 

MFIS is used by the Agency to track tenant data, and it is employed mainly to ensure 

that each tenant receives the correct amount of subsidy. MFIS uses the tenant data to 

calculate tenant rents and rental assistance, which drive many subsequent account 

servicing activities. MFIS is also the source for occupancy statistics used to describe 

Multi-Family Housing program beneficiaries. 

MFIS is the primary tool used by the Agency to track the status of borrowers’ 

compliance with loan agreements and all other program requirements. Account status 

data from AMAS are transferred to MFIS, where Loan Servicers use them to monitor the 

status of borrower compliance. For instance, the system holds data on project 

classification based on compliance status (i.e., Classification codes A, B, C, or D). In 

addition, the system tracks the status of project budgets (i.e., when they are due, when 

they are received, and when they are approved). 

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The goal of using MFIS for tracking is to identify borrower compliance violations, as 

well as to track the status of servicing letters, workout agreements, and other Agency 

servicing actions. For instance, MFIS tracks the 15-day period for responses to servicing 

letters or monitoring letters and alerts staff to the need for follow-up when that period has 

expired. 

MFIS also is used to track each state’s performance in meeting Agency goals, and 

evaluate those states that may need additional assistance in determining solutions to 

problem accounts and the effectiveness of actions previously taken. Many states use the 

information from MFIS in monthly staff meetings and to provide information to 

borrowers. MFIS allows for timely assembly of this information with minimal effort 

from the Servicing Offices. 

All regular borrower payments are processed through MFIS. MFIS maintains a 

collection history for each borrower. 

B. Major Components of MFIS 

The MFIS home page displays icons that each represents a Web page of their own 

that link to each other and are capable of interacting by accessing the data contained 

therein. The five main icons a Servicing Office should be concerned with are Projects, 

Project Payments, Customers, Reports, Electronic Transmissions, and Message Board. 

Each web page contains links for data input and analysis of important multi-family 

housing portfolio issues such as borrower compliance with their loan 

agreement/resolution, management efficiency, financial stability, occupancy trends, rent 

structures, and identities-of-interest, as well as program strengths and deficiencies. 

Moreover, MFIS archives a history of the multi-family housing portfolio nationwide, 

providing information necessary for determining the need for program changes and/or 

enhancements as well as funding needs. 

• Projects. This page is used when working on information specific to a single project. 

It contains the data on the borrower, management agent, project tenants, type of 

project, and the like. Basically it contains all information that was formerly contained 

on the Management Card System for each project. Any incorrect information on this 

page could lead to improper calculations on Form RD 3560-29, Notice of Payment 

Due Report, that the borrower uses to make their monthly/annual installment from, 

thus causing unnecessary delinquencies.

The Projects page is also where the Loan Servicer maintains information concerning 

borrower/management agent compliance with Agency regulations. One link on this 

page is Supervisory Activities. Supervisory Activities, when properly populated, can 

serve as an excellent tickler system to let the Servicing Official know when action is 

needed on their part. The same is true for the link Servicing Efforts, Findings, 

Financial Instruments, and Rents. When all components are analyzed, a clear and 

concise picture of the needs of the project can easily be determined. 

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• Project Payments. This page is used to perform activities related to payment 

processing. These functions include scheduling the release of Form Rd 3560-29 to 

borrowers, processing payments, and review payments. In addition, users can view 

and make adjustments for a specific pay period, monitor uncollectible returns, review 

and edit RA Obligations tracking for projects receiving RA units due to an obligation 

or transfer of units. The Project Payments page can be a very valuable tool when 

evaluating the feasibility of various servicing actions, providing collection history for 

a specific project at any given time. 

• Customers. This page should be used when working on information across projects 

or specific only to the borrower, key member, or management agent. This is the page 

used to enter the key members of the borrower and management agent. It also allows 

the user to access all of the projects managed by a particular management agent, 

enabling an identical change to multiple projects with ease. 

• Reports. This page contains predesigned reports by category, such as borrower, 

financials, findings, management agent, project, project summary, tenant, and 

tracking. Under each category, several different reports that may be generated are 

listed. The user is allowed to complete various data fields to allow one to zero in on 

the particular information that is desired. The accuracy of these reports is based on 

the information that has been input into the Projects and Customer Web pages.

• Electronic Transmissions. This page allows the MFIS user to view the individual 

transactions that have been electronically transmitted by the borrower/management 

agent. It is an important tool in assisting the borrower/management agent in correctly 

transmitting the data necessary to reflect the correct tenant and/or financial data. 

• Message Board. Below the icons for the individual Web pages is a link to the 

message board. Each user of MFIS is encouraged to view the message board on a 

regular basis. This shows information on changes that have been made to the system. 

Step-by-step instructions for the input of all requested and/or required data are 

provided in the training manuals that are accessible from the message board. 

C. Staff Responsibilities 

Loan Servicers are responsible for populating all data fields contained in the MFIS 

system with accurate and current information. The upgrading of the MFIS system is an 

ongoing process. It is extremely important that the information contained in MFIS III for 

each borrower/management agent/project be input and accurate. 

3.5 PREPAYMENT TRACKING AND CONCURRENCE 

Pre-Trac is a Web-based automated application that allows the Agency to significantly 

reduce the reporting burden required to process and monitor Multi-Family Housing prepayment 

activity. This means that the Agency enters prepayment-tracking information once for use by all 

administrative levels. State and Servicing Offices use Pre-Trac to process all prepayment 

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requests to meet the Agency’s requirements. Pre-Trac is designed to lead the user through the 

statutorily prescribed prepayment process. 

The Office of Rental Housing Preservation (ORHP) uses Pre-Trac to issue all 

concurrence and authorizations of incentives to avert prepayment, and equity loans and 

prepayments. See Chapter 15 for more detailed information on using Pre-Trac. 

3.6 FURTHER INFORMATION 

Because there is a detailed users’ manual for each of the Agency’s automated systems, 

the discussion provided here is intended to be more of a basic introduction to the systems and 

their uses and requirements than an exhaustive step-by-step tutorial. Agency staff requiring 

more detailed information on any of the automated systems should refer to the relevant users’ 

manual. 

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CHAPTER 4: ACCOUNT SERVICING 

4.1 INTRODUCTION 

To ensure that program objectives are met and that borrowers do not default on their 

loans, the Agency has specific procedures for servicing borrower accounts. These procedures 

are designed to ensure that loan payments are received on time and in the proper amounts; 

payments are properly applied to the appropriate account; past due accounts are serviced 

correctly; late fees are assessed for late payments; and procedures for final loan payments are 

followed. Diligent management of the account servicing process through promptly and 

accurately recording payments and tracking late payments is an effective method to reduce 

unnecessary delinquencies. 

This chapter presents the Agency’s procedures for servicing borrower accounts. It 

describes the procedures that all Loan Servicers must follow when servicing accounts to protect 

the Government’s interest in the loan and the property. 

4.2 OVERVIEW 

Agency regulations in 7 CFR 3560.401 through 7 CFR 3560.403 establish borrowers’ 

responsibilities and the actions the Agency may take to collect timely loan payments from 

borrowers, protect its interests and the security of its loan, and assist borrowers in meeting the 

objectives and requirements of the loan. These regulations require that borrowers repay their 

loans to the Agency according to the specific provisions of their debt instruments and operate 

their facilities in accordance with requirements of the rule and other applicable Federal, State, 

and Local laws. The Agency may reject any servicing request by a borrower if it is not in the 

best interest of the Government or tenants. 

Most servicing requirements and procedures are the same for Daily Interest Accrual 

System (DIAS) accounts and Predetermined Amortization Schedule System (PASS) accounts, 

with the exception of the assessment of late fees, which only applies to PASS accounts. 

Payments under DIAS are not assessed late fees because additional interest is charged 

automatically, based on the number of days the past due balance is outstanding. 

SECTION 1: ACCOUNT SERVICING REQUIREMENTS 

[7 CFR 3560.403 AND 7 CFR 3560.404]

The Agency’s regular account servicing requirements cover the following major topic 

areas: loan payments, late fees, waivers, servicing past due accounts, conversion of accounts 

from DIAS to PASS, and final loan payments. This section describes the regulatory 

requirements for each area. 

4.3 LOAN PAYMENTS 

Borrower loan payments are due on the first day of each month unless otherwise 

established in the debt instrument executed with the Agency. A borrower is in default of loan 

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agreements when the Agency has not received the full payment by the first day of the month. 

The Agency is under no obligation to offer borrowers loan servicing other than actions consistent 

with debt instruments and other agreements. However, the Agency does not pursue legal action 

to cure the default until a borrower is 60 days delinquent. If a borrower with a PASS account has 

not paid the full amount by the tenth day of the month, a late fee may be incurred. 

4.4 LATE FEES (PASS ACCOUNTS ONLY) 

The Agency will charge a fee for late payments under PASS accounts, equal to 6 percent 

of the note installment. Late fees are charged if any portion of a note payment exceeding $15 is 

late (i.e., outstanding after the tenth day of the month). The Agency may charge late fees only 

once for each regular installment or portion thereof. 

Late fees are an owner expense and, as such, may not be charged to the project. The 

amount of the late fees is not appealable. The Finance Office notifies all late borrowers with 

PASS accounts of late fees and the payment due, not including overage and rental assistance 

calculations. The Loan Servicer should follow up with the borrower on this notification in an 

effort to collect the amount due before an account becomes 30 days past due. 

4.5 LATE FEE WAIVERS 

The State Office may waive late fees only for circumstances beyond a borrower’s control 

or when granting the waiver is in the best interest of the Government. Waivers are issued at the 

Agency’s discretion and Field Office Staff are under no obligation to grant waivers. 

4.6 PAST DUE ACCOUNTS 

A. Past Due Payments 

The Agency considers a borrower to be delinquent if any past due amount remains 

after the payment due date. If a delinquency exists, the Agency immediately contacts the 

borrower and attempts to collect the amount due. 

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B. Interest on Past Due Payments 

(PASS Accounts Only) 

When a regular payment continues 

to be past due on the first day of the 

month following the payment due date, 

the Agency charges interest at the note 

rate on the unpaid delinquent principal 

amount. Interest is charged from the 

date the principal was due until all 

applicable payments are current in 

accordance with the number of full 

installments required by the Form RD 

3560-52, Promissory Note, and is in 

addition to the scheduled interest of the 

regular payment. The interest on 

delinquent principal, the unpaid 

delinquent principal, any applicable late 

fees, and recoverable cost charges are 

added to the regular payment amount 

due for the next month to determine the total amount due as of the first of the month 

following the delinquency. 

C. Special Servicing Action 

Borrowers with accounts 30 days past due may be subject to the special servicing 

provisions outlined in Chapters 10 and 12 of this handbook. 

4.7 CONVERSION FROM DIAS TO PASS 

To facilitate and standardize its servicing efforts, the Agency requires that all new loans 

be closed and serviced using PASS. The only exceptions are off-farm and on-farm labor housing 

loans, which may be closed on either DIAS or PASS. Farm labor loans may be closed on DIAS 

if the farm operation is such that the annual payment corresponds to the timing of usual farm 

income. 

Borrowers with DIAS accounts, except for farm labor housing loans, must convert to 

PASS if they request servicing actions that involve a change in the terms of their loan (e.g., 

credit sales, reamortizations, equity incentive loans, loan consolidations, and project transfers) or 

if they request subsequent loans. 

4.8 FINAL LOAN PAYMENTS 

Before the Loan Servicer begins the final loan payment process, they must determine if 

the final loan payment is a prepayment, as covered in Chapter 15. 

A borrower’s final loan payment must include repayment of all outstanding obligations to 

the Agency. The Agency will apply any remaining supervised funds to the borrower’s account 

Example – Determining Days for Past Due 

Accounts 

If a borrower fails to make a scheduled 

payment in full due on June 1, the following 

example demonstrates how the Agency 

calculates past due charges: 

June 1 – Payment due date. 

June 2 – Payment is 1 day past due. No 

Agency action taken. 

June 11 – Payment is 11 days past due. Late 

charge applied on overdue payments. 

June 30 – Borrower is delinquent and 30 days 

past due. Agency begins special servicing 

actions in accordance with Chapters 10 and 12. 
HB-3-3560 

or return such funds to the borrower following acceptance of final payment. At the borrower’s 

request, the Agency will provide a written statement indicating the amount necessary to pay the 

account in full. 

Suitable forms of payment include cashier’s check, money order, or bank draft. If a 

borrower uses forms of payment that require special handling, the borrower is responsible for the 

cost of such handling. When payment is provided in a form that is not the equivalent of cash, the 

Agency will consider a payment to be received at the time the funds have been successfully 

transferred to the Agency. This can now be accomplished electronically through Pre-Authorized 

Debit (PAD). 

The Agency will release security instruments when full payment of all outstanding 

obligations to the Agency have been received and accepted. If the Agency and the borrower 

agree to settle the account for less than the full amount owed, the Agency may release security 

instruments when the borrower has paid all agreed-upon obligations in full. 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. 

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. 

The Agency may collect any account balance that results from an error by the Agency in 

handling final payments. 

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______________________________________________________________________________ 

SECTION 2: PROCESSING TENANT CERTIFICATIONS 

4.9 OVERVIEW 

For borrowers to qualify for interest credit or rental assistance, they must demonstrate 

that their tenants meet the income and household size eligibility limits delineated by the Agency. 

This section describes the Agency’s policies and procedures for processing tenant certifications, 

including verification that the information is true and accurate. 

4.10 REQUIREMENTS OF THE RULE 

For each occupied unit under lease, borrowers must have a current tenant certification or 

recertification on file with the Agency to be eligible for interest credit or rental assistance. The 

Agency may charge borrowers overage and withhold rental assistance payments for units without 

a valid and current tenant certification. These requirements protect the Government’s interest by 

ensuring that only eligible units benefit from Agency subsidy payments. They also protect 

tenants’ interest by reserving subsidy benefits for those who actually qualify for them. 

4.11 GENERAL PROCEDURES 

A. Timely Submission and Overage Charges for Late Submissions 

Borrowers must submit tenant certifications for new tenants and required 

recertifications for existing tenants no later than the tenth day of the month for the 

certification to be effective for that month. This deadline applies regardless of whether 

the certifications are being submitted through electronic transmission or in hard copy. 

Tenant certifications received after the tenth day of the month will be considered late. 

Borrowers are not eligible for interest credit or rental assistance for units with late 

certifications, and the Agency will charge the appropriate amount of overage until valid 

certifications are received in a timely manner for all units. 

The tenth-day-of-the-month deadline applies regardless of whether the late 

certification in question relates to a new certification or a recertification. Any changes to 

tenant certifications that are effective as of the first day of the month must be submitted 

to the Agency by the tenth day of that month for the affected units to qualify for interest 

credit or rental assistance. If the changes are submitted after the tenth day of the month, 

the Agency will charge overage and the changes will be effective the first day of the 

following month. The Agency may remove a management agent if there is a pattern of 

failure to submit tenant certifications on time that results in excessive overage charges. 

B. Waivers of Overage 

The State Director may grant a waiver of overage charges resulting only from the late 

submission of tenant certifications in the following instances: 

• Circumstances existed that were beyond the borrower’s control (e.g., natural 

disaster or undetected transmission failures due to network interruption); 

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• It would place an unfair burden on the borrower; 

• It is in the best financial interest of the Government to grant the waiver; or 

• The charges were a result of an Agency error. 

In order for a waiver of overage charge to be considered, the borrower must submit a 

written request to the Servicing Office justifying the reasons for the waiver. For each 

waiver requested, the borrower must provide a written explanation of the circumstances 

that caused the late submission of the tenant certification, proof that these circumstances 

were beyond the borrower’s control and a description of the actions taken to prevent the 

situation from occurring in the future. 

To recommend the approval of a request for waiver of overage, the Servicing Official 

will attach a completed copy of Form RD 3560-23, Multi-Family Housing Waiver of 

Overage, to the borrower’s request and forward to the State Office. Only the State 

Director has the authority to grant a waiver of overage. Once the waiver is approved, the 

State Office is responsible for making the appropriate entries in AMAS and MFIS. 

If a request for waiver of overage is denied, the charge must be paid as a borrower 

expense. With prior Agency approval, nonprofit borrowers and cooperatives may treat 

the charge as a project expense. If a request for an overage waiver is denied, the 

borrower will be given appeal rights. 

C. Verification and Processing of Certifications 

In the case of projects with eight units or more, Borrowers are required to provide the 

data for all tenant certification forms to the Servicing Office through electronic 

transmission via MINC. Borrowers with less than eight units may submit hard copies. 

The Servicing Office processes these transmissions through the Industry Interface page of 

MFIS, providing assistance where needed with rejected entries. In the event of the 

receipt of hard copies of Form RD 3560-8, the Servicing Office will process manually the 

data into MFIS. MFIS calculates interest credit and rental assistance due the borrower, as 

well as overage due the Agency in cases of late certifications. These calculations are 

reflected on Form RD 3560-29. All subsidy payments are based on tenants’ occupying 

the units as of the first day of the month prior to the payment due date. For example, a 

payment due on July 1 is based on tenants’ occupying the units June 1. 

The Loan Servicer verifies the accuracy of the tenant data transmitted by the 

borrower through a random review of selected tenant files during the Supervisory Visit. 

Corrective action is initiated for any discrepancies revealed during this review. 

D. Approval of Subsidy 

The Agency will certify for interest credit or rental assistance only those tenants with 

current tenant certifications showing on MFIS when payments are being processed. 

MFIS retains a copy of Form RD 3560-29, to document the approved subsidies. 

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SECTION 3: LOAN PAYMENT PROCESSING 

4.12 OVERVIEW 

The Agency processes loan payments and subsidy requests according to the servicing and 

collection requirements of the individual loan. The requirements are established by the loan 

agreement or loan resolution, and Form RD 3560-52. There are a number of steps common to 

the processing of any loan payment, as outlined below. 

4.13 NOTIFICATION TO BORROWERS OF PAYMENTS DUE 

A. Factors Used to Determine Payment Amount 

The amount of each borrower’s monthly payment is automatically calculated by 

MFIS based on the tenant information received from the borrower and summarized on 

Form RD 3560-29. The Servicing Office releases this form to MINC on or about the 

seventeenth day of the month, where borrowers are able to view and approve the 

information for processing. 

B. Calculating Payment Amount 

To determine the amount of the payment that is due from the borrower, MFIS sums 

the total of the following components: 

• Audit receivables (e.g., excess rental assistance, unauthorized assistance) as 

determined by MFIS; 

• Late fees as determined by AMAS; 

• Unamortized cost items (e.g., taxes, insurance, protective advances) as determined by 

AMAS; 

• Amortized cost item loan installments as determined by AMAS and reflected on the 

MFIS Form RD 3560-29 (included in the project payment) and in the project payment 

amount on Form RD 3560-29; 

• Overage; and 

• Debt service (i.e., interest and principal as determined by AMAS). 

Note that audit receivables and cost items may be either unamortized or amortized. If 

they are amortized, a borrower may have up to five years to pay under the terms of an 

approved work-out agreement (see Chapter 10 for more information on workout 

agreements). 

The Agency will count only those tenants who have current tenant certifications on 

MFIS for interest credit or rental assistance when processing payments. For a project 

receiving rental assistance, the rental assistance amount is applied as a credit to the total 

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amount due as calculated on the project worksheet. The remaining balance is the net 

amount due. 

Exhibit 4-1 illustrates how rental assistance and overage are calculated and the impact 

they have on the tenant’s rent and the borrower’s loan payment. If the amount of rental 

assistance exceeds the borrower’s loan payment, the Agency will make a rental assistance 

payment to the borrower. In accordance with the Debt Collection Improvement Act of 

1996, the Agency is required to send rental assistance checks via an electronic funds 

transfer to the borrower’s bank account. 

Exhibit 4-1 

Overage and Rental Assistance

30% of Tenant 

Monthly Adjusted 

Income 

Rental 

Assistance 

Basic 

Rent Note Rent Overage 

Actual Rent Paid by 

Tenant 

$180 Not available 

($0) $200 $500 $0

Tenant pays Basic 

Rent, $200. Tenant is 

rent overburdened. 

$180 $20 $200 $500 $0 Tenant pays $180. 

$200 $0 $200 $500 $0 Tenant pays Basic 

Rent, $200. 

$230 $0 $200 $500 $30 Tenant pays $230; $30 

is considered overage. 

$500 $0 $200 $500 $300 Tenant pays $500; $300 

is considered overage. 

C. Borrower Verification Of Payment Data 

Form RD 3560-29 is released to MINC for verification by the borrower on or about 

the seventeenth day of the month. It is the borrower’s responsibility to access this form 

and verify that the data contained therein is accurate. Should discrepancies be found, the 

borrower must transmit corrected data through MINC or contact the Servicing Office for 

assistance. 

4.14 PAYMENT DUE DATES 

The regular payment due date is established in the Agency Form RD 3560-52 for the 

project and is generally the first day of each month. The first regular amortized payment after 

loan closing for transfers, reamortizations, voluntary conversions, credit sales, or loans closed 

after interim financing must be at least 1 month from closing. For example, if a loan is closed on 

January 31, the first regular amortized payment will be due March 1. For multiple advance 

loans, the first payment must be at least 1 month after the final advance. 

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4.15 PROCEDURES FOR PROCESSING PAYMENTS 

A. Overview 

Loan Servicers are responsible for administering the requirements for payment 

processing under the guidance and supervision of the State Director. Key steps in 

processing regular payments and advance regular payments are listed in Exhibit 4-2. 

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Exhibit 4-2 

Key Steps in Processing Loan Payments 

• Process payments that are submitted to the Servicing Office through MFIS. 

• Review payments for accuracy, balance totals, access the accounting system, and 

enter appropriate amounts in the proper fields; 

• When a payment is processed, the system will apply subsidy credit to the loan 

account before any payment or other credit is applied to the account. Subsidy 

credit will be applied first to accrued interest and then to principal after all 

interest is paid. Subsidy credit will not be applied to late fees, audit receivables, 

or recoverable cost charges; 

• After a payment has been processed, any change in application that does not 

involve changes in cash may be made in the Servicing Office by properly trained 

and certified staff. If changes need to be made in a cash field, the AMAS 

Coordinator in the State Office can process the charge after performing a cursory 

review of account information; and 

• Make modifications to the payment as necessary. Some examples of situations 

where modifications might be made include wrong date of credit, key punch 

errors, incorrect recording of rental assistance, and duplicate payments (see 

AMAS instructions for more information). 

When a borrower remits a payment, AMAS will net enough rental assistance to bring 

the account status current and pay any unpaid overage, late fees, or interest on delinquent 

principal based on the date payment is received. If the account is on or ahead of schedule 

when the payment is received, enough rental assistance will be netted to pay one full 

installment and any unpaid overage, interest, or other obligation. 

B. Borrower Submission 

Borrowers must prepare and submit Form RD 3560-29 providing the following 

information: 

• Only tenants’ occupying units the first day of the month prior to the payment due 

date; 

• Interest credit and rental assistance only for tenants with current tenant certifications; 

• Overage up to the market rent that must be paid to the Agency by the borrower for 

tenants without current tenant certifications unless there is a formal eviction in 

process. In that case, the payment will be based on the expired tenant certification; 

and 

• The borrower may subtract any rental assistance due the project (supported by current 

tenant certifications) from the payment due and remit a net payment. Calculations 

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supporting the net payment must be shown on Part I of Form RD 3560-29. AMAS 

will net enough rental assistance to bring the account status current and pay any 

unpaid overage, late fees, or interest on delinquent principal based on the payment 

receipt date. 

• If the RA due the borrower exceeds the balance of scheduled loan payments, 

delinquent payments and other charges, no additional payment is due from the 

borrower and an RA check for the excess will be issued. 

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Examples 

Example 1: Borrower Olson shows on Form RD 3560-29 for the 

month of May a loan payment due to the Agency of $1,865 and 

RA due from the Agency of $3,600. The Finance Office sends 

Olson a check for $1,735.

Example 2: Borrower Johnson shows on Form RD 3560-29 for 

the month of May a loan payment of $2,200 due to the Agency and 

RA of $1,200 due from the Agency. Johnson must attach a check 

made out to the Agency in the amount of $1,000.

C. Application of Payments 

1. Regular Payments 

The Agency has developed specific priorities for applying regular payments. 

Exhibit 4-3 lists these priorities in descending order. 

AMAS also will apply regular payments on projects with an initial and subsequent 

loan according to the priorities in Exhibit 4-3. Each priority item will be paid for all 

project loans before moving to the next item. AMAS will apply payments for each 

priority item in accordance with the loan number, beginning with the initial loan and 

ending with the highest-numbered subsequent loan. 

Exhibit 4-3 

Priorities for Application of Borrower Payments 

to Outstanding Obligations 

From highest to lowest, the priorities are: 

• Amortized audit receivables; 

• Unamortized audit receivables; 

• All project late fees due; 

• Amortized recoverable costs due; 

• Unamortized recoverable costs due; 

• Overage; 

• All other interest due; 

• Principal; and 

• Any remaining regular payment, which will be applied as an advance 

regular payment unless specifically designated otherwise. 

2. Advance Payments and Additional Principal Payments 

The Agency also has established specific procedures for applying advance payments 

and additional principal payments. Advance regular payments are applied as such only 

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when the loan account is current. The payment effective date will be the due date of the 

next regular payment that is not fully paid. Extra payments are applied as principal to the 

last installment to become due under the note. Voluntary additional principal payments 

will only be credited to the account when all regularly scheduled payments on the 

account have been paid. These payments are credited to all principal, as of the payment 

effective date, and do not affect the payment status of the loan. Any amount paid by the 

borrower in excess of the amount owed will be refunded to the borrower if the excess 

amount is over $10. 

4.16 ASSESSMENT OF LATE FEES 

Payments for loans closed on PASS and DIAS are due on the first day of the month. The 

Agency charges late fees on PASS payments received after the tenth day of the month. The 

Finance Office automatically notifies each borrower of late fees for PASS payments that were 

outstanding as of the tenth day of the month. On or about the eleventh day of each month, Form 

RD 3560-29A, Multiple Family Housing Statement of Payment Due, will be mailed to each 

borrower who is 30 days past due and/or owes late fees, showing the current monthly payment 

due, unpaid late fees, and past due payments due on the first day of the following month. This 

payoff statement will be determined from current Finance Office records but will not reflect 

overage due from the borrower or rental assistance due the borrower. A copy is also mailed to 

the Servicing Office. 

Late fees collected by the Finance Office are deposited in the Rural Housing Insurance 

Fund (RHIF). 

A. Agency Approval of Waivers Procedures for Granting Late Fee Waivers 

Waivers to late fee charges may be granted only as follows: 

• The State Director may grant a waiver for as many late fee charges as are justified by 

the facts of the case, based on a determination that the late fees would place an unfair 

burden on the borrower. For each waiver requested, the borrower must provide a 

written explanation of the circumstances that caused the late payment, proof that they 

were beyond the borrower’s control, and a description of what actions will be taken to 

bring the account current. Waivers are granted on a case-by-case basis; 

• There are only two circumstances under which the Agency will grant a waiver to late 

fees. The first is when the borrower is a board-managed nonprofit or cooperative, 

because they are the only entities on which the assessment of late fees would place an 

unfair burden. The second is where the Agency has agreed to accept deferred 

payments or partial payments as part of an approved workout agreement. In such 

cases, the State Director can grant as many waivers as are justified by the facts of the 

case (i.e., there is no annual limit on the number of waivers that may be granted); 

• As noted above, late fees are an owner expense. As a result, they may not be charged 

to the project, except in the case of cooperatives, which can pay late fees from project 

expenses in cases where the fees are not waived; 

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• The Agency will not grant a waiver solely to correct a delinquency; and 

• The State Director may authorize late fee waivers in cases where Agency error (e.g., 

an incorrect statement of the date a payment is due) leads directly to the late payment. 

B. Required Submissions from Borrower to Receive a Waiver 

Borrowers must submit a number of items to the Agency in order to receive a waiver. 

These include: 

• A written explanation of the circumstances that caused the late payment; 

• A description of the factors beyond the borrower’s control (e.g., natural disaster); and 

• A description of the actions that will be taken to bring the account current. 

If the late payment is due to Agency error, the borrower need not submit the abovelisted items. In such cases, providing notification to the Agency of its error will suffice, 

and loan services will promptly correct the error in the appropriate automated system(s). 

C. Notification upon Granting A Waiver 

When a waiver to late fees is granted, the State Director will notify the Servicing 

Office and the borrower on Form RD 3560-28, Multi-Family Housing Exception to Late 

Fees, completed according to the Forms Manual Insert (FMI), and enter the change into 

AMAS and MFIS. 

D. Denying Waivers 

When an application for a late fee waiver is denied, the State Director must give the 

borrower appeal rights under 7 CFR Part 11. 

4.17 SPECIAL CIRCUMSTANCES 

A. Reapplication of Payments 

Loan Servicers may approve, with the authorization of the State Director, 

reapplication of payments between accounts when payments have been applied in error. 

However, no change may be made if the loan is paid in full, the canceled note or notes 

have been returned to the borrower, and the security instruments have been satisfied. The 

AMAS Coordinator will enter changes through Field Office terminals. 

B. Overpayments and Refunds 

Loan Servicers will process overpayments and refunds to borrowers according to the 

procedures outlined in 7 CFR 3560.401 through 7 CFR 3560.404, Account Servicing 

Policies. 

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C. Recoverable and Nonrecoverable Cost Items 

The Loan Servicer will service recoverable and nonrecoverable cost items according 

to the procedures outlined in 7 CFR 3560.403 and RD Instruction 2024-A. 

SECTION 4: ACCOUNT TRACKING AND SERVICING 

4.18 OVERVIEW 

The Agency must track borrower accounts to ensure that all payments are up-to-date and 

to identify any problems that could lead to delinquencies or defaults. Any transaction that affects 

an account must be tracked to ensure that it has been processed correctly and that it has not had a 

negative impact on the interests of the borrower, tenants, or the Government. 

The Agency has sought to facilitate and standardize the account tracking process by 

requiring that all new loans, and many existing loans, be closed and serviced using PASS. 

4.19 ACCOUNT TRACKING PROCEDURES 

A. Conditions for Conversion from DIAS to PASS 

Conversion of accounts from DIAS to PASS may be either voluntary or involuntary. 

An involuntary conversion may occur at the time of a servicing action such as a 

subsequent loan, transfer, or reamortization. In such cases, the Servicing Office 

completes Form RD 3560-50, Conversion Agreement, and submits it to the State AMAS 

Coordinator for entry into AMAS. The terms for the converted loan will be the same as 

for the original loan. 

B. Procedures for Conversion from DIAS to PASS 

The following actions must be taken to convert an account from DIAS to PASS: 

• The Loan Servicer will complete Form RD 3560-50, except for loans converted on 

Form RD 3560-21, Assumption Agreement, or Form RD 3560-16, Reamortization 

Agreement (which converts the account to PASS); 

• When the borrower will continue to receive interest credit following conversion, the 

current interest credit plan type will be passed through to the PASS loan. A new 

Form RD 3560-9, Interest Credit and Rental Assistance Agreement, must be prepared 

by the borrower and the Loan Servicer to reflect the PASS payment and subsidy 

amount; 

• The Loan Servicer will document on the back of the original note or assumption 

agreement that the payment schedule was modified; and 

• The Loan Servicer will establish principal balance converted to PASS according to 

the FMI for Forms RD 3560-21 or 3560-16, and specific requirements based on 

whether the transaction is on the same terms or new terms. 

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C. Account Reviews 

The foundation for proper and timely debt payment is sound budgeting and monthly 

review of income and expenses by the borrower and, as necessary, by Loan Servicers. 

Account maintenance must begin with initial planning and must be an integral part of 

ongoing analysis, planning, and follow-up management assistance. 

Loan Servicers must review each loan account at least monthly by accessing AMAS 

and carefully reviewing the status screens showing account status and other relevant 

account information. Accounts that are 30 days past due are subject to special servicing 

actions, as outlined in Paragraph 4.21 and in Chapter 10 of this handbook. 

4.20 SERVICING ACCOUNTS THAT ARE 30 DAYS PAST DUE 

When tracking borrowers’ accounts, Loan Servicers must identify all accounts that are 30 

days past due. The Loan Servicer will service these delinquent accounts according to the 

procedures in this handbook, with guidance and assistance as necessary from the State Director. 

If a borrower’s delinquency is not corrected by the time the account is 60 days past due, the 

Agency initiates legal action to cure the borrower’s default. In such cases, Loan Servicers will 

follow the procedures described in Chapter 10 and any additional procedures established by the 

State Director for the particular type of loan. 

4.21 SPECIAL CIRCUMSTANCES 

A. Same Terms Transfers 

Same terms transfers, when the transferor has been converted to PASS, must take 

place in a current loan status on the date of the transfer. Borrowers must bring current 

any delinquent principal and interest before the conversion can occur. 

B. Overpayments and Advance Regular Payments 

Overpayments and advance regular payments made on PASS accounts result in the 

creation of a “future paid” status account under AMAS. Loan Servicers must reverse and 

apply such advance payments to the transferor’s principal balance prior to determining 

the loan balance to be transferred. If the future payments have been made through RA, 

they must be refunded to the transferor and reapplied in the form of cash on the loan 

balance. 

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SECTION 5: FINAL LOAN PAYMENT [7 CFR 3560.404]

4.22 OVERVIEW 

Because the final payment on an Agency loan signifies the end of the borrower—Agency 

relationship and opens a number of legal questions, it is important that the Agency has specific 

requirements and procedures for accepting and processing final loan payments. The Agency’s 

procedures ensure that payments are received in the proper amount and suitable form, that 

security instruments are released only when all obligations are satisfied, and that special 

circumstances are handled appropriately. 

Before the Loan Servicer begins the final loan payment process, they must determine if 

the final loan payment is a prepayment, as covered in Chapter 15. If the final payment is an 

advanced payment of the account, the borrower must complete the prepayment process as 

outlined in 7 CFR part 3560, subpart N, and Chapter 15 of this handbook before the Agency will 

process a final loan payment. 

4.23 PROCESSING FINAL LOAN PAYMENTS 

There are a number of steps that Loan Servicers must follow when accepting and 

processing a final loan payment. 

A. Payment Amount Determined 

Loan Servicers will obtain and provide to the borrower the amount to be collected for 

payment in full of all loans by accessing the relevant AMAS status inquiry screens on the 

Field Office terminal. Loan Servicers will furnish requests for payoff balances on all 

accounts in writing. Such requests require verification of the payoff amount by two 

employees in the Field Office. 

B. Funds from Supervised Bank Account 

When a borrower is ready to pay a loan in full, Loan Servicers must withdraw any 

funds remaining in the supervised bank account for the initial loan and remit this amount 

for application to the borrower’s account. Note: This requirement does not include the 

supervised bank account for reserves. Any amount remaining in the reserve account 

above the required level and unused is the borrower’s money and may be released to the 

borrower following receipt of the initial payment.

C. Forms Processed 

When the Field Office receives final payment, the Loan Servicer processes it in 

AMAS as a paid-in-full payment. The payment must be loan specific. 

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D. Payments Applied 

Loan Servicers apply final payments on the next payment due date or the final due 

date shown on Form RD 3560-52, assumption agreement, or reamortization agreement, 

whichever is sooner. 

E. Security Documents Released 

1. General 

When the Finance Office verifies that all amounts owed to the Government have been 

paid in full, or a compromise or adjusted agreement has been accepted and approved by 

the appropriate official, it will release security documents to the borrower, along with 

Form RD 140-4, Transmittal of Documents. 

If the Agency receives final payment in cash, U.S. Treasury check, cashier’s check, 

certified check, money order, or bank draft, Loan Servicers will give the security 

documents to the borrower at the time of final payment. If not, the Agency will release 

the documents after a 30-day waiting period. 

2. Loans Secured by Both Real Estate and Chattels 

If a loan secured by both real estate and chattels is paid in full, the chattel security 

instrument will be satisfied or released by the Loan Servicer in accordance with 

RD Instruction 1962-A. 

3. Loans Where Mortgagee Is Required to Record or File a Satisfaction 

If State law requires the mortgagee to record or file a satisfaction, the Agency will do 

so consistent with the State supplement. The Agency will deliver the form of satisfaction 

to the borrower for recordation at the borrower’s expense. 

4. Loans to Insured Borrowers Whose Note and Security Instrument Are Held by a 

Lender 

For an insured borrower whose note and security instrument are held by a lender, the 

Loan Servicer will deliver to the borrower the note and other documents upon receipt 

from the lender of Form RD 3560-52, marked “paid in full,” the original security 

instrument, and the instruments of satisfaction or release. 

F. Release of Interest in Insurance 

When the borrower’s loan has been paid in full and the satisfaction or release of the 

mortgage has been executed, the Loan Servicer is authorized to release the mortgagee 

interest in the insurance policy as provided in Chapter 3 of HB-2-3560. 

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G. Special Circumstances 

1. Refunded 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 the receipt of the refund. 

2. Overpayment 

If the borrower’s final loan payment is greater than the amount due to close the loan, 

the Agency will process a refund to the borrower 30 days after receipt of the final 

payment. 

3. Agency Error in Handling Final Payments 

If the Agency makes an error in handling final payments and the error results in an 

account balance, the Loan Servicer may attempt to collect that amount from the 

borrower. 

4. Note-Only Cases 

When a loan is evidenced only by a note (i.e., no security instruments are evident) 

and the note is paid in full, the Agency will deliver the note to the borrower. 

5. Other Situations 

If a situation develops that is not covered by regulations, the Loan Servicer forwards 

the borrower’s case file to the State Director, who may offer assistance and special 

instructions after consultation with the Office of General Counsel (OGC). 

H. State Supplements 

The State Director, with the advice of OGC, will issue a State supplement and the 

necessary forms for releasing or satisfying real estate security instruments. Any unusual 

cases that are not covered by the State supplement will be handled in accordance with 

advice from OGC. 

I. Redelegation of Authority 

Field Office Directors are authorized to redelegate to Field Office Staff the authority 

to execute releases and satisfactions associated with final payments, provided it is 

determined that the individual to whom such authority is being redelegated has had 

sufficient training and experience to properly exercise such authority. 

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CHAPTER 5: OWNERSHIP AND ORGANIZATION 

CHANGES [7 CFR 3560.405]

5.1 INTRODUCTION 

During the term of an Agency loan, changing circumstances may lead borrowers to seek 

Agency approval of a change in the structure of the ownership entity. For instance, partnerships 

may dissolve, or substitute individuals or entities may obtain an ownership interest in a property 

due to business reorganizations, retirements, or other reasons. To address these situations, the 

Agency has developed requirements and procedures for receiving notification of and reviewing 

proposed changes, as well as granting approval for such changes to ensure that the Agency’s 

security interest is protected. 

This chapter covers the Agency’s requirements regarding changes in a borrower’s 

ownership structure and Agency procedures for reviewing and accepting such changes. 

5.2 OVERVIEW OF CHANGES REQUIRING PRIOR AGENCY CONSENT 

The Agency imposes specific requirements on certain proposed changes in the structure 

of the borrower entity to ensure the adequacy of the new or substitute interests and thus protect 

the interests of tenants and the Government. 

The Agency requires that borrowers obtain prior Agency consent to organizational 

changes involving the controlling interests of the borrower entity to ensure that such changes will 

continue to serve the needs of tenants and protect the interest of the Government. For example, 

if one partner in a borrower entity decides to sell their interest to a new individual from outside 

the existing organizational structure, the Agency needs to review that individual’s prior history 

and qualifications to ensure that the person is eligible to participate in the program (i.e., is not 

under suspension, debarred, under Office of the Inspector General (OIG) review, or known to be 

in default on any Agency loan[s]). The purpose of this review is to evaluate that the borrower 

entity will continue to be eligible under program requirements and that any changes in the 

organizational structure do not adversely affect the Agency’s security interests. 

5.3 REQUIREMENTS FOR OBTAINING AGENCY CONSENT 

A. Overview

Certain changes in the structure and ownership interests in the borrower entity require 

Agency consent before they become effective. These include: 

• Any changes in the controlling interests of the borrower entity; 

• Changes in the ownership interests of the borrower entity that involve the transfer of 

stock to any individual or organization not previously listed in the ownership 

documents submitted to the Agency; or 

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• A 100 percent change in membership interest where the tax ID remains the same and 

the organizational entity remains the same during any 12-month period. 

Examples of such changes include changes in general partners, addition of new general 

partners, proprietorship as a result of death, divorce, or other applicable ownership 

changes. 

B. Written Request 

Requests for Agency consent to organizational changes must be submitted in writing,

along with Form RD 3560-1, Application for Partial Release, Subordination, or Consent,

to the Servicing Office. Each request must describe the proposed changes in the 

organizational structure of the borrower entity and provide the information shown in 

Exhibit 5-1 for each new or substitute ownership interest or member in the borrower 

entity. 

The information included with the written request must demonstrate that the proposed 

change will not adversely affect the Agency’s security interest in the property by 

illustrating that all key individuals would meet loan approval requirements. 

Exhibit 5-1 

Required Content of Requests for Agency Consent

to Changes in Borrower Entity 

• Form RD 3560-1, Application for Partial Release, Subordination, or Consent;

• The names, addresses, and taxpayer identification numbers of individuals with controlling 

interests in the new or substitute entity;

• Certification that the new interests and/or members are not suspended, debarred, or in default 

on Agency loan(s); 

• The organizational role of the new interest/member or changes in roles of existing individuals;

• Résumé, including experience managing real estate, business experience, and education; 

• Identity-of-interest (Forms RD 3560-30, Certification of No Identity of Interest (IOI), and 

3560-31, Identity of Interest Disclosure/Qualification Certificate);

• Personal financial statement; 

• Percentage of ownership of the new interest/members in the borrower entity;

• Proposed amendments to organizational documents; 

• Previous participation certification; 

• Opinion of the borrower's attorney stating that the changes are in accordance with reapproved 

organizational documents, are permitted by law, and comply with Agency regulations; and 

• Credit report fee, if applicable. 

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C. Assumption of All Applicable Responsibilities by New Interests 

If any portion of the controlling interest in the borrower entity is transferred to an 

individual or organization not previously holding a controlling interest, the new 

individual or organization must agree to assume the responsibilities and obligations 

established under the terms of the Form RD 3560-52, Promissory Note with the Agency, 

the mortgage, the loan agreement/resolution, and any applicable partnership documents 

for the entity. 

D. Assumption of Liability by Substitute General Partner 

In the case of substitution of any general partner, the substitute general partner must 

agree to assume the responsibilities and obligations of the original general partner under 

the terms of the Agency Form RD 3560-52, mortgage, and the borrower’s partnership 

agreement. 

In consultation with the Office of General Counsel (OGC), the State Director may 

require the substitute partner to sign an agreement to assume all applicable 

responsibilities. This agreement is placed in the case file. 

E. Satisfaction of Eligibility Requirements 

All proposed new individuals in the ownership entity must meet applicable eligibility 

requirements for borrowers under 7 CFR 3560.55. For further information on eligibility 

requirements, see Chapter 4 of HB-1-3560. 

5.4 BORROWER REQUESTS FOR CONSENT 

Borrowers must submit their written requests for Agency consent to organizational 

changes at least 45 days prior to the desired effective date of the change. Borrower requests 

must contain the information listed in Exhibit 5-1. 

5.5 AGENCY REVIEW OF BORROWER REQUESTS 

A. Overview

To ensure that all changes to borrower entities protect the interests of tenants and the 

Government, the Agency has developed procedures for review and approval of proposed 

changes. By preventing changes that do not further program objectives, the review 

process ensures that program implementation is consistent with Agency mandates. 

Loan Servicers need to take all actions necessary to determine that the changes will 

have no adverse impact on the loan or property. These actions will vary based on the

nature of the changes to the borrower entity. 

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The Agency may reject such requests if the borrower fails to adequately demonstrate 

that the proposed change will not adversely affect the interests of the Agency or the 

tenants of the property. 

B. Loan Servicer and State Director Actions 

Loan Servicers first review borrower submissions for completeness. Next, they 

perform a review to determine whether the new individuals or organizations proposed 

meet eligibility criteria (i.e., the same criteria required to qualify for a new Agency loan 

as set forth in the HB-1-3560). To determine that approval of the transaction will not 

adversely affect the objectives of the loan or the property, the State Director must 

consider past performance, experience, qualifications, and abilities of any individual or 

organization obtaining an interest in the borrower organization. Finally, Loan Servicers 

review all documentation to determine if the substitute general partners propose to 

assume all liability that had been assumed by the withdrawing entity. 

When the initial review has been completed, Loan Servicers process and submit 

Form RD 3560-1 to the State Director, who either approves or rejects the proposed 

transfers or changes. In cases where proposed membership changes are not covered in 

the organizational documents or appear to be in conflict with applicable regulatory 

requirements, Loan Servicers may submit case files to OGC for review and concurrence 

regarding a borrower’s legal sufficiency to assume the proposed role in the new 

organization. OGC does not override the decisions made by Loan Servicers with regard 

to organizational changes. 

5.6 DOCUMENTATION OF CHANGES 

To ensure that there is a running history of all changes made to the organization of a 

borrower entity, the Agency requires that all changes be adequately documented through both 

written notification to borrowers and maintenance of case files. Loan Servicers must respond to 

all requests for Agency consent to changes in a formal letter, a copy of which is placed in the 

borrower’s case file. Documentation allows the Agency to track the legality of the changes and 

the suitability of any new individuals or organizations added to the borrower entity over time. 

All changes must be entered into the MFIS so that the automated system is always up to date. 

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CHAPTER 6: PORTFOLIO AND PROPERTY 

ASSESSMENT 

6.1 INTRODUCTION 

This chapter is designed to assist Loan Servicers in assessing the Multi-Family Housing Programs’ 

Direct Loan portfolio and to determine whether Rural Development (RD)-financed properties meet the 

objectives of the Agency. The goal of the assessment is to position the property for long term viability 

and participation in RD programs. Preservation of RD assets should be prioritized as an outcome of the 

property assessment, using all RD preservation and asset servicing tools at our disposal to achieve a 

preservation outcome. 

Many of the property and marketing factors that support the Portfolio Assessment will also provide 

indications of whether a property should remain in the program or be removed. It is imperative to 

annually review the portfolio in every State to allow for the appropriate and timely application of 

servicing actions, which will ensure that tenants in RD-financed properties continue to be provided 

decent, safe and affordable housing. 

6.2 KEY STEPS TO COMPLETING PORTFOLIO ASSESSMENT 

The key components to a Portfolio Assessment are divided into Action Summary steps, summarized in 

Exhibit 6-1. Loan Servicers should use these steps to ensure the continued suitability of each RDfinanced property. 

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HB-3-3560 

Exhibit 6-1 

Action Summary 

Step Action Guidance 

1 

Determine appropriate 

classification of projects in the 

portfolio. 

Correct Multi-Family Information System 

(MFIS) database information, if needed. 

2 

Complete an assessment of the 

State’s portfolio. 

A. Evaluation Tools and Asset Data 

Collection, Exhibit 6-2 

B. Property and Marketing Factors 

C. Categorize the State’s Properties 

3 

Focus on “D” properties or those 

properties with outstanding 

deficiencies such as vacancy that 

exceeds the recommended 

thresholds. 

Servicing Strategies: 

 Send series of servicing letters 

 Meet with Borrower 

 Obtain a Workout Plan 

 If no action, prepare Problem Case Report 

 Accelerate account 

Step 1: Determine appropriate classification of properties in the portfolio. 

The first step in the assessment process is to ensure that the properties are properly classified in the 

MFIS database. Old findings long unresolved will affect today’s classification and should be resolved 

with the Borrower. Removing out of date findings is covered in a MFIS Tip, available on-line. In 

addition, Loan Servicers should periodically review and update properties that are working toward or 

operating under a Workout Plan to determine if changes in the MFIS classification are appropriate. For 

example, a property classified as a “D” because of unresolved findings may enter into a Workout Plan to 

resolve the findings, thereby re-classifying the property to a “B”. Having accurate baseline information 

is critical to conducting the portfolio evaluation. 

Step 2: Complete an assessment of the State’s portfolio to determine how to prioritize assets for 

servicing and preservation. 

A. Evaluation Tools and Asset Data Collection 

In an effort to identify the physical condition and market viability of the Section 515 portfolio, the 

Agency has identified three property categories: 

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 Category 1: Property is needed but is in a strong market, and is very expensive for Rural 

Development to preserve; 

 Category 2: Property is needed and suitable for revitalization because it is in a good market, is 

well-performing or remains viable despite limited chronic vacancies; 

 Category 3: Property is no longer needed in the program as determined by the local affordable 

housing market or is too expensive for the owner to maintain as determined by the financial 

condition of the property, i.e., delinquent taxes, lack of insurance or deferred maintenance. 

This analysis, using the categories in Exhibit 6-2, is a starting point to identify the appropriate use of 

resources. The analysis should be an annual exercise to ensure that property changes are captured and 

considered. 

Step 3: Focus on “D” properties or those properties with outstanding deficiencies such as vacancy 

that exceeds the recommended thresholds. 

Use the Servicing Strategies from Chapter 10 of this Handbook: 

 Send series of servicing letters 

 Meet with Borrower 

 Obtain a Workout Plan from the Borrower with actions that are appropriate and acceptable to the 

Agency to restore compliance and correct deficiencies. 

 If no action, prepare Problem Case Report 

 Accelerate account 

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HB-3-3560

EXHIBIT 6-2

Assessment Categories 

Category 1 Category 2 Category 3 

Needed, but Too Expensive To 

Preserve 

Properties that meet one of the 

four conditions below: 

a) Cost to Rural Development 

to revitalize (rehabilitation loan 

+ MPR tools) exceeds 50% of 

estimated replacement cost; 

b) Preservation funding is not 

available; 

c) Property is in a strong 

market with market rents that 

are affordable to moderateincome households; or 

d) Rental Assistance (RA) is 

not needed to keep property 

viable. 

Needed and Preserve-Able 

Good market, good property; 

modest cost to revitalize (less 

than 50% of replacement cost 

estimate) or recent 

rehabilitation; rents remain at 

or below Conventional Rents 

for Comparable Units (CRCU). 

Moderate market, only 

affordable housing available, 

property cash flows with 

vacancy above 15%. 

Not Needed or Revitalization Is 

Not Financially Feasible 

Weak market; weak property; 

weak financials; rents cannot be 

held at CRCU; has chronic high 

vacancy as described below; 

For projects with 15 or 

fewer units, the historical 

vacancy rate is 15 

percent or greater; 

For projects with more 

than 15 units, the 

historical vacancy rate is 

10 percent or greater; 

Other affordable housing 

available to meet needs or use of 

Rural Development Voucher 

Program. 

*Action: If property meets the 

prepayment requirements at 7 

CFR 3560, subpart N and 

leaves the portfolio: Rural 

Development Vouchers can be 

used to protect tenants. 

Action: Institute a suitable 

Workout Plan, or revitalize 

using an appropriate mix of 

MPR tools, or facilitate an 

efficient transfer. If the 

property is in good standing, 

continue with routine servicing. 

Action: Use necessary servicing 

actions, including compromise 

offers, debt settlement, and 

foreclosure, and make vouchers 

available to tenants. 

*The Agency does not and cannot advocate methods to move properties to prepayment. Requesting a mortgage prepayment is solely a

decision of the Borrower and prepayment requests must continue to follow the process outlined in Chapter 15 of this Handbook. 

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States can access population shift and growth information at the following URL: 

https://www.policymap.com/. Other State facts to consider when evaluating properties such as income, 

education, employment, Federal funds, are at http://www.ers.usda.gov/topics/rural-economypopulation.aspx. 

B. Property and Marketing Factors 

Listed below are property and market factors that, taken together, can assist the Loan Servicer in 

evaluating the properties in the State’s portfolio. There may be other factors particular to each State that 

should also be considered and documented using a format similar to Attachment 6-A, Property 

Categorization Worksheet. 

Factor 1: Ownership. Consider whether ownership has been uncooperative and non-compliant with 

Agency requirements. Uncooperative ownership can result in deferred maintenance, low occupancy 

rates, high accounts payable, and financial viability problems. 

Key questions to answer include: 

 

 Is the present ownership entity still legally operational? 

 Is the ownership entity cooperative? Is the ownership entity responsive to Agency requests for 

information and does it take action when the Agency identifies issues and deficiencies? 

 Is the ownership entity financially solvent? 

 Is competent management being provided? 

The answer to all four questions should be yes. If not, improvements must be made for a property to be 

deemed suitable. 

Factor 2: Management. Consider whether the property is experiencing current and/or ongoing 

problems with property management, either on-site or off-site. Problems may include but are not 

limited to: 

 Responding to property compliance issues 

 Aggressively marketing the property to broad income-eligible groups 

 Resolving health or safety needs 

 Cooperating with Loan Servicers’ instructions 

 Failing to follow-through with required actions in relation to Workout Plans, Transition Plans, 

and property maintenance needs 

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HB-3-3560 

Factor 3: Health or Safety. Health or safety issues are most often identified or documented during a 

physical inspection or environmental assessment of the property. While a majority of violations can be 

fixed through maintenance, repairs, or even a rehabilitation loan to pay for rehabilitation, some 

violations are more difficult to resolve. 

A compliance violation that is identified on the Physical Inspection Report may be considered a health 

or safety issue. However, most of these violations will never lead to a concern of suitability. For 

example, broken windows, a leaking roof, or exposed wiring are all easily corrected if funds are 

available. Health or safety issues that do affect suitability will likely pertain to the entire property and 

either cannot be repaired, or repair is too costly. For example, a property with a damaged and unstable 

foundation may not be repairable or repaired at an expense beyond that which is fiscally responsible. 

Consider whether the property is experiencing problems that are of a health or safety nature that the 

owner/management has been unsuccessful in resolving. This may involve a recurring condition and/or a 

situation that the owner/management has failed to adequately address. Some health or safety issues such 

as structural problems and extensive mold may be so pervasive that there is no financially-feasible 

remediation, at which point the account may need to be accelerated. 

Factor 4: Physical Standards/Obsolesce. Determine whether there is evidence of physical deterioration 

and extensive deferred maintenance. Signs of physical stress are unresolved physical condition 

problems identified during annual inspections or supervisory visits (also known as “open physical 

findings”), media reports of the property’s poor conditions, and tenant complaints. 

The Loan Servicer must also determine whether the problem can be solved through special servicing, 

workout agreement, or revitalization funding or that solving the problem is not in the Agency’s best 

financial interest. 

If the issues from any of these property and marketing factors are not addressed in a timely manner, the 

property may be considered obsolete as compared to similar properties in the market area. The Loan 

Servicer must also consider the issue of need when determining if a property is obsolete. The outcome 

of the need determination does not affect the result of the obsolescence determination, but it may 

influence how the Agency implements the result. Exhibit 6-3 lists helpful questions to use in making 

this determination. 

There are three reasons that a property may be considered obsolete: 

 The property poses a health or safety risk to the tenants; 

 The building has structural or design characteristics that make the property economically 

infeasible; or 

 The site is no longer economically viable because of local economic conditions (such as the 

transportation infrastructure). 

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HB-3-3560 

The Loan Servicer should go through the following process to determine if the property (i.e., the site and 

the building) poses a health or safety threat, has physical characteristics that cannot be addressed 

economically, or faces adverse local economic conditions. 

Physical characteristics that make the property obsolete or economically infeasible are usually 

documented either through a physical inspection or with a market study. 

Factor 5: Transition Events. Identify whether the property is eligible to prepay the mortgage; is 

reaching the expiration of tax credit eligibility; or is coming up on the natural maturity of the mortgage. 

Factor 6: Revitalization Cost vs. New Construction/Replacement Cost. Consider the cost to 

rehabilitate the property compared to building a new, comparable property. The Agency’s share of 

rehabilitation costs, including a rehabilitation loan and the cost of revitalization loan tools if available, 

should not exceed 50 percent of the cost of new construction. The property may still be needed in the 

market, but it is too expensive for Rural Development to fund. 

Conversely, preservation funding may not be available even for a property for which the Agency’s 

portion of the cost is less than 50 percent. 

An alternative to consider is subordinating the Agency’s position to enable the Borrower to obtain 

rehabilitation financing from a third-party. Low-Income Housing Tax Credits (LIHTC) are one form of 

financing. Subordinations can only occur if the requirements of 7 CFR §3560.409 are met. 

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Exhibit 6-3

Factors Influencing Obsolescence 

Site 

 Has economic obsolescence adversely affected the community? 

 Does the community have adequate medical, transportation, and school systems? 

 Is the site itself located in a solid residential neighborhood that is a viable part of 

the community? 

 Does the topography of the site lend itself to optimal accessibility? 

 Does the site have environmental hazards or commercial influences that 

adversely affect it? 

Building 

 Is the building structurally sound? 

 Are there obsolescence factors that are economically unfeasible to correct such as 

the building design, poor quality of construction, environmental hazards, or 

structural deterioration? 

 Does a unit-by-unit inspection with cost estimate for rehabilitation, deferred 

maintenance, and wheelchair accessibility demonstrate that the costs of this work 

are not feasible in the property budget? 

 Can the property be rehabilitated to bring it into compliance with applicable 

building codes or must an exception to code requirements be obtained from local 

authorities? 

 What is the estimated economic useful life of the property after rehabilitation? 

Exhibit 6-4 provides the type of information the Loan Servicer needs to determine if a property is 

obsolete. In most cases, the Loan Servicer may need one or more of the following: 

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HB-3-3560 

Exhibit 6-4 

Information Needed to Determine Obsolescence 

Type of Information Guidance 

1. Data on 

environmental 

conditions. 

 The need for an environmental review, assessment, or due 

diligence is based on the condition of the property and must be 

conducted in accordance with RD Instruction 1970 Part. 

 Due diligence is to be accomplished prior to appraisal to assure 

that any adverse conditions are considered in valuation. 

 In cases when contamination is found, the State Environmental 

Coordinator should be consulted on further actions. 

2. A Physical Inspection. The Loan Servicer and State Architect, if appropriate, may conduct 

a unit-by-unit physical inspection of the property with a cost 

estimate to fully understand the problem, and to determine whether 

repairs or rehabilitation may resolve the problem. 

3. Market Study. A market study is most appropriate when the problems are related 

to external factors. 

4. Cost Estimate. A professional may be needed to determine the feasibility of 

repairs, and to obtain a cost estimate. The State Architect should 

be consulted for review of estimates. 

5. Cost estimates for 

new construction in 

the property’s area. 

New construction cost estimates are critical to determine the 

Agency’s financial interest. 

6. Borrower’s Intentions. The Loan Servicer may ask the Borrower to prepare 

documentation stating the Borrower’s intentions for the property. 

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Example

For a property that may need on-site laundry facilities to improve 

the property’s marketability, the Borrower may be able to receive a 

rehabilitation loan to resolve the problem; therefore, the property is 

not obsolete. However, if a factory is built near the property, even 

if there are no negative health or safety factors, the quality of life 

may suffer due to an increase in noise, odor, or other factors. Such 

developments may make it difficult to market the property and 

cause it to become obsolete in the local market. 
 

HB-3-3560 

Factor 7: Market Demand/Vacancy Rates. Consider whether the market demand for the property has 

decreased significantly creating a high vacancy rate, i.e. a rate in excess of 15 percent over the last two 

years. The high vacancy rate may have resulted in a lack of adequate cash flow, and drained the 

property of financial resources. Determine whether there are other RD-financed properties within the 

market area (e.g., the county) or within a reasonable distance from the property, and whether those 

properties are also experiencing high vacancy rates. 

If other RD-financed properties are experiencing high vacancies, the Loan Servicer should consider 

which of the properties in that market area should be considered for Category 3. Evaluate the status of 

waiting lists, unit turnover frequency, and downtime so that the remaining portfolio will have sufficient 

demand. 

The Loan Servicer should have the following information to determine need: 

1) The Agency should obtain a market study. If the Agency has a market study covering the 

property area that is less than 12 months old, the Loan Servicer may use this market study and 

update any information as necessary. 

2) If not included in the market study, the Loan Servicer may need to obtain local economic 

indicators, such as local employment and economic trends to judge the short- and long-term 

prospects for change. 

3) The Loan Servicer should have the property’s updated budget, including a record of accounts 

receivable and accounts payable. 

4) The Loan Servicer should also seek community input to get information on the community’s 

interest in retaining the property and the community perception of the need for the property. 

There are two components to the needs analysis: impact and economic viability. The Loan Servicer 

must consider both components to determine if there is a need for a property. 

The Loan Servicer must determine if removing the property from the portfolio would have a negative 

impact on tenants. This analysis is the same impact analysis as conducted in response to a prepayment 

request. See Chapter 15 of this Handbook for a detailed discussion on determining impact. The 

objective of this analysis is to determine if tenants will lose their units, suffer from rent overburden, or 

be unable to find comparable housing in the community if the designation is changed. 

Also consider whether the property is located in close proximity to other subsidized, affordable housing 

units (Tax Credit, Section 538 Guaranteed Rural Rental Housing, Section 8, or even market-rate 

properties) that, in effect, reduce the demand for RD-financed property units, i.e., the need for the 

property is no longer there. This condition may be ongoing, or the property may be just beginning to 

experience vacancies as a result of new development within the immediate vicinity. 

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Consider, for this specific property, what is the true market area: i.e., where would existing tenants go 

for new housing? Include consideration of the Rural Development Voucher Program, the United States 

Department of Housing and Urban Development’s (HUD) Section 8, tax credit, etc., which is available 

to low-income tenants of Section 515 properties that prepay or are foreclosed by the Agency. 

Consider whether the property was located in an eligible rural area when constructed but, due to 

population growth, is now located in an ineligible area. 

Determine whether there is still a market need for this property, now likely to be in a high rent area. If 

the property has a vacancy problem, it may be an indication of a lack of market need for the property, or 

it could indicate a management problem. 

If subsidy is no longer needed for the benefit of tenants the Loan Servicer may, upon written notice, 

suspend, modify or terminate the Interest Credit Agreement for the property, using form RD-3560-9 

“Multiple Family Housing Interest Credit Agreement”. 

Consider whether the property is located in an area that is in the process of or has experienced a 

significant population change that has a negative effect on its continued successful operation. 

Examples include: 

1) the population in the area has declined, which likely will reduce the demand for housing; 

2) the population will decline in the future, likely reducing housing demand in the coming 

years; and 

3) a local factor that will reduce population or housing demand such as a plant closing that 

causes families to move out of the area, the effects of a natural disaster, and/or an economic 

crisis impacting the area. 

Population change could also be an increase. To the extent that this information is available, consider 

the population age groups that have increased or decreased as this may affect the market for the 

property. In some areas, the overall population is stable but the portion of the population that is most 

likely to use RD-financed properties is declining, and this will negatively affect housing demand. 

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The Loan Servicer should use the market study to consider the following: 

 The tenant’s ability to stay in the property. This analysis depends on the proposed use of the 

property after leaving the program and CRCU; 

 The availability of alternative housing if the proposed use of the property or increase in rents will 

cause rent overburden. The alternative housing must be comparable in size, amenities, and rent 

to keep property tenants in the local community; and 

 If the property has RA, the Loan Servicer must identify comparable units with RA or other rental 

subsidies, such as HUD Section 8. 

Factor 8: Economic Viability. Consider whether the property is economically viable. Does it have a 

difficult time generating sufficient income to pay essential expenses, fund the reserve account, and make 

loan payments? Evaluate financial stresses on the property and their cause, and consider whether they 

can be resolved. 

The Loan Servicer must determine if the property is economically viable. If the property cannot 

generate sufficient income to pay essential expenses, fund accounts, and make loan payments - despite 

appropriate loan servicing actions, budgeting, and marketing - the property may no longer be 

economically viable. Economic viability problems are usually associated with a change in local 

economic conditions and the inability of the property to maintain a sufficient occupancy rate even with 

aggressive marketing. 

For example, if a 20-unit property has a 50 percent vacancy rate and has been steadily losing tenants as 

the area’s population declines due to the closing of a factory, the property may not be economically 

viable. It may not be in the Agency’s interest to spend limited resources on a property that cannot meet 

the financial requirements of the program. Physical characteristics of a property that impact on viability 

are considered under obsolescence, but utilize the same basic analysis. 

Types of questions to consider regarding economic viability include: 

 Has the market changed due to changing demographics or local economic conditions such that 

there is no longer demand for the units? 

 Is there a need for a different bedroom mix than the property has to offer? 

 In the case of Section 514 on-farm Farm Labor Housing, is the operator still farming? 

 Have there been significant vacancies that cannot be reduced with aggressive marketing? 

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HB-3-3560

To make the determination of economic viability, the Loan Servicer should: 

 Determine whether the Borrower’s budget, rents and marketing plans are appropriate in 

accordance with Chapters 4 and 7 of HB-2-3560. 

 Determine that special servicing efforts, including utilizing all appropriate workout tools in 

accordance with Chapter 10, and increased RA, if available, will be sufficient for the property to 

be viable. Any increase in RA must be reasonable and approved in accordance with Chapter 8 of 

HB-2-3560. If the cost to the Agency of special servicing exceeds replacement costs, the special 

servicing action is not in the Agency’s best interest. 

 Determine whether, based upon the market study, local economic conditions will significantly 

improve in the next one to two years. The market study should identify any known changes in 

the local economy to assist the Loan Servicer in understanding the short- and medium-term 

impacts. For example, if a new factory or large business is relocating to the local area, or has 

announced plans to close, these plans will affect the local economy. 

 Determine whether the Borrower, given occupancy levels and any servicing actions, can pay 

essential expenses, adequately fund accounts, and pay the Borrower’s monthly loan payment in 

full. 

Local economic conditions that can affect a property’s viability are addressed in the market study and 

generally cannot be fixed through any changes to or investments in the property. For example, if a 

community lacks sufficient transportation, medical, and school systems or if the local neighborhood has 

changed in character so that it is no longer a desirable residential site, the property may be rendered 

obsolete. 

Factor 9: Environmental Influences. Consider whether there are businesses or facilities located nearby 

that would be undesirable as neighbors, and may affect marketability of the property to prospective 

tenants. Are any such plants, facilities, or industrial parks planned that may negatively impact the 

property? Are there sufficient and adequate services located nearby? Are there stable, growing or 

declining employment opportunities? Is there a social deterioration in the neighborhood and/or an 

increase in crime? 

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HB-3-3560 

C. Categorize the State’s Properties 

Using the three broad categories in Exhibit 6-2 and the assessment measures in Exhibit 6-4 to identify 

the appropriate category for each property. Attachment 6-A, Property Categorization Worksheet is an 

acceptable format for documenting the property assessment. 

Proactively service the properties that are viable and needed in the program. For the properties with 

monetary and nonmonetary compliance problems, initiate the series of servicing letters as outlined in 

Chapter 10 of this Handbook. Varying factors may affect the category of the State’s properties over 

time. It will be necessary to determine an appropriate schedule to re-assess the portfolio. 

D. Servicing Strategies 

The Portfolio Assessment should have provided a good base for identifying property problems. The 

evaluation should be considered in conjunction with Chapter 10 of this Handbook, which provides 

guidance to ascertain the source of the property problem, and whether the problem can be resolved to the 

satisfaction of all. If it cannot be resolved, the Loan Servicer must determine the appropriate next step. 

While the Agency would prefer to recover all of its funds, the two primary concerns are: 

a) Protection of the tenants from irresponsible owners or managers, from harmful living conditions, 

from the loss of affordable housing; and 

b) Ensuring that Government funds in the form of financing and subsidy are used effectively and 

efficiently. 

1. Send series of servicing letters in strict accordance with handbook requirements 

Loan Servicers must adhere to the servicing letter timeframes and process discussed in Chapter 10 of 

this Handbook. 

2. Meet with Borrower 

It is important to maintain clear communication with the Borrower throughout this process to ensure that 

they meet their responsibility to address property problems. Meet with the Borrower and work with 

them to develop a Workout Plan to resolve all open issues. If an acceptable Workout Plan is developed, 

be sure to update MFIS to reflect the current status. 

3. Obtain an acceptable, comprehensive Workout Plan within 60 days of having met with the Borrower 

Development of a Workout Plan is the Borrower’s responsibility; the Agency does not develop or 

recommend a plan. The Agency has several options to offer a Borrower in developing resolutions to 

property problems. Refer to Chapter 10 of this Handbook for servicing measures. The MPR program is 

available for qualified properties. A Borrower’s failure to utilize the assistance offered by the Agency 

should not result in a property remaining indefinitely in the “D” classification. Prompt action is 

necessary to enforce compliance. 

__________________________________________________________________________________ 6-14 
HB-3-3560 

4. If no action, prepare Problem Case Report in accordance with handbook requirements. 

The Loan Servicer must use Form RD 3560-56 and follow the procedures set forth at Chapter 10, 

paragraph 10.14 of this Handbook. If the Borrower cannot present an acceptable, comprehensive 

Workout Plan in 60 days, immediately begin preparation of the Problem Case Report. 

5. Accelerate account 

In conjunction with the Regional Office of General Counsel, issue the acceleration letter. Follow the 

guidance in Chapter 12 of this Handbook on Account Liquidation. As a note, compromise offers should 

only be offered after acceleration of the account. 

Tenants in properties subject to foreclosure by the Agency are eligible to receive an offer of a Rural 

Development Voucher. An area market rent study (AMRS) should be ordered to determine the amount 

of any voucher that will be provided. Guidance for the Rural Development Voucher Program is 

provided at the Rural Development Voucher SharePoint site. If accepting a deed-in-lieu or payoff of 

accelerated account, order AMRS immediately. Otherwise, follow foreclosure guidance. 

6. Different course of action when assessing the property 

The Agency may determine it is in our best interest to take a different course of action, rather than 

removing the property from the program. The Agency may: 

 Continue with special servicing actions in accordance with Chapter 10 of this Handbook, 

including developing a workout agreement; 

 Request the Borrower to transfer the property in accordance with Chapter 7 of this Handbook; 

 Consider changing the use of the property. A change from elderly housing to family, a change to 

congregate or cooperative housing, for example, may provide a positive opportunity for 

salvaging a property and serving the community; or 

 Request the Borrower to change the management agent in accordance with Chapter 3 of 

HB-2-3560. 

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HB-3-3560 

6.3 IMPLEMENTATION PLAN TO REMOVE PROPERTY FROM PROGRAM 

In making a determination of the most appropriate means to remove a property from the program, the 

Agency must balance the following interests: 

 Act to protect the interest of the tenants by ensuring they have decent, safe, and affordable 

housing; 

 Act in the financial interest of the Agency by obtaining the greatest net recovery; 

 Act to protect the integrity of the program by ensuring that removal from the program does not 

provide undue rewards to the Borrower. 

 Based on these interests, the Agency must choose the most appropriate option to remove the 

property from the program: 

o Allow the Borrower to prepay the loan in accordance with Chapter 15 of this Handbook. The 

National Office must approve all prepayment agreements; or 

o Proceed with liquidation as detailed in Chapter 12 of this Handbook. 

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Attachment 6-A 

Page 1 of 6 

Attachment 6-A 

Property Categorization Worksheet 

(Use additional sheets as needed) 

Property Name: ______________________________________________ 

Address: _______________________________________________ 

 _______________________________________________ 

Borrower Case No.: ___________________________________________________ 

Appropriate Classification ___________ Date of classification _________ 

Factors and influences to consider when evaluating a property. Use the sections below to comment on 

each factor or influence. 

1. Ownership: 

 

2. Management: 

____________________________________________________________________________________ 

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Added (06-04-18) PN 513
HB-3-3560 

Attachment 6-A 

Page 2 of 6 

3. Health or Safety: 

 

4. Physical Standards/Obsolesce: 

 

5: Transition Events: 

 

___________________________________________________________________________________ 
 

HB-3-3560 

Attachment 6-A 

Page 3 of 6

6. Revitalization Cost vs. New Construction/Replacement Cost: 

7. Market Demand/ Vacancy / Need: 

8. Economic Viability: 

 

____________________________________________________________________________________ 

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HB-3-3560 

Attachment 6-A 

Page 4 of 6

 9. Environmental Influences : 

 

10. Other (describe unique factors/influences affecting the property): 

___________________________________________________________________________________ 
 

HB-3-3560 

Attachment 6-A 

Page 5 of 6 

Conclusion: 

The property is categorized as: 

__________ Category 1 – needed, but too expensive to preserve. 

__________ Category 2 – needed and preserve-able. 

__________ Category 3 – not need or revitalization is not financially feasible. 

By: _____________________________________________________ Date: __________ 

 (Servicing or State Official) 

____________________________________________________________________________________ 

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HB-3-3560 

Attachment 6-A 

Page 6 of 6 

Servicing Strategy (describe servicing strategy): 

____________________________________________________________________________________

____________________________________________________________________________________ 

 

____________________________________________________________________________________

____________________________________________________________________________________ 

 

____________________________________________________________________________________

____________________________________________________________________________________ 

____________________________________________________________________________________

____________________________________________________________________________________ 

____________________________________________________________________________________

____________________________________________________________________________________ 

This assessment should be reviewed periodically as market, ownership and property conditions change 

frequently. 

Reviewed _____________ (date & initial) Changes noted: ___________________________________ 

Reviewed _____________ (date & initial) Changes noted: ___________________________________ 

Reviewed _____________ (date & initial) Changes noted: ___________________________________ 

____________________________________________________________________________________ 
HB-3-3560

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7-1

7.1 INTRODUCTION

This chapter applies to ownership transfers or sales [7 CFR 3560.406] of all or a 

controlling interest in the project ownership.

During the term of a Rural Development (RD) loan, borrowers may determine that it is 

in their best interest to transfer a project to another owner. Transfer of any RD project 

requires RD’s prior approval. RD may approve a project transfer [7 CFR 3560.406 (b)] if that 

project continues to further the objectives of the program, if the transaction is in the best 

interest of Government and the tenants, and if RD’s security is protected.

The Agency's Transfer Application Process (TAP) strives to balance the needs of RD 

and its customers. This chapter elaborates on Agency policies and defines thresholds to 

accomplish this goal. The Agency review process relies on accurate information being timely 

provided from all parties. This chapter outlines the requirementsfor project transfers and RD’s 

procedures for reviewing and approving those transfers.

The programs covered by this Chapter and authorized by Title V of the Housing Act 

of 1949 are as follows:

1. Section 515 Rural Rental Housing (RRH) that includes congregate housing, group 

homes, and Rural Cooperative Housing as defined in §3560.11; and

2. Section 514 Farm Labor Housing (FLH) loans and Section 516 FLH grants for 

farm-worker housing.

A transferee must meet the eligibility requirements found in HB-1-3560 for the 

respective loan program type (RRH or FLH) as defined in 7 CFR§3560.55 and §3560.555, 

including possessing the financial capacity and management experience to successfully own and 

manage the project. After a transfer is authorized, the property should be financially and 

operationally sustainable for the remaining term of the RD funding. The property should 

provide adequate, affordable, decent, safe, and sanitary rental units for very low-, low-, and 

moderate-income households in rural areas.

To protect RD’s security interests in a transfer, the RD underwriter must perform the 

evaluations outlined in this chapter, taking into account the requirements in Chapters 4 and 5 

of HB-1-3560 and considering the impact of the transaction on the tenants. While transfers 

offer an opportunity to improve the quality of housing through improved maintenance, 

rehabilitation, and/or better management, if not properly scrutinized, a transfer may increase the 

risk of loan default or poorer housing conditions.

For purposes of this chapter, the term applicant, transferee, or purchaser is used to refer 

to the entity that wishes to acquire the property, and borrower, transferor, or seller refers to the 

current borrower, or the entity transferring the property.

For additional guidance on loan restructuring, see Chapter 11 of this Handbook. For a 

list of documents to be submitted when requesting RD approval of a transfer,see Attachment 

7-B-1, Transfer Application Documents.

CHAPTER 7: TRANSFER OF OWNERSHIP 

7 CFR 3560.406
HB-3-3560

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7-3

SECTION 1: OVERVIEW

7.2 RD OBJECTIVES AND GUIDING PRINCIPLES

A. Objectives

The key objective of this chapter is to ensure RD Multi-Family Housing (MFH) 

projects continue to meet long-term program goals stated below by maintaining the 

affordability of needed rental housing in rural areas. This chapter guides the Loan 

Servicer/underwriter and the applicant in evaluating transfer requests to ensure the transaction 

meetsthe best interests of the Government and the tenants by:

1. Improving and maintaining the long-term physical and financial viability of the 

property;

2. Improving or maintaining the affordability of the property for RD-eligible tenants 

and applicants;

3. Completing the transaction in a timely and efficient manner; and

4. Providing a framework for the timely and consistent review of the applicant’s 

submission subject to the applicable program and statutory requirements.

B. Responsibilities

RD relies on the ability of underwriter and loan originator (hereinafter used 

interchangeably and in those cases they may be designated as a MFH specialist and may 

further serve as the loan servicer) to complete the basic eligibility determinations concerning 

both the applicant/borrower and the project to ensure the transaction complies with the 

respective MFH program authorities described in current RD Handbooks, Code of Federal 

Regulations (CFR), and statutory authorities. It is RD’s responsibility to fully evaluate the 

proposal and determine when the transaction meets applicable Agency administrative and 

program requirements. In those cases where the RD underwriter and RD loan servicer are 

two different individuals, they will jointly be involved in processing the loan transfer and 

share accountability for successfully completing the transfer by fulfilling the actions 

described in this Chapter. All transfers and Multi-Family Housing Preservation and 

Revitalization (MPR) Transactions must be in the best interests of the Government and 

tenants. These transactions must demonstrate the extended viability/sustainability of the 

project, the likelihood of full repayment under the terms being offered, and the probability of 

providing and maintaining quality affordable housing over the long-term.

The Applicant is responsible for providing complete, timely and accurate information 

and documentation throughout the transfer process to comply with all of the applicable 

program policies, procedures, and regulations. The Loan Servicer istypically the initial point of 

contract when a borrower decidesto transfer their property and will determine if the transfer meets 

these objectives subject to the applicable program and statutory requirements. If a transfer 

does not meet each of these objectives, the Loan Servicer should work with the purchaser and 

the seller in an effort to resolve issues of concern within the respective program limitations. If 

the applicant contacts the RD underwriter who is not also the designated loan servicer, the 

underwriter will inform the servicer and initiate the cooperative effort necessary to comply
HB-3-3560

with the process described in this Chapter. It is not RD’s role to assume any responsibility for 

the individual business decisions of the borrower or applicant in ultimately determining the 

course of action they propose. RD does not negotiate the terms of the transaction that are 

between the buyer and seller. 

C. Guiding Principles

Agency underwriters will use the currently available underwriting analysis and guides 

available at the RD intranet (SharePoint) https://mfhdemoteam.sc.egov.usda.gov/ 

ProgTracking/ default.aspx to document their MFH transfer and MPR decisions. Applicants 

and borrowers may access these forms through the appropriate RD public websites 

(http://www.rd.usda.gov/programs-services/multi-family-housing-direct-loans or 

http://www.rd.usda.gov/programs-services/housing-preservation-revitalization- demonstration-loans-grants).

The key parties to the transfer include the Seller, the Purchaser, the Agency (on behalf 

of the tenants and as mortgagor), and any third-party funders (other lenders, tax credit 

agencies, syndicators/investors, etc.). The different parties may have competing or 

conflicting requirements, needs, and/or objectives and goals that must be recognized and 

addressed early in the transfer process. RD is not responsible for reconciling conflicts 

between buyers, seller or any other interested third parties. RD may, within its policy 

constraints and to protect the interest of the Government and the tenants, offer alternatives for 

conflict resolution.

An initial or preliminary conceptual meeting with the RD loan servicer, Seller, and 

Purchaser should be arranged as early in the process as possible to evaluate the potential 

suitability of the proposed transfer and formulate a mutually acceptable schedule for RD's 

internal program analysis. This meeting can also identify potential problems or issues early in 

the process that will need to be addressed before completing the transfer application. 

When initiating the conceptual discussion, RD should recommend to applicants the 

use of RD’s optional Preliminary Assessment Tool (PAT) or a suitable preliminary 

assessment tool alternative offered by other parties, as a starting point to explore the 

feasibility of the transaction. Using the PAT encourages all interested parties to contact the 

RD servicing office as early as possible to discuss program requirements and conditions. The 

PAT contains general instructions, basic underwriting thresholds and pertinent tips for RD 

customers and staff to assist in preparing and evaluating proposals. The tool incorporates the 

detailed instructions found in the applicable RD Handbooks, CFR, and other applicable 

Agency and Departmental regulations. Additional instructions and suggestions are available 

internally for Agency underwriters through the Agency SharePoint by drilling down to their 

specific needs.

The RD website (http://www.rd.usda.gov/programs-services/multi-family-housingdirect-loans) includes the PAT along with many of the other tools and additional program 

information.

Using the information provided by the applicant, Loan Servicers should assess whether 

the transfer request is consistent with the following guiding principles:

1. There is a continuing need for the property in the community. This should be 

considered in lieu of prepayment of any existing RD direct loan MFH properties. 

2. When the transaction is complete, the property will be in the hands of eligible 

owners.

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3. The transaction will address the immediate and long-term physical needs, 

including accessibility issues identified in a Transition Plan as well as any other 

fair housing requirements, and other needs of the property.

4. Any increased post-transaction rents will not displace existing tenants otherwise 

meeting the RD eligibility requirements for continued occupancy.

5. Post-transaction basic rents will not exceed the lesser of conventional rents for 

comparable units (CRCU), or the restricted rents as defined below in Paragraph D 

1, unless an exception is allowed by the Agency. Low Income Housing Tax 

Credits (LIHTC) rents are differentiated from CRCU and other restricted rents that 

may be imposed by the applicant’s participation in other funding sources such as 

HOME or individual State Housing Assistance programs. See Paragraph 7.7 B.

6. Any equity amount recognized by RD will be supported by a market value 

appraisal meeting RD appraisal acceptability and underwriting requirements.

7. The RD-recognized Seller's Equity will consider the Market Value reflected in the 

RD-approved appraisal (See Paragraph 7.7 B) less the unpaid balance of the 

outstanding RD Loans on the Property and any other amortizing debt or other real 

estate secured liens outstanding at the time of transfer as determined appropriate 

by the Agency. If any new loans will be placed on the property at the time of 

transfer that will cause the total real estate debt to exceed the RD security value, 

an exception may be made for payment of a Seller’s Equity on a case-by-case 

basis with RD Headquarters (HQ) Multi-Family Housing Preservation and Direct 

Loan Division (PDLD) approval.

8. An Exit Incentive (EI) can be paid to the Seller if the following tests are met:

a. The present RD-accepted market value appraisal does not indicate any equity 

exists in the property as is;

b. All threshold items in Paragraph 7.2 C of this handbook are met;

c. The total amount paid as EI is available from tax credits or other soft dollars 

(RD funds will not be used to fund EI);

d. All New Loans are used for eligible RD MFH program purposes; and

e. All RD Direct Loans together with any RD authorized senior or superior debt, 

such as may be incurred when the RD direct loans have been subordinated or 

were previously issued in a junior lien position, post transfer will be less than 

the Security Value determined by RD.

9. The Seller’s Equity and any EI may not both be paid on the same transfer. When 

an EI is proposed, the RD HQ must review the PAT before RD issues a letter of 

support for the buyer to obtain tax credits. RD must also review the settlement 

statement pre- and post-closing to verify the amounts that may ultimately be 

released at closing, and confirm no more than the amount authorized has been 

allowed.

10. The PDLD concurs with the equity loan amounts and the new Return-To-Owner 

(RTO) being authorized when it exceeds the seller’s originally authorized return, 

and coordinates the approval of all waivers for unique and non-recurring
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circumstances that fall outside of the normal transaction principles, RD HQ 

approvals, or revitalization-related policy issues.

11. RD encourages the use of third-party resources to secure adequate funding to 

successfully complete transfers and associated revitalization efforts. Such 

resources include Low Income Housing Tax Credits (LIHTC), grants, and 

participating lenders adhering to established RD MFH policies and programs, 

including Section 538, Guaranteed Rural Rental Housing (GRRH) loans. Lenders 

include Federally-regulated and insured institutions; State-regulated, chartered, 

and insured institutions; and other national, state, regional, or local governmental 

agencies specifically authorized to make loans and/or grants for multi-family 

housing purposes authorized under the authorities accorded to USDA.

12. Post-transaction basic rents will not exceed the lesser of Conventional Rents for 

Conventional Units (CRCU) or the restricted rents as defined below in Paragraph 

C 1, unless an exception is allowable or the rents are 100 percent Project-Based 

Section 8 with evidence from HUD that the current rents will be carried forward to 

the new borrower without anticipating any reduction for the remaining term of the 

Housing Assistance Payments Contract (HAP) contract. See Paragraph 7.7 B.

13. Each transfer will result in computation of a new Return-to-Owner (RTO) for the 

new owner. Currently the RD RRH program allows the project owner to 

potentially earn its maximum return based on original loan terms and/or prior 

modification authorized by the Agency. A new RTO will replace the previous 

owner's return amount in underwriting and future operating budgets for the longest 

remaining term of any RD direct MFH loan on the property assumed, incurred or 

modified as part of the transfer transaction.

For transfers, the following conditions are considered in determining when any 

tax-credit equity, projected-deferred developer fees, or other program adjustments 

will be used to establish the maximum total RTO the new owner may be allowed:

a. Rehabilitation costs eligible for the RD Section 515 Program purposes less all 

outstanding and new RD direct loans, together with any RD authorized senior 

or superior debt such as may be incurred when the RD direct loans have been 

subordinated or were previously issued in a junior lien position must not exceed 

the RD-determined Security Value;

b. The new maximum projected RTO at the time of transfer approval based on the 

Agency underwriting analysis of Net Operating Income (NOI) less debt service 

for all loans (without agency debt deferral);

c. NOI for payment of RTO should provide for the Debt Service Coverage Ratio 

(DSCR) of 1.15 (when RD-recognized new equity has been provided), and will 

be based upon the projected post-rehabilitation operating budget with rents not 

exceeding the lesser of CRCU or, if applicable, the LIHTC rents required by 

the tax credit application process or any other restricted rents as approved 

during RD underwriting;
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d. The budget must reflect the lesser of the Agency’s 5 percent of O&M and 

historical vacancy plus 2 percent (not to exceed maximum of 10 percent for 16 

or more units, or 15 percent for fewer than 16 units), or the industry standard of 

5 percent vacancy;

e. There must be a demonstrated ability to repay any deferred developer’s fee from 

the NOI proposed by the applicant at the time of RD underwriting approval for 

the remaining term of the RD loan using the rents approved for the transaction 

(See Paragraph 7.2 B); and

f. Each transfer request received by RD will be tracked by Agency underwriters 

and loan servicers throughout the transfer process in the electronic monitoring 

and tracking system prescribed by RD HQ.

D. Preliminary Transfer Thresholds

RD adopted the following thresholds and policies for evaluating MFH transfer 

feasibility to promote consistency in RD underwriting for MFH transfer transactions; and 

balance the needs of the Agency, customers, and the project to maintain affordability for 

eligible tenants under the RD programs. The transferee should complete a preliminary 

assessment using these standards early in the transfer process and discuss it with the RD 

office responsible for servicing the account. Careful analysis by all parties involved can 

identify the general issues that will need to be resolved as the transfer application is 

completed and submitted for formal review. Acceptance of the preliminary analysis by RD 

does not constitute final approval of any transfer proposal by RD or any other third-party 

funder. Thresholds RD considers include:

1. Post-Transfer Rents. Post-transfer rents should not exceed the restricted rents of 

the LIHTC, HOME Program (if applicable), or CRCU (as defined in existing RD 

regulations), whichever is less. The term Restricted Rents for the purpose of this 

review will be the rent restrictions of LIHTC, HOME, or other Rent Restricting 

Program(s) that will be placed on the property upon completion of the transfer. 

Post-transfer rents on properties with 100 percent Project-Based Section 8 will not 

exceed the maximum rents authorized under the HAP contract. No rent increase 

beyond the current basic rents is authorized prior to completion of the planned 

rehabilitation.

2. Rents Cash Flow in Proposed Operations. Proposed rents must be sufficient to 

meet all projected expenses including a reasonable allowance for operations and 

incidentals, and are typically included in the estimated individual operating 

expense line items. The allowance may be expressed as a percentage of total 

operating expenses and the resulting planned amount is reflected in the amount 

shown as net cash on the RD operating budget, Form RD 3560-7, Part I, Line 30. 

The minimum combined allowance for operating expenses and vacancy/bad debt 

loss must not fall below the equivalent industry standard of 5 percent vacancy loss 

or the applicable amount specified in #3 below. Net operating income (NOI) must 

also be sufficient to meet the general industry minimum standard of 1.15 Debt 

Service Coverage Ratio (DSCR) for all amortizing debt being placed on the 

property in the initial underwriting review and authorization determination based 

on the first year of typical operations (rents, O&M, etc.). If third-party lenders

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specifically require DSCR in excess of the minimum, such rate should be used for 

RD underwriting analysis during the initial three operating years. See also # 9 

below.

3. Vacancy/Bad Debt Loss. The maximum allowance for vacancy and bad debt is 10 

percent (for 16 or more units) and 15 percent (for fewer than 16 units) unless 

otherwise specified by terms of any supplemental Notice of Solicitation of 

Applications (NOSA) for which the transaction has been submitted. The

minimum allowance is the lesser of the historical average of collected rents for the 

most recent three years plus 2 percent for bad debt, or the Restricted Rent 

Program/Lender requirement when specified. If the budgeted allowance is less 

than historical average plus 2 percent, it will be considered a failure to meet the 

required threshold unless extenuating circumstances can be supported and 

documented to RD’s satisfaction.

4. Operating Expenses. The minimum amount of operating expenses required per 

unit is the greater of any specified by the Restricted Rent Program (LIHTC, 

HOME, etc.) or the third-party lender (if applicable). Generally, project 

maintenance costs are reduced as a result of the proposed rehab and generate a net 

reduction. However, any reduction must be reasonable. No more than a 10 percent 

change or variance in total project post-transfer closing operating expenses based 

on historical actual averages will be accepted for underwriting without an adequate 

justification acceptable to RD.

5. General Operating Account Minimum Requirement. The project’s General 

Operating Account (GOA) must be equal to 20 percent total operating expense as 

underwritten at the time of transfer (excluding the required prorated tax and 

insurance escrow), and there must not be any outstanding accounts payable 

exceeding 30 days. If this requirement cannot be achieved through normal project 

operations as reflected in the underwritten typical year budget, the transfer 

development budget must include an additional cash deposit to the GOA from 

non-debt, LIHTC or the applicant’s non-project resources. Any additional 

required deposit (not from normal operations) made by the applicant must be 

documented to the Agency at the time of transfer. The applicant may recoup the 

additional required cash deposit to the GOA between the second and seventh year 

of operation in accordance with HB-2-3560 Chapter 4, Section 1, 4.3.

6. Tenant Protection. RD does not permit the intentional displacement of any 

existing RD-eligible tenant because of the planned transfer, as long as the tenant 

remains eligible under RD regulations and the terms of the RD-approved lease. 

For projects not having full Rental Assistance (RA) and for all non-RA assisted 

revenue units where the transfer results in a rent increase, the applicant must agree 

to protect currently eligible tenants affected by the rent increase as long as the 

tenant resides in the project. All tenant protection costs must be included in the 

Sources and Uses analysis used in RD underwriting for the full amount needed to 

fund the initial two-year minimum period following the transfer closing for 

transfer underwriting purposes. NOTE: This does not limit the total cost of tenant 

protections the transferee may ultimately be responsible for and is solely to aid in 

completing the initial transfer underwriting analysis using the PAT. The applicant 

will establish a specific cash escrow set-aside for this purpose at the time of 

closing, and is responsible for providing, from non-project resources, any future
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tenant subsidy or protections necessary to maintain cash flows if the project does 

not have or fails to secure 100 percent RA, or other tenant subsidy necessary to 

meet LIHTC or other third-party tenant rent restrictions.

7. Capital Needs Assessment (CNA) Funding & Reserve Deposit. The minimum 

requirement per unit is the greater of any Restricted Rent Program (LIHTC, 

HOME, etc.) requirement, or third-party lender (if applicable) requirement that 

will be placed on the property upon completion of the transfer. The Reserve 

Account ending balance forecast must be positive for all 20 years of CNA.

8. New Loans for RD Section 515 Eligible Purposes. Any new loans placed on the 

property must be for Section 515 RRH-eligible loan purposes only, as defined in 7 

CFR 3560.53. 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 [7 CFR 3560.63(d)]. Any 

prohibited uses of loan funds as defined in 7 CFR 3560.54 must be paid from non- debt sources. However, projects using a RD Section 538 Guaranteed Rural Rental 

Housing (GRRH) loan may be allowed additional debt for purposes eligible under 

the GRRH regulations.

9. Debt Service Coverage Ratio (DSCR). RD underwriting will include annual 

trending increases of revenue at 2 percent and expenses at 3 percent (including 

reserve) for each of the first 15 years. For transfer underwriting and analysis, the 

project at a minimum must meet an initial DSCR of 1.15 through year 3, and may 

project subsequent DSCRs of 1.1 in years 4 and 5, and 1.0 for the remaining years 

solely for the purposes of the RD initial transfer analysis. Third-party lenders may 

require higher DSCR for their individual underwriting approval requirements. If 

so, the DSCR required by the third-party lenders should be used in the RD 

underwriting analysis during the initial 3 operating years.

10. Loan-to-Value. Upon completion of all planned rehabilitation/repairs and 

approved development, all Debts must be secured within the Prospective As- Improved Security Value as defined by RD in 7 CFR 3560, §3560.63. RD 

determines Security Value and includes the intangible benefits afforded by the 

interest credit subsidy of the RD loans, and the benefits of other favorable 

financing resulting from other Federal, state or local government instrumentality 

direct or authorized intermediary lending programs such as HOME, Preservation 

Revolving Loan Fund (PRLF), and Section 538 GRRH loans being made at 

below-market rates and terms, as permitted by RD regulations. Security Value

does not include any non-amortizing or deferred loans or grants regardless of the 

source; or any federal, state or local LHITC and Historic tax credits or the 

investment value thereof.

11. Loan Terms of Third-Party Debt. No balloon payment from any third-party debt 

is allowed prior to the expiration of the minimum RD Loan Term (30 years for 

RRH transfers and 33 years for FLH transfers), unless the Lender provides a 

written agreement, acceptable to the Agency, to extend the scheduled maturity on 

terms that do not require rents above comparable rents for comparable units 

(CRCU) through the term of the RD loan.

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12. Sources and Uses Must Balance. Sufficient funds must be available for all 

proposed rehabilitation, acquisition costs, and uses to meet the terms of the 

proposed transaction. Funds must be adequate to address repairs needed 

immediately, including all health and safety, fair housing and accessibility issues.

13. These may be included as part of the up-front rehabilitation that is being paid by 

third-party funds. Applicants must be able to fund any projected shortfalls from 

resources other than the project or project income. 

7.3 KEY ANALYTICAL CONCEPTS

In evaluating all the components of a transfer request, the Loan Servicer and the 

Applicant need to determine if the transfer meets RD’s objectives by collecting the 

information necessary to form the analytical foundation for Agency processing and 

authorization of the proposal. 

Using a preliminary analytical process and the processes provided in this Handbook, 

the Loan Servicer and underwriter should be able to answer, and document the proposed terms 

and conditions that will ultimately serve as part of the basis for approving the transfer request. 

Formal final approval will only be granted upon submission and acceptance of all required 

documentation in its totality, and the Agency's completion of the internal analytical analysis 

tools as prescribed. RD underwriting considers the applicant's capacity to pay the loan, 

provide sufficient capital to meet the transfer requirements, demonstrate the character 

necessary to meet operational ownership and management requirements, provide and 

maintain the project collateral, and meet the anticipated conditions necessary to close the 

transaction and complete any required construction needs. 

Applicants must have both sufficient experience and the financial capacity for the 

development and ownership of the proposed property transfer. Applicants are required to 

submit appropriate documentation to assist RD underwriters and approval officials evaluate 

and establish reasonable expectations to assure the terms and conditions of the respective 

assistance can be followed and carried in meeting the purposes intended. Applicants, 

including any affiliated entities sharing an identity of interest with the applicant (i.e., 

management, contractors, etc.), must be in compliance on all or any other Agency-financed 

projects that they may own or provide decision-making and operational authority over. Any 

noncompliance issues must have been cured or be in compliance with a workout agreement 

approved by the RD for at least 6 consecutive months as of the date that the initial application 

is due unless an exception is authorized by HQ. 

Newly formed applicant entities, may not have the ability to demonstrate creditworthiness 

and financial capacity to meet basic program eligibility determinations. RD underwriters and 

approval officials may then look at the individual key principals the applicant identifies with the 

organization, decision making and operational authority controlling the applicant organization or 

entity as necessary.

All Principals will be identified and analyzed with respect to their capacity of credit, 

experience and financial histories. Regulatory standards established in the Code of Federal 

Regulations (24 C.F.R.) Part 200 Subpart H Participation and Compliance requirements determine 

the appropriate review of previous participation in multifamily insured programs based upon their 

past performance as well as other aspects of their records. 42 U.S. Code § 1441 
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These considerations are generally categorized in each of the following areas:

A. Eligibility

The Loan Servicer must establish applicant eligibility in the same manner as during the 

loan origination process, including an in depth evaluation of the applicant and the individual 

principals of the applicant entity and any sub-entity. These requirements set the basic 

standards for all borrowers including:

1. Analysis of financial capacity (such as balance sheetsfor all principals, including the 

individual key principals involved in the organization, decision-making and 

operational authority that may control the applicant and any sub-applicant entities 

involved);

2. Credit worthiness of all principals(such as credit reports, contingent obligations, 

payment history, etc.);

3. Experience (such as previous participation certificates, CAIVRs, SAMs, etc.);

4. Incidence of ongoing or chronic adverse actions in other projects or business 

transactions;

5. Satisfactory explanation of all insufficient, incomplete, or negative factorsidentified in 

the eligibility review; and,

6. Simultaneously, completion of the planned transfer must sufficiently determine a 

continued need for affordable housing with adequate demand for continued use of the 

project by tenants meeting the RD eligibility requirements. When necessary to establish 

the continued need for a property, the loan underwriter may require additional 

documentation acceptable to RD that there is an actual need for the project considering 

any other existing or planned affordable housing in the market area.

Note: RD needs and LIHTC needs may not always serve the same market, and may 

have different demands and concerns as affordable housing. Reviewers must ensure that RD 

funds will be used in accordance with the program’s statutory requirements. The project’s 

eligibility as documented during the loan transfer process requires the loan servicer to confirm 

that the project will remain eligible after the transfer.

B. Feasibility

The Loan Servicer must determine if the proposed transfer is feasible. This 

feasibility determination requires an in-depth financial analysis of project operations, sources 

and uses of funds, and potential for future success. See Paragraph 7.23.

C. Improve or Maintain Risk Levels

The Loan Servicer must consider any financial and operational risk factors in the 

transfer that conflict with the respective MFH loan program origination and servicing 

principles.

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7.4 DEFINITIONS

As used in this chapter, the following definitions apply to ownership transfers or sales 

of all or a controlling interest in the project ownership as addressed in 7 CFR 3560.406.

A. Transfer

A transfer occurs whenever there is a change in a project’s ownership that:

1. Places title to the property in the hands of a new owner;

2. A new owner assumes all liability for the debt; or

3. There is a change in the legal entity owning the project, such that the transferee 

is commonly considered a distinct and separate legal entity from the original 

borrower (including, without limitation, a change resulting in a new Internal 

Revenue Service Tax ID number), or 100 percent of a borrower entity's 

ownership interests will be transferred within a 12-month period (7 CFR 

3560.405 (a)).

Changes in membership within the ownership entity such as the admission of non- controlling members do not constitute a transfer, but do require RD involvement as discussed 

in Chapter 5 of this Handbook. A change in ownership due to the death or involuntary 

incapacitation of a joint owner, beneficiary of a trust owner, or in membership within the 

ownership entity such as a general partner interest being sold or bequeathed may not 

constitute a transfer as long as the incoming member meets RD eligibility requirements, and 

the State Director requests authorization on a case-by-case basis from RD HQ. The change 

must be appropriately documented without any change in the currently authorized RTO for 

the project; additional debt, liability, or encumbrance of the RD loan security; or change of 

project type or purpose. RD HQ will review the status of the project's current physical and 

operational condition and may waive any other provision of this chapter for these cases only 

when the RD approval official determines that such ownership change is in the best interests 

of the government and the tenants. Borrowers may request to transfer their project to another 

entity in which the members are involved in both the transferring and the assuming entities, 

provided the new entity be legally organized, discloses all Identity-of-Interest situations, and 

meets applicable RD eligibility requirements. (See also Paragraphs 7.5 and 7.16 E.)

A proposed transfer to an IRS-approved intermediary for purposes of a Section 1031 

exchange is a transfer for purposes of this chapter.

If the transfer being proposed is part of an Agency incentive offer as described in 

Chapter 15 of this Handbook as part of a prepayment incentive offer, a complete transfer 

application package must be submitted as described herein unless all of the following 

conditions are being met:

1. No additional sources of funding are being brought into the transaction and the 

new owner does not request any RTO consideration other than those approved 

as part of the Agency incentive offer;

2. There are also no existing physical, operational or financial needs, or 

deficiencies that must be addressed to ensure the continued success of the 

project in meeting the MFH program mission; and
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3. The State Office has consulted with PDLD and determines an exception to this 

Chapter is in the best interests of the government and the tenants.

B. Non-Program Transfers [7 CFR 3560.406 (l)]

This chapter does not apply to non-program transfers, as discussed in Chapter 5 of this 

Handbook. However, such a transfer or sale will only be considered when it is determined by 

RD to be in the best interest of the Federal Government and the objectives of the original loan 

can no longer be met.

C. Underwriting

Underwriting as used in this Chapter refers to the process of determining the financial 

and operational feasibility of the project, applicant eligibility, environmental compliance, and 

fair housing compliance of a proposed transaction based on the specific requirements 

specified in this Chapter, Agency Handbooks and guidance, and/or applicable Notice of 

Funding Availability (NOFA), and/or Notice of Solicitation of Applications (NOSA). The 

specific aspects of the transaction process such as determining applicant eligibility, assessing 

environmental compliance, or evaluating fair housing compliance are more fully addressed in 

the current RD Handbooks and Regulations, and supplemented from time to time with other 

published guidance available on the RD website.

D. Related Definitions

The following are definitions for certain related terms used in this Chapter.

• Acceptable Appraisal. 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 an effective date that is not more than one year old 

per §3560.752. 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) Standard 3, and Agency requirements as prescribed in 

Handbook 1, 3560.

• Corporation. A corporation is any entity that has filed Articles of Incorporation in 

one of the 50 States, the District of Columbia, or the various territories of the 

United States including American Samoa, Federated States of Micronesia, Guam, 

Midway Islands, Northern Mariana Islands, Puerto Rico, Republic of Palau, 

Republic of the Marshall Islands, or the U.S. Virgin Islands. Corporations include 

for both profit and non-profit entities.

• Debt Deferral. A deferral of an existing RD debt. Agency debt deferral is subject 

to appropriations and may be offered to a transfer applicant selected for 

participation under the terms of an outstanding MPR Program NOSA. This 

deferral includes the deferment of the monthly principal and interest payments 

with a balloon payment at the end of the deferral period. A debt deferral 

agreement will be required for the debts assumed eligible for deferral at the time 

of closing.

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• Equity. Equity is the amount of the RD-accepted market value that exceeds the 

total of all currently outstanding RD direct loans and any other parity, or senior 

debts approved by RD, or to which RD has an outstanding subordination.

• Exit Incentive. An Exit Incentive is an amount of incentive compensation 

determined by RD that may be paid to the selling borrower to facilitate

transferring the property to an eligible buyer when there is no equity as determined 

by the RD-accepted market value used in the underwriting analysis. See also 7.2 C 

8 for mandatory applicable Guiding Principles.

• Identity-of-Interest. 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 (7CFR 3560.102 (g)):

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

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 by the Agency. 

See 7 CFR 3560.11.

• Key Principle. A key principle is the party or parties involved in the organization, 

decision-making and operational authority that may control the applicant and any subapplicant entities involved and includes the actual individual(s) of any sub-entity 

(i.e., other organizations, partnerships, etc.) which cannot demonstrate financial 

ability, creditworthiness or experience in the name of the transferee or identified 

sub-entity, to mitigate any creditworthiness, financial capacity and/or experience in 

the transferee’s own right or may not have equal strength with respect to all of the 

eligibility criteria.

• Non-Equity Compensation. Non-equity compensation is a payment to the Seller, 

from the buyer when no equity exists in the property. This payment should come 

from non-loan funds and must not affect project rents at any time during the term of 

the RD direct loan or any modification thereof. See Paragraph 7.8 D.

• Portfolio Transaction. A portfolio transfer transaction is a transaction involving 

multiple projects within one State being acquired by a single purchaser.

• RD Funds. RD funds include, for example, a subsequent Section 515 loan or a 

Section 538 loan.
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• Security Value. The security value is the property value established by RD which 

is the lesser of the total development cost [exclusive of any developer's fee as 

provided by §3560.63 (d)(2)]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. 

• Third-Party Funding. Third-party funding involves sources of funds other than 

RD funds and the purchaser’s personal funds. The third-party funding is provided 

by other recognized third-party funding sources as described in 7 CFR 3565.102. 

Tax credit equity, HOME funds, and Community Development Block Grant 

(CDBG) funds are a few examples of third-party funding. 

• Transferee. The transferee is the person or entity acquiring the RD-financed 

property. In this Chapter, the term is used interchangeably with the terms 

purchaser or buyer. 

• Transferor. The transferor is the person or entity selling the RD-financed 

property. In this chapter, the term is used interchangeably with the terms borrower 

or seller.

7.5 CONDITIONS FOR TRANSFERS

A. Conditions When a Transfer May Occur

Transfer applications, documenting in writing one of more of the following 

conditions, will generally be considered for further processing: 

• The transfer facilitates the physical and financial revitalization of the property;

• The transfer is needed to remove a hardship to the current borrower that was 

caused by circumstances beyond the borrower’s control (circumstances 

constituting ‘hardship’ are discussed below);

• The transfer is a result of a court order requiring the division of security property;

• The transfer is being requested as an alternative to prepayment;

• The transfer will do no harm to RD or the current and future eligible tenants; or

• Other circumstances exist which make the transfer in the best interest of the 

Government.

Typically, RD will not consider a transfer if the borrower has owned the property for 

fewer than five years. However, if the State Director determines that a hardship is present, 

the transfer may occur without prejudice to the borrower.

Examples of hardship include, but are not limited to:

• Serious Illness or death of the borrower;

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• Serious financial difficulties beyond a borrower’s control that cause the borrower 

to shut down the business operation; or

• Inability of the borrower to obtain necessary credit on terms that would facilitate 

refinancing the debt and allow for operation of the project at affordable rents, if

the outstanding loans are eligible for prepayment.

NOTE: RD will pursue appropriate administrative and/or civil remedies with respect 

to transfers that occur without prior RD approval. RD considers these transfers to be 

unauthorized sales. An unauthorized sale also constitutes a default on the RD loan [7 CFR 

3560, subpart J].

B. Types of Transfers

There are many different characteristics and circumstances that may be present in a 

transfer. All transfer applications, unless otherwise specifically exempted in RD Regulations, 

will comply with the eligibility requirements based on the type of project and the nature of the 

transferee for the respective RD MFH program. These requirements are more fully described 

in the applicable sections of HB 1-3560.

If any project being transferred is currently subject to an RD-approved Workout Plan 

and an Identity-of-Interest as defined by RD regulations, the transferee must be in compliance 

with the workout plan in place and on schedule. In addition, the purchaser (transferee) must 

be in compliance with RD regulations or have a RD-approved workout plan in place and on 

schedule with respect to any other RD properties owned.

For a list of documents to be submitted when requesting RD approval of a transfer, see 

Attachment 7-B-1, Transfer Application Documents.

C. Coordination between RD Headquarters and State Offices

Some transfers raise complex issues and require close coordination between the 

borrower, the purchaser, and the Agency. However, simple transfers can be quickly and 

easily addressed between the borrower, purchaser, and the Agency. For example, a simple 

transfer of title to a purchaser with proven capacity, or transfer of a project without regulatory 

compliance issues that does not require a rent increase or new funding from RD, would 

proceed rapidly from application to approval to closing under the authority of the Loan 

Servicer, with a final approval from the State Director as permitted by this Chapter up to the 

amounts specified in RD Instruction 1901-A. Compliance issues could include issues with 

the physical or financial condition of the property, poor management, or noncompliance with 

civil rights and accessibility laws.

In transfers where the State Director’s approval limit is exceeded or requires 

additional concurrence (e.g. where a rent increase or a policy waiver is necessary) and 

authorization by RD HQ, the State Director will submit the request together with their 

recommendation, appropriate documentation and sufficient underwriting documentation as 

specified by Agency policy and procedures to MPDL prior to approval. Upon completion of 

the HQ review, the State Director will be provided with the appropriate concurrence and 

guidance memorandum authorizing the terms/conditions for the continued final processing, 

formal approval or denial of the transaction at the State Director level.

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MFH Transfer and MPR underwriting is used to authorize the transaction and approve 

the terms leading to approval. Often underwriting transactions becomes intertwined among 

the aspects and requirements crossing multiple interdisciplinary divisions within the Rural 

Housing Service (RHS). To minimize potential confusion for borrowers and applicants, and 

to ensure consistent application of pertinent RHS requirements, underwriters must coordinate 

loan making (direct and guaranteed when applicable) and servicing expectations when 

evaluating the proposed MFH transaction. Responsibility for successfully completing any 

MFH underwriting requires ongoing coordination of Preservation and Direct Loan Division 

(PDLD) loan making; Guaranteed Loan Division (GLD) guaranteed loan participation, and 

Portfolio Management Division (PMD) loan servicing efforts.

7.6 PROCESSING A TRANSFER REQUEST

The Loan Servicer will coordinate the review process to meet the processing 

guidelines by completing all of the steps below to move through the process of receiving a 

transfer application, evaluating the transaction, and closing the transfer. These steps are listed 

in Exhibit 7-1, Key Steps to Conduct a Transfer, and may be used to as a preliminary 

checklist for discussion with the applicant.
HB-3-3560

Exhibit 7-1

Key Steps to Conduct a Transfer

Step Action

1 Applicant completes Preliminary Analysis and schedules Initial 

Consultation with designated RD Loan Servicer

2 Initial Consultation with Applicant, Seller, and other key participants 

having significant roles in the transaction such as other lenders, grantors, 

etc.

3 Application Provided by Applicant preliminary review starts; RD 

completeness review of application completed within 14 business days. 

Incomplete applications will be returned to applicant and processing does

not begin until the complete application is received.

4 Request Underwriter Review - Detailed review by Underwriter commences 

and processing starts. Status updates provided to applicant within every 30 

business days the application is in process at RD. If additional clarification 

or other materials are needed, the application will be considered incomplete 

and it well be returned to the applicant for resolution. Unsatisfactory

submissions will be returned as incomplete or rejected.

5 Submit application to RD HQ for Authorization. Upon completion of the 

Underwriter’s detailed review, the application will be submitted to HQ. 

Within 10 business days, HQ determines if the transfer may be authorized. 

If the transfer requires additional information from the applicant, the

application is returned to the state office for continued processing.

6 Agency Decision - Communicate to Applicant within 45 business days 

(single property) / 75 days (multiple properties) - Processing for approval is 

limited to the periods shown and does not include delays beyond the 

underwriter’s immediate control.

7 Prepare Approval Conditions for Signature of Applicant - Within 15 

business days of Agency Decision written approval conditions sent to

applicant for acceptance

8 Coordinate Closing Instructions and OGC Loan Document Approval.

9 Schedule and Close Transfer.

10 Complete post-closing review and verification that approval and closing

conditions have been met.

A. Key Steps to Process a Transfer

1. Applicant completes Preliminary Analysis and schedules Initial Consultation with 

designated RD Loan Servicer.

The applicant will complete the preliminary feasibility analysis and submit it to 

the Loan servicer or other designated State Office reviewer for the Agency's 

consideration within five business days of its receipt. If this preliminary

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feasibility analysis has used the RD Preliminary Assessment Tool (PAT) and 

the analysis appears to meet Agency thresholds or provides sufficient 

explanation to indicate preliminary feasibility, an initial consultation will be 

scheduled with the applicant, seller, and other participants as appropriate.

2. Initial Consultation with Applicant and Interested Parties.

The initial consultation will establish a common understanding of the transfer 

process, timelines, terms, limitations, responsibilities, and conditions all parties 

will be required to agree to that will affect the transfer being proposed. In 

addition to the specific transfer requirements contained in the respective MFH 

program authorities, additional discussion will further clarify the minimum 

acceptable requirements for each of the following topics. Items to be discussed 

include:

a. Identification of the transfer applicant and its principal entities or 

individuals

• Type of entity must be legally recognized and authorized to conduct 

business operations for the proposed transaction under applicable state 

governing laws, rules, regulations, licensing, etc.;

• List of all individual sponsors, registered agents, key principals, 

controlling members, and any board members and officers based on the 

type of entity; and

• Identification of the applicant’s principal ownership interests and all 

Identity-of-Interests among participants including buyer, seller, contractor, 

management, lender, etc.

b. Eligibility requirements ( 7CFR 3560.55), including

• Creditworthiness of the sponsors, the borrower entity if formed, and its 

principals should be verified with an appropriate commercial credit report,

• Applicant's experience record must be documented for the principals, 

controlling members, officers, etc.

• Project limitations and restrictions to include discussion of any 

outstanding or potential use restrictions that currently exist or will be 

imposed based on the terms, financing, or other participants in the 

proposed transaction; this includes existing LIHTC and any other 

restrictions outstanding on the property.

• Financing plans, participants, roles, amounts, terms, and conditions 

necessary to secure funding will be discussed.

• See HB1-3560, Chapters 2 and 4 for additional specific program eligibility 

requirements.

c. Site control

• Applicant must have enforceable site control throughout the transfer 

process. Adequately describe real estate and any other personal property, 

chattels, equipment, movable property and business property that is not 

real property, money or investments belonging to the project being
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acquired in compliance with state laws and practices. Applicant should 

consult with his or her own appropriate legal counsel as necessary to 

ensure adequacy and proper enforceability of the purchase agreement.

• Price and terms must be clearly defined

• See also Handbook 1-3560, Chapter 7 for additional eligibility 

requirements.

d. Appraisal requirements

• Only appraisals acceptable to RD will be used for transfer underwriting. 

Third-party appraisals may not be sufficient for RD use unless they 

comply with Agency requirements in form, timeliness, and sufficiency. 

See HB1-3560, Chapter 7.

• Applicants should discuss RD appraisal requirements including the 

statement of work prior to engaging an appraiser.

• Appraisals prepared for any other participants or lenders may not satisfy 

RD Statement of Work requirements, and may require the applicant to 

incur additional appraisal costs.

e. Capital Needs Assessment requirements

• RD requires a current CNA meeting Agency requirement for all transfers.

• CNA guidelines are available on the RD public website at: 

http://www.rd.usda.gov/programs-services/multi-family-housing-directloans

f. Scope of Work

• All planned repairs, replacements, and other development must comply 

with RD requirements as required in RD Instruction 1924-A, regardless of 

funding source.

• To coordinate construction and satisfy transfer requirements, applicants, 

their contractors, and any technical staff should discuss the details of the 

Scope of Work being planned to ensure the requirements of each 

participating funder is addressed.

g. Applicant’s Feasibility Analysis

• Verify that all parties to the transaction have been identified, and that lines 

of communication can be extended to ensure that full disclosure of the 

planned transaction will be forthcoming.

• Remind the applicant that it is his or her responsibility to provide adequate 

and accurate information in a timely manner to move forward with the 

transfer request.

• Be available to discuss deficiencies in the application, and demonstrate a 

willingness to consider appropriate compromise with the participants and 

lenders when evaluating the best interests of the Government and the 

tenants.
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• Remember a transfer request is a business and financial decision being 

made by the buyer and seller to request RD permission to effect the 

transfer under the rules, regulations, and policies that have been 

prescribed.

h. Provide a general Letter of Support based upon agreements being proposed.

• The applicant's delivery of a completed self-analysis of their transfer 

proposal using the PAT, does not guarantee final approval of the transfer 

request.

• However, this analysis should present a reasonable approximation that a 

final transfer application adhering to the fundamental assumptions that 

have been presented would, upon the completion of the full transfer 

process, likely lead to an RD transfer authorization subject to the 

regulations then in effect. 

3. Application Provided by Applicant.

The Loan Servicer will record all transfer applications into the MFH Transfer 

Tracking System in SharePoint at: 

https://mfh.usda.net/Admin/Lists/Transfer%20Tracking/AllItems.aspx and 

annotate Multi-family Information System (MFIS) with an appropriate 

servicing action as designated by RD HQ upon receipt from the applicant. The 

Servicing Office receiving the application will establish a transferee account in 

MFH records based on the information provided by entering the M1AA, M5A 

and M5B into AMAS to establish the transferee.

All transfer applications received will be reviewed within 14 business days of 

receipt for completeness, and provide appropriate notification to applicant. 

Applicants established in the tracking and servicing monitoring system will 

also be updated to include appropriate comments and follow up actions so long 

as the transfer application remains active. If the application is incomplete, it 

will immediately be returned to applicant. However, minor errors or 

administrative omissions should not prevent determination of application’s 

eligibility or feasibility.

Internal Agency reviews will commence upon determining the application is 

sufficiently complete to begin processing the PAT. To ensure that the 

processing guideline goals can be met, the Loan Servicer will typically 

schedule simultaneous reviews by one or more staff members:

• The State Office review of the CNA;

• The required on-site inspection, and completion of the analytical template; 

and

• Coordinate all other requests for reviews.

The goal is to complete the full evaluation of the complete application(s) is:

• 45 business days if one property is involved, or

• 75 business days if two or more properties are involved.

The complete application submitted by the applicant will be evaluated based on 

the application materials provided by the applicant and a review of Agency 

records, including AMAS and MFIS information for the project being 
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transferred, the applicant, and the other key principals involved in the 

transaction. The Loan Servicer must demonstrate in the case file that the 

transfer application sufficiently addresses the issues of eligibility, compliance, 

feasibility, and risk as discussed in this chapter in each of the following broad 

categories.

a. Evaluate the Transferee

Transferees must meet the basic applicant eligibility for the respective loan 

program (RRH or FLH) currently financing the property. These 

requirements are presented in more detail in HB 1-3560.

• Analyze creditworthiness of the sponsors, the borrower entity if formed, 

and its principles; order a commercial credit report for the applicant 

entity, any parent organization, affiliate, subsidiary, and all principals. 

A comprehensive commercial credit report will be order by RD for all 

transferees, including any key principles as defined in 7.4 C of this 

handbook.

• Analyze program organization requirements for all applicant entities' 

ability to meet the organizational formation and operating 

requirements/restrictions within the state in which the project is 

located, including representations regarding felony conviction and tax 

delinquency status for a corporation. Use Form AD-3030, for 

corporations to verify the corporation does not that have felony 

convictions within the past 24 months, or have unpaid Federal tax 

delinquencies.

• Require current financial statements from all entities and principals.

• Analyze the applicant's experience record and resumes from principals.

• Review Form RD 1944-37, Previous Participation Certification(s) for all 

principles.

• Order CAIVRS, SAM, and Credit Reports.

• Request initial Organizational Document review from OGC.

b. Evaluate the Property

Each property being transferred must be evaluated to determine if, upon 

closing the transaction, the property will continue to meet the respective 

loan program purposes, including:

• Evidence of continuing project need;

• Rents and occupancy; CRCU and other rent limitations;

• Property feasibility/adequacy of repair and rehabilitation, and method of 

construction; and,

• Reasonableness of costs for planned development.
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c. Evaluate the Project

The transfer further encompasses a number of other Agency requirements 

and conditions that become the complete project. This includes the 

following items necessary to satisfy the commitments imposed by other 

applicable Federal laws and regulations.

• Environmental Review (typically categorical exclusion);

• Evidence of third-party funding availability, including rates and terms;

• Coordination with other third-party participants in place;

• Request of Reviews by PSS and OGC; and,

• Civil Rights Impact Analysis.

d. Compile all information necessary to complete underwriting analytical 

analysis using the RD PAT.

e. Notify the applicant of any deficiencies, and require corrections before 

considering the application to be complete for processing. Applications 

not corrected within 30 days will be withdrawn and returned to the 

applicant for resubmission when the outstanding issues are resolved.

PAT contains general instructions, basic underwriting thresholds, and 

pertinent tips for RD customers and staff to assist in preparing and 

evaluating proposals. The tool supplements the more detailed instructions 

found in the applicable RD Handbooks, CFR, and regulations. Additional 

instructions and suggestions are available internally for Agency 

underwriters through the Agency SharePoint.

4. Request Underwriter Review.

MFH Transfer underwriting is used to authorize the transaction and the future 

servicing requirements upon closing. Responsibility for successfully 

completing any MFH underwriting relies on the ongoing coordination of loan 

making and loan servicing efforts. The underwriting review relies on the 

expertise of the RD staff currently servicing the loan, and the invaluable input 

and insights each can offer on the project, the market, the borrower, and the 

applicant. An on-going RD team effort involving both the underwriting staff 

and servicing is required to deliver a project that will be sustainable for eligible 

tenants over the life of the RD loan.

The underwriter must have the ability to complete the basic eligibility 

determinations concerning both the applicant/borrower and the project to
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ensure the transaction complies with the respective MFH program authorities 

described in current RD Handbooks, CFR, and statutory authorities. 

The Underwriter will import the CNA, appraisal information, and all other 

third-party sources and uses into the PAT (available at the RD intranet 

SharePoint https://mfh.usda.net/default.aspx) to document the MFH transfer.

All transfers, including those utilizing any MPR tools, must be in the best 

interests of the Government and tenants. These transactions must demonstrate 

the extended viability and sustainability of the project, the likelihood of full 

repayment under the terms being offered, and the potential to succeed in 

providing and maintaining quality housing over the long-term. It is not the 

Agency’s role to assume any responsibility for the individual business 

decisions of the borrower or applicant in ultimately determining the course of 

action they propose.

Each component in every transaction will be evaluated and analyzed on its 

individual merits. Common sense consideration of pertinent present and 

historical conditions, as well as recognition of justifiable future impacts, must 

all be used to judge the project’s potential to succeed over the term of 

financing being proposed. 

Key considerations may include questions such as:

• Is the project needed?

• Is the applicant eligible?

• Is the project eligible? Is there a present and continuing need for the project 

in its market area?

• Is the project economically feasible? Does the transaction cash flow use a 

reasonable operating budget comparable to other similar affordable 

properties in the market area?

• Will the project be and remain affordable upon completion of the 

transaction?

• Are the RD-eligible project construction and operating costs reasonable?

• Are the Agency’s interests secure?

• Is the transaction in the best interests of the Government and the tenants?

• Does the proposal offer adequate property and asset management to meet 

RD requirements into the future based on the information presented? 

The terms and conditions of the transaction presented by the applicant must 

reasonably address the issues that determine the potential for success. This 

includes substantiating any future tenant subsidies that may be necessary to 

ensure success of planned operations. All parties need to recognize that the 

transactional costs and fees proposed may adversely limit the amount of funds 

needed for repairs, replacements, and improvements and become detrimental to

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the Agency transfer requirements and thresholds. Ultimately, any allowable 

costs will pass to the tenants through rent increases, but tenant subsidies such 

as Rental Assistance (RA) are not guaranteed beyond their current expiration. 

Tenants who do not receive RA will be impacted directly by any rent increase, 

which they may not be able to afford. 

Agency underwriters must use the most current underwriting tools and 

guidance such as those in the PAT available at the RD intranet (SharePoint) 

https://mfh.usda.net/ProgTracking/default.aspx to document the MFH transfer 

and MPR decisions.

Applicants and borrowers may access these forms through the appropriate RD 

public websites (http://www.rd.usda.gov/programs-services/multi-family- housing-direct-loans or http://www.rd.usda.gov/programs-services/housingpreservation-revitalization-demonstration-loans-grants).

At this point, the Underwriter will complete the final underwriting analysis to 

determine full feasibility and terms for the transaction. The Underwriter will 

normally conclude this analysis within 45 days (for a single property) or 75 

days (for multiple properties) from the date that the complete application(s) has 

(have) been received. The Underwriter will evaluate the application for overall 

compliance, risk to the Agency, and impact to the tenants. 

If the terms of the transfer do not meet Agency requirements, the Underwriter 

will communicate to the Loan Servicer that the assumptions used in the 

application are not reasonable and the application will rejected. The Loan 

Servicer will communicate to the applicant the Agency’s decision and follow 

the applicable requirements of RD Instruction 2033-A for file retention.

If the terms of the transfer meet the Agency’s requirements, the Underwriter 

will communicate to the Loan Servicer that the assumptions used in the 

application are reasonable and the application will proceed. The Loan Servicer 

will communicate to the applicant the Agency’s decision to continue 

processing the transfer application. 

The Loan Servicer will provide the applicant with a status update within 30 

business days of receipt of the application.

5. Submit to RD HQ for Concurrence and Authorization for approval by the State 

Director.

When the underwriter has completed the underwriting analysis using the 

information and materials supplied by the Loan Servicer, the transfer 

underwriting analytical tool or PAT, and appropriate supporting information, 

the application will be signed by the State Director and submitted for 

authorization by the RD HQ Office. The submission will include the 

underwriter’s recommended conditions and estimated closing date. 
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6. Agency Decision.

RD HQ will review the underwriter's package and recommendations. Upon 

acceptance of the information, a letter authorizing the State Director to 

formally approve the specific transfer pursuant to program regulations, 

funding, etc. will be provided to the State Director within 15 business days.

7. Prepare Approval Conditions for Signature of Applicant.

Within 15 business days of the date the authorization is signed by the RD HQ 

Office designate, the State Director will notify the applicant of the specific 

approval conditions. The Applicant will signify acceptance of approval 

conditions by endorsing and returning the duplicate set of the State Director's 

approval letter.

8. Coordinate Closing Instructions and Loan Document Approval from OGC.

The Loan Servicer will coordinate closing instructions and any necessary loan 

document approval with OGC and the closing agent within the closing 

timeframe authorized in the transfer approval letter. The Loan Servicer will 

also establish the new buyer's account in AMAS and MFIS within the 

timeframes established in the accounting system, and input necessary budgets, 

worksheets, etc. as required by the AMAS tips.

9. Schedule and Close Transfer.

The designated closing agent will coordinate the delivery of the RD closing 

documents, complete the scheduled closing as directed and deliver the 

necessary documentation to RD to properly evidence closing, recording, etc.

10. Complete post-closing review and verification.

The Loan Servicer will finalize the buyer's account in AMAS and MFIS to 

ensure the transaction complies with all of the applicable loan and operational 

conditions authorized for the transaction.

B. Procedure for Incomplete Transfer Requests

If at any point, the Loan Servicer determines that additional information is required 

from the purchaser in order to complete processing, the Loan Servicer will notify the 

purchaser in writing as follows:

• Explain the deficiency and describe what additional information is needed and 

the timeframe for submitting the additional information.

• RD’s timeframe for processing the transfer request may be extended for not more 

than 30 business days beginning with the date of the notice to the applicant.

• If the information is not submitted within the extension period, RD will consider 

the transfer request to have been withdrawn and return the application.
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C. Denial of Transfer Request

The Loan Servicer may issue a denial of the transfer request at any point during the 

process. Appeal rights should be given for denials as submitted. Grounds for denial include, 

without limitation:

1. Eligibility issues as determined by the specific program regulations for RRH 

and LH, and this Handbook:

• Ineligible transferee; or

• Ineligible project.

2. Feasibility issues, such as:

• CNA does not meet RD requirements;

• The proposed transfer does not address the property’s physical needs;

• The appraisal submitted does not meet RD requirements;

• The proposed transfer does not address all compliance issues;

• Proposed Operations and Maintenance (O&M) expenses are not adequate 

for the project’s long-term viability;

• Proposed net operating income (NOI) is not sufficient to meet the general 

industry standard of 1.15 debt service coverage ratio (DSCR) through year 

three for all amortizing debt that is being placed on the property with the 

proposed transfer transaction;

• Proposed rents exceed the lesser of CRCU or restricted rents unless an 

exception is allowable under the regulation; or

• Proposed rents are not adequate to support the property’s long-term 

viability.

3. Financial issues, such as:

• The proposed transfer would not bring all loan accounts current;

• The taxes and insurance account will not be adequately funded, with all 

outstanding bills paid; and

• The security deposit account will not be fully funded.

4. The proposed management is not acceptable as required in 7 CFR 3560.102 

and further described in RD HB 2-3560.

5. The proposed transfer will not correct all outstanding findings sufficiently to 

allow re-classification of the property to an acceptable level. In some cases

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the agreement to transfer ownership may be considered part of an

acceptable workout plan for MFIS entry together when any further servicing 

actions determined appropriate to meet the best interests of the government 

and the tenants. Some transfer requests may be unacceptable as submitted 

but could be acceptable with specific modifications. At any point during the 

process, the Loan Servicer may inform the applicant accordingly, using the 

procedure in paragraph 7.6 B. Incomplete transfer requests not corrected 

within 30 business days will be withdrawn or rejected, as appropriate.

6. Proposed sales price and/or equity payout exceeds the allowable maximum, but 

the transfer request would be acceptable if the sales price and/or equity 

payout were reduced, or the buyer demonstrates the ability to provide 

sufficient other resources not otherwise impacting proposed project rents, 

RTO or eligible cash flows, security or other RD requirements. See Section

7.4 definition for Non-Equity Compensation in this Handbook. Applications 

without sufficient resources to fully fund all proposed project costs, needs 

and uses will be rejected for lack of financial feasibility. All sources and uses 

must balance.

7. Proposed rents exceed the lesser of CRCU or rent restricted rents, but the 

transfer request would be acceptable when the applicant provides sufficient 

justification and RD agrees with the rents necessary to operate the property.

8. Proposed RTO exceeds the allowable maximum, but the transfer request would 

be acceptable when the proposed RTO is reduced.

9. The proposed management and/or management documents are not acceptable 

under the requirements of 7 CFR 3560.102, but the transfer request would be 

acceptable when acceptable management/management documents are 

substituted. See Paragraph 7.18 for a further explanation of what is 

acceptable.

10. The transfer request would be acceptable when an acceptable tenant 

protection plan is included. See Paragraph 7.27 for a further explanation of 

what is acceptable.

D. Payments Received While Transfer Pending

During the period in which a transfer is pending in the Field Office, Deputy Chief, 

National Financial and Accounting Operations Center (NFAOCS) will continue to apply any 

payments received to the transferor’s account. Such payments include any down payments 

made in connection with the transfer for reducing the amount of the debt to be assumed.

• Identification. Project Worksheets must be submitted by the transferor at least 

seven days prior to transfer closing. Project Worksheets must reflect the prior 

month’s activity that will be credited to the transferor’s account. This will ensure 

the transferor receives the RA check and has time to deposit it into the project 

account. Refer to MFIS Tip #2 (January 2008, revised August 2012) for 

additional guidance on processing transfers in AMAS.

• Payment. An interest-only installment payment may be required from the 

transferor. Refer to the AMAS Manual for further guidance on when this would 

be collected and how it is to be processed. Refer to MFIS Tip #2 (March 2008) 

for additional guidance on processing transfers in AMAS.
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E. Uncompleted Transfer

If for any reason a transfer will not be completed after approval, the Loan Servicer 

will immediately notify the State Office Loan Underwriter of the reason with a request to 

withdraw the application and resume normal servicing of the project account.

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HB-3-3560

7.7 RENTS

SECTION 2: POLICY CONSIDERATIONS

A. Budget/Reasonable Rents [7 CFR 3560.406 (d)(2)]

The Loan Servicer must review the budget submitted by the transferee to determine 

whether the budget provides for reasonable rents that the persons eligible for the units in 

question can afford. If the transferee is proposing a rent increase, the submission from the 

transferee should include information on market rents for comparable units in the area, and 

documentation that the units will be marketable at the proposed higher rents. In addition, the 

proposed basic rents for the project upon completion of the transfer must be the lesser of 

CRCU or the restricted rents. This standard is a benchmark meant to maintain the 

affordability of program units and avoid increasing RD Rents above local conventional rents, 

a situation which could lead to non-competitive rents, excessive vacancies, or demand for 

new or increased rental assistance to remedy any underutilization of units by inappropriate 

occupancy standards.

With the case-by-case approval of the RD HQ the rent standard may be exceeded in a 

transfer, but only if the buyer agrees to fund a cash escrow from non-project and nonamortizing funding sources such as grants, soft loans, etc. sufficient to cover necessary 

operating, maintenance, and reserve costs at the property being transferred for the term of the 

RD loan for any amount exceeding the CRCU rents. This might occur in areas experiencing 

an economic decline that has led to rents in conventional properties being set below break- even levels. While an increase in RTO or financing equity payout to a seller may sometimes 

be an appropriate servicing action, neither will be authorized. These are not valid factors to 

consider in assessing whether property viability creates a need to exceed CRCU.

The Loan Servicer should be particularly diligent in analyzing the budget and 

proposed rents when the transferee will also receive a subsequent loan or other third-party 

financing, or there are significant repairs or rehabilitation plans. The Loan Servicer must 

consider both the short-term impact of loan payments the transferee must make immediately 

following the transfer, and the long-term feasibility of the budget and rents to allow for a 

successful project. If there is any deficiency in the budget or rent structure, the transferee 

must take appropriate corrective action as part of the transfer actions.

Third-party debt-service increases can be built into the rent only if the new debt is 

designated for, and actually disbursed for, eligible Section 515 loan purposes unless otherwise 

used for necessary eligible purposes as prescribed when using a Section 538 GRRH loan. If 

the transaction includes a GRRH loan as part of the final underwritten transaction, a portion

of the maximum total allowable development fee may be included as part of the GRRH loan 

provided there is sufficient cash flow at the rents determined appropriate for the specific 

transaction and which do not exceed the lesser of CRCU or the allowable LIHTC rents in 

effect at the time of transfer approval. Loan Servicers will ensure the developer fee is 

reasonable, and does not exceed the maximum allowable by their state tax-credit allocating 

agency.

Eligible Section 515 loan purposes include costs that are RD-approved repairs and 

improvements, and eligible soft costs which include legal, technical, environmental, and 

professional services [7 CFR 3560.53]. For additional guidance on eligible loan purposes, see 

Paragraph 12.6 of RD Handbook 3560-3, Attachment 4-B of HB-1-3560, and 7 CFR

(02-04-05) SPECIAL PN 7-31

Revised (01 06-17) PN 492
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3565.205 if a GRRH loan is also authorized for the transaction. If additional debt is being 

allowed for projects using a RD Section 538 GRRH loan, eligible purposes may also include 

those defined in 7 CFR 3565.205.

The effective date of any rent increase resulting from a repair/rehabilitation loan is 

following the completion of the approved repairs and/or improvements.

In addition, the Loan Servicer should review the budget:

• To determine if the project reserve levels are sufficient to allow for the necessary 

maintenance of the property over a 20-year CNA period. If there are any 

deficiencies, the borrower must take appropriate corrective action; and,

• To ensure a minimum combined operating allowance and vacancy loss is provided 

that does not fall below the industry standards outlined previously in Chapter 7.2 D 

2.

B. Conventional Rents for Comparable Units (CRCU) Limitation [7 CFR 

3560.406 (d) (2)]

In addition to RD’s contractual requirements and any HUD Section 8 requirements, 

rents in RD-transfer properties are further limited by Federal regulations. Program 

regulations [7 CFR 3560.406(d)(2)] require the buyer to agree to set Basic Rents at the 

housing project, covered by the assumed loans, at levels that do not exceed CRCU rents in the 

area.

Attachment 7-A, Revitalization Guidance, under Revitalization principles number (5) 

states that post- transaction Basic Rents will not exceed the lesser of CRCU or restricted 

rents. All the following must be reflected in project Basic Rents except as provided below:

• project equity;

• rehabilitation;

• RD or non-RD debt service;

• reserve deposits;

• operating costs; and,

• RTO.

Before determining the amount of equity pay out or the amount of the new RTO, RD 

will first establish a new reserve deposit level that is adequate to fund all reserve-eligible 

needs according to the CNA, and will establish a new O&M expense level that is adequate to 

support the project.

The CRCU rents used for transfer underwriting are established using information from 

one of the following:

1. An appraisal meeting RD requirements (See HB-1-3560, Chapter 7 and 

Attachment 7-C of HB-1-3560); or
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2. An Area Market Rent Survey (AMRS) meeting RD requirements. If an AMRS is 

used, RD’s Statement of Work (SOW) should be used. RD’s guidelines for an 

AMRS are available in any RD office.

3. When no appraisal is required, i.e., no new RD funds are provided, the transfer is 

on same rates and terms, no additional senior debt or subordination is being 

requested, and there is no change in the currently authorized RTO, and a current 

AMRS has not been provided, one of the following alternative methods may be 

used to establish CRCU rents:

a. Determinations by third parties:

• Paragraph 4.18 of HB-1-3560 discusses a market study to establish the project 

need which may be conducted by an appraiser, and a market survey by a non- appraiser to establish the market need for the units. These are two different 

types of analysis used for different purposes. The market study by an appraiser 

to establish a possible rent for valuation purposes does not establish CRCU 

rents; however a market survey by a non-appraiser would be acceptable to 

establish CRCU rents.

• If the third-party is an appraiser, an AMRS would be appropriate as discussed 

above. There is no need to order a market study.

• If the third party is not an appraiser, a market survey may be used to establish 

CRCU rents.

b. Determinations by State Office staff:

• State office review of advertised rents for comparable conventional properties.

• State Office knowledge of rents being charged in the area.

Basic Rents used in RD underwriting are capped at 100 percent of the lesser of CRCU 

or the restricted rents if the proposed transfer includes any increased RTO or an equity payout 

to the seller. Non-equity compensation cannot have an impact on rents.

In other situations when the proposed post-transfer rent increase is solely to support 

operations, including increased annual reserve deposits based on the approved CNA, Basic 

Rents may exceed CRCU, but may not exceed 150 percent of CRCU [7 CFR 3560.406(d)(2)]. 

RD HQ prior concurrence is required when Basic Rents exceed CRCU.

NOTE: Loan Servicers should note that field office authority is capped at 100 

percent of CRCU for transfer transactions. RD HQ Multi-family Preservation and Direct 

Loan (PDLD) concurrence is required for any situation in which CRCU will be exceeded for 

any transfer transactions.

A rent increase may be justified when it is solely to support operations for increased 

O&M expenses and/or an increased reserve deposit. Annual rent increases should be limited 

to not more than 10% per year. If a larger rent increase is necessary to meet required third 

party underwriting requirements, the rent increase may be phased in to meet such 

requirements.

If the rent increase includes debt service on a new loan, Basic Rents must be at or 

below CRCU. RD may consider an exception if the rent increase is solely to support 

operations if all of the following are true:

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• No equity is being paid out;

• No increase in RTO;

• 100 percent of loan proceeds are used for the hard cost of repairs and other 

eligible purposes; and

• The rents are phased in by the transferee at not more than 10% per operating 

year. Shortfalls must be offset by the transferee from non-project sources or funded 

with additional third party debt.

In cases in which the existing Basic Rents exceed CRCU, the Loan Servicer must 

document to the approval official that the above-CRCU rents were needed solely to meet 

operational requirements. No increased RTO or equity pay out was built into the pre-transfer 

rents. If this documentation cannot be provided, a violation of [7 CFR 3560.406(d) (2)] has 

occurred, and the State Office and PDLD must appropriately service the account to restore 

program compliance. This may impact the proposed transfer transaction.

C. Increased Basic Rents Because of New Debt Service

If rehabilitation will be performed, Basic Rents should not increase until after 

completion of construction/repairs and RD acceptance. Debt service on new debt (not 

construction permanent, bridge or interim/temporary) resulting from construction, 

improvements and repairs should not be included in Basic Rents until all eligible costs, 

funded with the proceeds of the new debt, have been expended. Interim rent increases may be 

considered for payment of that portion of the new permanent debt used to pay acquisition 

equity only if not otherwise funded with interim or bridge financing included with interim 

construction financing. 

Loan Servicers may begin the rent increase and tenant notification processes prior to 

completion of repairs so that Basic Rents can be increased as soon as possible following 

completion of repairs. Depending on the nature of the repairs and the length of the tenant 

notification period, processing of the rent increase may need to begin when repairs are no less 

than 50 percent complete so that rents can increase soon after completion of repairs. 

If debt service is included in the Basic Rents, the proceeds of the loan must be used 

for eligible Section 515 loan purposes or allowable Section 538 loan purposes as underwritten 

for the transfer. See [7 CFR 3560.53], Attachment 4-B of HB-1-3560, and 7CFR 3565.205. 

Often, new third-party debt is proposed to have a first-lien security position, and 

existing USDA loans are proposed to be subordinated and be in a second lien position. 

Subordination will not be allowed unless all proceeds of the new debt are for eligible RD 

uses.

7.8 SALES PRICE

A. Limitations

There is no limitation on the sales price that is paid solely from assumption of existing 

debt plus non-RD funds that do not affect Basic Rents, e.g. LIHTC equity, and the 

purchaser’s personal equity.

In all other situations, the sales price should not exceed the lower of two limitations:

1. The first limitation is the total of:

a. The appraised present market value of the real estate; and
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b. The balance of the Reserve for Replacements account. The balance itself must 

pass to the purchaser, but the amount can be included in the sales price when 

the approved transfer-underwriting Sources and Uses includes other sufficient 

non-permanent debt sources of equivalent amounts. 

2. The second limitation is the amount of sales price that can be supported within 

CRCU rents. For example, if the cash portion of the sales price is paid with thirdparty debt, the new debt service plus all other costs of operation including 

adequate O&M expenses and an adequate Reserve deposit must be supportable at 

Basic Rents that do not exceed CRCU.

B. Equity Payout (General)

The intended purpose of this section is to clarify RD’s position as it pertains to paying 

out equity depending on different loan situations. Generally, an equity payout pertains to 

transfers in which the seller desires an equity payment and the transfer will avert prepayment 

of the existing RD loan(s) and removal of needed affordable rental housing units. 

1. Equity Sources Not Affecting Basic Rents.

As long as the requirements of 7 CFR 3560.406(e) are met, RD generally does 

not place any restrictions on payments of equity funded with the purchaser’s cash, 

grants, tax credit equity, or third-party loans that do not depend on rental income for 

repayment. Such equity payments do not result in any increased RTO or in any 

adjustment to the Basic Rents. RD will not subordinate its first lien position to any 

such third-party loan. Owners who have previously received incentives not to prepay 

may receive additional equity from these sources. 

2. Equity Funded With RD Debt Repaid Through Rents.

Current RD policy is to fund equity payout with RD loans only in prepayment 

situations. These situations are not addressed in this Chapter. See Chapter 15 of HB 

3-3560.

3. Equity Funded With Third-Party Debt Repaid Through Rents.

Equity can be funded from a third-party loan including a Section 538 

guaranteed loan that is repaid from rental income only if: 

a. The equity amount is limited to the lesser of an amount documented in an 

appraisal acceptable to Rural Development (See HB-1-3560, Chapter 7 and 

Attachment 7-C of HB-1-3560), or an amount supportable at rents within 

CRCU, after allowing for adequate O&M expenses and an adequate Reserve in 

accordance with this chapter.

b. The restrictive-use period has not expired and the appraisal determines the 

reduction in value attributable to the remaining period of restricted use, using a 

method acceptable to RD. See Attachment 7-D and Attachment 7-A of

HB-1-3560.

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c. A new 30-year Restrictive-Use Provision (RUP) is required. See Paragraph 7.31 

D and [7 CFR 3560.406(g)] and the project received an initial loan to construct 

new units that was approved on or after December 15, 1989, and at least 20 

years have elapsed since the date of the closing of the loan

d. Subject to the restrictions of [7 CFR 3560.409], RD may subordinate its first lien 

position to a third-party equity loan that meets the requirements of this chapter 

provided RD determines that there is adequate Security Value to cover RD’s 

loans and any loans senior to the RD loans.

4. Buyer/seller/cash flow notes.

If full payment is not made in cash to the seller at closing, no rental income 

may be used to pay any of the remaining amount of the purchase price, no lien may be 

placed on the project assets or income, and there must be no provisions that provide 

the note holder with any present or future interest or claim in the property, income, or 

assets of the property being sold or relinquished. 7 CFR 3560.406(c)(5) further 

provides that there must not be any provision that allows the property to revert back to 

the original owner for any reason during the term that any RD loan remains 

outstanding. These types of transactions are frequently referred to as buyer, seller, 

cash flow or carryback notes and do not meet RD requirements for recognized debt 

types. Therefore, they cannot be paid with project revenues or subsidies at any time an 

RD direct loan, grant or other RD authorized assistance remains outstanding on the 

property.

5. Use of Equity Loan Proceeds.

Proceeds of a proposed equity payout must be in accordance with [7 CFR 

3560.406(e)].

The Agency cannot permit any equity payment to the borrower as part of an 

ownership transfer or sale of a property if any of the following conditions exists:

a. The borrower's indebtedness to the Agency is not being 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.

b. Any prior non-Agency liens against the property that are not paid in full or not 

being assumed by the transferee under this Chapter.

c. Any required 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.

d. Any management, operation and/or maintenance deficiencies cited in a 

compliance violation notice issued to the borrower by the Agency are not being 

corrected as part of the ownership transfer process.

e. 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 without prior consent of RD HQ.
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6. Determining Equity When Repairs Are Required.

When repairs are required to be completed before any equity is paid out to the 

seller and all parties to the transaction, including all participating lenders, mutually 

agree that such repairs cannot be completed due to seasonal opportunity or other 

circumstances beyond the seller’s control before the transfer occurs, the Repair 

Agreement (See Attachment 7-B-1, Transfer Application Documents) must include a 

guarantee acceptable to RD, that the actual repair costs will not exceed the estimated 

repair costs. This guarantee, which may take the form of a cash escrow, bond, 

enforceable letter of credit or other valid form of surety acceptable to RD, will be 

provided by either the seller or purchaser to assure timely completion of the repair.

7. RD Approval.

The State Director may authorize a transfer involving equity payout only if:

a. Any equity payout being proposed is paid from non-USDA funds,

b. The equity payout will not result in an increase to the Basic Rents,

c. No increase is proposed to the RTO,

d. There is no modification of any USDA loan, and

e. The buyer and seller do not hold an Identity of Interest (IOI) as defined by RD 

regulations.

C. Equity Payout during the Term of an Existing RUP

When the property is nearing the end of its RUP, borrowers who are considering a 

transfer sometimes want to be compensated for the profits they hope to make from a future 

prepayment. The purpose of this section is to discuss how USDA will respond to requests to 

include equity payments to the seller as a Use of Funds in transfer transactions when the 

property is still within its RUP period.

a. No equity payout is allowed from USDA loan funds.

b. Equity payout is allowed from other funds, typically using a third-party loan, 

provided that the transfer otherwise meets the requirements of this chapter. See the 

discussion above for Agency requirements for third-party equity loans.

c. RD understands that the Uniform Standards of Appraisal Practice do not permit 

the prospective value of a conversion to market-rate operations to be taken into 

account in determining market value if there are 10 years or more remaining in the 

RUP.

d. RD requires appraisers to use a discounted cash flow approach to value in 

determining market value (unrestricted) when the RUP has not expired. The 

discounted cash flow projection would reflect regulated operations through the end 

of the RUP, through a conversion period to market-rate operations.

(02-04-05) SPECIAL PN 7-37

Revised (01 06-17) PN 492
HB-3-3560

D. Non-Equity Compensation Payments

When there is no equity in the project, the transferee may choose to pay additional 

compensation as part of the negotiations with the transferor to reach a mutual agreement for 

the transfer. This situation is most appropriate when the buyer determines that the transfer 

will be in their best interests if they were to offer assistance to remove an existing RD 

borrower with compliance or performance problems, and RD concurs that non-equity 

compensation is less expensive than liquidating the property.

The State Director must request RD HQ to authorize the transaction. No RD loan 

funds may be used to pay the non-equity compensation. See Paragraph 7.29 F.

The proposed non-equity compensation must be applied first to satisfy any non- USDA claims, e.g. third-party loans, before any amounts may be paid to the seller/transferor.

7.9 RETURN-TO-OWNER (RTO)

A. RTO in General

The transferee’s initial investment and RTO, will be determined by RD analytical 

analysis at the time of transfer approval. The new owner's RTO will be computed based on 

the provisions of the Agency’s current transfer guidance and principles.

The maximum potential RTO for RD MFH transfers is based on the net cash flow 

from project operations, as determined by use of the RD analytical tool, PAT. The RTO 

calculation considers the amount of tax credit equity [as defined in 7 CFR 3560.406(d)] that is 

used for the RD RRH eligible hard costs of construction purposes (defined in 7 CFR 3560.68) 

and any additional owner contribution for hard construction costs in establishing the 

maximum RTO the specific project will support. The maximum potential RTO the buyer

may be eligible to earn annually throughout the term of the loan is determined by RD at the 

time of transfer approval. This maximum RTO is computed through an analysis of the 

Rehabilitation total hard costs eligible under the RD Section 515 Program less all new Loans 

that do not exceed the RD as improved Security Value determined at the time of loan 

approval.

The new RTO may not exceed the amount remaining from the projected Net 

Operating Income (NOI) less debt service for all loans without agency debt deferral as 

determined in the final RD underwriting used for the transfer approval. NOI for payment of 

RTO will be based on the project budget post-rehabilitation, using rents not exceeding the 

lessor of CRCU or LIHTC or other restricted program rents, and after deducting all operating, 

reserve, vacancy, and other cushions and approved project operating costs.

If the transfer is from a non-profit to a limited-profit borrower, the initial investment 

to be shown in the loan agreement or resolution will be “None” unless the transferee 

contributes additional equity.

RTO as established for the transfer closing will remain unchanged throughout the term 

of the RD loan(s) included, assumed, or modified at the time of transfer closing unless 

modified at a future date by RD as part of an approved servicing action.

B. RTO Based on Low Income Housing Tax Credits (LIHTC) Equity [7 CFR 

3560.68] (Paragraph 5.12 of HB-1-3560)

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HB-3-3560

RTO in LIHTC properties is based on cash, not loan proceeds, invested in hard costs 

of construction as calculated in the RD PAT.

• Cash for this purpose includes LIHTC equity as defined in this Chapter.

• Hard cost for this purpose means actual material and labor cost only and does not 

include general requirements, overhead, general contractor fee/profit, or 

development fees to be paid from LIHTC syndication proceeds.

Loan Servicers should note that the authority for this RTO calculation is found in 7 

CFR 3560.406 (d). The actual calculation is carried out in the RD analytical template (PAT) 

required by RD HQ. Note that this RTO calculation for transfers differs from the RTO 

calculations for prepayment transactions and the ROI calculations used in the project's 

initial/original development.

If the new RTO approved for the transfer decreases, it will be effective immediately 

upon closing and accrue to the new owner. Increased RTO does not begin until the associated 

repairs have been completed, inspected and accepted by RD. Until repairs have been 

completed and inspected, the existing ROI/RTO authorized in the seller’s RD Loan 

Agreement/Resolution continues to be applicable and may be earned by the buyer for as may 

be provided in the purchase and sales agreement.

If the new RTO will begin in the future, there should be an addendum made to the RD 

Loan Agreement or Loan Resolution used for the respective type of transferee. The 

addendum should include language such as the following:

A maximum potential earned annual authorized Return to Owner (RTO) in the amount 

of $ ( ) has been determined allowable by RD based on the Agency's analytical 

analysis used in authorizing the transfer to the borrower named herein. The 

authorized RTO replaces any previous reference to Return-on-Investment (ROI) or the 

payment thereof which may be otherwise referenced herein. Any increase in RTO may 

only be earned starting the beginning of the first project fiscal year following the 

completion and RD approval of the agreed-upon rehabilitation.

The addendum must be submitted to the Regional OGC for review of any state law

issues.

The maximum new RTO is the amount supportable within NOI set forth in Paragraph

7.2 D 2 for the property using the post-rehab operating budget expenses, reserves and debt 

service used in the transfer underwriting analysis and documented in the PAT at the time of 

transfer approval. However, new maximum potential RTO described in 7.2 C is also limited 

to an amount that is at or below the lesser of CRCU or the LIHTC rents.

In reality, the purchaser may not be able to earn the full RTO in any given year.

• The Loan Agreement will contain the maximum potential new RTO based 

on the RD analysis and will remain the same for the term of the RD loan.

• The RTO amount in each year’s budget may be lower because there may 

not be room in that year’s proposed rents for the full RTO.

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Revised (01 06-17) PN 492
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• The amount of RTO actually earned in each year may also be below the 

maximum RTO.

• RTO will not be allowed for any amount that exceeds the maximum 

potential described in this Chapter. 

Tenant protection requirements may apply when increased RTO is approved. See 

Section 7, Paragraph 7.27 B. 

The new RTO authorized by RD is specific to the property transfer transaction and 

will apply for the remaining term of the loan unless authorized as a separate future servicing 

action by RD which allows modification of the RTO. 

7.10 FEES TO DEVELOPER

A. Developer Fees in General

In accordance with §3560.54(a) (9), payment of a developer's fee is not an eligible use 

of RD loan funds unless they are being used in conjunction with a Section 538 GRRH loan in 

the transaction. The fees may be included in the total development costs if they are paid from 

other sources when analyzing the Federal Government assistance to the project. 

• 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 LIHTC purposes, or by another Federal Government program. 

• For transfer proposals that include acquisition costs, the developer's fee on 

the acquisition cost may be recognized up to eight (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. Debt service on new debt may not be included in Basic Rents unless all 

proceeds are used for eligible Section 515 loan purposes. See acceptable uses at 7 CFR 

3560.53, and 7 CFR 3565.205, if applicable. 

RD recognizes, however, that some non-RD funders may allow developer/builder fees 

that are reasonable in their specifically defined and designated circumstances but such fees 

are not eligible for payment from any project revenues or sources. There is an exception for 

Section 538 loans, which can include a developer fee, however the maximum RD allowable 

rents may not be sufficient to support the amount of Section 538 debt and will require either a 

reduction or deferral of all or part of this fee.

B. Deferred Developer Fee

In LIHTC transactions with third-party funding, the maximum developer fee 

allowable may exceed the amount that can be paid in cash from the transfer transaction’s 

sources of funds. The amount of the unpaid developer fee is referred to as a deferred 

developer fee. Sponsors expect to collect their deferred developer fee from cash flow derived 

from the future successful operation of the property. The deferred developer fee may not be 

paid from operations. They may be paid from authorized RTO that is earned by the project 

and paid to the borrower. 

RD does not permit borrowers to treat the deferred developer fee as a loan or to make 

payments toward the deferred developer fee from the operating account.
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7.11 LOW INCOME HOUSING TAX CREDITS (LIHTCs)

A. Relationship between Basic Rents and LIHTC Rents -

General (Paragraph 7.4 F of HB-2-3560)

This section applies during the term in which the LIHTC rents are in effect, generally 

15 to 30 years but may be longer for some properties and in some states.

LIHTC rent limitations require that the owner charge tenants no more than the 

maximum LIHTC rents. Therefore, LIHTC maximum rents may differ from the Basic Rents 

that are established in accordance with RD requirements. It is also possible that there will be 

different LIHTC rents for the same unit type due to differing LIHTC affordability 

requirements. See Paragraph 7.11 C. of this Handbook for a discussion of Tax Credit Rents.

The following is a summary of the relevant provisions of Chapter 7 of HB-2-3560, 

provided here for convenience, and does not modify or supersede HB-2-3560:

1. Basic Rents continue to be set by RD at the level necessary to provide for the 

physical and financial viability of the project. Basic Rents may be higher or lower 

than the maximum LIHTC rents.

2. If Basic Rents are higher than the maximum LIHTC rents, then:

• The tenant portion of rent may not exceed the maximum LIHTC rent.

• For tenants receiving RA and for tenants receiving Section 8 vouchers, the 

borrower may collect the full amount of RA or Section 8 voucher amounts not 

greater than Basic Rent without violating LIHTC requirements.

• When RA is not available, the borrower is responsible for any shortfalls in 

revenue including all overage. See 7 CFR 3560.202(g).

3. If Basic Rents are equal to or lower than the maximum LIHTC rents, then:

• The tenant portion will be based on 30 percent of the adjusted monthly income.

• If 30 percent of the tenant’s adjusted monthly income is above Basic Rent:

 If the project was allocated LIHTCs after 1990, the borrower may charge 

tenants the appropriate overage due without regard to the maximum LIHTC 

rent. [Internal Revenue Code §42(g)(2)(B)(iv)]

 If the project was allocated LIHTCs in 1990 or earlier, the borrower may 

not charge tenants more than the maximum LIHTC rent, and the borrower is 

responsible for any shortfall in overage that the borrower must pay to RD 

from non-project funds. See Paragraph 7.4, Exhibit 7-3, Example 2 of HB- 2-3560.)

 The determining factor is the allocation year for the LIHTCs. This factor 

would need to be verified with the State agency that allocated the LIHTCs.

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Revised (01 06-17) PN 492
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The LIHTC maximum rents have no bearing on Note Rate rents, which continue to be 

set in the same manner as in non-LIHTC projects.

B. Tax Credit Rents in LIHTC Transactions [7 CFR 3560.202(g)]

The same unit type may not have more than one Basic Rent. However, in a Section 

515 LIHTC property include multiple Tax Credit Rents based on the LIHTC award granted to 

the transferee. See Attachment 7-C, Tax Credit Rents in Transfer Transactions, for a detailed 

discussion of a Tax Credit Rent.

If rental income from Tax Credit Rents is less than what is needed for the property to 

cash flow, the borrower will be responsible for funding this shortfall as outlined below.

C. Financial Viability When Basic Rents Exceed Maximum LIHTC Rents

If the proposed transfer involves a revenue shortfall because Basic Rents exceed 

maximum authorized Tax Credit Rents and the estimated shortfall is less than the post- transfer RTO, the borrower will receive less than the full RTO. Each Form RD 3560-7 must 

show a positive cash flow on Line 30, and will show a level of RTO that is less than the 

maximum allowable RTO.

However, if the estimated shortfall is more than the new post-transfer RTO, the 

proposed transfer is not viable unless the borrower proposes a funding mechanism together 

with reducing the RTO to zero that is sufficient to cover the likely revenue shortfalls. An 

example of an adequate funding mechanism is an operating deficit reserve, funded from non- USDA funds that is adequate to cover projected revenue shortfalls over the LIHTC 

compliance period. A borrower’s promise to pay future shortfalls over and above reducing 

RTO to zero is not an adequate funding mechanism, unless the promise is backed by a 

guarantee from a creditworthy entity.

RD HQ will provide technical assistance to State Offices on a case-by-case basis in 

implementing Tax Credit Rents.

7.12 OTHER POLICY CONSIDERATIONS

A. Principal and Interest during Construction

If the transfer includes new financing, any payments toward the new financing during 

construction must be paid from third-party funds and may not be paid from the operating 

account. The Sources and Uses of Funds statement should include a category entitled 

Construction Loan Interest or Construction Period Interest, and should show funds sufficient 

to pay any construction-period interest and/or principal on third-party debt.

Principal and interest on the pre-existing USDA loan(s) will continue to be an 

authorized payment from the operating account during the construction period.

Loan Servicers should expect that, typically, construction loan interest will be built 

into the construction loan amount.
HB-3-3560

B. Transactions with Multiple Sources of Funds

Transfers may involve a variety of non-USDA funds such as LIHTC equity, HUD 

funds under the HOME or CDBG programs, and various State and local government 

programs, private loans, and private grants.

1. In these complex transactions, Loan Servicers will consider the following in order 

to ensure that costs are reasonable and that Basic Rents are no higher than 

necessary:

a.RD requirement that Basic Rents not exceed CRCU. See Paragraph 7.7 B.

b. RD guidelinesto protect unassisted tenants against transfer-related rent 

increases. See Paragraph 7.27 B.

c.Subsidy-layering analyses by other government funders. Loan Servicers 

should request these analyses and should review them if provided. See the 

paragraph below on non-USDA funds.

d. The purchaser’s applications to other funders, including any updated 

applications. Loan Servicersshould require that purchasers provide these.

e.The final cost certification audit, if one is required by other funders. (This is a 

requirement for most HUD programs and for LIHTCs.) Loan Servicers 

should require that purchasers provide such documents. As a reminder, RD 

requires a cost certification audit whenever new RD funding is provided and an 

identity of interest exists, as defined by 7 CFR 1924.4 (i).

f. RD requirementsthat any loans, whose debt service will be built into the Basic 

Rents, be expended solely for eligible purposes. See Paragraph 7.7 C.

2. When non-USDA funds are involved, Loan Servicers should address the following 

items when evaluating a transfer request:

a.Loan Servicers should coordinate with other government funders so that the 

objectives of all of the funding agencies are achieved. When all the 

government funders speak with a united voice, it is more likely that the 

appropriate public purpose objectives will be achieved. The Loan Servicer 

should contact the other government funders to determine their objectives, 

concerns, and constraints, and to share USDA’s objectives, concerns, and 

constraints.

b. Government providers of funds are required to have completed a subsidy 

layering or other analysis that is similar to the USDA Sources and Uses 

Comprehensive Evaluation (SAUCE) analysis to determine all the sources

and uses of funds in the transaction, and to ensure that all government sources 

of funds are not more than necessary to carry out the transaction. This 

analysis will include determining that the proposed levels of compensation to 

the seller, purchaser, and contractor are acceptable. The Loan Servicer should 

request a copy of the subsidy layering analysis from each of the other 

government funders, including the LIHTC allocating agency. A USDA 

SAUCE analysis is required as follows:

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• A USDA SAUCE analysis is required only if a subsequent RD loan is 

proposed.

• In tax credit transactions, if the RD State Office obtains and accepts the 

tax credit agency’s subsidy-layering review, no SAUCE analysis is 

required.

c.Loan Servicers should determine whether the non-USDA funds are 

unconditionally committed, conditionally committed, or merely applied for. 

Loan Servicers should understand the conditions in other funders’ conditional 

commitments. If funds are not yet firmly committed:

• Typically, USDA would withhold approval of the transfer until firm 

funding commitments from other funders have been received.

• However, a third-party funder may need evidence of USDA’s support for 

the proposed transaction. The State Office may issue a conditional 

approval conditioned on receipt of firm funding commitments that 

specifies that USDA approval will be withdrawn if a firm commitment is 

not received, and that the transfer cannot close until a firm commitment is 

received.

• See Paragraph 7.29 H, for transfers involving a workout plan for a 

discussion of a rare situation in which it might be prudent for RD to allow 

a transfer to close prior to receiving the firm commitment for third-party 

funding.

• RD understands that purchasers who are utilizing tax credits may want to 

accelerate the timing of the transfer in order to meet the tax credit 

carryover requirement to expend at least 10 percent of total funds for the 

transaction. In these situations, State Offices are encouraged to cooperate 

with purchasers. Sometimes this will result in transfers being closed 

before all non-USDA funds are firmly committed. In such situations, the 

State Office should reach written agreements with the purchaser regarding 

what will happen if the intended non-USDA funds are not actually 

received.

d. Loan Servicers should understand the funding timetables of the other funds 

providers. They should be aware of when funding decisions will be made; 

and when initial funds will be available to be drawn by the purchaser. If the 

funding timetables of other funds providers are available early enough to 

support the viability of the transaction, the Loan Servicer should discuss the 

situation first with the other funders, and then with the purchaser and seller to 

attempt to identify solutions.

e.Loan Servicers should establish when funds will be provided. Often, loan funds 

are provided only when the purchaser has already incurred the costs and 

requests reimbursement from the funder. Typically, LIHTC equity funds are 

paid partially at the start of construction, with the balance being paid over an 

extended period typically ending at some point well after construction 

completion. These situations may lead to a need for interim 

bridge/construction financing. The Loan Servicer should request a monthly 

sources and uses of funds statement from the purchaser to verify whether

there will be sufficient sources of funds to cover each month’s estimated uses 

of funds.
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f. Loan Servicers should determine if other funders require reserves other than the 

Replacement Reserve. Often an additional operating reserve, rent up/lease up 

reserve, or some similar account may require the owner to replenish any 

withdrawals that occur over the course of the loan from project cash flows or 

excess cash. These reserves will not be replenished by any project funds or 

from project operations, and must be funded directly by the owner or from 

earned RTO.

g. Loan Servicers should understand when funds can be withdrawn and what 

approvals are required for withdrawal, and then decide whether those 

provisions are acceptable to RD.

h. Loan Servicers should determine whether there will be conflicts in regulatory 

requirements; i.e., differences in reserve requirements. If so, they should 

work with the purchaser to identify solutions acceptable to RD. An 

appropriate inter-agency or inter-creditor agreement must be in place not later 

than the time of closing.

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SECTION 3: PRELIMINARY ASSESSMENT

7.13 PRE-REQUEST CONSULTATION WITH BORROWER AND TRANSFEREE

Purchasers are encouraged to consult with RD prior to submitting a transfer request.

Prior to submitting a transfer request, either the borrower or transferee will likely 

contact the Loan Servicer to discuss what documentation is required as part of a transfer. The 

Loan Servicer should provide the transferee with the list of required documents (See 

Attachment 7-B-1, Transfer Application Documents) and should encourage discussion with 

RD as questions arise during preparation of the transfer request. The Loan Servicer should 

also explain the process and provide any documentation necessary to assist the transferee in 

understanding RD’s eligibility requirements and the basis used to evaluate a transfer 

application [7 CFR 3560.406].

Purchasers or Sellers may request that RD provide Attachment 7-E of HB 1-3560 

Appraisal Information Sheet. Purchasers may request RD assistance in assembling the 

information referenced in Attachment 7-F of HB 1-3560, Appraisal Data Package Checklist. 

The request to RD for a transfer should come from the current borrower per [7 CFR 3560.406 

(c)].

7.14 INITIAL RD REVIEW FOR COMPLETENESS

A complete application must include all of the information listed in Attachment 7-D 

of this handbook, Transfer Request Checklist, before it can be reviewed for underwriting. If 

the application is incomplete, the application will be returned to the applicant with an 

explanation in sufficient detail outlining the items needing to be addressed to consider the 

application for underwriting review.

7.15 CONSULT WITH PDLD REGARDING UNUSUAL TRANSACTIONS

Unusual and complex transactions not addressed in this Chapter should be identified 

and resolved as early as possible. State Offices should discuss unusual transaction features 

with PDLD as necessary to allow continued processing of the transfer request.

Transaction features that should be discussed with PDLD may include:

• Features that may require coordination with other agencies; e.g., the transaction 

includes new debt that is FHA-insured or Section 8 assistance provided by HUD.

• Exceptions to regulations or exceptions to this chapter that may be required.

• Transactions with proposed third-party financing in which the new debt service is 

proposed to be built into the new Basic Rents. The State Office and PDLD will 

need to discuss the USDA requirement that loan proceeds be expended for eligible 

purposes [7 CFR 3560.53 and Attachment 4-B of HB-1-3560].

• Transactions that have participated in or are participating in the MPR Revitalization 

Loan Program.

• Unusual or novel transactions likely to raise policy issues.

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SECTION 4: EVALUATING THE TRANSFEREE

7.16 DETERMINE TRANSFEREE ELIGIBILITY

This Chapter only provides guidance to transfer a project to eligible applicants as 

prescribed in the Housing Act of 1949. The Loan Servicer will evaluate the transferee’s 

eligibility based on the items submitted as part of the transfer request including evaluation 

and verification that:

• The transferee and the property satisfy the general program eligibility 

requirements;

• Identity-of-Interests are disclosed;

• Legal capability, formation, and capacity information has been provided; and

• The requirements of this Chapter are satisfied

If there are any deficiencies, the Loan Servicer will notify the transferee and, as 

appropriate, the borrower as outlined in Paragraph 7.6 B to establish a plan for their timely 

resolution.

A. U.S. Citizenship/Qualified Alien Status Requirements

Purchasers must provide to their attorney acceptable evidence of U.S. citizenship and/or 

qualified alien status.

Acceptable evidence of U.S. citizenship may include a valid U.S. birth certificate, a valid 

U.S. Passport, a valid U.S. Certificate of Naturalization, or other acceptable evidence of U.S. 

citizenship proposed by the applicant and determined by the Agency. Acceptable evidence 

of qualified alien status may include valid documentation issued by the U.S. Citizenship and 

Immigration Services (USCIS), or other acceptable documentation of qualified alien status 

proposed by the applicant and determined by the Agency.

Attorney Certification. The applicant’s attorney must review applicable evidence to verify 

U.S. citizenship and/or qualified alien status, must certify that the Agency’s U.S. citizenship 

and/or qualified alien status eligibility requirements are met by all purchaser applicants, and 

must submit the certification for Agency review.

The Loan Servicer will review the attorney certification to ensure the outlined 

citizenship/qualified alien status requirements are met.

B. Organizational Requirements

The Loan Servicer will ensure that the following requirements have been met.

• The organizational documents: (a) are properly signed; (b) include the correct 

state statute for the purchaser organization; (c) provide appropriate proof of 

organization and filing information; this may be in the form of a certification or 

opinion provided by the applicant's attorney or register; and (d) the State 

documentation and all necessary recording information is included. The Loan 

Servicer will then forward the organizational documents to OGC for review.

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• Form AD 1047/1048 Certification Regarding Debarment and Form HUD-2530 

Previous Participation Certification, will be used to identify the principals of the 

purchaser entity. The Loan Servicer will then check the principals against the list 

of debarred individuals at (https://www.sam.gov/portal/SAM/#1) and will 

document the results.

• Form RD 1910-11 Applicant Certification Federal Collection Policies for 

Consumer or Commercial Debts, will be properly completed and signed by the 

necessary parties.

C. Legal Capability

The Loan Servicer must make a determination of the transferee’s legal capability to 

successfully assume and operate the project based on an attorney’s letter and organizational 

documents submitted as part of the application. The Loan Servicer may obtain OGC 

concurrence as needed to make such a determination. If there are any deficiencies, the Loan 

Servicer should follow the procedure in Paragraph 7.6 C. 

D. Additional Requirements for Existing Borrowers

If the transferee is an existing borrower with existing or past RD loans, and is 

acquiring title under the same name, refer to [7 CFR 3560.55(b)] and Section 3: 4.16, 

Paragraph D of HB-1-3560, for a detailed discussion on further eligibility requirements for 

current or previous borrowers. (Existing borrowers currently have one or more outstanding 

loans with RD and the ownership name will remain the same.) For existing borrowers and 

key principles the transferee must:

• Be in compliance with all program requirements or have been in compliance with 

an approved workout agreement for a minimum of six months for all other 

projects owned by members of the assuming entity; 

• Have documented evidence that the conditions that resulted in any workout 

agreement were beyond the borrower’s control and were not due to inappropriate 

actions by the borrower; and 

• Have no outstanding adverse audit or investigation findings issued by the OIG. 

Any OIG audit or investigation must be closed or disposed of to the satisfaction of 

OIG. If there is an open audit or an investigation is underway, the Loan Servicer 

will contact OIG to determine if there are potential eligibility issues that may 

affect the transfer.

E. Identity-of-Interest

During the preliminary assessment, the Loan Servicer should have determined if the 

transfer involves an Identity-of-Interest (IOI) as defined in RD regulations. The Loan 

Servicer will verify that all IOI companies listed on Form RD 3560-30 have filed Form RD 

3560-31.

As with non-IOI transfers, Loan Servicers must not approve IOI transfers until the 

State Office can certify that the following conditions are met:

• All RD loan accounts being transferred must be current.

• The reserve account is on schedule, less any authorized withdrawals.
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• The taxes and insurance account is on schedule, and all outstanding bills are 

paid.

• The tenant’s security deposit account is fully funded.

• All outstanding unacceptable maintenance items have been resolved to

RD satisfaction.

• Management issatisfactory, and there is an approved management plan

and management agreement, if applicable.

• The transferee is in compliance with equal opportunity and fair

housing requirements.

Completion of this step ensures that IOI transferees receive appropriate RD assistance 

in restoring security properties to compliance through transfers.

F. Insurance

All RD properties are required to be able to obtain and maintain insurance as require 

by program regulations. Applicants incapable of providing evidence of insurability prior to 

closing, are not eligible and will be processed under Paragraph 7.6 C. Completion of this step 

ensures that RD’s security properties will be protected from all damage and loss following 

transfers.

G. Site Control

The transferee’s documentation must show enforceable control of the property as 

described in Paragraph 7.6 A 2. As explained under [7 CFR 3560.61(d)], the transferee must 

own the land when the transfer is closed, or have an RD approved leasehold interest in land. 

Most commonly in transfer situations, site control will be in the form of an option-to- purchase from the borrower or in the form of a purchase contract. If the purchaser does not 

yet have site control, i.e., the right to purchase the project without further consents from the 

seller, the Loan Servicer should decline the transfer request and return the application to the 

purchaser.

H. Eligible Transferee

Attachment 7-A, Revitalization Guidance, states that when the transaction is 

complete, the property will be in the hands of eligible owners. The post-transaction owner 

must be capable and willing to operate the revitalized property in accordance with the 

purpose and intent of the RRH program, and be considered eligible within program 

requirements.

An applicant will be considered ineligible if the applicant is currently in non- compliance with existing RD regulations including equal opportunity, fair housing, and 

accessibility requirements; or has an outstanding finding of non-compliance issued by RD 

including failing to follow any outstanding workout plans to which they are a party.

7.17 FINANCIAL REQUIREMENTS

Refer to Paragraph 4.18 C of HB-1-3560 for a detailed discussion on reviewing the 

transferee’s financial capability. The credit report and financial statement are the two 

primary documents the Loan Servicer uses to determine financial capacity. The Loan 

Servicer will follow the process outlined in RD Instruction 1910-C to order credit reports.

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As part of this financial review, the Loan Servicer must verify that:

• The transferee possesses the financial capacity to carry out the obligations required 

for the loan;

• If applying for a subsequent loan, the transferee is unable to obtain sufficient credit 

elsewhere at rates that would allow for project rents within the payment ability of 

eligible residents; and

• The transferee has the financial ability to meet the program’s requirements unless 

mitigated by the strength and ability of the key principles and documented in the 

application. In some cases, the applicant may voluntarily offer mitigation 

considerations (e.g. the principals offer evidence to document having clean credit, 

strong diversified financial capacity and the property will be managed by a third party 

management agent with relevant and positive MFH experience) to compensate for any 

short comings.

In transfer situations, the Loan Servicer’s review of transferee financial capacity can 

generally be limited to the following:

• A determination that the transferee is solvent, i.e., not in danger of financial 

failure because of debts and obligations unrelated to the project.

• By reviewing the commercial credit report, the applicant entity and the principals 

have demonstrated credit worthiness in meeting past and present financial 

obligations.

• The absence of financial issues that might call into question the transferee’s ability 

and willingness to operate the project in accordance with RD requirements, e.g. 

evidence that the transferee has a history of financial compliance violations.

• If the transaction calls for cash equity from the transferee, documentation that the 

transferee has sufficient financial capacity to provide that amount of cash equity. 

See above mitigation considerations.

7.18 MANAGEMENT CAPACITY

The transferee must demonstrate that it will provide management acceptable to RD 

under [7 CFR 3560.102(e)] to ensure successful operation of the project. The Loan Servicer 

should refer to:

• Paragraph 5.9 E of HB-1-3560 for guidance on analyzing overall management 

capacity.

• Chapter 3 of HB-2-3560 contains detailed information on analyzing the 

management plan and the management certification, if applicable.

• IOI management companies being retained by a transferee must be held to the 

same standards as all other management agents successfully managing RD 

properties.

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SECTION 5: EVALUATING THE PROJECT

[7 CFR 3560.406(c) and (d)]

7.19 DETERMINE PROJECT SUITABILITY

The purchaser’s written statements and the financial and operational history of the 

project will typically demonstrate that there is still a need for the project, and that the project 

is not obsolete. If there are questions, however, the Loan Servicer should refer to Chapter 6 

of this Handbook to determine if additional analysis is required to verify that there is still a 

need for the project and the project is not obsolete. Any additional analysis should be 

prioritized in order to meet the timeframes for processing the transfer request.

Prior to entering into a transfer or other revitalization process, RD must be satisfied 

that favorable patterns in housing and population statistics indicate the property will be 

needed to provide affordable rental housing to eligible tenants in the community.

• The determination of need will be documented in the case file. More complete 

documentation will be required if vacancy exceeds 10 percent during the most 

recent 12 months.

• [7 CFR 3560.651 through 3560.663] may also be used during the transfer process 

for guidance in making this determination.

7.20 DETERMINE PROJECT ELIGIBILITY

The Loan Servicer should ensure that major components of project eligibility were 

verified during the loan origination process and are not affected by a transfer. However, the 

Loan Servicer should take the necessary steps to ensure that the project remains an eligible 

property. Typically, the purchaser’s written statements (See Attachment 7-B-1, Transfer 

Application Documents) and the project’s operational and financial history will provide the 

primary foundation for determining that the project will continue to be eligible.

The following addresses the various aspects of the project eligibility that are required 

in Paragraph 4.17 of HB-1-3560 and that were reviewed when the project was originally 

developed. In processing the transfer request the Loan Servicer should consider all of the 

following.

A. Civil Rights Impact Analysis

This requirement is satisfied through the civil rights review discussed in Paragraph

7.21. In addition, the State Civil Rights Coordinator is invited to participate in the site 

inspection. See Paragraph 7.22 B.

B. State Historic Preservation Office

This requirement is generally not applicable. See [7 CFR 1700] for additional 

guidance.
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C. Flood Hazard Determination

See Paragraph 7.22 E 3 for a discussion of when Form FEMA 81-93 Standard Flood 

Hazard Determination will be required.

D. Design Review

If required by local building codes or enforcement agencies, or due to the scope and 

nature of the planned rehabilitation, the applicant, loan servicer and underwriter should 

consult RD Instruction 1924-A, any outstanding CNA guidance, and the respective program 

requirements for rehabilitation and repair designs that may require professional and technical 

assistance.

Applicants also intending to participate in the LIHTC program should discuss any 

additional design reviews that may be required to receive tax credits with the RD staff to 

coordinate development plans. See also Chapter 7.21 to determine if additional design 

review is needed to ensure full compliance with requirements.

E. Prohibited Conditions

An example of prohibited conditions for a transfer is high vacancy in the area. This 

requirement is not applicable as an eligibility factor unless additional RD funding is

proposed, in which case the Loan Servicer will consider Prohibited Conditions in connection 

with the new funding. See Paragraph 4.17 of HB-1-3560. High vacancy in the area would, 

of course, be a significant factor affecting project feasibility. Any other affordable housing 

projects in the market area also need to be evaluated to determine if there is a continuing need 

for the property being transferred.

F. Other Project Eligibility Requirements

The Loan Servicer must verify that all Required Written Statements for a transfer as 

outlined in this Chapter were provided. See Attachment 7-B-1, Transfer Application 

Documents.

A restrictive-use agreement will be required [7 CFR 3560.406 (g)]. See also 

Paragraph 7.31 D.

7.21 CIVIL RIGHTS AND ACCESSIBILITY COMPLIANCE

1. The Civil Rights Coordinator or designee will conduct a civil rights and 

accessibility compliance review, provided one has not been completed in the past 

12 months. This review is usually conducted during the physical inspection. The 

review must be conducted to ensure that the project complies with the:

• Section 504(c) of the Americans with Disability Act, which covers accessibility 

requirements;

• Section 504 of the Rehabilitation Act of 1973;

• Title VI of the Civil Rights Act of 1964; and

• Title VIII of the Fair Housing Act of 1968.
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2. The transferee must take action to mitigate any civil rights and accessibility 

concerns identified. Examples of civil rights deficiencies may include, but are not 

limited to, the following:

• Failure to market units in accordance with Form HUD 935.2A, Affirmative Fair 

Housing Marketing Plan (AFHMP) - Multifamily Housing;

• Inconsistent treatment of applicants when screening for occupancy;

• Inconsistent treatment of tenants when assigning units;

• Borrower failure to have documented the self-assessment review of civil rights 

and accessibility practices;

• Improper waiting lists and tenant selection routines;

• Delaying or deferring maintenance; and

• Handicapped accessibility concerns.

Any project in which civil rights and accessibility concerns have been identified will 

not be approved for transfer without review by the Civil Rights Coordinator. The transfer file 

must include the civil rights and accessibility review by the Civil Rights Coordinator.

7.22 PHYSICAL INSPECTION

All transfers require completion of a Capital Needs Assessment (CNA). For 

properties of nine units or more, an independent third-party CNA is required.

For properties with eight units or fewer, this requirement may be satisfied in either of 

the following ways:

1. A third-party CNA.

2. The purchaser accepts RD underwriter’s average CNA needs for projects of 

similar age and condition.

• RD underwriters will compile the amount of CNA needs approved for transfers 

and MPR transactions for the present fiscal year and most recent past 2 fiscal 

years to determine the approximate total CNA needs per unit in their 

respective state office areas and obtain HQ PDLD concurrence prior to 

utilization.

• The average needs would be entered into the PAT and adjusted to add inflation 

for years 2-20 using the same inflation rate as used for O&M expense 

assumptions in the specific project’s underwriting.

• RD HQ may publish from time to time a revised per-unit-per-year amount 

reflecting the average needs from recent CNAs on a national basis which may 

be used if the state data is insufficient to present representative CNA cost 

estimates.

• Underwriters should contact their respective HQRU for assistance.
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Based on this information, transfers may require re-sizing of the reserve balance, i.e., 

a one-time additional deposit to the reserve may be required at the closing of the transfer; 

and/or re-sizing of the ongoing deposits, i.e., a higher on-going deposit may be required, so 

that future major repairs and replacements can be funded solely from the reserve.

The CNA includes an evaluation of any accessibility needs [7 CFR 3560.406(d)(9)] 

and must identify all immediate and long term repair and rehabilitation needs.

See [7 CFR 3560.406(d) (5)].

A CNA provides a repair schedule for the property in its present condition, indicating 

repairs and replacements necessary for a property to function properly and efficiently over a 

span of 20 years. It is not an estimate of existing rehabilitation needs, or an estimate of 

rehabilitation costs. If any rehabilitation of the MFH property is planned as part of the 

proposed transfer, the rehabilitation repair list (also called a “Scope of Work”) should be 

developed outside of the CNA and must fit within the available funding resources being 

proposed. This rehabilitation repair list may be developed by the owner, a project architect, or 

an outside party (such as the CNA Provider, when qualified) hired by the owner. A copy of 

the rehabilitation repair list or Scope of Work should then be provided to the CNA Provider 

and will be reviewed and incorporated into the transfer underwriting analysis. The cost of 

such repairs and rehabilitation will be shown in the Sources and Uses in the PAT. The as- improved CNA/Reserve Analysis section of the PAT, will reflect only those capital items not 

initially fully cured in the RD approved Scope of Work and will be required to repaired or 

replaced within the 20-year analysis period of the PAT 

A. CNA Requirements

See the current RD CNA Unnumbered Letter at http://www.rd.usda.gov/files/02-18- 16%20CNA%20UL.pdf or contact your local RD office for more specific information about 

RD CNA requirements.

At a minimum, CNA submissions must contain all of the components identified 

within the 20-year cycle specified by RD. Incomplete CNAs will be returned and the 

application may be rejected upon the applicant’s failure to supply this information for any 

application over eight units.

For transactions that do not include third-party fully funded rehabilitation, the CNA 

scope of work requires the CNA provider to assess and evaluate the current ‘as-is’ physical 

condition of the property and, using the Estimated Useful Life table that is included as part of 

the Statement of Work, develop a 20-year Replacement Reserve schedule showing the timing 

and costs for the maintenance, repair, and replacement of all capital items at the property.

For transactions that include third-party funded rehabilitation, e.g., transactions 

involving the acquisition of tax credits, the scope of work requires the CNA provider to use 

the proposed and RD -approved third-party funded rehabilitation scope, and develop a 20-year 

Replacement Reserve schedule that assumes that the third-party funded rehabilitation will 

occur as planned. Because the rehabilitation will not be funded from the reserve, RD does not 

require the CNA to include the rehabilitation, and does not require the CNA provider to review 

the rehabilitation costs or scope.

Typically, the draft CNA is subsequently revised based on input from RD, the 

purchaser, and/or other funders to project the “Post Rehab” CNA indicating what repairs are 

planned for the property in the coming 20 years based on conditions after the rehabilitation is
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completed. Items to be replaced during rehabilitation, such as appliances, that will need to be 

replaced again during the 20 years will be included in the “Post Rehab” CNA. Items, such as 

a new roof, that will not need replacement during the coming 20 years may also be included 

in the “Post Rehab” CNA- if the EUL is more than 20 years. The line item should not be 

removed from the CNA, but no data input will be necessary until an updated CNA is 

required. Appropriate comments should be included in the CNA report to acknowledge the 

scope of work or rehabilitation repairs that were considered.

B. State Office Review of CNA

A draft of the completed CNA should be submitted by the CNA provider to the State 

Office for review by the State Designated CNA Reviewer. The State Designated CNA 

Reviewer will advise the CNA provider of any deficiencies in the report and, when these 

have been addressed by the provider, the state designated CNA reviewer will sign off on the 

final report. Processing of the CNA will begin when the State Designated CNA Reviewer’s 

approval of the CNA has been provided.

After receipt of the draft CNA, the Loan Servicer will make an on-site inspection of 

each vacant unit and 10 percent of the remaining units in the project being transferred. When 

substantial rehabilitation issues are involved, additional units may be inspected. The State 

Architect and Civil Rights Coordinator are encouraged to participate in the on-site inspection.

The purpose of the inspection is to ensure that the transferee’s plans are adequate to 

ensure that RD’s decent, safe, and sanitary criteria are met. The inspection will also help RD 

assess compliance with applicable civil rights, accessibility, and environmental requirements.

The Loan Servicer will conduct a compliance review if one had not been completed in 

the past 12 months prior to the physical inspection. Pictures of any deficiencies will be made 

part of the applicant’s file.

C. Finalize Detailed Repair and Rehabilitation Plans and Costs 

[7 CFR 3560.406(d) (7)]

For RD-funded repairs, the detailed repair and rehabilitation plans and costs will be 

based on the CNA. The Loan Servicer should consider whether some or all of the repairs 

should be supported by contractor bids. For third-party funded repairs that were excluded 

from the CNA, the detailed repair and rehabilitation plans and costs will be based on similar 

analyses conducted for the purchaser and third-party funder that the Loan Servicer will 

review.

RD and the transferee must agree to and document all necessary repairs to make the 

housing decent, safe, and sanitary. The funds with respect to any work that will be completed 

after the transfer will be escrowed or otherwise placed under funding controls acceptable to 

the RD, and a plan for such work must be submitted. The plan will identify each repair, the 

time frame for completion, an estimate of costs for each item, who will do the work, and any 

Identity-of-Interest between the transferee and the parties doing the work or providing 

materials or services. RD must concur with the plan as part of the approval of the transfer.

If any tenants will be temporarily relocated during the rehabilitation, the transferee 

must have a detailed plan, acceptable to RD, for providing housing and services to these 

tenants. RD must concur with the plan as part of the approval of the transfer. The relocation
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Exhibit 7-2

Funding Sourcesfor Repairs

The following is list of funding sources that may be used for any improvements or 

repairs.

• Transferee’s cash contribution;

• Syndication proceeds;

• Reserve amount being transferred if the amount remaining will be adequate to 

meet near-term repair and expense needs;

• Transferor funds;

• Third-party funding sources;

• Junior liens;

• Subordination; and

• Rural Development loan funds only to the extent needed for essential repairs to 

ensure that the housing is decent, safe, and sanitary if no other funding sources 

are available.

plan should detail the number of tenants who will be relocated, the number of days each 

tenant will be displaced, the daily estimate for lodging and meals, and details of other costs as 

applicable; e.g., temporary storage costs and transportation costs.

The level of review and documentation of a transferee’s repair and rehabilitation plans 

should be adequate based on the level of repairs and rehabilitation required for the property. 

The objectives of the analysis are to ensure that the property is in full compliance with 

program requirements, the plans meet the best interest of the tenants, and the transferee has 

the financial and management capacity to fulfill the plans.

Exhibit 7-2, Funding Sources for Repairs, lists acceptable funding sources used to pay 

for improvements or repairs.

D. Required Repairs and the Repair Agreement

The Repair Agreement (See Attachment 7-B-1, Transfer Application Documents) 

between the seller and purchaser must address all repairs that RD will require in connection 

with the transfer to be completed within the first 12 months of operation under the new 

owner.

These repairs will be identified in the CNA for completion in year 0 (for health and 

safety related repairs) or year 1.

• Year 0 health and safety-related repairs must always be addressed in the Repair 

Agreement.
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• Year 1 repairs must be addressed in the Repair Agreement unless the Loan 

Servicer directs otherwise. For example, the Loan Servicer might agree to exclude 

year 1 items that are currently functioning but are estimated to require replacement 

within one year so long as they are specifically identified and addressed in 

underwriting and the PAT.

The Repair Agreement must ensure satisfactory and timely completion, generally 

within 12 months following closing. Satisfactory arrangements could include any of the 

following:

• Completion of urgent repairs as a precondition to RD's acceptance or approval of 

a transfer request, or the closing of the transfer.

• Withholding of funds to pay for repairs from proceeds of the transaction with the 

funds being under RD’s control.

• Funding of RD required repairs from the proceeds of a subsequent Section 515 

loan.

• Inclusion of funding for RD-required repairs in a repair escrow that is 

administered by a third-party lender, under procedures acceptable to RD.

E. Environmental Review [7 CFR 3560.406 (d)(4)]

1.Environmental Review under the National Environmental Policy Act (NEPA).

RD approval of a transfer will normally qualify as a categorical exclusion and 

will not require preparation of any environmental review document, provided the 

proposed transfer will not alter the purpose, operation, location, or design of the 

project as originally approved. If the transfer includes additional financial 

assistance, the appropriate level of environmental review will be completed in 

accordance with 7 CFR part 1970 and Chapter 3, Section 3 of HB-1-3560.

2.Due Diligence.

When additional RD financial assistance is involved, due diligence will be 

performed for a transfer in accordance with the procedures identified in Chapter 

3, Section 3 of HB-1-3560. Normally, due diligence will be completed in 

conjunction with the appraisal, if one is being done.

3.Documentation of Flood Hazard Determination.

Form FEMA 81-93 will be completed for all transfers involving new RD 

funding, and for any projects that did not have a flood hazard determination at 

the time of original development.

4.Correction of Deficiencies and Documentation.

Both the NEPA review and the due diligence report, as appropriate, will be made 

a part of the transfer file. Any outstanding concerns noted in either document 

must be resolved prior to approval of the requested action. The State 

Environmental Coordinator should be consulted for further evaluation and 

guidance on any such problems.

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F. Advance RD Approval Required for Third-Party Funded Repairs

When there are third-party funded repairs, RD must approve the repair plan and cost 

estimate for the third-party funded repairs. Costs in the final plan will be evaluated by RD 

using cost data sources recognized by the housing industry.

G. Reserve Must Be Adequate to Meet 20-Year Capital Needs Based on CNA

Funding of the reserve account should be adequate in accordance with CNA 

requirements to meet estimated reserve-eligible needs over a 20-year analysis period. If 

appropriate, a one-time additional reserve deposit to be made at the closing of the transfer

will be included in the costs of the transaction, and may affect the revitalization transaction’s 

feasibility. Increases to annual reserve account funding will be included in the estimation of 

post-transaction rents and may affect the revitalization transaction’s feasibility. The Loan 

Servicer will implement the reserve account changes approved in the transfer as required by 7 

CFR 3560.306(j) which provides guidance for any change to reserve account requirements.

The minimum reserve deposit that RD may consider will be the greater of (a) the amount 

required by the most restrictive rent program or third-party lender that will be in place on the 

property upon completion of the transfer and all repairs; or (b) rehabilitation or other 

improvements. Reserve accounts shall not be used to meet the CNA needs during the period 

covered to such an extent that the project will no longer have sufficient amounts to meet the 

routine servicing needs typically anticipated in the annual budget cycle unless appropriate 

servicing actions have been initiated by the RD servicing office.
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SECTION 6: EVALUATING FEASIBILITY

7.23 EVALUATE FEASIBILITY

Feasibility analysis is the process by which RD determines that the proposed transfer, 

if implemented, would support the property’s long-term viability.

Feasibility analysis involves, without limitation, assessment of the proposed budget, 

the CNA, the proposed reserve deposit, any proposed payment to the seller, the proposed 

financing, and the proposed rents. For transfer analysis, the underwriting tool (PAT) 

considers the ongoing future operations by assuming that Basic Rents rise no faster than 

inflation to be consistent with typical third-party lending principles that the property should 

be viable for at least the 20-year CNA analysis period provided it also complies with required 

RD servicing regulations. This analysis assumes the new owner will comply with the ongoing 

terms and conditions over the term of the RD direct loan program servicing requirements.

A. Analytical Template

In order to evaluate feasibility, the Loan Servicer will complete an analytical template 

(PAT) in the format prescribed by PDLD, and found on SharePoint. The template is designed 

to support decision-making regarding feasibility, and to serve as a record of feasibility 

decisions in processing the transfer.

B. Compliance Issues

The transfer must address all known compliance issues whether relating to physical 

condition, financial condition, management findings, occupancy findings, civil rights and 

accessibility findings, or other issues that must be resolved in order to maintain compliance 

with RD requirements.

C. Repair Related Issues

The Loan Servicer will ensure that the CNA complies with the statement of work, that 

it accurately reflects the property’s physical needs, and that the transfer is otherwise 

acceptable to RD.

• If the transferee is planning to make substantial repairs or undertake rehabilitation 

of the property, the Loan Servicer will consider whether the transferee’s initial 

plans seem reasonable and that the estimated repair costs seem reasonable.

• If the transferee is proposing significant up-front rehabilitation, that there are 

adequate provisions for supervising the work, inspecting the work, and controlling 

the repair funds.

• The Loan Servicer will ensure there are sufficient sources of funds to carry out 

repairs and to pay other costs of the proposed transaction.

D. Third-Party Funding Issues

The Loan Servicer will determine whether:

• All sources of funds are committed. If not, whether it is plausible that firm 

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• Any third-party funding sources impose additional restrictions on the real 

property;

• Any third-party funding sources impose additional affordability requirements; or

• Any third-party funder requires a balloon payment prior to the expiration of the 

proposed RD loan terms.

The Loan Servicer should document any additional requirements and determine how 

they affect the operation of the project. For example, LIHTC and HOME funding involve 

additional restrictions on tenant eligibility and the maximum rents that may be charged.

E. TenantImpact

If the proposed transfer is likely to result in the physical displacement of tenants, e.g., 

because of planned rehabilitation work, the Loan Servicer will consider whether the proposed 

transfer includes an adequate tenant relocation plan.

If it is likely that the proposed rent increase will result in the economic displacement 

of tenants, unless adequate protections are in place, the Loan Servicer will consider whether 

the proposed transfer includes adequate protections for tenants and the terms, conditions and 

funding source for such protections.

F. Rents and the Proposed Operating Budget

The Loan Servicer will consider the following to determine if the rents and proposed 

operating budget are sufficient for the operation of the housing as follows:

• Whether the CRCU rents are sufficient; see Paragraph 7.7 B;

• Whether the proposed transfer requires a rent increase; if so, determine 

whether the proposed rents will be at or below the lesser of CRCU or restricted 

rents;

• Whether the proposed O&M expenses are sufficient to support the property’s 

long-term viability;

• Whether the proposed budget meets the minimum combined cushion and 

vacancy loss, see Paragraph 7.2 D 2;

• Whether the NOI is sufficient to meet the industry standard debt service coverage 

ratio (DSCR); see Paragraph 7.2 C 13 or 7.2 D 2;

• Whether the level of rent loss. i.e., vacancy plus bad debt, is reasonable in 

relation to the property’s historical performance and local market conditions; see 

Paragraph 7.2 D 3;

• Whether the proposed operating budget includes an adequate operating margin 

equal to 20 percent of the total operating expense as underwritten (See Paragraph 

7.2 D 5) so that the property can absorb reasonable, foreseeable fluctuations in 

revenues and expenses without risking deferred maintenance, default on RD loans, 

or other financial stresses;
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• Whether the Debt Service Coverage Ratio (DSCR) is within the established 

Agency thresholds, see Paragraph 7.2 C 13 or 7.2 D 2;

• Whether the proposed rents are adequate to support adequate O&M 

expenses, an adequate Reserve deposit, and other costs of operation;

• Whether the proposed rents are otherwise achievable, e.g., in relation to tenant 

incomes; and

• Whether it is likely that the purchaser will need a future rent increase above the 

rate of inflation in order to provide for property viability; if so, the transfer does not 

satisfy viability principles and is not approvable; see Paragraph 7.29 H for a 

potential exception.

G. Sales Price/Equity Payout

If the transfer calls for equity distributions to the existing owner:

• The appraisal reportshould meet RD requirementsfor determining 

equity;

• The proposed equity payoutshould comply with RD requirements; 

and

• The proposed transfer includes adequate provisions to ensure that the 

seller has met all applicable requirements before equity is paid.

H. RD Loans

Normally a transfer will involve assumption of the entire balance of the borrower’s 

existing loan. If, however, there is insufficient Security Value that will result in a shortfall, 

the Loan Servicer should determine the borrower’s intentions to address any outstanding 

balance, and whether a write-down may be required as part of the transfer. See Chapter 11 of 

this Handbook for more information on write-downs.

After the transfer, the Loan Servicer should confirm:

• All RD loans will be current;

• The taxes and insurance account will be adequately funded, with all 

outstanding bills paid; and

• The security deposit account will be fully funded.

If the transferee is requesting a subsequent loan, the proposed amount of the 

subsequent loan should be reasonable and sufficient, based on the information and supporting 

documentation reviewed by the Loan Servicer. If any RD requirements are not likely to be 

met, the Loan Servicer and Underwriter, through negotiations with the applicant, should enter 

into a credible plan to cure all of the most serious deficiencies within 12 months and the 

remainder within the first 3 years using funds provided by the applicant unless the general 

operating account is adequately funded thru planned project operations under a detailed 

workout plan, or the application should be rejected and provide the applicant with appropriate 

appeal rights.
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I. Other Feasibility Issues

The Loan Servicer will consider whether the proposed transfer will result in a project 

classification of A or B in the MFIS system; and if there are any other conditions in the 

proposed transfer or the proposed budget, that either RD or the project’s tenants may find 

objectionable. See Chapter 4 of this Handbook.
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SECTION 7: EVALUATING RD LOANS AND OVERALL RISK

7.24 EXISTING RURAL DEVELOPMENT LOANS

A. New Terms or Same Loan Terms [7 CFR 3560.406 (j)]

Loan Servicers will review the account to determine which type of transfer needs to 

occur. RD generally completes transfers on new rates and terms to extend the amortization 

period thereby reducing the amount of debt service needing to be included in tenant rents. 

RD may allow transfers at same rates and terms even if the transfer does not involve an 

increase in rents. In order for this latter type of transfer to take place, it is incumbent upon 

the borrower to demonstrate how a transfer under same rates and terms is in the best interest 

of the Government. For example, if the new owner under a transfer has applied for tax 

credits, and to qualify for 9 percent credits it is necessary to retain same rates and terms, a 

same-rates-and-terms transfer may be justified on a case-by-case basis by RD HQ.

Before making a recommendation on the transfer, the Loan Servicer should determine 

if the transfer will be on new terms or the same terms, and address any issues or obstacles that 

this may present.

B. Existing Loans/New Terms - Amortization Period and Loan Term

New rates and terms transfers require that the remaining term of the loan, i.e., the 

maturity date, does not extend past the lesser of (a) 30 years from the date of transfer; or (b) 

the remaining useful life of the property. The loan may be re-amortized over a period not to 

exceed 50 years or the remaining economic life of the property as determined by the appraisal 

report of the property, whichever is less.

The Loan Servicer typically will determine the remaining economic life of the 

housing based on the appraisal. However, the Loan Servicer may consider other information, 

including knowledge and experience of RD staff. If the remaining economic life as 

determined in the appraisal is not used, the Loan Servicer must document in the file why a 

different economic life was selected.

C. Existing Loans/New Terms - Interest Rate

Transfers on new terms are subject to the interest rate conditions described below. If 

rents are increased due to the transfer, the transfer will be done under new rates and terms if 

RD determines that this is in the best interest of the Government.

• The interest rate charged for all loans, except Labor Housing loans, will be 

the current rate being charged for those loans at the time of loan closing or the 

interest rate at the time of loan approval, whichever is lower.

• The interest rate on Labor Housing loans will be the rate specified in the note, 

generally 1 percent, except those on farm loans at the exception rate when credit 

elsewhere is available.
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D. Closing Out An Existing Loan That Will Not Be Assumed In Full

Typical transfers will result in the seller assuming the entire balance of the existing 

loan(s). If, however, there is insufficient Security Value and the existing loan balance will 

not be assumed in full, the Loan Servicer and the existing borrower must agree on the debt 

settlement of the existing loan. This is particularly important if the transfer will result in a 

loan shortfall or the borrower is requesting an equity payment because no equity will be paid.

The remainder of this paragraph discusses considerations that the Loan Servicer 

should take into account when the full balance of the existing loan will not be assumed by the 

purchaser.

The Loan Servicer should ensure that the agreed-upon resolution of a shortfall 

maximizes the borrower’s repayment ability, and avoids or minimizes loss to the Government 

unless it is in RD’s best interest to accept an option that is less than the lowest-cost option.

The Loan Servicer should ensure that the necessary actions to resolve any issues with the 

existing borrower are completed, or sufficiently complete to allow for the approval of the 

transfer. The Loan Servicer should:

• Determine if the transfer will result in a shortfall on the existing loan. If a 

write-down is needed,see Chapter 11 of this Handbook for more information;

• Initiate the debt settlement process, in accordance with Chapter 12 of this 

Handbook, if appropriate; and

• Determine if RD should pursue legal remedies against the borrower.

If there is insufficient Security Value to support the existing RD debt, the seller will 

not have equity in the property. If the seller does have equity that is supported by an 

appraisal meeting RD requirements and equity payout is proposed, consultation with PDLD 

would be appropriate. If the seller does not have equity, and non-equity compensation is 

proposed, see Paragraphs 7.8 D and 7.29 F.

7.25 SUBSEQUENT RD LOANS [7 CFR 3560.406 (h) and (i)]

RD may provide a subsequent loan or approve one from a third-party source in 

conjunction with an ownership transfer or sale of a housing project. An RD subsequent loan 

may be:

• a parity loan; sharing the first lien position with the existing RD loan;

• a junior loan; junior to an existing non-RD loan and sharing the second lien 

position with the existing RD loan; or

• a soft second from a non-RD third-party.

A third-party subsequent loan may have the first lien position, with the existing RD 

loans accepting second lien position if the loan(s) are sufficiently secured. RD will execute 

its standard Subordination Agreement.

In any case, the Government must be in a secure position. If the transferee is 

requesting or receiving a subsequent RD loan, the Loan Servicer should refer to Chapter 10

of HB-1-3560 to ensure that the transferee’s application is complete and being processed. The 

Loan Servicer should verify:
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• The subsequent loan process will be completed to coincide with the transfer closing 

to ensure a smooth closing process; and

• The subsequent loan and its impact are accurately reflected in the transferee’s budget 

and repair and rehabilitation plans.

7.26 VERIFY ADEQUATE SECURITY VALUE [7 CFR 3560.406 (d) (3)]

The Security Value (determined in accordance with the regulations cited above) of the 

project covered by RD loans to be assumed by the transferee must be sufficient to ensure that 

all RD loans being assumed and all subsequent loans offered as a part of the transfer can be 

secured to a level that fully protects RD. Soft second and deferred loans are not included in 

this determination.

The proposed debt, including existing debt being assumed and any additional debt, 

shall be counted for determining the Security Value limitations set out in [7 CFR 3560.63]. 

Third-party soft second mortgages secured only by proceeds from a future sale of the 

property may be excluded from the debt ceiling and Security Value calculations.

In all cases, Agency-approved appraisals will be required when new debt is added or 

when the transfer will be approved and closed with new rates and terms. The amount of 

indebtedness to be assumed will be based on an appraisal that complies with the Uniform 

Standards of Professional Appraisal Practices (USPAP). In no instances may appraisals be 

inflated to defer loan losses and write- offs, to avoid adverse tax consequences, or to support 

a higher tax credit basis.

7.27 ASSESS THE OVERALL RISK AND IMPACT ON RD AND TENANTS

The Loan Servicer compiles the evaluation of the eligibility, transferee, and the 

property and decides whether to recommend the transfer. Regardless of the level of detail the 

Loan Servicer went into in evaluating the transfer, the questions and process that the Loan 

Servicer must follow remain the same.

Based on the transferee’s application and the Loan Servicer’s knowledge of the 

existing borrower and property condition, the Loan Servicer should ask three questions as 

discussed in the following.

A. Is the Potential for Financial Loss to RD Better or No Worse Than With 

the Existing Borrower?

For both the seller and purchaser, the Loan Servicer should consider financial 

strength, managerial strength, and prior experience. The Loan Servicer should examine the 

security for any increase in per unit debt for RD funding. The Loan Servicer should consider 

whether any proposed third-party funds are fully committed; if not, the transfer approval 

should be contingent upon receipt of a binding commitment for the third-party funds.

B. Will Any Financial Impact on Current and Future Tenants be Reasonable?

The Loan Servicer should consider any significant change in property rents in relation 

to tenant incomes. If post-transfer rents approach or exceed CRCU and not all units are
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covered by RA or Section 8, the Loan Servicer should consider whether the non-assisted units 

will be marketable at the proposed rents.

For current unsubsidized tenants, RD may require the tenant protections described 

below as a condition of approval, in order to determine that the transfer is in the best interests 

of residents and the Federal Government pursuant to [7 CFR 3560.406(b)].

a. In these situations, RD may require that post-transfer rents for unsubsidized 

tenants be subsidized by the owner foregoing any authorized RTO, to the extent 

necessary to reduce the rental payment to the pre-transfer rent, or 30 percent of 

adjusted income, if higher.

b. If RD requires the above condition be met, the applicant/transferee will only be 

required to subsidize the difference in rents that exists at the time of the transfer 

closing for any unsubsidized tenant that is negatively impacted by the post-transfer 

rents. For example, if at the time of the transfer, the 2BR rent increased by $75, 

one unsubsidized tenant was negatively impacted, and that tenant occupied a 2BR 

unit at the time of the transfer, the subsidy to be provided by the applicant to the 

affected tenant remains at $75 per month without regard to subsequent changes to 

the Basic Rents.

c. Annual operating budgets are to reflect the amount of foregone RTO to fund the 

temporary rent protections. The obligation with respect to each unsubsidized 

tenant in place at the time of the transfer will end when the tenant:

• Receives rental assistance;

• Receives a housing voucher;

• Voluntarily leaves the property;

• Is evicted for proper cause; or

• Has income increased to pay the post-transfer Basic Rent without being rent 

over-burdened. If, for example, the pre-transfer rent is $250, at each 

recertification the unsubsidized tenant will pay the greater of $250 or 30 

percent of adjusted income, until the tenant can pay the full post-transfer Basic 

Rent.

d. The following is loan agreement language that may be used as an addendum to 

document this requirement:

As of [date],[number] income-producing units were unsubsidized units, of 

which [number] were occupied by the following Affected Tenants:

[Unit number, unit type, tenant name, pre-transfer Basic Rent, post-transfer 

Basic Rent]. Notwithstanding the authorized Return to Owner (RTO) level 

discussed in paragraph [x], the owner is responsible for any shortfall in 

overage that the borrower must pay to RD from non-project funds to subsidize 

the rents of all affected tenants. The subsidy for each unit is the difference 

between the pre-transfer Basic Rent and the post-transfer Basic Rent; that is, 

the rent to be paid by each affected tenant will be the then current Basic Rent 

minus the subsidy. The subsidy shall not increase or decrease based on

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subsequent adjustments in Basic Rents. The owner is to fund the subsidy by 

foregoing otherwise allowable Return to Owner. Annual operating budgets 

are to reflect the amount of foregone Return to Owner to fund the temporary 

rent incentives.

This obligation will end when the last of the Affected Tenants is either 

assigned rental assistance, receives a housing voucher, voluntarily leaves the 

property, has his or her tenancy properly terminated for cause, or achieves 

increased income sufficient to afford the then current Basic Rent without 

exceeding 30 percent for rent and utilities. Furthermore, the borrower at all 

times remains obligated to observe all applicable occupancy and tenancy 

requirements of USDA regulations, including 7 CFR part 3560. When 

proposing and approving rent changes during the transition, the borrower 

and USDA agree that the Basic Rent rates and utility charges for a unit will 

not be affected by whether the tenant is an Affected Tenant.

All addendums will be reviewed by the Regional OGC.

C. Will Housing Conditions Be Better or No Worse Than under the

Current Borrower?

The Loan Servicer should consider existing property conditions, any repair plans, or 

plans to increase available reserves. In addition, the Loan Servicer should examine the 

purchaser’s demonstrated record of managing property effectively, maintaining good physical 

conditions, and providing services to tenants while keeping expenses reasonable and 

necessary in comparison with comparable RD properties in the state or region.

The Loan Servicer must be able to answer these questions and explain the answers 

through the transfer application and case file documentation. The Loan Servicer must answer 

yes to all questions in order to recommend the transfer. If the Loan Servicer answers no to 

one or more questions, continue to work with the transferee to resolve any outstanding issues 

before recommending the transfer. The information the Loan Servicer receives as part of the 

application and documentation completed during the review process will account for most of 

the documentation required. However, the Loan Servicer should include a narrative 

statement in the case file explaining how the Loan Servicer reached the conclusion that the 

transfer meets RD objectives.

7.28 COMPLETE AND VERIFY APPLICABLE FORMS

Throughout the review process, the Loan Servicer must prepare relevant forms to 

facilitate the transfer and ensure that each form is prepared correctly. The forms listed below 

must be filled out to complete a transfer:

• To transfer multiple housing loans to borrowers assuming the obligations, Loan 

Servicers must prepare Form RD 3560-21. One signed copy of this form 

should be given to the transferee, another signed copy kept in the Field Office 

case file, and the original form kept in a secure location such as the Field Office 

safe.

• To transfer rental assistance, Loan Servicers need to prepare Form RD 3560-55.
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• To record borrower eligibility to receive interest credit or rental assistance, 

Loan Servicers need to prepare Form RD 3560-9.

• The proposed transfer conforms to the applicable procedural requirements and that 

determinations of hardship status, eligibility, etc. are clearly documented in the case 

file;

• Each form is prepared correctly according to the Forms Manual Insert (FMI) or other 

appropriate regulations; and

• Items such as names, addresses, and the amount of the indebtedness to be assumed 

are the same on all forms in which those items appear.

7.29 OBTAIN PDLD CONCURRENCE

When the Loan Servicer determines that all conditions have been met and is ready to 

recommend approval of the transfer, the Loan Servicer forwards the application docket and 

the official case file, with comments and recommendations, to the State Office.

If PDLD concurrence will be needed, the Loan Servicer will include in the docket the 

appropriate analytical template and any other information that will be needed for PDLD’s 

review. When requesting PDLD concurrence, the State Office will forward only the 

materials needed for PDLD’s review. The docket itself will not be forwarded to PDLD 

unless requested by PDLD, but the Loan Servicer needs to include in the docket all materials 

that the State Office will need to forward to PDLD.

To request PDLD concurrence, the State Director emails RD HQ to request PDLD’s 

concurrence, attaching only those materials that are needed for PDLD’s review. The 

following should be attached to the email:

• A transmittal summary outlining the areas in which concurrence is requested, 

discussing the relevant aspects of the proposed transfer, and certifying that the 

proposed transfer meets applicable RD transfer requirements. Use Form RD 

3560-20, Multi-Family Housing Transfer and Assumption Review and 

Recommendation.

• If an appraisal is required by this chapter, the cover letter will certify that the 

appraiser evaluated the impact of any remaining RUP using methods acceptable to 

RD, and that the appraisal was otherwise completed in accordance with applicable 

RD requirements.

• The analytical template; either PAT or in the format prescribed by PDLD.

• Any additional information that may be needed for PDLD to perform its review; 

e.g., Loan Servicer memorandum concerning proposed business terms of new 

third-party debt.

The State must also email a pdf or fax a copy of the signed request letter to RD HQ.

Prior to forwarding the docket to OGC for review, PDLD’s review and concurrence 

should be obtained and documented in the circumstances discussed below.
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PDLD review and concurrence is required for all prepayment-related transfers; i.e., 

properties being transferred pursuant to Chapter 15 of this Handbook, and any transfers that 

include changes in the terms of RD’s financing or additional investment of funds by RD.

For non-prepayment-related transfers unless otherwise stated below, PDLD’s review 

will be limited to the analytical template (PAT or in the format prescribed by PDLD) supplied 

by the Loan Servicer.

A. Equity Payout to Seller

Using the PAT supplied by the Loan Servicer, PDLD will verify that the equity 

payout amount was correctly calculated and that the Basic Rents, including an adequate 

reserve deposit and adequate O&M expenses, do not exceed CRCU.

B. Increased Debt Service BuiltInto the Basic Rents

Using the PAT analytical tool supplied by the Loan Servicer, PDLD will verify that 

Basic Rents including an adequate reserve deposit and adequate O&M expenses do not 

exceed CRCU. On a case-by-case basis, PDLD may also ask the Loan Servicer to submit the 

Loan Servicer’s determination that all uses of loan proceeds are eligible uses. In addition, the 

Loan Servicer must include in the docket, for PDLD review, a memorandum stating that the 

Loan Servicer has reviewed the proposed business terms of the new debt to verify the 

applicable RD guidelines listed below have been satisfied:

• The debt is fully amortizing;

• The maturity date is after the maturity date of all RD debt; and

• There is an agreement by the third-party lender, acceptable to PDLD, to 

extend the scheduled maturity on terms that do not require rents above CRCU.

C. Increased Return to Owner

Using the PAT supplied by the Loan Servicer, PDLD will verify that the new RTO 

has been correctly calculated as discussed in Paragraph 7.9. PDLD will verify that the 

proposed Basic Rents, including an adequate reserve deposit and adequate O&M expenses, 

do not exceed CRCU. If there are unsubsidized tenants, the Loan Servicer must include in 

the docket, for PDLD review, documentation that applicable tenant protection requirements 

have been satisfied as discussed in Paragraph 7.27.

D. Section 515 Loan Modified

If the underlying Section 515 loan(s) will be modified, e.g., change in rate, change in 

maturity date, change in Interest Credit payment or Note Rate payment, subordination, or 

modification to balance due, the Loan Servicer will document in the analytical template each 

of the proposed modifications. PDLD will review the proposed modification(s) to verify that 

applicable RD requirements have been satisfied.
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E. Basic Rents Increase More Than $25 per Month, and There Are Unassisted 

Tenants

If Basic Rents increase more than $25 per month and there are unassisted tenants, the 

Loan Servicer must include in the docket, for PDLD review, a discussion of:

• Whether the proposed Basic Rents include an adequate reserve deposit and 

adequate O&M expenses; if not, a workout agreement should be included.

• Any measures already taken to minimize the increase in Basic Rents.

• Any commitments by the State Office to transfer unused RA to this project, 

including an estimate of when unused RA might become available to this project.

• The impact of the proposed increase on current unassisted tenants.

• Any commitments by the purchaser to minimize the impact on current 

unassisted tenants.

F. Non-Equity Compensation

PDLD’s concurrence is required and PDLD will review the analytical template if the 

transfer involves non-equity compensation. See Paragraph 7.8 D.

G. Exceptions to Regulations

If elements of the proposed transaction are not in accordance with applicable 

regulations, PDLD’s approval of those elements must be obtained. PDLD will coordinate the 

approval of any exceptions that are required. Requests for exceptions must be made in 

accordance with [7 CFR 3560.8].

H. Transfers Not Meeting Viability Criteria (Transfers with Workout).

This chapter requires post-transfer Basic Rents must support an adequate reserve 

deposit so that all projected reserve-eligible needs can be funded from the reserve, and are 

adequate to pay O&M expenses. However, from time to time, State Offices may propose for 

approval transfers that do not meet these criteria; for example, when there are compelling 

reasons such as outstanding physical issues and there is a credible plan to secure additional 

funding after the closing of the transfer.

When proposing a Transfer with Workout, the Loan Servicer must include in the 

transmittal letter to PDLD:

• A comparison between the proposed post-transfer rents and the (higher) rents that 

would otherwise be required under this chapter.

• The purchaser’s plans for achieving financial viability and the time frame in 

which the purchaser plans to achieve viability.

• The written agreements between the State Office and the purchaser concerning 

the consequences to the property and the purchaser if the purchaser’s plans cannot 

be implemented. If the proposed consequences include higher Basic Rents, a 

discussion of tenant impact must be included, covering the issues outlined in 

Paragraph 7.27 B.

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Revised (01 06-17) PN 492
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I. MPR Program Tools

For transferees that have applied for or are currently participating in the MPR 

Program, awards of MPR Tools such as debt deferral of existing RD loans, grants, deferred 

payment or soft loans may be offered under an MPR NOSA. These require PDLD prior 

approval.

J. Authorization

RD HQ will provide the respective RD State Director with project-specific 

authorization based on the underwriting proposed and recommended by the state office. 

Authorities will include any appropriate waivers, exceptions, or other special conditions for 

the specific transaction. Each authorization is unique to the individual transfer transaction 

and does not establish policy or precedent. Each transfer stands on its own merits.
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SECTION 8: MAKING THE DECISION

Once RD has made the decision to approve a transfer and issue closing instructions, it 

must undertake a number of steps to implement the transfer. The steps RD takes to process 

and close a transfer on either new or same terms are similar to each other.

7.30 OVERVIEW [7 CFR 3560.406 (k)]

RD has established specific requirements for implementing project transfers to ensure 

that the obligations and responsibilities of the transferor are formally passed to the transferee 

and that RD’s security interests are protected. Specifically, these requirements ensure that:

• All accounts, property, and subsidy as applicable, with advice from regional OGC 

are properly assigned to the transferee;

• A proper loan agreement or loan resolution for the type of transferee is in effect and 

secured in the mortgage or deed of trust (typically a same rates and terms transfer 

does not require a new mortgage or deed of trust unless required by the Regional 

OGC);

• The transferor is released from liability when all RD security is transferred and 

the total outstanding debt is assumed; and

• Applicable restrictive-use provisions are required for the transferred loans. 

Exhibit 7-3, Basic Steps in Implementing Transfers, summarizes the steps Loan

Servicers and Underwriters should take to implement approved transfers and may the order 

may be adjusted to meet the specific timelines necessary to successfully complete the 

transaction. These steps should be reviewed and coordinated with the RD Underwriter 

processing the transfer request and the RD Servicer.

Exhibit 7-3

Basic Steps in Implementing Transfers

1. Determine current loan balances for transfer;

2. Prepare the closing package;

3. Review applicable closing requirements with the transferee;

4. Determine the new RUP;

5. Prepare and discussthe Letter of Conditions with applicable parties;

6. Obligate the subsequent loan, if applicable;

7. Approve the transfer;

8. OGC review for closing;

9. Close the transfer;

10. Release the seller from liability when authorized by OGC;

11. Assign leases and other legal documents to transferee;

12. Shift accounts, funds, and assets to transferee;

13. Inform new borrower of administrative responsibilities;

14. Schedule a follow-up servicing visit; and 

Monitor rehabilitation work.
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7.31 MAKING THE DECISION

A. Determine Current Loan Balances for Transfer

1. Determine the Loan Balance

To determine the current loan balance for transfer, the Loan Servicer must execute 

Form RD 3560-21 according to the FMI. The unpaid principal balance and accrued interest 

to be shown on Form RD 3560-21 is determined by accessing the project account record via 

field terminal. The Loan Servicer should contact NFAOC to verify the correct amounts and 

dates to be used in closing the transaction. The Loan Servicer will advise the transferee of:

• The total amount paid as of the closing date that has not been credited to the 

account;

• The payment required to place the account on schedule as of the previous 

installment due date;

• Payment required to bring any monthly or annual payment current; and

• The amount needed to bring the reserve account current less any authorized 

withdrawals.

The Loan Servicer must base the amount of indebtedness to be assumed on current 

appraisal regulations.

In the case of a transfer with assumption of less than the full debt, the Loan Servicer 

will attach a copy of Form RD 3560-52 to Form RD 3560-21 MFH Assumption Agreement, 

and place it in the field office safe.

2. Adjustments to the Account

Same-terms transfers, when the transferor has been converted to Predetermined 

Amortization Schedule System (PASS), must take place in a current loan status on the date of 

transfer. Thus, transferors must bring any delinquent principal and interest current prior to 

the transfer.

Overpayments and advance regular payments made on PASS accounts result in the 

creation of a future paid status account under Automated Multi-Family Housing Accounting 

System (AMAS). The Loan Servicer must work with NFAOC to determine the disposition of 

future payments; e.g., as a refund to transferor or applied as an extra payment to the 

transferee's account. Loan Servicers should refer to the AMAS Manual, Chapter 4, for 

additional guidance and document the verified information with NFAOC prior to closing.

B. Prepare the Closing Package

1. Basic Components of the Docket

The Loan Servicer should verify that any items listed in the Transfer Request 

Checklist (Attachment 7-D) and not provided earlier; e.g., evidence of insurance, have been 

submitted by the transferee.
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2. Other Supplemental Documentation 

Other transfer docket items may include: 

• Letter of Conditions;

• Mortgagee title policy;

• Title evidence or report of lien search;

• Original or certified copy of deed to any property;

• Purchase contract or other instrument of ownership;

• Assignment of HUD Section 8 Housing Assistance Payments contract; and

• Information on prior or junior mortgage(s).

Completion of this step ensures that the entire history of the transfer, from request 

through final approval, is adequately and legally documented. Maintenance of this history 

allows RD to hold transferees accountable for compliance with all agreements signed during 

the transfer process.

C. Review Applicable Requirements with the Transferee

After closing instructions have been issued but before the transfer is closed, the Loan 

Servicer will carefully review with the transferee the applicable loan program regulations, 

and loan agreement or resolution if this was not fully completed during the preliminary 

request meeting in accordance with Paragraph 7.13. 

D. Determine New Restrictive Use Period Requirement

Exhibit 7-4, RUPs for Transfers Outside the RD Prepayment Process does not address 

borrowers who are in the prepayment process (including re-amortizations in conjunction with 

incentives to avert prepayment).

For borrowers outside the prepayment process, restrictive-use provisions must be 

included in: (a) the release documents; (b) a restrictive-use agreement acceptable to RD and 

signed by the borrower; and (c) a deed restriction.

Exhibit 7-4

RUPs For Transfers Outside the RD Prepayment Process

[7 CFR 3560.406(g) and 7 CFR 3560.662 (b)]

Type of Transfer (Outside the Prepayment Process) 20-Yr 30-Yr

Third-party with debt for equity; USDA is not the lender 30-yr

All other transfers outside the prepayment process 

(no equity paid with loan funds of any type) 20-Yr
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For transfers occurring in the prepayment process, the State Office should work 

closely with PDLD, and the new RUP will be determined in accordance with applicable 

regulations and other guidance. See Chapter 15 of this Handbook.

E. Prepare the Draft Letter of Conditions

Prepare the draft Letter of Conditions, containing the proposed conditions to RD’s 

approval for the purchaser and seller to close the transfer. Review the draft Letter of 

Conditions with the purchaser. See also Paragraph 7.29.

F. Prepare to Close the Transfer and Obligate the Subsequent Loan

Normally, a new Loan Agreement/Resolution will be required for all transfers with 

guidance from the Regional OGC. The following forms are always required if changes must 

be made to the existing loan agreement or the transfer is a new terms transfer.

1. Form RD 3560-33, Loan Agreement

2. Form RD 3560-34, Loan Agreement

3. Form RD 3560-35, Loan Resolution

4. Form RD 3560-51, (Required if new RD funds are being provided).

The Loan Servicer enters the required data on borrower and project characteristics 

into the appropriate AMAS screens. The account and project numbers is updated by AMAS 

to identify the transferee when completing the transfer closing documents.

The Loan Servicer must also ensure that the proper type of loan agreement or loan 

resolution is in effect, and secured by the mortgage or deed of trust at the time of transfer.

G. OGC Review

After receiving any required PDLD concurrence, the State Director will forward the 

docket to OGC for review and preparation of final closing instructions. When transmitting 

the docket to OGC, include the draft Letter of Conditions for OGC review unless otherwise 

instructed by OGC.

If the transfer is approved, OGC will issue closing instructions. The State Office 

forwards any comments and conditions to the Field Office and gives them authority to issue 

the Letter of Conditions to the transferee. Within 10 days of receipt, the transferee will return 

a copy of the Letter of Conditions, signed and dated, to the Servicing Office. After receipt, 

the Field Office will schedule a meeting with the transferee to execute the obligating 

documents.

H. Approve the Transfer

When the transfer is approved, the Loan Servicer completes Form RD 3560-20. Form 

RD 3560-20 is primarily a record of RD’s determinations regarding the transfer.

Form RD 3560-20 should summarize all transactions involved relating to equity 

including disposition of syndication proceeds between the transferee and transferor, method 

and source of payment, payment of recoverable costs items, disposition of future payments, 

assignment of project accounts, and leases and disposition of any equipment purchased with 

loan or project funds.
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The Loan Servicer documents:

1. That the transfer will result in post-transaction balances in the project’s operating, 

reserve, taxes and insurance, and tenant security deposit accounts to at least equal 

pre-transaction levels.

2. Any necessary actions to bring the project into compliance with regulations and 

loan instruments, such as Identity of Interest Statements, delinquent payments, 

under-funded reserves, accessibility issues, and deferred maintenance.

3. That any Required Repairs that were to be completed prior to closing have been 

completed. See Paragraph 7.22 D.

If Required Repairs were determined necessary, the Loan Servicer ensures that the 

Repair Agreement (See Attachment 7-B-1, Transfer Application Documents) provides for 

completion of the Required Repairs and states which party will be responsible and the source 

of funds.

The seller and purchaser will sign page 6 of Form RD 3560-20 to certify their 

agreement with the statements within the Form that relate to the purchase contract. The 

purchase contract between the buyer and seller is attached to the form as an addendum.

Upon receipt of the transfer authorization memo from RD HQ, the State Director or 

authorized designee will prepare and issue to the Applicant the formal approval letter based 

on that authorization, including any waivers, exceptions, or other special conditions; and any 

other specific conditions unique to the individual transfer transaction deemed necessary and 

appropriate.

Frequently, the transfer approval and closing conditions are addressed in the same 

letter. However, this should be discussed with the individual regional OGC to ensure the 

timely and efficient closing of the approved transaction.

Transfers that have been underwritten, reviewed and authorized will require 

reconsideration by RD HQ if they are not closed within six months from the date of the 

transfer authorization memo.
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SECTION 9: IMPLEMENTING THE TRANSFER

7.32 CLOSING THE TRANSFER

A. Overview

RD will close the transfer according to the closing instructions received from OGC. 

After the transfer is approved, the Loan Servicer enters the transfer into the AMAS system 

within five business days after closing. The transferee has now become the new borrower.

Upon completion of the transfer, there must be no liens, third-party loans, judgments, 

or other claims against the security being transferred other than those by RD and those to 

which RD has previously agreed, unless prior written approval is obtained from RD HQ.

The parties to the transfer are responsible for obtaining legal services necessary to 

accomplish the transfer.

• A for-profit or limited-profit organization transferee may use any designated 

attorney or title insurance company to close the transfer according to the 

applicable closing instructions from OGC. The attorney or title insurance 

company and its principals or employees must not be members, officers, 

directors, trustees, stockholders, or partners of the transferee or transferor entity.

• Non-profit organization transferees may use a designated attorney who is a

member of their organization if the cost is reasonable, typical for the area, and 

earned.

B. Release the Seller From Liability

RD should release the seller from liability from any debts owed to RD when the 

housing project and all equipment, related facilities, and housing project financial accounts 

have been transferred or sold to the transferee and the transferor’s outstanding RD debts have 

been assumed or satisfied.

If all of a transferor’s outstanding RD debt is not assumed or paid off at the time of 

the transfer or sale, RD will not release a borrower from liability unless RD determines that 

the borrower is unable to pay the remaining debt from assets taken as security through the 

debt settlement procedures.

Refer to Chapter 12 of this Handbook for debt settlement procedures.

C. Assign Leasesto Transferee

All leases must be assigned to the transferee no later than the date of closing.

D. Assign Rental Assistance Agreement to Transferee

When a transferee assumes a rental assistance agreement, the Loan Servicer will 

complete Form RD 3560-55, and attach it to Form RD 3560-27, Rental Assistance 

Agreement. In addition, they will process the transfer of RA through the AMAS system. If 

the transferee does not assume an existing agreement, the units will be considered unused and 

will be recaptured in accordance with 7 CFR 3560.259.
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E. Assign Other Agreements to Transferee

If a project operates under the HUD Section 8 program, the Housing Assistance 

Payment contract must also be assigned to the transferee with prior HUD approval.

When the full amount of the debt is being assumed and an amount has been advanced 

for insurance premiums or for any other purpose, the transfer will not be completed until 

NFAOC has charged the advance to the transferor’s account.

F. Shift Accounts, Funds, and Assets to Transferee (General)

Following the assignment of leases, responsibility for the accounts, funds, and assets 

listed below is shifted from the transferor to the transferee:

• Project operating accounts;

• Reserve account;

• Tenant security deposits;

• Supervised bank accounts;

• Any fundsremaining in rental assistance contract; and

• Equipment purchased with project funds.

7.33 POST-CLOSING

A. Inform Borrower of Administrative Responsibilities

Following completion of a transfer, the transferee has several reporting and other 

administrative responsibilities that need to be satisfied. The Loan Servicer must inform the 

transferee of these requirements shortly after the transfer is closed. RD HQ may also conduct 

post-closing reviews and analysis as they deem appropriate for program monitoring and 

administration.

B. Schedule a Follow-Up Servicing Visit

The Loan Servicer should schedule a servicing visit within 90 days after closing to 

verify the transferee’s compliance with all applicable program requirements.

C. Monitor Rehabilitation Work

RD will monitor all repairs and approve payments using the procedures outlined in 

Chapter 9 of HB-1-3560. Completing this step allows RD to verify that the property will 

continue to operate in a decent, safe, and sanitary condition.

D. Reporting

Following the transfer, transferees must submit monthly or quarterly project financial 

reports to RD to document the financial viability of the project.
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E. Tenant Certifications

Transferees must ensure that current executed tenant certifications are on file with RD 

or provided for each tenant following the transfer.

F. Identification of All Creditors

At completion of the transfer, transferees must establish that there are no liens, 

judgments, or other claims against the security being transferred other than those by RD and 

those to which RD has previously agreed.

G. Verify All AMAS/MFIS Data

At completion of the transfer, the Loan Servicer will verify that all AMAS/MIFS data 

has been input or updated to accurately reflect the loan approval and closing conditions as 

underwritten, including the approved CNA and reserve funding schedules within 30 days of 

closing.

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ATTACHMENT 7‐A

PAGE 1 of 2

ATTACHMENT 7-A 

REVITALIZATION GUIDANCE

This Attachment contains Revitalization Principles adopted by Rural Development to guide 

all multifamily housing activities.

This Attachment provides guidance on using Rural Development’s regulatory authorities to 

revitalize and preserve the existing MFH portfolio through transfers and assumptions.

Prolonged reduced program funding, the portfolio’s increasing age, and existing owners 

seeking viable program exit strategies are key reasons why exceptional efforts are now 

needed to revitalize the portfolio. It will take extensive cooperation by existing owners, 

potential purchasers, non-Rural Development financiers, and Rural Development to help 

preserve this irreplaceable affordable rental housing option in rural America.

Rural Development will seek to find solutions to extend and enhance the use of each MFH 

property that continues to serve the affordable housing needs in its community. This 

attachment establishes guidance for revitalizing MFH projects using the transfer authority of 

[7 CFR part 3560].

Revitalization Principles. The goal of revitalization is to refocus resources on existing 

properties so they can meet affordable rental housing needs well into the future. Basic 

revitalization principles are summarized below.

1. There is a need for the property in the community.

2. When the transaction is complete, the property will be in the hands of eligible owners.

3. The transaction will address the physical needs of the property.

4. Existing tenants will not be displaced because of increased post-transaction rents.

5. Post-transaction basic rents will not exceed comparable market rents.

6. Any equity loan amount will be supported by a market value appraisal.

7. The PDLD concurs with equity loan amounts and new RTO, and coordinates the 

approval of waivers, National Office approvals, or revitalization related policy issues.

These principles must be documented by Rural Development’s loan servicer.

Use effective processing strategies. Rural Development must work effectively to help 

purchasers to meet timeframes and other requirements of third-party funding sources. Key 

methods to foster cooperation and efficiencies within State Office jurisdictions include:

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ATTACHMENT 7‐A 

PAGE 2 OF 2

1. The State MFH Preservation Contact coordinates State revitalization activity.

2. Develop and maintain standard transfer processing guidance and checklists.

3. For each transaction, establish an up-front understanding for assessing capital needs, 

establishing the scope of rehabilitation and determining the appraised value.

4. Develop a good working relationship with third-party funding sources.

5. Understand processing timeframes and requirements for third-party funding sources.

6. Process and approve transactions to assist owners to meet timeframes and other 

requirements of third-party funding sources.

Fully use servicing authorities. Rural Development must creatively consider and use when 

practicable other servicing authorities to facilitate revitalization. These authorities include:

1. Subordination for third-party equity or rehabilitation loans.

2. Accept parity or junior liens for equity or rehabilitation purposes.

3. Accept pre- or post-transaction consolidations to facilitate efficient management.

4. Re-amortization of existing Rural Development debt to reduce debt service.

5. Reallocate unused RA units to assure affordability by existing tenants.

6. Allow for post-transaction asset management fee to a non-profit or public body.

7. Other waivers and National Office approvals as necessary.
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ATTACHMENT 7-B-1 

TRANSFER APPLICATION DOCUMENTS

The following is a list of the documents constituting a complete application for Rural 

Development approval of a proposed transfer. Rural Development processing will begin 

only when a complete transfer request package has been submitted.

Transfer requests must be submitted at least 45 days prior to the proposed transfer approval 

date. [7 CFR 3560.406 (c)]. Unless otherwise noted, all documents are to be submitted at the 

time of application. Form numbers and references to applicable guidance are shown in 

italics.

The Proposed Transaction

1. Executive Summary. An executive summary of significant aspects of the proposed 

transaction. Because each of the following will be supported by more detailed information 

that will also be provided, discussion should be brief in the executive summary. The 

following should be discussed:

A. Acceptable Reason for Transfer. Why the transfer satisfies at least one of the following 

(see paragraph 7.5).

• Facilitates the physical and financial revitalization of the property.

• Needed to remove a hardship to the current borrower that was caused by 

circumstances beyond the borrower’s control (circumstances constituting 

‘hardship’ are discussed in Paragraph 7.5.

• The transfer is a result of a court order requiring the division of security property.

• The transfer is being requested as an alternative to prepayment. Chapter 15 of 

HB-3-3560.

• The transfer will do no harm to Rural Development or tenants.

• Other circumstances exist which make the transfer in the best interest of the 

Government and the tenants of the project.

B. How the proposed transaction will improve or maintain:

• The viability of the property. Discuss the nature and extent of repairs. If the 

project is in an area experiencing economic stress, or if the project is experiencing 

occupancy challenges, discuss plans for ensuring that the project remains viable.

• The likelihood of loan repayment to Rural Development.

• The quality of housing for the tenants.

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C. Any concerns previously identified by Rural Development (e.g., maintenance issues, 

compliance findings) and how these concerns will be addressed.

D. Proposed purchaser.

E. Proposed management.

F. Establish that the purchaser has site control. For example, sit control can be established 

through an option to purchase, or through a purchase and sale agreement.

G. If the new proposed Return to Owner (RTO) differs from the RTO currently applicable to 

the seller, explain the reason for the proposed change and show that the proposed change 

is in accordance with applicable Rural Development requirements. See paragraph 7.0 

and Exhibit 7.3

H. Any financial commitments, financial concessions, or other economic benefits proposed 

to be provided by Rural Development. For example:

• A change in rents

• A change in interest rate or loan term or amortization.

• Rental Assistance.

• A subsequent Section 515 loan.

• Subordination in lien position.

I. Third-party funding. For each third-party funding source, discuss briefly (providing 

highlights of the more detail information called for under items 19 through 23 below):

• Funding provider (names of debt/equity providers).

• Commitment status (e.g. application submitted, conditional commitment 

received). Unless all non-USDA funds are fully committed, including a 

discussion explaining how the proposed transaction will change if some or all of

the conditionally committed funds are not realized.

• Timing issues, including:

◊ Any deadlines for Rural Development approval of the transfer, or for 

closing the transfer.

◊ When the proposed third-party funding is expected to be available to the 

project.

◊ For loans, when it is anticipated that debt service payments will start, and 

how debt service payments will be funded prior to the time that Rural 

Development will allow project operating funds to be used to pay debt 

service.

• Any restrictions that will be applicable to the project and/or the purchase, for 

example rent limitations, tenant eligibility requirements, and regulatory 

agreements. Discuss the nature and duration of any such requirements.
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• Whether any accommodation by Rural Development (such as subordination in 

lien position) is proposed.

J. Any proposed compensation to parties having an identity of interest with either the seller 

or purchaser.

K. Any proposed interim financing (for example, a construction or bridge loan) that may be 

needed to pay for uses prior to the time that third-party funding sources become 

available.

2. Required written statements. If there are exceptions, the statement should be worded 

accordingly and should include an explanation of any exceptions. For example, “there is no 

identity-of-interest ... except that [include explanation].” If information is being provided by 

key principles to mitigate shortcomings in the transferee they will be added to this section 

and signed by the parties involved.

A. Joint Statement Concerning Project Equipment and Accounts. Acknowledgement by 

the seller and purchaser that, “Rural Development 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 account”. See [7 CFR 3560.406(k)].

B. Joint Statement Concerning Identity of Interest. “A statement disclosing any identityof-interest between the borrower and the party to which the housing project ownership is 

being transferred or sold.” See [7 CFR 3560.406(c)(1)].

C. Joint Statement Concerning Environmental Review. Statement by the seller and 

purchaser that, “The proposed transfer will not alter the purpose, operation, location, or 

design of the project as originally approved.”

D. Joint Statement Authorizing Release of Information to Rural Development (if thirdparty funding is proposed). Authorization from both the seller and purchaser to each 

third-party funder authorizing the third-party funder to release information to Rural 

Development.

E. Seller Statement Concerning Project Financial Condition. The seller’s 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.” See 

[7 CFR 3560.406(c)(2)].

F. Purchaser Statement Concerning Transfer. The purchaser’s written statement, signed 

by the proposed transferee or buyer, “Certify that the transferee or buyer will assume the 

borrower responsibilities and obligations specified in Rural Development program
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requirements including requirements in a promissory note, loan agreement or other 

documents related to Rural Development loans held by the borrower entity.” See [7 CFR 

3560.406(c)(4)].

G. Joint Statement Concerning No Reversionary Interest. “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.” See [C CFR 3560.406(c)(5)].

H. Purchaser Statement Concerning Tenant Certifications. The purchaser’s plan for 

complying with the requirement that transferee must, “Ensure that tenant certifications in 

compliance with subpart D of this part for all occupied rental units are on file with Rural 

Development.” [7 CFR 3560.406(d)(10)].

I. Purchaser Statement Concerning Financial Reports. “The purchaser’s agrees to 

submit financial reports to Rural Development as required under 7 CFR part 3560, 

subpart G.”[7 CFR 3560.406(d)(12)].

J. Purchaser Statement Concerning Credit (if applying for a subsequent loan). The 

purchaser’s statement (accompanied by documentation acceptable to Rural Development) 

that, “The purchaser is unable to obtain sufficient credit elsewhere at rates that would 

allow for project rents within the payment ability of eligible residents.” Documentation 

may include letters from lenders or a certification from the applicant which identifies the 

lenders contacted along with rates and terms quote from lenders.

K. Seller Statement Concerning Five-Year Requirement (if applicable). If the seller has 

owned the project less than five years, “The sellers acknowledges that the sellers will be 

ineligible for further Rural Development loans for the remainder of the 5-year period 

beginning on the date the seller acquired the project.” Paragraph 7.5 A.

L. Purchase Statement Regarding Appraisal. A statement by the purchaser that that 

reflects, “The market value appraisal referenced in item 13 below was completed in 

accordance with HB-1-3560, Chapter 7, Attachment 7-C.” In addition, the purchaser 

must acknowledge whether there are any current restrictions or prepayment prohibitions 

on the property and must state that, “All restrictions and prepayment prohibitions were 

considered by the appraiser in determining the market value.”

3. MFH Transfer & Assumption Application Supplement. Attachment 7-B-2.

4. Partial Release or Subordination (if applicable). If the proposed transaction includes 

partial release or subordination of Rural Development’s lien, include Application for Partial 

Release. Form RD 3560-1.

5. Purchase and Sale Agreement. Submit the applicable document, executed by purchaser 

and seller, in its entirety, including all attachments and amendments. Include any side 

agreements. The document must clearly recite all consideration to be paid to the seller, [7 

CFR 3560.460 (d)(6)]. Purchasers and sellers may use Form RD 440-34 as the purchase and 

sale agreement.

6. Current Preliminary Title Report. 7 CFR 3560.406.(d)(13)]. May be omitted for 

Deceased Borrower transfers (Paragraph 7.5 D.)
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Revised (01-06-17) PN 492

7. Legal Services Agreement. [7 CFR 3560.62(a)]. Provide a copy of any written contract for 

legal services that will be paid with Rural Development loan funds.

The Project and Proposed Repairs

8. Capital Needs Assessment (CNA). See Paragraph 7.22. The CNA will be reviewed by the 

Rural Development CNA Reviewer and may need to be revised or adjusted to conform to 

Rural Development program requirements. Final approval of the CNA must be provided by 

the Rural Development CNA Reviewer prior to final approval of the transfer. May be 

omitted for Deceased Borrower transfer (Paragraph 7.5 D).

9. Current Self Evaluation/Transition Plan. See HB-2-3560, Chapter 3, Paragraph 3.5. 

Submit a current (less than 3 years old) Self Evaluation/Transition Plan, if applicable and 

completed in accordance with 7 CFR 3560 15b.

10. Repair Agreement [7 CFR 3560.406 (d)(7)]. May be omitted for Deceased Borrower 

transfer (Paragraph 7.8 B 6). This should be developed in light of the CNA and should 

address the following:

A. Must be signed by seller and purchaser.

B. Must address known compliance issues.

• Must identify all repairs known by the borrower to be necessary to bring the 

project into compliance with Rural Development requirements.

• Must include any repairs required to correct any compliance violations previously 

cited by Rural Development.

• Repairs to correct compliance issues must either be completed by the seller prior 

to transfer, or be subject to a workout agreement between the Rural Development 

and the purchaser.

C. If the CNA was prepared on the assumption that certain repairs have been completed, 

provide:

• Evidence of Rural Development approval of the repair agreement and cost 

estimate for the third-party funded repairs.

• Cost estimate for the repairs.

• Month-to-month estimate for repair expenditures.

• How the repairs are proposed to be funded.

D. Tenant relocation costs if tenant relocation is necessary to rehabilitate the property.
HB‐3‐3560

ATTACHMENT 7‐B‐1 

PAGE 6 OF 14

E. The repair agreement must identify each up-front repair or enhancement item, the 

timeframe for completion, estimate of costs for each item, funding source for each phase 

of completion, who will do the work, and any Identify of Interest between the transferee 

and the party doing the work or providing materials and services.

F. Division of responsibility for repairs between purchaser and seller.

G. If equity is proposed to be paid out prior to completion of repairs, a guarantee acceptable 

to Rural Development that any repair costs in excess of the estimate will be paid from 

non-project funds.

11. Cost Estimate (if applicable). Form RD 1924-13. “Estimate and Certificate of Actual 

Cost”. Applicable if repairs will be funded by Rural Development.

Documentation of Market Rents and Value

Rural Development strongly recommends that purchasers consult with Rural Development 

before ordering appraisal products, to verify that the correct instructions are being provided 

to the appraiser. See HB1-3560, Chapter 7 and Attachment 7-C for Rural Development 

requirements regarding instructions to the appraiser. Purchasers may request that Rural 

Development provide Attachment 7-D of HB-1-3560 Information Sheet. Purchasers may 

request Rural Development assistance in assembling the information referenced in 

Attachment 7-F of HB-1-3560 Appraisal Data Package Checklist. In all cases, appraisals 

will be required when new debt is added or when the transfer will be using new rates and 

terms. For transfers processed on ‘same rates and terms’ where no new Rural Development 

debit is requested, the Loan Servicer may waive the appraisal requirement if the Loan 

Servicer determines that the security is adequate for the Rural Development indebtedness 

being assumed. Appraisal fees are purchaser/seller expense and may not be paid from 

project funds. Loan Servicers must document their review and determinations based on a 

review of Rural Development reports conducted in accordance with the requirements of [7 

CFR part 3560, subpart H (3560.3511 through 3560.400)].

12. Market Value Appraisal “Prospective Market Value, Subject to Restricted Rents within 

7 CFR 3560.752 (b) (1) (i)”. Rural Development staff will use this appraisal in order to 

determine security value. See HB-1-3560, Chapter 7 and Attachment 7-C for appraisal 

guidance.

A. The instructions to the appraiser must include language specified by Rural Development 

(see HB-1-3560, Attachment 7-C).

B. This appraisal is required if the sum of the USDA loan balance at the time of transfer, 

plus any subsequent loan, will exceed $100,000. This may be omitted for Deceased 

Borrower transfer (Paragraph 7.5 D).

13. Market Value Appraisal – “Market Value, within 7 CFR 3560.752 (b)(1)(ii) with any 

current restrictions or prohibitions currently existing on the property taken into
HB‐3‐3560

ATTACHMENT 7‐B‐1

PAGE 7 of 14

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492

consideration”; or “Market Value with 7 CFR 3560.752 (b)(1)(ii) Premised upon a 

Hypothetical Condition As-If Unsubsidized Conventional Housing.” This appraisal 

establishes a value for used in analyzing the Rural Development’s limitations on sale price 

and equity pay-out. See HB-1-3560, Chapter 7 and for appraisal guidance.

A. This appraisal is required whenever an equity pay-put is proposed to the seller.

B. The instructions to the appraiser must include language specified by Rural Development 

(See HB-1-2560, Chapter 7, Attachment 7-C).

C. If, at the time of the appraisal, a Restrictive-Use Provision or Restrictive-Use Covenant 

will be in effect, see HB-1-3560, Chapter 7, Attachment 7-C regarding Rural 

Development requirements that restrict (and may prohibit) the inclusion as a component 

of market value any value of the hypothetical future ability of the owner to convert the 

property to conventional housing use.

14. Rent Comparability Study (RCS) or Area Market Rents Study (ARMS). If neither of 

the preceding appraisal products is required for this transaction, an acceptable RCS or ARMS 

may be required to establish Conventional Rents for Comparable Units (CRCU).

A. See Paragraph 7.7 B regarding when an RCS may be used.

B. If an RCS is used, Rural Development’s Statement of Work must be used. See Paragraph

7.7 B.

15. If No Appraisal Product is required. Submit the purchaser’s best available evidence for 

CRCU. See Paragraph 7.8 F. May be omitted for Deceased Borrower transfers (Paragraph 

7.5 D).

Financial Aspects of the Transaction

16. Application for Federal Assistance. Form SF-424. Required for all transfers other than 

Deceased Borrower transfers (Paragraph 7.5 D).

A. Application for Federal Assistance. Form SF-424.

B. Budget – Construction Programs. Form SF-424C.

C. Assurances – Construction Programs. Form SF-424D.

17. Proposed Project Budget. Required for all transfers. Purchaser’s proposed project 

operating budgets covering the first year of operation following the transfer or sale. This 

budget form should set forth the project’s current Rural Development – approved budget in 

the “Current Budget” columns and the projects’ proposed budget after acquisition in the 

Proposed Budget columns.
HB‐3‐3560

ATTACHMENT 7‐B‐1 

PAGE 8 OF 14

A. Form RD 3560-7.

B. Narrative justification of changes in budget. It is important that any and all differences 

between the current and proposed budget be fully explained and justified.

18. Sources and Uses of Funds Statement. May be omitted for Deceased Borrower transfer 

(Paragraph 7.5 D). Must be accompanied by a certification that:

A. All sources of funding contemplated by the purchaser are included.

B. Itemizes each proposed use of funds to be paid to the seller, the purchaser, any affiliate of 

the seller, or any affiliate of the purchaser. Each such use will identify the proposed 

amount, identify the entity to whom it is to be paid, disclose the nature of any identify of 

interest or affiliation with seller and/or purchaser, and discuss why the proposed amount 

is reasonable. If any portion of the amount to be paid to the seller will remain unpaid 

after the closing of the transfer, the purchaser must certify that no project revenue or 

assets (other than authorized RTO earned and paid to the purchaser) may be used to pay 

such amounts and that the purchaser’s obligation to pay such amounts will be unsecured.

Note Regarding Evidence of Insurance Coverage. See Paragraph 7.16 F and [7 

CFR 3560.406(d)(11)]. Evidence of insurance coverage is not required as part of the 

transfer application package. However, the transfer cannot be closed until Rural 

Development has approved the purchaser’s insurance coverage.

Third-Party Funding (If Applicable)

19. Application for Funding. Any application submitted by the purchaser to the

proposed funder.

20. Financial Pro Forma Information. Include any estimates of repair costs, any information 

regarding proposed sources and uses of funds, and any revenue and expense projections 

submitted to the proposed funder, whether or not such documents were included in the 

application.

21. Environmental Information. Any environmental reports or analyses submitted by the 

purchaser to the proposed funder.

22. Commitment Letter or Equivalent (if applicable). Commitment letters may be conditional 

at the time of application. For LIHTC/TCAP/TCEP funding, provide a copy of the 

following: the reservation letter, any subsequent correspondence from the state allocating 

agency, and any Letter of Intent or similar correspondence from the proposed equity investor 

describing terms and conditions of its proposed investment. Before the transaction may be 

closed, the following will be required:

A. Commitment Letter

B. Documentation that any conditions in the commitment letter have been 

satisfied.
HB‐3‐3560

ATTACHMENT 7‐B‐1

PAGE 9 of 14

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492

23. Regulatory Requirements. Documentation for any requirements to be imposed on the 

project and/or the purchaser as a condition of the proposed third-party funding.

A. For Low-Income Housing Tax Credits:

• The proposed Land Use Restriction Agreement or equivalent, showing the LIHTC 

set-aside by income level and unit type; and

• The current LIHTC income limits and maximum rents for the county in which the 

project is located.

B. For a proposed loan, a copy of the proposed loan agreement, note, security instrument (if 

applicable) and regulatory agreement (if applicable).

C. For a proposed grant, a copy of the proposed grant agreement and regulatory agreement 

(if applicable).

24. Interim Financing.

A. Include a month-by-month projection of interim financing draws and interest cost. This 

projection should take into account:

• Applicable Rural Development requirements regarding the use of project 

operating funds to pay debt service. See Paragraphs 7.7 C and 7.12 A.

• Any net interest cost for permanent loan funds that are borrowed up front but not 

available to the project until funding conditions (such as completion of 

rehabilitation) have been satisfied.

• Monthly costs for rehabilitation and other costs.

• Monthly receipts from other sources of funds such as tax credit equity.

B. If a source of repayment is from tax credit equity, the schedule of equity pay-in from the 

syndicator.

C. If a source of repayment is from permanent financing, the funding conditions that must 

be satisfied before the permanent financing will be available to the project.

25. (Advisory to purchasers, no submission required) Sources and Use 

Comprehensive Evaluation (SAUCE) Analysis. Purchasers proposing to use a subsequent 

Rural Development loan should note that Rural Development must prepare a SAUCE 

analysis, or accept the tax credit agency’s sources and uses analysis, as a pre-requisite to the 

closing of the transfer. A SAUCE analysis is not required for transfers not utilizing a

subsequent Rural Development loan.

The Proposed Purchaser

For purposes of the following documents, the terms “principal” and “affiliate” and 

“participation” are defined in Form HUD-2530 Previous Participation Certification.
HB‐3‐3560

ATTACHMENT 7‐B‐1 

PAGE 10 OF 14

26. Purchaser’s Resume. May be omitted for Deceased Borrower transfers (Paragraph 7.5 D).

A. Proposed organizational structure.

B. Resume for each principal of the purchaser who has no previous participation with Rural 

Development. Resumes should be in sufficient detail for Rural Development to 

understand the nature of the new principal’s real estate experience.

C. Disclosure of any proposed role(s) in the ownership or management of the project by 

affiliates of the purchaser or affiliates of the seller.

27. Previous Participation Certification (Form HUD-2530). This form reflects the 

participation by principals of the proposed purchaser in other HUD and USDA multifamily 

projects over the past ten years. May be omitted for Deceased Borrower transfer (Paragraph 

7.5 D).

28. Identity of Interest Certification. As applicable, either:

A. Certification of No Identity of Interest, Form RD 3560-30; or

B. Identity of Interest Disclosure, Form RD 3560-31.

29. Debarment/Suspension Certification. As applicable, either:

A. Certification Regarding Debarment, Suspension and other Responsibility Matters

Form AD 1047; or

B. Certification Regarding Debarment Suspension: Ineligibility and Voluntary Exclusion

Form AD 1048.

30. Purchaser’s Financial Statements. May be omitted for Deceased Borrower

transfers (Paragraph 7.5 D). Current financial statements for:

A. The applicant (i.e., the entity that will own the project). If the applicant is an entity that 

has not yet been formed, financial statements should be pro forma (after completing the 

proposed purchase).

B. Each proposed principal.

C. Non-profit applicants/principals may satisfy this requirement by submitting their current 

IRS Form 990 “Return of Organization Exempt from Income Tax” (with Schedules A & 

B).

D. Attachment 7-B-4, MFG Transfer & Assumption Certification for Financial Statements, 

must be included with all financial statements.

31. Credit Report Fees. May be omitted for Deceased Borrower transfers (Paragraph 7.5 D), 

Purchaser’s check, made out to USDA, for the required credit reports obtained initially as 

part of the transfer application and subsequently for any additional credit reports necessary 

prior to closing to verify the applicant’s continued eligibility for participation in the transfer 

Contact your local Rural Development Office to verify what the current credit reports fees 

are (current fees as of February 2008 are $28 for each individual and $40 for each other 

principal; e.g. a corporation or partnership).
HB‐3‐3560

ATTACHMENT 7‐B‐1 

PAGE 11 of 14

A. The purchaser.

B. Each general partner of a purchaser that is a partnership, and spouse.

C. Each managing member of a purchaser that is an LLC, and spouse.

D. Each other partner/member who will have a 10 percent or greater interest.

E. If an entity is existing or newly-formed, order a credit report. If an entity is to-beformed, order a credit report (s) for existing principal(s) of the entity.

32. Attorney Certification of Eligible U.S. Citizenship/Qualified Alien Status. The purchaser’s 

attorney must review all applicable evidence to verify U.S. citizenship and/or qualified alien 

status, must certify that the Agency’s U.S. citizenship and/or qualified alien status eligibility 

requirements are met by each proposed principal applicant, and must submit the certification 

for Agency review.

Proposed Management

33. Management Plan. The purchaser may satisfy this requirement by accepting the existing 

Rural Development-approved management plan and lease and occupancy rules of the seller. 

The management plan should include:

A. A narrative description of the proposed record-keeping system.

B. A copy of the proposed lease.

C. A copy of the proposed occupancy rules.

34. Attorney Opinion Regarding Proposed Lease. This is required only if the purchaser will 

not continue to use the Rural Development-approved lease currently used by the seller. 

Transferee attorney’s opinion regarding legal sufficiency and compliance of lease with 

State/local laws, ordinances and Rural Development regulations.

35. Management Certification. Form RD 3560-13. Required for all transfers, each time a 

management agreement or management plan is executed.

36. Affirmative Fair Housing Marketing Plan. Form HUD 935.2A. May be omitted for 

Deceased Borrower transfers (Paragraph 7.5 D).

Proposed Organizational Documents of the Purchaser

37. Purchaser’s Organizational Documents. May be omitted for purchasers who are 

individuals. If the Transferee is an entity that has not yet been formed, draft documents may 

be submitted. The submission must include all amendments.

A. Purchaser is a corporation: provide the charter, articles of incorporation and bylaws, or 

equivalent.

B. If the Transferee is a non-profit the following should also be submitted.

(02-04-05) SPECIAL PN

Revised (12-08-22) PN 572
HB‐3‐3560

ATTACHMENT 7‐B‐1 

PAGE 12 OF 14

• Tax-exempt ruling from the IRS conferring 501(c)(3) or 501(c)(4) status.

• List of members on Board of Directors Purchaser is a partnership: provide the 

partnership agreement.

C. Purchaser is a partnership: provide the partnership agreement.

D. Purchaser is a trust: provide the trust agreement.

E. The documents shall show that the corporation, partnership or trust is authorized to 

operate the property and to execute and be bound by the Regulatory Agreement.

F. The documents (or minutes of meetings, as applicable) should establish clearly the 

authority of the persons executing the Regulatory Agreement and other documents for the 

Transferee.

38. Attorney Certification. Letter from the purchaser’s attorney certifying the legal sufficiency 

of the organizational documents. The attorney must certify:

A. The transferee’s legal capacity to successfully assume and operate the project for the life 

of the Rural Development loan.

B. That the organizational documents comply with the requirements of Paragraph 4.16 B of 

HF-1-3560 and [7 CFR 3560.55].

C. For partnership purchasers, that the term of the partnership extends at least through the 

latest maturity of all existing and proposed Rural Development debt.

D. For partnership purchasers, that the partnership agreement requires the General Partner(s) 

to maintain a five percent financial interest in the residual or refinancing proceeds of the 

partnership.

E. That the organizational documents required prior written Rural Development approval for 

any of the following: withdrawal of a general partner/managing member, admission of a 

general partner/managing member, amending the organizational documents, and selling 

all or substantially all of the assets of the purchaser.

Other

39. Assurance Agreement. Form RD 400-4, Certifying civil rights compliance.

40. Equal Opportunity Agreement. Form RD 400-1.

41. Lobbying Certifications (s).

A. Attachment 7-B-5, MFH Transfer & Assumption Certification for Contracts. Required.

B. Lobbying Disclosure. Form SF-LLL. If applicable.

42. Certification Regarding Drug-Free Workplace Requirements. Either:

A. Form AD 1050 (for individual purchasers); or

B. Form AD 1049 (for other purchasers).

43. Certification Regarding Collection Policies. Form RD 1910-11.
HB‐3‐3560

ATTACHMENT 7‐B‐1 

PAGE 13 of 14

Other

44. (For Projects with HUD Section 8 Housing Assistance Payments (HAP) Contracts). 

Applicant should submit a letter from HUD indicating HUD’s approval of the Section 8 HAP 

funding transfer. Formal approval from HUD is a pre-requisite for the closing of the 

transaction. Purchasers should note that HUD Section 8 rents are adjusted in accordance 

with HUD procedures and that generally, no rent adjustment should be expected in 

conjunction with the transfer.

45. Request for Rental Assistance. Form RD 3560-25. If Rental Assistance is being requested.

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492
HB‐3‐3560

ATTACHMENT 7‐B‐1 

PAGE 14 OF 14

This page is intentionally left blank
HB‐3‐3560

ATTACHMENT 7‐B‐2

PAGE 1 of 9

ATTACHMENT 7-B-2

MFH TRANSFER & ASSUMPTION APPLICATION 

SUPPLEMENT

Name of Project:

Street Address of Project (w/zip code) 

Name of Project’s Current Owner 

The following information supplements Form SF-424. This information is submitted

along with an application to assume the USDA debt associated with the above-mentioned

security property. A complete application is or will be submitted promptly.

The undersigned is in accordance with the terms of the security instruments held by 

USDA Rural Development (hereinafter referred to as “USDA”) on their property is 

applying for release or subordination of the liens of said security instruments and consent 

to the following transaction: 

1. Transfer of the USDA security property in full as outlined below.

2. Assumption of the full balance of all USDA loans associated with the security property on 

new rates and terms.

3. Subordination of the USDA security instruments as outlined below.

4. Other (explain). 

A. Applicant/Buyer/Transferee Information

The following information is supplied about the applicant (i.e., the legal entity to 

acquire title to the property, not the developer/sponsor): 

Applicant Legal Name:

Provide exact legal name of the entity that will take title to the real property and be 

USDA’s borrower at the conclusion of the transaction – e.g., “Happy Valley Associates, 

LP, a Maryland limited partnership”. 

Type of organization:

e.g. limited partnership, general partnership, non-profit, corporation, LLC, tribe, public 

body, cooperative, individual 

Tax ID #: 

Date of Formation: 

Official Mailing Address:

Developer/Sponsor Name

(If there is a developer sponsoring the applicant entity).

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492
HB‐3‐3560

ATTACHMENT 7‐B‐2 

PAGE 2 OF 9

Primary contact person for this transaction: 

Capacity:

Organization: 

Address: 

Phone: Fax: Email: 

Disclose any identity of interest relationship between borrower/seller and transferee/buyer (if 

none, indicate this): 

B.Member/Owner Information (complete one)

If applicant is a limited partnership: (Please provide exact legal names) 

Role Exact Tax Non- % Mailing Authorized

Legal ID # Profit? Share Address Sign &

Name Title

If applicant is not a limited partnership: (Please provide exact legal names) 

Role Exact 

Legal

Name

Tax 

ID # 

NonProfit?

%

Share

Mailing 

Address

Authorized 

Sign &

Title

C. Transaction Information

USDA Rural Development’s approval is requested for the following preservation transfer 

& assumption:

Negotiated purchase price $ (Please attach copy of purchase agreement)

Purchase Agreement expires: (USDA typically needs 120 days to complete 

such transactions). 
HB‐3‐3560

ATTACHMENT 7‐B‐2

PAGE 3 of 9

Proposed disposition of project & project assets:

RRH project assets Transferred to buyer? (yes/no, explain)*

Real property

Furnishing, fixtures & equipment

Replacement reserve account

Tax & insurance escrow account

General operating account

Security deposit account

Other

*Note: if any project assets are not transferred in their entirety, the buyer will be 

responsible for funding their full replacement value from equity funds. 

Timetable

Estimate timetable for acquisition, with key deadlines for funding commitments:

This Transfer must close by no later than because

D. Sources & Uses of Funds

Funding Uses * Amount

Total acquisition costs $

Total rehab costs $

Total all other costs $

TOTAL PROJECT 

FUNDING $

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492
HB‐3‐3560

ATTACHMENT 7‐B‐2 

PAGE 4 OF 9

Permanent 

Funding 

Sources

Amount Status: 

Date/Commit 

ted or 

Pending

Anticipated 

rates/terms

Lien 

position 

proposed

Assumption 

of USDA 

loan

$ Pending 1%, 50-yr

amortization, 30 

year term

Borrower 

contribution

$ n/a

9% Low 

Income 

Housing Tax 

Credit

$ n/a

4% Low 

Income 

Housing Tax 

Credit

$ n/a

Loan From: $

Loan From: $

Other: $

Other: $

Other $

Other $

Total Project 

Funding

$

*See attached “Preservation Transfer Development Budget (Sources & Uses of 

Funds)” for details.
HB‐3‐3560

ATTACHMENT 7‐B‐2

PAGE 5 of 9

E. Effect of transfer on affordability, rents and tenant subsidy

Applicant/transferee/buyer will enter into a new Restrictive-Use Agreement with 

USDA for:

[ ] 30 years [ ] 20 years [ ] remaining useful life of project [ ] Other 

Rent information:

Tenant Subsidy at project:

Current PostTransfer

USDA Rental

Assistance (RA)

HUD project-based

Section 8

RHCP

Other

Other

Total subsidized

units:

If project currently lacks 100 percent subsidy coverage on incoming-producing units, 

explain plan to maintain affordability, obtain additional subsidy and avoid adverse 

impact on tenants. 

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492

Bedroom 

Size

Units Current 

Basic Rents

Post Transfer 

Basic Rent

Estimated 

Market Rent in 

Area

0 Bedroom

1 Bedroom

2 Bedroom

3 Bedroom

4 Bedroom

Total Units
HB‐3‐3560

ATTACHMENT 7‐B‐2 

PAGE 6 OF 9

F. Planned method of management and operation

Management services provider and identification of any IOI or other related party 

affiliations to the seller or buyer:

[ ] Contract Manager (Identify: ) [ ] Borrower [ ] Other

General discussion of management plan: 

7. Certifications

Have you or any member, stockholder, partner or joint operator of the entity borrower been 

convicted under Federal or State law of planting, cultivating, growing, producing, harvesting, 

or storing a controlled substance since December 23, 1985? (yes / no) 

If this application is approved, the undersigned applicant(s) agree to comply with such terms 

as may be prescribed by USDA and to disposition of the proceeds as required by USDA 

pursuant to its regulations, including the method of applying payment to the applicant(s)’ 

loan accounts. It is expressly understood that unless a separate written instrument of 

subordination is executed and delivered by USDA pursuant to this application, approval by 

USDA of this application will merely constitute and evidence its consent, as lienholder, to 

the proposed transaction without in any way subordinating its lien, releasing any of its 

security, modifying the payment terms of the loan, or otherwise affecting any rights of 

USDA. 

The applicant(s) agrees that none of the funds obtained as a result of any subordination 

covered by this application will be used for a purpose that will contribute to excessive 

erosion of highly erodible land or the conversion of wetlands to produce an agricultural 

commodities, as explained in Exhibit M of subpart G of part 1940 of title 7 of the Code of 

Federal Regulations.
HB‐3‐3560

ATTACHMENT 7‐B‐2

PAGE 7 of 9

CERTIFICATION

I hereby certify that the information given above concerning agreements between us 

and the transferor/seller is correct and fully understood by us. 

I/we certify the information is a true and accurate reflection of proposed transfer & 

assumption project. This information is given for the purpose of inducing the United States 

of America to make a loan or to enable the United States of America to make a determination 

of continued eligibility of the applicant for a loan as requested in the loan application of 

which this statement is a part.

Neither the applicant nor its principals are delinquent on any Federal debt nor barred 

from participating in Federal housing programs. 

 Signed: 

Date Applicant/Transferee

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492
HB‐3‐3560

ATTACHMENT 7‐B‐2 

PAGE 8 OF 9

This page is intentionally left blank
MFH Transfer Development Budget (Sources & Uses of Funds)

Project: Sample Apartments preservation transfer to Preservation Associates, LP

HB‐3‐3560 

ATTACHMENT 7‐B‐2

PAGE 9 of 9 

PERMANENT SOURCES OF FUNDS

USE OF FUNDS TOTAL Tax

Credits

USDA

Assumption Rural town Bank City Other Other

Total Acquisition $ $ $ $ $ $ $

Total Rehab $ $ $ $ $ $ $

Total Relocation $ $ $ $ $ $ $

Total New $ $ $ $ $ $ $

Total $ $ $ $ $ $ $

Total Survey & $ $ $ $ $ $ $

Total $ $ $ $ $ $ $

Total Permanent $ $ $ $ $ $ $

Total Attorney $ $ $ $ $ $ $

Total Reserve $ $ $ $ $ $ $

Total Appraisal $ $ $ $ $ $ $

Total $ $ $ $ $ $ $

Total Other $ $ $ $ $ $ $

Total Developer $ $ $ $ $ $ $

TOTAL 

PROJECT COST

BALANCED

Permanent Financing Detail (for all sources other than USDA & tax credits)

Funding Source Loan

Amount Interest Rate Amortization(yrs.) Term (yrs.) Monthlypayment

Indicate if residual receipts,

deferred, etc.

Rural town Bank $ 0. 3 3 $

City $ 0. 3 3 $ Residual receipts

Other $ 0. 3 3 $

Other $ 0. 3 3 $

Interim Financing Detail (for all sources other than USDA)

Funding Source Loan

Amount

In3terest

Rate

Amortization

(yrs.)

Term (yrs.) Monthly

payment

Indicate if residual receipts,

deferred, etc. 

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492
HB‐3‐3560

ATTACHMENT 7‐B‐3

PAGE 1 of 2

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492

ATTACHMENT 7-B-3

MFH TRANSFER & ASSUMPTION 

FINANCIAL STATEMENT CERTIFICATION

Financial Statement Certification

(This certification is to be attached to all financial statements submitted to the Agency).

Financial Statement of: 

Date of Financial Statement: 

I/we certify the attached is a true and accurate reflection of my/our financial condition as of the 

date stated herein. This statement is given for the purpose of inducing the United States of America to 

make a loan or to enable the United States of American to make a determination of continued eligibility 

of the applicant for a loan as requested in the loan application of which this statement is a part.

Name Date

Signature Title
HB‐3‐3560

ATTACHMENT 7‐B‐3 

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This page is intentionally left blank
HB‐3‐3560

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492

ATTACHMENT 7‐B‐4

PAGE 1 of 2 

ATTACHMENT 7-B-4

MFH TRANSFER & ASSUMPTION CERTIFICATION FOR CONTRACTS 

CERTIFICATION FOR CONTRACTS, GRANTS AND LOANS

The undersigned certifies, to the best of his or her knowledge and belief, that:

1. No Federal appropriated funds have been paid or will be paid, by or on behalf of the undersigned, to any 

person for influencing or attempting to influence an officer or employee of any agency, a Member of 

Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with 

the awarding of any Federal contract, the making of any Federal grant or Federal loan, and the extension, 

continuation, renewal, amendment or modification of any Federal contract, grant or loan. 

2. If any funds other than Federal appropriated funds have been paid or will be paid to any person for 

influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an 

officer or employee of Congress, or an employee of a Member of Congress in connection with this Federal 

contract, grant or loan, the undersigned shall complete and submit Standard Form – LLL, in accordance with 

its instructions.

3. The undersigned shall require that the language of this certification be included in the award documents 

for all sub awards at all tiers (including contracts, subcontracts, and sub-grants under grants and loans) and 

that all sub-recipients shall certify and disclose accordingly.

This certification is a material representation of fact upon which reliance was placed when this transaction 

was made or entered into. Submission of this certification is a prerequisite for making or entering into this 

transaction imposed by section 1352, title 31, U.S. Code. Any person who fails to file the required 

certification shall be subject to a civil penalty of not less than $10,000 and not more than $100,000 for each 

such failure.

(Signed) (Date)

(Name)

(Title)

(Name of certifying entity)
HB‐3‐3560

ATTACHMENT 7‐B‐4 

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HB‐3‐3560

ATTACHMENT 7‐C

PAGE 1 of 3

ATTACHMENT 7-C

TAX CREDIT RENTS IN TRANSFER TRANSACTIONS

[7 CFR 3560.202(g)]

Under applicable USDA regulations, borrowers are allowed to utilize Tax Credit Rents in Section 515 

properties participating in the LIHTC program. The following discussion explains how the same unit type 

may have multiple Basic Rents in a Section 515 property with LIHTC. Rural Development refers to these 

situations as Tax Credit Rents. Note Rate Rents are not affected and continue to be set in the same manner as 

in non-LIHTC properties.

In most States, the competition for LIHTCs is intense. Most LIHTC allocation agencies provide priorities for 

proposals that provide for deeper affordability than the LIHTC minimum. Accordingly, a USDA borrower 

will sometimes propose transfers with multiple Tax Credit Rents in which a single unit may encompass two 

or more area median income levels.

Unit 

Type

LIHTC

Allocation

# Units Maximum 

LIHTC

Rent

RD Basic 

Rent

LIHTC

Credit 

Rent

Note Rent

1 BR 40% AMI 2 units $283 $356 $283 $522

1 BR 50% AMI 2 units $389 $356 $369 $522

1 BR 60% AMI 4 units $455 $356 $435 $522

2 BR 40% AMI 8 units $312 $420 $312 $597

2 BR 50% AMI 8 units $410 $420 $412 $597

2 BR 60% AMI 16 units $508 $420 $489 $597

3 BR 40% AMI 2 units $341 $515 $341 $772

3 BR 50% AMI 2 units $410 $515 $451 $772

3 BR 60% AMI 4 units $562 $515 $545 $772

Total 48 $250,320 $244,896 $244,896 $353,472

For proposed transfers involving Tax Credit Rents, the Loan Servicer must determine whether the 

proposed rents will provide sufficient revenue to cover project costs including an adequate Transfer 

to Reserve. If sufficient revenue will not be available, the proposed transfer is not viable unless the

borrower proposes an adequate plan for addressing the shortfall

A property with Tax Credit Rents is more difficult for the borrower to manage and more difficult for the 

USDA staff to monitor. Rural Development staff members are not responsible for assuring that borrowers 

are satisfying LIHTC compliance requirements. The LIHTC allocating agency is responsible for LIHTC 

compliance monitoring. Rural Development staff is, however, responsible for:

• Ensuring that tenants are not charged rents in excess of maximums allowed under USDA 

requirements.

• Ensuring that borrowers pay the correct amount of overage to USDA.

• Ensuring that borrowers cover shortfalls in revenue from reduced RTO and non-project funds.

(02-04-05) SPECIAL PN

Revised (01-06-17) PN 492
HB‐3‐3560

ATTACHMENT 7‐C 

PAGE 2 OF 3

In LIHTC properties, borrowers have powerful incentives to rent units only to households with incomes in 

the appropriate bracket to avoid losing LIHTC for that unit during the entire period of occupancy. One 

practical implication is that the borrower will need to maintain multiple waiting lists for the various LIHTC 

allocations. Accordingly, Rural Development staff should expect that borrowers will hold units vacant if 

there is no one on the waiting list in the appropriate income bracket, which could lead to increased vacancy 

losses in these projects. Rural Development staff should consider these factors carefully in judging the 

viability of the proposed transfer and in approving the proposed rent, vacancy allowance, and O&M 

expenses.

In LIHTC properties, it would be desirable if Rural Development could require that the LIHTC allocation be 

assigned to a specific unit. However, this is not possible and, the units will float throughout the property as a 

result of tenant turnover.

At the time that the Tax Credit Rents are implemented, Rural Development will require that the affected 

units be assigned based on tenant incomes (for example, the lowest 2 BR rent will be assigned to units 

occupied by the 2 BR tenants with the lowest incomes), and without regard to whether tenants are receiving 

RA.

Available RA will be assigned in accordance with existing Handbook requirements, see HB-2-3560, 

Paragraph 8.10. This guidance does not permit borrowers to shift RA to units with the highest Tax Credit 

Rents

The RD HQ will provide technical assistance to State Offices on a case-by-case basis in implementing Tax 

Credit rents, including assistance in assigning available RA.
HB‐3‐3560

ATTACHMENT 7‐C

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Revised (01-06-17) PN 492
HB‐3‐3560 

ATTACHMENT 7‐D

PAGE 1 of 2

ATTACHMENT 7-D: TRANSFER REQUEST CHECKLIST

The following list of required documents constitutes a complete application for Agency approval of a 

proposed transfer. Agency processing will begin only when a complete transfer request package has been 

submitted as set forth below and as described in Attachment 7-B-1. The application package and all 

documents must have original signatures. Transfer requests must be submitted at least 45 days prior to the 

proposed transfer approval date. All documents must be submitted by the application.

Proposed Transaction

∆ Yes ∆ No ∆ N/A Executive Summary (narrative)

∆ Yes ∆ No ∆ N/A Required written statement/certifications

∆ Yes ∆ No ∆ N/A MFH Transfer & Assumption Application Supplement (Attachment 7-B-2)

∆ Yes ∆ No ∆ N/A Application for Partial Release, Subordination or Consent (Form RD-3560-1)

∆ Yes ∆ No ∆ N/A Purchase and Sales Agreement

∆ Yes ∆ No ∆ N/A Current Preliminary Title Report

∆ Yes ∆ No ∆ N/A Legal Services Agreement

The Project and Proposed Repairs

∆ Yes ∆ No ∆ N/A Capital Needs Assessment

∆ Yes ∆ No ∆ N/A Repair Agreement

∆ Yes ∆ No ∆ N/A Cost Estimate, if applicable (Form RD 1924-13, Estimate & Certificate of 

Actual Cost)

Documentation of Market Rents and Value

Financial Aspects of the Transaction

∆ Yes ∆ No ∆ N/A Application for Federal Assistance (Form SF 424 & attachments)

∆ Yes ∆ No ∆ N/A Proposed Project Budget (Form RD 3560-7)

∆ Yes ∆ No ∆ N/A Sources and Uses of Funds Statement

Third-Party funding (if applicable)

∆ Yes ∆ No ∆ N/A Application(s) for Funding

∆ Yes ∆ No ∆ N/A Financial Pro Forma Information

∆ Yes ∆ No ∆ N/A Environmental Information

∆ Yes ∆ No ∆ N/A Commitment Letters or Equivalent

∆ Yes ∆ No ∆ N/A Regulation Requirements

∆ Yes ∆ No ∆ N/A Interim Financing

(02-04-05) SPECIAL PN

Revised (12-08-22) PN 572

∆ Yes ∆ No ∆ N/A Appraisal for USDA Security Value

∆ Yes ∆ No ∆ N/A Appraisal As-Is Unrestricted

∆ Yes ∆ No ∆ N/A Rent Comparability Study/ARMS

∆ Yes ∆ No ∆ N/A Purchasers best available evidence to support CRCU, if no appraisal
HB‐3‐3560 

ATTACHMENT 7‐D 

PAGE 2 OF 2 

The Proposed Purchaser

∆ Yes ∆ No ∆ N/A Purchaser’s Resume

∆ Yes ∆ No ∆ N/A Previous Participation Certification (Form HUD 2530)

∆ Yes ∆ No ∆ N/A Identity of Interest Certification (Form RD 3560-30 or 3560-13)

∆ Yes ∆ No ∆ N/A Debarment/Suspension Certification (Form AD 1047 or AD 1048)

∆ Yes ∆ No ∆ N/A Purchaser’s Financial Statements w/Attachments 7-B-3 MFH Transfer &

Assumption Certification

∆ Yes ∆ No ∆ N/A Credit Report Fees

∆ Yes ∆ No ∆ N/A Attorney Certification of Eligible U.S. Citizenship/Qualified Alien Status 

submitted for Agency review

Proposed Management

Proposed Organizational Documents for Purchaser 

Other:

∆ Yes ∆ No ∆ N/A Complete Management Plan

∆ Yes ∆ No ∆ N/A Attorney Opinion Regarding Proposed Lease & compliance with State/local

laws & RD regulations

∆ Yes ∆ No ∆ N/A Management Certification (Form RD 3560-13)

∆ Yes ∆ No ∆ N/A Affirmative Fair Housing Marketing Plan (Form HUD 935.2A)

∆ Yes ∆ No ∆ N/A Purchaser’s Organizational Documents

∆ Yes ∆ No ∆ N/A Attorney Certification certifying legal sufficiency

∆ Yes ∆ No ∆ N/A Assurance Agreement (Form RD 400-4)

∆ Yes ∆ No ∆ N/A Equal Opportunity Agreement (Form RE 400-1)

∆ Yes ∆ No ∆ N/A Lobbying Certification (Att. 7-B-4, MFH Transfer Certification &

Form SF-LLL, if applicable)

∆ Yes ∆ No ∆ N/A Certification Regarding Drug-Free Workplace Requirements

(Form AD 1049 or AD 1050)

∆ Yes ∆ No ∆ N/A Certification Regarding Collection Policies (Form RD 1910-11)

∆ Yes ∆ No ∆ N/A Letter from HUD concurring to transfer of HAP Contract & 

concurrence in post transfer rents

∆ Yes ∆ No ∆ N/A Request for Rental Assistance (Form RD 3560-25)
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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HB-3-3560

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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(02-24-05) SPECIAL PN
HB-3-3560

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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HB-3-3560

• 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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(02-24-05) SPECIAL PN
HB-3-3560

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

account for liquidation with the guidance of OGC. 

8-6 
HB-3-3560

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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(02-24-05) SPECIAL PN
HB-3-3560

• 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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HB-3-3560

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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HB-3-3560

• 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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HB-3-3560

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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CHAPTER 9: UNAUTHORIZED ASSISTANCE 

AND CIVIL MONETARY PENALTIES 

9.1 INTRODUCTION 

During the term of an Agency loan, there may be cases when the borrower or tenants 

receive assistance to which they are not entitled, or a member of the borrower entity knowingly 

and materially participates in the violation of provisions of Title V of the Housing Act of 1949, 

the regulation, or agreements made in accordance with the Housing Act. 

 

When a borrower incurs unauthorized assistance, it may be due to intentional fraud, 

inadvertent submittal of inaccurate information by borrowers or tenants, Agency error in 

calculation or assignment of benefits, or other causes. In cases where unauthorized assistance is 

identified, the Agency seeks to collect the entire amount of assistance determined to be 

unauthorized. 

Civil Monetary Penalties may be imposed by the Agency due to submitting false 

information, submitting false certifications, failing to timely submit information, failing to 

maintain real property in good repair and condition, failing to provide acceptable management 

for a project, or failing to comply with applicable civil rights statutes and regulations. 

This chapter covers Agency procedures for identifying and collecting unauthorized 

assistance received from tenants, members, or borrowers, and the procedures for imposing and 

collecting civil monetary penalties from borrower entities and related parties. The Agency’s 

guidance on civil monetary penalties can be found in Section 8 of this chapter.

SECTION 1: TYPES OF UNAUTHORIZED ASSISTANCE 

9.2 OVERVIEW 

The Agency has established procedures for servicing its multi-family housing loans and 

grants when it determines that the borrower, grantee, or tenants were not eligible for all or part of 

the financial assistance received, or the project was not made subject to restrictive-use provisions 

required by law and/or regulation. Unauthorized assistance includes the following categories: 

 The recipient was not eligible for the assistance; 

 The property, as approved, does not qualify for the program (e.g., a property clearly 

above modest in size, design, or cost, or that was not located in an area designated as 

rural when the initial loan was made); 

 The loan or grant was made for unauthorized purposes (e.g., purchase of an excessive 

amount of land); 

 The recipient was granted unauthorized subsidy in the form of interest credits, rental 

assistance, or a subsidy benefit received through use of an incorrect interest rate; and 

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 The recipient was not subjected to obligations required by the assistance, such as 

restrictive-use provisions, at the time the assistance was provided. 

9.3 ADDRESSING UNAUTHORIZED ASSISTANCE 

Provisions in 7 CFR part 3560, subpart O establish the Agency’s authority to seek 

recapture of the full amount of unauthorized assistance regardless of whether receipt of the 

assistance is due to errors by the Agency, the borrower, or the tenant. In determining whether to 

recapture unauthorized assistance, the Agency will consider the cost-effectiveness of such action 

given the amount of unauthorized assistance, the availability of records to support the Agency’s 

determination, and any applicable statute of limitations. 

However, there are certain circumstances where repayment of the unauthorized assistance 

will not be the agreed-to corrective action. The Agency may forgo collection of unauthorized 

assistance if the following conditions are met: 

 A demand for recovery of the unauthorized assistance was made; 

 The unauthorized assistance did not result from inaccurate or false information 

knowingly or fraudulently provided by a borrower or tenant; 

 

 The Agency determines that the borrower or tenant is unable to comply with the 

unauthorized assistance repayment demand, but is otherwise willing and able to meet 

Agency requirements; and 

 The Agency determines that it is in the best interest of the Federal Government to 

forgo collection of the unauthorized assistance. 

At the other extreme, the Agency can also choose to initiate liquidation or enforcement 

proceedings against a recipient of unauthorized assistance on a case-by-case basis. 

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SECTION 2: IDENTIFYING UNAUTHORIZED ASSISTANCE 

[7 CFR 3560.703]

9.4 OVERVIEW 

Unauthorized assistance may be identified through audits conducted by the Office of the 

Inspector General (OIG), through reviews and federal and state database searches conducted by 

Loan Servicers, or through other means such as information provided by a private citizen that 

documents the receipt of unauthorized assistance by a recipient of Agency assistance. In 

addition, a borrower or management agent also may identify unauthorized assistance resulting 

from tenant error or fraud. 

If the Agency has reason to believe that unauthorized assistance was received but is 

unable to determine whether or not the assistance was in fact unauthorized, the case will be 

referred to Office of General Counsel (OGC), as appropriate, for review and advice. OIG 

investigation should be requested in every case where the Agency knows or believes that the 

assistance was based on false information. If OIG conducts an investigation, the Agency’s 

notification and collection procedures will be deferred until the investigation is completed. 

9.5 REQUIREMENTS FOR IDENTIFYING UNAUTHORIZED ASSISTANCE 

Identification of unauthorized assistance may be accomplished by the Agency or by 

borrowers in cases involving tenant fraud. The Agency may use all available means to identify 

unauthorized assistance, including audit reports, monitoring activities, and information provided 

by reliable sources including the Treasury Department’s Do Not Pay (DNP) Portal. Borrowers 

have the primary responsibility for identifying and pursuing cases of unauthorized assistance 

received by tenants. 

The Agency will take necessary actions to identify unauthorized assistance, provide 

notice of the unauthorized assistance to the borrower, and recapture that assistance. At its 

discretion, the Agency may choose to continue with the borrower following the receipt of 

unauthorized assistance if certain criteria are met. Section 7 of this chapter presents the 

requirements and procedures for continuation of accounts following the receipt of unauthorized 

assistance. 

9.6 METHODS OF IDENTIFYING UNAUTHORIZED ASSISTANCE 

The Agency uses a number of methods to identify unauthorized assistance, including: 

 Audits conducted by OIG; 

 Reviews by Agency personnel; 

 Search of the Department of the Treasury’s DNP Portal; or 

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 Other means (e.g., information provided by a private citizen that documents the 

unauthorized assistance). 

In addition, the Agency has the authority to pay a contractor (from authorized contracting 

funds) to conduct an audit to identify unauthorized assistance. In such cases, the State Office 

and Contracting Staff would work together to identify audit needs and a contractor to perform 

the audit. 

OIG audits can be random or targeted at projects or borrowers suspected of receiving 

unauthorized assistance. These audits may be either requested by Loan Servicers or conducted at 

OIG’s initiative. In every case where the Agency knows or believes that the unauthorized 

assistance was based on false information, OIG investigation will be requested by the Servicing 

Office as provided for in RD Instruction 2012-B. 

9.7 DOCUMENTATION OF UNAUTHORIZED ASSISTANCE 

Loan Servicers must document the reasons for unauthorized assistance in the case file, 

specifically stating whether the cause was error or submission of false or inaccurate information. 

The case file will specifically state whether the unauthorized assistance was a result of: 

 Submission of inaccurate information by the recipient; 

 Submission of false information by the recipient; 

 Submission of inaccurate or false information by another party on the recipient’s 

behalf, such as a loan packager, developer, or real estate broker, or professional 

consultants (e.g., engineers, architects, management agents, and attorneys), when the 

recipient did not know the other party had submitted inaccurate or false information; 

 Error by Agency personnel, either in making computations or failure to follow 

published regulations or guidance; or 

 Error in preparing a debt instrument that caused a loan to be closed at an interest rate 

lower than the correct rate in effect when the loan was approved or which was caused 

by omission from the instrument of language required by applicable regulation (e.g., 

restrictive-use provisions). 

9.8 NOTICE TO RECIPIENT 

A. Agency Notice to Borrower 

The Agency will provide notice to borrowers upon determining that unauthorized 

assistance was received. The notice will: 

 Specify in detail the reason(s) that the assistance was determined to be unauthorized; 

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 State the amount of unauthorized assistance to be repaid; 

 Establish a meeting for the borrower to discuss the basis for the claim and give the 

borrower an opportunity to provide facts, figures, written records, or other 

information that might alter the determination that the assistance was unauthorized; 

and 

 Outline borrower’s appeal rights. 

Upon request, the Agency may grant additional time for the borrower to assemble the 

necessary documentation. 

B. Borrower Notice to Tenant 

The borrower will provide notice to tenants upon determining that a household 

received unauthorized assistance. The notice will: 

 Specify in detail the reason(s) that the assistance was determined to be unauthorized; 

 State the amount of unauthorized assistance to be repaid; and 

 Establish a meeting for the tenant to discuss the basis for the claim and give the tenant 

an opportunity to provide facts, figures, written records, or other information that 

might alter the determination that the assistance was unauthorized. 

Upon request, the borrower may grant additional time for the tenant to assemble the 

necessary documentation. 

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SECTION 3: CORRECTING UNAUTHORIZED ASSISTANCE 

9.9 OVERVIEW 

After confirming and documenting receipt of unauthorized assistance, the next step is to 

end the flow of unauthorized assistance to the borrower or tenant receiving it. This section 

outlines the procedures employed to correct unauthorized assistance, including procedures for 

both audit and nonaudit cases. 

9.10 ACCOUNT ADJUSTMENTS – AUDIT CASES 

When a final determination has been 

made through an OIG audit that unauthorized 

assistance has been granted, the Field Office will 

be notified of necessary account adjustments by 

OIG and the State Office. 

Only cases of unauthorized assistance 

identified by OIG audits are reported to the Field 

Office. In such cases, the Automated MultiFamily Housing Accounting System (AMAS) will be updated with the correct information, if the 

unauthorized assistance affects establishment of the loan interest rate or closing information. 

 

The chosen method of corrective action depends on the type of unauthorized assistance. 

The following text describes the actions that Loan Servicers must take to correct each type of 

unauthorized assistance. 

A. Unauthorized Loan 

For an active borrower with an unauthorized loan, if the problem causing the 

assistance to be unauthorized can be corrected, appropriate corrective action will be 

required. For example: 

 Where a loan was in excess of the authorized amount, the Agency will require the 

recipient to refund the difference; 

 Where the loan included funds for purchase of excess land, the Agency will require 

the recipient to sell the excess land and apply the proceeds to the account as an extra 

payment; and 

 Where a restrictive-use provision was omitted from a loan document, the Agency will 

insert the provision. 

Types of Unauthorized Assistance 

 Unauthorized loan 

 Unauthorized subsidy benefits 

received through use of incorrect interest rate 

 Unauthorized interest credit or rental 

assistance 

 Unauthorized grant assistance 

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B. Unauthorized Subsidy Benefits Received Through Use of Incorrect Interest Rate 

When the recipient was eligible for the loan but should have been charged a higher 

interest rate than that shown in the debt instrument, resulting in the receipt of 

unauthorized subsidy benefits, the Agency must correct the interest rate to that which was 

in effect when the loan was approved. 

 Loan Servicers must ensure that all payments made are reversed and reapplied at the 

correct interest rate and future installments will be scheduled at the correct interest 

rate; 

 The Agency will service any delinquency thus created in accordance with applicable 

Agency procedures; 

 After reapplication of payments, the Agency will service the loan as an authorized 

loan; and 

 Continuation of existing terms is authorized when the recipient is a public body with 

loans secured by bonds on which the interest rate cannot legally be changed or 

payments reversed or reapplied. 

C. Unauthorized Interest Credit or Rental Assistance 

In cases involving rental assistance or interest credit, the subsidy benefits should be 

terminated as provided in Form RD 3560-9. The Agency will service unauthorized rental 

assistance as a delinquent account, see Chapter 10. 

D. Unauthorized Grant Assistance 

When the recipient will repay unauthorized grant assistance over a period of time, the 

Agency will charge interest at the rate specified in the grant agreement for default from 

the date received until paid. 

 The Agency will schedule repayment over a period consistent with the recipient’s 

repayment ability but not to exceed 10 years; 

 The Loan Servicer must maintain collection records, as the St. Louis Office cannot 

set up an account for repayment of a grant. The Loan Servicer will attempt to collect 

the monies due, and all collections data will be entered into AMAS as a 

“Miscellaneous Collection;” 

 The Loan Servicer will report quarterly to the State Office on cases identified in OIG 

audits; 

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 If the Agency determines that the recipient cannot repay unauthorized grant 

assistance, the Agency may leave the assistance outstanding under the terms of the 

grant agreement; and 

 In the case of committed funds not yet disbursed, the Agency will make no further 

disbursements without prior consent of the Administrator. 

E. Cases Where Recipient Has Both Authorized and Unauthorized Loans 

Outstanding 

When a recipient has both authorized and unauthorized loans outstanding, the Agency 

will schedule installments to be paid concurrently on all loans. The Agency will service 

each loan according to the loan servicing regulations in effect for an authorized loan of its 

type. 

F. Liquidation Pending 

When the Agency initiates liquidation, Loan Servicers enter data into AMAS and the 

account will be flagged accordingly. The account is overseen by the Loan Servicer. 

G. Liquidation Not Initiated 

Cases in which liquidation have not been initiated because the outstanding amount is 

less than $1,000 or it would not be in the Agency’s best interest to do so will be adjusted, 

and the adjustments will be entered into AMAS. In this instance only, State Office staff 

may make adjustments without the recipient’s signature. 

As requested, the State Office will report to OIG on the status of cases of 

unauthorized assistance identified in OIG audit reports and tracked by Loan Servicers. 

The amounts to be reported will be determined by the Field Office after servicing actions 

have been completed. 

9.11 ACCOUNT ADJUSTMENTS – NONAUDIT CASES 

Servicing procedures are essentially the same for audit and nonaudit cases. However, 

when the Agency identifies receipt of unauthorized assistance by a means other than an OIG 

audit report, the St. Louis Office will be notified only if adjustments to an active account or 

reinstatement of an inactive account are needed or grant funds are repaid. 

Once the appropriate adjustments are made, the Agency will treat the loan(s) as an 

authorized loan(s). Any payment reversed will be reapplied as of the original date of credit. 

 

The Agency will handle nonaudit account adjustments as follows:

 When a change in interest rate retroactive to the date of loan closing is necessary, the 

borrower will initial changes to Form RD 3560-52, Promissory Note. Loan Servicers 

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will update AMAS with the correct information. AMAS will automatically will 

reverse and reapply payments accordingly. 

 When an inactive borrower agrees to repay unauthorized assistance, the Loan 

Servicer will notify the St. Louis Office by memo, attaching a copy of Form RD 

3560-52. The St. Louis Office will establish or reinstate the account according to the 

terms of Form RD 3560-52. 

 If a loan is paid in full, the Agency will handle the remittance like any other final 

payment. 

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SECTION 4: RECAPTURE OF UNAUTHORIZED 

ASSISTANCE TO BORROWERS 

9.12 OVERVIEW 

To ensure that borrowers do not benefit from unauthorized assistance at the expense of 

others who truly need and qualify for such assistance, the Agency seeks to recover all 

unauthorized assistance from borrowers. The Agency has established a set of detailed 

procedures that Loan Servicers must follow in each case of unauthorized assistance. 

9.13 REQUIREMENTS FOR COLLECTING UNAUTHORIZED ASSISTANCE 

[7 CFR 3560.705] 

The Agency will seek repayment of all unauthorized assistance received by a borrower, 

plus the cost of collection, to the fullest extent permitted by law. In doing so Loan Servicers 

should be guided by the following: 

 The amount due will be the amount stated in the notice letter (Handbook Letter 304 

or Handbook Letter 305, or 305-A (3560); 

 No interest will be charged against the debt if the borrower agrees to repay the money 

in a lump sum or by payment plan within 90 days from the date of debt on Form RD 

3560-65, “MFH Miscellaneous Receivable Notification/Repayment Agreement.” 

Otherwise, a repayment plan longer than 90 days will charge a fixed interest rate 

of 1%. 

 When the borrower cannot repay the money in a lump sum, but will repay over a 

period of time, the Loan Servicer may allow no more than 60 monthly payments 

beginning with the date of the first payment due. However, the debt will be 

submitted to Treasury for Cross Servicing if the borrower: (a) does not agree or 

respond to a repayment agreement, or (b) agrees to a lump sum repayment and the 

debt is not fully paid within 90 days, or (c) agrees to a repayment agreement and the 

remaining debt balance becomes 30 days delinquent at anytime during the agreed 

upon repayment period. 

In determining how to recapture unauthorized assistance, the Agency will consider: 

 The cost effectiveness of recapture efforts relative to the amount of unauthorized 

assistance to be repaid; 

 The availability of records to support the Agency’s unauthorized assistance 

determination; 

 Any applicable Federal, state, or local statute of limitations;

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Steps for Recapturing Unauthorized Assistance 

from Borrowers 

 Coordination with OGC (needed to 

determine appropriate statute of limitations) 

 Notification to recipient (HB Letter 

304(3560)) 

 Recipient response and Agency follow-up 

 Collection 

 Whether the unauthorized assistance resulted from the provision of inaccurate or false 

information knowingly or fraudulently provided by the borrower or tenant; and 

 The ability of the borrower or tenant to repay. 

9.14 AGENCY RECAPTURE OF UNAUTHORIZED ASSISTANCE 

A. Overview 

To collect unauthorized assistance, Loan Servicers must follow the following steps 

described in subparagraph 9.14 A.1 through A.5: 

1. Coordination with OGC 

Loan Servicers may need to work with OGC to determine the appropriate statute of 

limitations before making a decision to collect. 

2. Notification to Recipient 

The Agency will seek to collect 

unauthorized assistance from borrowers, 

up to the applicable statute of limitations 

for any particular amount of unauthorized 

assistance. 

 

Coordination with OGC (if needed to 

determine the appropriate statute of limitations) and the State Office via e-mail must 

occur before proceeding with the initial notification to the recipient when: (a) the debt 

extends beyond one year, and (b) the amount of unauthorized assistance for that year is 

greater than or equal to $1,000. The period of review for cases meeting the criteria of (a) 

and (b) will extend to 3 years. 

The Loan Servicer will initiate collection efforts in the notice described in the Section 3 

of this chapter. Handbook Letter 304 (3560) will be used for this notice. The Loan 

Servicer mails the notice to the recipient by certified mail, with a copy to the State 

Director and, for a case identified in an OIG audit report, a copy to the OIG office that 

conducted the audit and the Financial Management Division of the National Office. The 

Loan Servicer will send the notice to all recipients who received unauthorized assistance, 

regardless of the amount. If the recipient responds to the initial notification within 15 

days and agrees to repay, the Form RD 3560-65, is submitted to the National Financial 

and Accounting Operations Center (NFAOC) in St. Louis. 

3. Recipient Response and Agency Follow-Up 

If the recipient does not agree with the Agency’s determination, or if the recipient 

fails to respond to the initial letter within 15 days, the Loan Servicer will notify the 

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recipient of the following in a second certified letter, using Handbook Letter 305 or 305-

A (3560): 

 The amount of unauthorized assistance to be repaid and the basis for the unauthorized 

assistance determination; 

 A statement of further actions to be taken by the Agency if repayment is not made by 

a certain date; and 

 The recipient’s appeal rights. 

As with the first notice, the Loan Servicer sends copies of the second letter to the 

State Office and will additionally send copies to OIG and the Financial Management 

Division in the National Office if the unauthorized assistance was the result of any audit 

findings. If the borrower does not respond to the second certified letter after 30 days and 

no appeal was received, the Loan Servicer will continue servicing with Handbook Letters 

301, 302, and 303 (3560), Servicing Letters #1, #2, and #3 as appropriate. When all 

attempts to obtain a repayment agreement fail or if a repayment agreement is reached, the 

Form RD 3560-65, is completed and submitted to NFAOC in St. Louis. 

4. Collection 

If the recipient does not prevail in an appeal, or when an appeal is not requested 

during the time allowed, the Loan Servicer will proceed with either liquidation or legal 

action to enforce collection. The Agency allows for repayment of all unauthorized 

assistance either in a lump sum or from a monthly repayment schedule without the 

charging of interest if the recipient pays the debt in full within 90 days from the date of 

debt on Form RD 3560-65. Interest is charged on repayment agreements where the final 

due date is greater than 90 days. Otherwise, the debt will be submitted by NFAOC to 

Treasury Cross Servicing if the debtor has been afforded due process notifications 

resulting in no repayment agreement or a debt with a repayment agreement and a full 

payment is missed or is delinquent more than 30 days from the due date. 

 

5. Restriction on Loan Servicer’s Actions 

When the Loan Servicer is the same person who approved the unauthorized 

assistance, the State Office must review the case before further actions are taken by the 

Loan Servicer. 

B. Procedures for Collection of Unauthorized Assistance 

Following the final Agency determination of unauthorized assistance, Loan Servicers 

must take the following steps: 

 Notify the NFAOC, Multi-Family Housing Servicing Branch (MFHSB) of the debt to 

be established by email to RD.NFAOC.MFHSB@stl.usda.gov or fax to 314-457-

4282 using Form RD 3560-65. MFHSB may also receive a signed memo for any 

correction adjustments to the debt (initialed by Debtor and Agency). Payments are to 

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be mailed to Unauthorized Assistance lockbox address: Rural Development, P.O. 

Box 970005, St. Louis, MO 63197-0005. In all communications, precaution must be 

taken to prevent the distribution of any Personally Identifiable Information (PII). 

 Restructure accounts so that all money owed is collected and no borrowers are 

receiving assistance to which they are not entitled. This is normally accomplished on 

a case-by-case basis, with appropriate involvement of the management agent and 

tenant in cases where the tenant receives unauthorized assistance. Otherwise, it is 

accomplished on a case-by-case basis for repayment by the borrower in 3 months or 

less. Upon demand, borrowers must repay any unauthorized rental assistance and/or 

return on investment; sometimes this may be achieved through a workout agreement 

with the Agency. If 3 months is not a feasible timeframe for complete repayment, the 

State Director can make an exception where justified. 

 After submitting the agreement, Form RD 3560-65 to NFAOC, the Loan Servicers 

may view the Account in CLSS and MFIS. 

The specific procedures to be followed in each case will depend on the reason for the 

unauthorized assistance (i.e., borrower error or Agency error). The procedures associated 

with each cause of unauthorized assistance are discussed below.

1. Borrower Error 

 Borrower actions that require borrower repayment of unauthorized assistance 

received by tenants include, but are not limited to: 

a) 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 7 CFR part 3560, as applicable; or 

b) Assignment of rental assistance to a household that is ineligible under the 

requirements of subpart F of 7 CFR part 3560. If the borrower assigned rental 

assistance incorrectly even though the tenant correctly reported income and 

household size, the borrower will first notify the Loan Servicer. If the Loan 

Servicer verifies that the error was made based on information that was available 

at the time the unit was assigned, the borrower or management agent will give the 

tenant a 30-day written notice that the unit was assigned in error and that the 

rental assistance benefit will be canceled effective on the next monthly rental 

payment due after the end of the 30-day notice period. In such cases, Loan 

Servicers must insure that borrowers grant tenants the chance to cancel their lease 

without penalty at the time the rental assistance is canceled or appeal the decision. 

The written notice will provide that: the rental assistance will be assigned to the 

next eligible household based on Form RD 3560-29, from which the original 

priority was established when the unit was erroneously assigned. The rental 

assistance will not be retroactive unless the reassignment was based on an appeal 

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by the tenant. Retroactive rental assistance may not exceed the project’s 

remaining rental assistance obligation balance. 

 Borrowers should not charge tenants amounts due to the Agency as a result of 

unauthorized assistance to tenants through borrower error. (See 7 CFR section 

3560.708(d)). 

 Restitution for unauthorized rental assistance that is the borrower’s fault will be 

handled as a refund. 

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 Exhibit 9-1 lists the specific actions that Loan Servicers must take to attempt to recapture 

unauthorized assistance to borrowers. 

Exhibit 9-1 

Loan Servicer Actions to Recapture Unauthorized Assistance to Borrowers 

Specific Agency actions to be taken in order to recapture unauthorized assistance in cases of borrower error include the 

following: 

 Notify the borrower of the Agency’s finding in Handbook Letter 304 (3560), Preliminary Determination Notice. 

Include in the letter a specific dollar amount and timeframe for response on or before 15 days from receipt of the letter. 

Schedule a meeting time. This letter is the initial notification to the recipient and considered the first demand letter. 

 If the borrower responds to the first demand letter within 15 days and agrees to repay the unauthorized amount, 

complete Form RD 3560-65, with borrower signature as debtor, Agency signature, and mail the payment to: Rural 

Development, P.O. Box 970005, St. Louis, MO 63197-0005, or fax it to MFHSB at 314-457-4282. NFAOC will send 

out a billing notice. A lump sum or monthly payment may be made to repay the debt within 90 days of the date of the 

first demand letter without interest. Failure of the recipient to fully pay the debt by 90 days will result in the debt being

submitted to Treasury for Cross-Servicing. 

 If the borrower does not respond within 15 days to the first demand letter or disagrees with the findings, send 

Handbook Letter 305 or 305-A (3560), Final Determination/Demand Letter. This second letter should include a final 

demand and a description of the collection and enforcement action(s) the Agency plans to take if there is no response. 

Appeal Rights will be provided. 

 If the borrower does not respond or appeal within 30 days from the date of the Final Determination/Demand Letter, 

continue servicing with Handbook Letters 301, 302, & 303 (3560), Servicing Letter #1, #2, & #3 as appropriate. Each 

successive letter requests a response time from the recipient within 15 days. Borrowers have 30 days from the date of 

the Final Determination/Demand letter to appeal the Agency’s decision. 

 If the borrower does not respond or appeal after 90 days when all demand letters have been sent, complete Form RD 

3560-65 without signature from the recipient, include Agency signature and mail or fax to the MFHSB. The debt will 

be submitted to Treasury for Cross-Servicing, as well as referred to OGC for collection as appropriate. 

 If the borrower agrees to a repayment agreement as a result of the Final Determination/Demand letter or any servicing 

letter, complete and submit Form RD 3560-65 with borrower signature as debtor, and Agency signature to the 

NFAOC/MFHSB. If repayment is more than 90 days, the debt will accrue interest, calculated at 1%, from the date of 

debt established on Form RD 3560-65. No repayment period may have a final due date longer than 60 months from the 

date of the first due date. 

 Any repayment agreement with the borrower will have the date of first payment due on the 15th of the month and at 

least 21 days from the fax date of Form RD 3560-65. The repayment period may be no longer than 60 months from the 

date of the first payment due and interest will be charged on repayment periods more than 90 days. Equal installments 

rounded up to the nearest dollar will be used to repay by the final due date. The NFAOC/DCIB will mail a monthly 

billing invoice directly to the borrower for all repayment agreements. NFAOC/DCIB will begin Treasury Referral, 

including mailing the 60-day due process letter to the debtor, on all unpaid debt balances that are delinquent more than 

30 days from the due date. If the debt has been referred to Treasury, borrowers should send the payments to Treasury. 

Instructions will be provided on the billing invoice for payment to be mailed by the borrower to the CSC/MFH 

Lockbox. Any payment received by the servicing office, will be mailed to the Unauthorized Assistance lockbox: Rural 

Development, P.O. Box 970005, St. Louis, MO 63197-0005, along with the completed MFH Payment Transmittal 

Cover Sheet, Form RD 1944-63. 

 Unauthorized assistance should not be repaid from project funds due to borrower fraud, but only if the project received 

a monetary benefit from the unauthorized assistance. See 7 CFR section 3560.705(g). 

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2. Agency Error 

There are several types of Agency error that may result in unauthorized assistance. 

 The most common include: 

 Use of incorrect interest rate; 

 Assignment of unauthorized rental assistance; 

 Improper issuance of interest credit; 

 Non-application of recoverable cost changes; 

 Approving a loan for ineligible purposes; and 

 Other errors (e.g., failure to apply use restrictions). 

Exhibit 9-2 describes the actions that Loan Servicers must take to attempt to recapture 

unauthorized assistance in the event of Agency error. 

Exhibit 9-2 

Actions to Recapture Unauthorized Assistance 

due to Agency Error 

Specific Agency actions to be taken in order to correct cases of Agency 

error include the following: 

 Identify the mistake and the amount of assistance involved; 

 Provide notice to the borrower of the Agency’s intent to correct its 

mistake and collect the unauthorized amount. This notice will 

include a description of where corrections to documents are 

required, if applicable; 

 Contact OGC for advice if needed; 

 Request repayment based on OGC advice regarding the feasibility

of collection and any applicable collection threshold. The State 

Director retains the authority to decide not to pursue any 

unauthorized amounts below the applicable collection threshold. If 

the unauthorized amount is above the applicable collection 

threshold, no OGC review is required; 

 Take all appropriate actions to correct the original error that led to 

the unauthorized assistance, and negotiate terms of repayment (if 

applicable) with the borrower; and 

 If there is no response from the borrower, follow the procedures 

outlined in Exhibit 9-1. 

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9.15 REPAYMENT METHODS 

Repayment of unauthorized assistance may be accomplished by voluntary repayment 

from the borrower, full prepayment governed by the prepayment regulations at 7 C.F.R. part 

3560, Subpart N, or methods allowed by the Debt Collection Improvement Act of 1996 (DCIA). 

The best approach will depend largely on case-specific circumstances. 

9.16 FULL PREPAYMENT 

 

If full prepayment is determined to be the optimal servicing solution, the Agency will 

accept the prepayment in accordance with applicable requirements under 7 CFR part 

3560, subpart N. Prepayment would be an acceptable solution if there is an adequate supply of 

decent, safe, and sanitary rental housing affordable to program eligible tenants in the area, and if 

there would be no adverse impact to low- or moderate-income housing or minority segments of 

the community. Appropriate restrictive-use provisions, if applicable, must remain in the deeds of 

release following prepayment. 

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SECTION 5: RECAPTURE OF UNAUTHORIZED 

ASSISTANCE TO TENANTS 

9.17 OVERVIEW 

Section 4 of this chapter addressed the requirements and procedures for recapturing 

unauthorized assistance from borrowers. The Agency also established requirements that 

borrowers identify unauthorized assistance to tenant households. This section addresses those 

requirements and procedures. 

 

9.18 REQUIREMENTS FOR COLLECTION OF UNAUTHORIZED ASSISTANCE 

TO TENANTS [7 CFR 3560.708] 

Any assistance resulting from misrepresentation of tenant income or status that varies 

from the allowable amounts set forth under the occupancy requirements is unauthorized and 

must be repaid. Tenant’s failure to pay monthly rent according to their lease is not a part of 

unauthorized assistance and should be properly serviced by the management company. The 

borrower will inform the Agency of any identified unauthorized assistance and should assist the 

Agency in establishing a repayment agreement with the tenant. Borrowers and Loan Servicers 

will be guided by the following: 

 The amount due will be the amount stated in the notice letter (Handbook Letter 304 or 

Handbook Letter 305 or 305-A (3560)); 

 No interest will be charged against the debt if the tenant agrees to repay the money in a lump 

sum or by payment plan within 90 days from the date of debt on Form RD 3560-65, “MFH 

Miscellaneous Receivable Notification/Repayment Agreement”. Otherwise, a repayment 

plan longer than 90 days will charge a fixed interest rate of 1%. 

 

 When the tenant cannot repay the money in a lump sum, but will repay over a period of time, 

the Loan Servicer may allow no more than 60 monthly payments beginning with the date of 

the first payment due. However, the debt will be submitted to Treasury for Cross Servicing, 

by NFAOC if the tenant: (a) does not agree or respond to a repayment agreement, or (b) 

agrees to a lump sum repayment and the debt is not fully paid within 90 days, or (c) agrees to 

a repayment agreement and is delinquent more than 30 days from the due date. 

 If an agreement is made between the Tenant and Agency and the Tenant later requests a 

change to the agreement, the Loan Servicer will review the request and if approved, revise 

the original agreement, initialed by debtor and Agency, and fax to NFAOC. 

 When a tenant moves out of a property, the borrower will submit copies of all documents 

demonstrating attempts to establish a repayment agreement at the Agency’s request. At that 

point, the Agency will assume all collection actions in accordance with the DCIA, and 7 CFR 

section 3560.705(e). 

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 With all debts identified, the borrower will submit copies of all documentation supporting the 

debt amount to the Agency for their files. (e.g.: documentation of phone calls, 

correspondence, signed tenant certification and lease, how unauthorized assistance was 

discovered and calculated.) 

9.19 PROCEDURES FOR COLLECTION OF UNAUTHORIZED ASSISTANCE TO 

TENANTS 

When unauthorized assistance was determined as received by the tenant, and the 

determination was made by: 

A. The borrower 

The borrower will notify the tenant in writing the unauthorized assistance was 

received by the tenant. Per 7 CFR Section 3560.704(b), the borrower will complete 

and send Handbook Letter 304-A, Borrower Preliminary Determination Notice to the 

tenant, and simultaneously send a copy of this letter to the Agency. 

When the tenant’s unauthorized assistance is determined to have exceeded $100 for at 

least one month, the borrower must review at least the previous three tenant 

certifications for possible unauthorized assistance, when applicable. 

If the tenant agrees to repay the unauthorized assistance, the borrower will inform the 

Agency of the unauthorized assistance and of the agreement made by the tenant to 

repay with a signed Form RD 3560-65, MFH Miscellaneous Receivable 

Notification/Repayment Agreement. If lump sum payment is not feasible, a 

repayment schedule may be allowed, which will require Agency approval prior to 

implementation. The debt and repayment schedule will be reported, and will not 

exceed 60 months from the date of the first payment due which will be the 15th of the 

month and at least 21 days from the fax date of Form RD 3560-65. Any repayment 

schedule that may exceed 60 months will require approval by the MFH National 

Office. The borrower and tenant must complete a new tenant recertification for as of 

the first of the month after the unauthorized assistance was discovered. No 

modifications to tenant certifications will be made in Management Interactive 

Network Connection (MINC). 

When the tenant disagrees, fails to respond to notice, or fails to agree to a repayment 

schedule, the borrower will send Handbook Letter 305-A, Borrower Sent Final 

Determination/Demand Letter, and should issue a notice of lease violation to the 

tenant (according to lease requirements in 7 CFR Section 156). The notice informs 

the tenant of 1) the amount of unauthorized assistance and the basis for the 

unauthorized assistance determination; 2) the actions to be taken if repayment is not 

made by a specific date, and tenant grievance procedures pursuant to 7 CFR section 

3560.160. If no agreement is made and the debt becomes delinquent, Form RD 3560-

65 must be completed, without tenant signature, and sent to the Agency for 

approval/signature and transmission to NFAOC/MFHSB for transfer to Treasury debt 

cross-servicing. 

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B. The Agency 

If the Agency (Loan Servicer) determines the unauthorized assistance, they will 

notify Borrower requesting response to either confirm or dispute Agency finding. If 

the borrower agrees, the Agency will send the tenant Handbook Letter 304, 

Preliminary Determination Notice. 

If the tenant agrees to repay the unauthorized assistance, Form RD 3560-65 must be 

completed, with tenant signature, signed by the Agency, and emailed or faxed to the 

NFAOC/MFHSB. 

If the tenant does not agree to repay, or no agreement is made, Form RD 3560-65 

must be completed, without tenant signature, signed by the Agency, and emailed or 

faxed to the NFAOC/MFHSB, for submission to Treasury for debt collection, as 

allowed by DCIA. The servicing office will take actions to pursue the debt from the 

tenant when the tenant moves out of the unit, using information provided by the 

borrower. 

Immediately after submitting the agreement, Form RD 3560-65, NFAOC/MFHSB 

will create a Tenant Tracked Account in CLSS. As payments are made, 

NFAOC/MFHSB will update the tracked account. If the account is turned over to 

Treasury for Cross Servicing, CSC will update the tracked account to indicate 

referral. 

Any adjustments to an incorrectly calculated debt or debt repayment by the Agency 

(with any applicable approval from MFH National Office) will be made by 

amending Form RD 3560-65, adding “CORRECTED” across the top of the form, 

and sending to NFAOC/MFHSB for notification. 

Exhibit 9-3 summarizes the steps that must be taken by Loan Servicers and borrowers to 

recapture unauthorized assistance from tenants 

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Exhibit 9-3 

Actions to Recapture Unauthorized Assistance from Tenants 

The following steps should be taken by the borrower to correct cases of unauthorized assistance due to tenant 

error: 

 If the Agency/borrower determines that a tenant misrepresented income or the number of occupants in the 

unit and has received unauthorized assistance, the borrower will determine the reason for the unauthorized 

assistance and issue a notice of intent to recapture unauthorized assistance (Handbook Letter 304, 

Preliminary Notice) which provides an opportunity for repayment by the tenant, with a copy to the Agency. 

If the tenant agrees to the income calculation, a tenant recertification will be completed as of the first of the 

month after the unauthorized assistance was discovered. No modifications to tenant certifications will be 

made in MINC. 

 If either the borrower or the tenant disputes the Agency’s findings, they may provide evidence for 

consideration by the Agency. An OGC opinion and/or concurrence for pursuit or dismissal of the 

unauthorized assistance may be submitted to support the decision for any subsequent audit. 

 If the borrower and the tenant agree to the unauthorized assistance as a result of any notice or demand 

letter, the borrower and Agency will negotiate the repayment terms with the tenant, complete Form RD 

3560-65 with tenant signature as debtor and email to RD.NFAOC.MFHSB@stl.usda.gov, or fax it to 

NFAOC/MFHSB at 314-457-4282. The original will be retained by the servicing office and a copy given 

to the tenant. 

 Any repayment agreement with the tenant will have the date of first payment due on the 15th of the month 

and at least 21 days from the fax date of Form RD 3560-65. The repayment period may be no longer than 

60 months from the date of the first payment due and interest, calculated at 1%, will be charged on 

repayment periods more than 90 days. Equal installments rounded up to the nearest dollar will be used to 

repay by the final due date. The NFAOC/DCIB will mail a monthly billing invoice directly to the tenant 

for all repayment agreements. NFAOC/DCIB will begin Treasury Referral, including mailing the 60-day 

due process letter to the tenant, on all unpaid debt balances that are delinquent more than 30 days from 

the due date. 

 Instructions will be provided on the billing invoice for payment to be mailed by the tenant to the CSC/MFH 

Lockbox. If any payment is received by the servicing office, a MFH Payment Transmittal Cover Sheet, 

Form RD 1944-63, will be completed and mailed with payment to the Unauthorized Assistance lockbox: 

Rural Development, P.O. Box 970005, St. Louis, MO 63197-0005. 

 If the borrower agrees to the unauthorized assistance and the tenant fails to respond to the notice or fails to 

agree to a repayment schedule, the borrower will send the tenant Handbook Letter 305, or 305-A, Final 

Determination/Demand letter. Appeal rights will be provided pursuant to 7 CFR 3560.160. If there is no 

response or appeal from the tenant after 30 days from the date of the Final Determination/Demand Letter, 

the borrower will again initiate eviction proceedings and complete Form RD 3560-65 without tenant 

signature as debtor, without interest (indicated by a “0” in the interest field) or installment amount, include 

Agency signature, and email to RD.NFAOC.MFHSB@stl.usda.gov, or fax it to NFAOC/MFHSB at 314-

457-4282. The original will be retained at the servicing office. The NFAOC/DCIB will follow procedures 

for submission of the debt to Treasury Cross Servicing. 

 If tenant has moved out of the unit, the borrower must turn over copies of relevant tenant records upon 

request (e.g., signed tenant certification and lease, how much unauthorized assistance was discovered, 

calculation of unauthorized assistance, eviction notice, and tenant move-out form) to the Agency. The 

servicing office will, if necessary, send the Final Determination/Demand Letter to the tenant, process any 

appeal, and complete Form RD 3560-65 for faxing to the NFAOC/MFHSB. The NFAOC will refer the debt 

to Treasury for collection as allowed by DCIA. 

 For all debts identified, the borrower will submit documentation supporting the debt amount to the Agency 

(e.g. documentation of phone calls, correspondence, signed tenant certification and lease, how unauthorized 

assistance was discovered and calculated.) 

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SECTION 6: REFERRAL OF DEBT TO THE 

UNITED STATES DEPARTMENT OF TREASURY (TREASURY) 

9.20 GENERAL TREASURY REFERRAL REQUIREMENTS 

Treasury referral is a process by which delinquent debts can be collected from borrowers, 

grantees, or tenants through means other than a direct payment. Agencies are required by law to 

transfer debts that are 180 days delinquent, nontax, legally enforceable to Treasury for collection. 

Exhibit 9-4 lists the general procedures that Loan Servicers must follow when 

implementing Treasury Referral. 

9.21 GENERAL TREASURY REFERRAL PROCESS 

The Agency does not perform Administrative Offsets, Salary Offsets, or IRS Offsets. 

These tools are used by the U.S. Treasury once a debt has been determined eligible and 

subsequently referred to Treasury. In addition to the various types of offsets, the U.S. Treasury 

may also use wage garnishment and private collection agencies, to attempt collection of a debt. 

A brief process is as follows: 

• The Debt Collection Improvement Act of 1996 (DCIA) provides additional collection 

remedies to Treasury for collecting delinquent debts Government wide. 

• Prior to submitting the debt to Treasury, NFAOC/DCIB issues the debtor a 60-Day Due 

Process Letter. This letter explains the debt and rights of the debtor as required by law. 

DCIA requires debts to be referred for Cross Servicing at 180 days delinquent. Debts that 

are referred to the Treasury Offset Program are referred at 120 days delinquent. See 7 

CFR section 3.30. If the debtor begins making full payments as agreed upon by the 

repayment plan as a result of the 60-day notice, the debt will not be referred. 

• Once the debt is referred for Cross Servicing, Treasury begins collecting the debt. CrossServicing is the process whereby federal agencies refer delinquent debts to Treasury for 

collection. Treasury will use various tools in an attempt to collect these debts. Some of 

these tools are such things as offsetting any government payments (tax refunds, federal 

salary payroll, all vendor payments, etc.), wage garnishment and the use of private 

collection agencies, to attempt collection of a debt. 

• NFAOC/DCIB is responsible for maintaining communications with Treasury on all 

aspects of the debts referred, including but not limited to full collection of the debt. 

• Once a debt goes to Treasury, it can only be recalled if it was referred in error or under 

other extenuating circumstances. If the debtor starts to make payments again, if paid to 

Treasury, part of the collection goes back to Treasury. Payments made to the Agency will 

be processed and notification of the payment will be sent to Treasury. Resuming 

payments requires that a revised form RD 3560-65 be sent to NFAOC. 

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Exhibit 9-4 

General Procedures for Implementing Treasury referral 

 Notify debtors of intent to use Treasury referral. Notify debtors of the Agency’s intent to use Treasury 

referral. If the debtor requests a meeting to discuss the matter, schedule the meeting and advise the debtor of 

the date, time, and place. This does not replace the 60-day due process letter sent by NFAOC. 

 Inform debtor of their rights. Inform debtor that they have 15 days after receipt of notification to 

inspect/copy records, and 30 days to either make a written submission, request a meeting, or appeal. Inform 

debtors of when and where records may be inspected and/or copied. 

 Respect debtors’ rights. Ensure that debtors’ rights are respected (e.g., the right to inspect and copy 

records, the right to avoid Treasury referral by paying debts in full within 30 days, the right to present reasons 

why Treasury referral should not be used, the right to request meetings with the decision-making official, and 

the right to appeal the decision). 

 Communicate effectively with debtors. Make decisions promptly, within 15 days, after a meeting with

the debtor and communicate them in writing to the debtor. If a request from a debtor not to use Treasury 

referral is denied, the letter communicating that decision should advise the debtor of their rights to appeal to 

the National Appeals Division. 

 Follow appropriate hearing procedures. Inform debtors that they may request a hearing if they dispute 

any Agency finding. Hearings can include consideration of any issues concerning the debt that the debtor 

wishes to raise. Respond promptly to all written or oral requests or presentations made by debtors; 

 Complete Form RD 3560-65. If it is determined that the debt is valid, complete Form RD 3560-65, 

following the guidelines defined in the FMI. 

 Notify NFAOC of course of actions. Provide the completed Form RD 3560-65 to NFAOC who 

will establish the debt as a receivable. The information on the Form RD 3560-65 will be the 

determining factor when and whether or not to begin Treasury Referral, including mailing the 60-

Day Due Process Letter to the debtor(s). The NFAOC group e-mailbox for MFH is 

rd.nfaoc.mfhsb@usda.gov. 

 If the debtor begins full payments as agreed upon by the repayment plan after the 60-day due process letter, 

then the debt will not be referred. However, if the debtor becomes delinquent again, a second 60-day notice 

will not be provided and the debt will go directly to Treasury.

 Credit collections to debtor’s account. NFAOC will receive and process transactions to the debtor’s 

receivable record that are received from Treasury or through repayment agreements with the Agency. 

 Request Debt Recall from Treasury. Once it is referred, debt may only be called once and only under 

extenuating circumstances. If the debtor requests to begin making payments and the Agency decides that the 

debt should be recalled from Treasury, a new agreement, Form RD 3560-65 must be signed and submitted to 

NFAOC with a request to recall from Treasury. Debts will not be recalled more than once unless extenuating 

circumstances exist. 

 

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SECTION 7: CONTINUATION OF LOAN ACCOUNTS 

9.22 OVERVIEW 

The Agency realizes that it would be counterproductive to liquidate the account of each 

borrower that receives unauthorized assistance. Thus, a much more common scenario is to 

continue the loan account with a stipulation that some or all of the unauthorized assistance will 

be collected, either immediately or over time. This way, the Agency can continue to meet the 

needs of low-income tenants while still responsibly protecting the taxpayers’ interest in the RHS 

portfolio. 

9.23 REQUIREMENTS FOR CONTINUATION OF LOAN ACCOUNTS 

[7 CFR 3560.707] 

If a recipient of unauthorized assistance is willing to pay the amount in question but 

cannot repay within a reasonable period of time, the Agency may continue to service the account 

if the recipient has the legal and financial capabilities to continue. 

When the borrower is responsible for the circumstances causing the assistance to be 

unauthorized, the borrower must take appropriate action to correct the problem. When 

unauthorized assistance is due to Agency actions, the Agency will correct the problem. When 

circumstances resulting in a determination of unauthorized assistance cannot be corrected, the 

Agency may, at its discretion, decide that continuation on existing terms is appropriate. 

9.24 AGENCY DECISION TO CONTINUE SERVICING ACCOUNT 

If a recipient is willing to pay the amount in question but cannot repay within a 

reasonable period of time, the Agency can continue to service the account. The Agency can take 

appropriate servicing actions to continue the account if: 

 The recipient did not provide false information; 

 Requiring prompt repayment of the unauthorized assistance would be highly 

inequitable; and 

 Failure to collect the unauthorized assistance in full will not adversely affect the 

Agency’s financial interest. 

9.25 SERVICING OPTIONS IN LIEU OF LIQUIDATION OR LEGAL ACTION TO 

COLLECT 

When the conditions for continuation of the account are met, the Loan Servicer will 

service an unauthorized loan or grant, provided the recipient has the legal and financial 

capabilities to continue. Agency actions will depend on whether the case involves an active or 

inactive borrower or grantee and the type of unauthorized assistance received. 

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A. Agency Actions 

Generally, borrower accounts need to be restructured so that the Agency collects all 

money due it and so that no borrower is receiving assistance to which they are not 

entitled. The Loan Servicer accomplishes this result through the account adjustments 

described below. In most cases requiring such corrective actions, the Loan Servicer 

reports to the State Director, who often consults with OGC on further actions. 

B. Notice of Determination When Agreement is Not Reached 

If the recipient does not agree with the Agency determination of unauthorized 

assistance or does not respond to the initial letter within 30 days, the Loan Servicer must 

send a second certified letter (to the same recipients) specifying the final amount 

determined by the Agency to be unauthorized, further actions to be taken by the Agency, 

and the recipient’s appeal rights. 

C. Reporting to OIG 

At prescribed intervals, the St. Louis Office will report to OIG on the status of cases 

involving unauthorized assistance which were identified by OIG in audit reports. The 

St. Louis Office will determine the amounts to be reported to OIG after account servicing 

actions have been completed. For reporting purposes, the procedures outlined below 

apply. 

1. Unauthorized Loan 

When a borrower repays an unauthorized loan account in full (if allowed under the 

prepayment regulations found at 7 CFR 3560, Subpart N.) Loan Servicers should include 

that payment in the next scheduled report only. When the Agency approves continuation 

with the loan on existing terms, Loan Servicers will report the case as resolved on the 

next scheduled report. No further reporting is required. 

2. Unauthorized Subsidy 

For unauthorized subsidy cases, after the borrower has repaid the unauthorized 

amount or payments have been reversed and reapplied at the correct interest rate, Loan 

Servicers should include the unauthorized subsidy as resolved in the next scheduled 

report. No further reporting is required. 

3. Liquidation Pending 

When the Agency establishes an account with liquidation action pending, Loan 

Servicers will include the status in each scheduled report until the liquidation is 

completed or the account is otherwise paid in full. 

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4. Liquidation Not Initiated 

When liquidation is not initiated, Loan Servicers should report so in the next 

scheduled report, along with collections (if any). No further reporting is required. 

5. Unauthorized Grant 

When unauthorized grant assistance is scheduled to be repaid, the collections and 

status reported by the State Office to the St. Louis Office by memorandum are included 

in the OIG report until the account is paid in full. 

6. Inactive Borrower 

When an inactive borrower has agreed to repay unauthorized assistance, Loan 

Servicers will report the account initially, and include collections and status in each 

scheduled report until the account is paid in full. 

D. Quarterly Reporting to the State Office 

The Loan Servicer will report to the State Office by the first day of March, June, 

September, and December of each year the repayment of unauthorized rental assistance 

by account name, case number, account code, audit report number, finding number, date 

of claim, amount of claim, amount collected during period, and balance owed at the end 

of the reporting period. The State Office will forward a consolidated report to the St. 

Louis Office no later than the fifteenth day of March, June, September, and December of 

each year for inclusion in the OIG report. 

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SECTION 8: ENFORCEMENT 

9.26 OVERVIEW 

If all of the Agency actions described in this chapter fail to result in an acceptable 

resolution to the unauthorized assistance or borrower violations, enforcement actions may be 

considered. Most enforcement actions will require close coordination with OGC, which will 

develop the Agency’s enforcement approach based on information supplied by Loan Servicers. 

It is the Agency’s goal to resolve all cases, when possible, before they reach this stage. 

9.27 AGENCY ACTIONS FOR ENFORCEMENT AGAINST RECIPIENTS OF 

UNAUTHORIZED ASSISTANCE AND FOR IMPOSING CIVIL MONETARY 

PENALTIES AGAINST BORROWER ENTITIES AND RELATED PARTIES 

If a recipient of unauthorized assistance is unwilling or unable to arrange for repayment, 

or continuation is not feasible, or after working with a borrower or any individual or entity, 

including its officers, general partners, limited partners, or employees, who knowingly and 

materially violate, or participate in committing programmatic violations, the Agency may take 

one of the following actions, as appropriate. 

A. Liquidation (7 CFR 3560.456) 

In the case of an active borrower with a secured loan, the Loan Servicer will attempt 

to have the recipient liquidate voluntarily subject to compliance with prepayment 

requirements. If the recipient agrees, the Loan servicer will document the agreement 

with an entry in the running record of the case file. 

Where real property is involved, the Loan Servicer will prepare a letter to be signed 

by the recipient agreeing to voluntary liquidation. If the recipient does not agree to 

voluntary liquidation, or agrees but is unable to accomplish it within a reasonable period 

of time (usually not more than 90 days), the Agency will initiate forced liquidation 

action, unless the amount of unauthorized assistance outstanding totals less than $1,000 

or it can be clearly documented that it would not be in the best financial interest of the 

Government to force liquidation. If a borrower meets either of the two criteria to forego 

forced liquidation, the Agency will make all necessary account adjustments without the 

recipient’s signature and notify the recipient by letter of the actions taken. 

B. Legal Action to Enforce Collection 

In the case of a grantee, inactive borrower, or active borrower with an unsecured loan 

(e.g., collection-only or unsatisfied balance after liquidation), the Loan Servicer will 

document the facts in the case file and submit it to the State Director, who will request 

the advice of OGC on pursuing legal action to effect collection. The State Director will 

tell OGC what assets, if any, are available from which to collect. The State Director will 

forward the case file, recommendation of the State Director, and OGC comments to the 

National Office for review and authorization to implement recommended servicing 

actions. 

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C. Double Damages (7 CFR 3560.460) 

1. Action to Recover Assets or Income 

The Agency may request to the Attorney General to bring an action in a U.S. 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. 

For the purposes of this section, 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. 

For the purposes of this section, the term “person” means: 

 Any individual or entity that borrows funds in accordance with programs authorized 

by this section; 

 Any individual or entity holding 25 percent or more interest in any entity that the 

Agency funds in accordance with programs authorized by section 3560.1; and 

 Any officer, director, or partner of an entity that borrows funds in accordance with 

programs authorized section 3560.1. 

2. Amount Recoverable 

In any judgment favorable to the United States entered under this subsection, 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. 

Notwithstanding any other provisions of law, the Agency may use amounts recovered 

under this section for activities authorized under section 3560.1, and such funds must 

remain available for such use until expended. 

3. Time Limitation 

Notwithstanding any other provisions of law, an action under section 3560.460 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. 

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HB-3-3560 

4. Continued Availability of Other Remedies 

The remedy provided in section 3560.460 is in addition to—not in substitution of—

any other remedies available to the Agency or the United States Government. 

D. Equity Skimming (7 CFR 3560.461(a)) 

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 Title V of the 

Housing Act of 1949, as amended (Housing Act), 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 (USC), 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 the Housing Act and the regulations 

adopted pursuant to the Housing Act, 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. 

E. Civil Monetary Penalties (7 CFR 3560.461(b)) 

1. Overview 

Civil Monetary Penalties is authorized under section 543(b) of the Housing Act of 

1949, as amended (42 U.S.C. 1490s(b)), and provides a remedy for non-monetary 

compliance violations without imposing more severe actions such as acceleration, 

foreclosure and liquidation that may not be in the best interest of the Federal 

Government. It also allows the Agency to elicit compliance by the borrower when all 

other efforts for reestablishing program compliance have been exhausted. In order to 

avoid pursuing civil monetary penalties, Agency staff would prefer to work alongside 

borrowers to resolve outstanding violations of the Housing Act, the regulation issued by 

the Agency pursuant to the Housing Act, or agreements made in accordance to the 

Housing Act where there is an imminent or real threat of loss of financial integrity to the 

property or to the value of the Agency’s security. However, the decision to impose 

penalties should only be made after the Agency has made several unsuccessful attempts 

_________________________________________________________________________ 9-31 

(02-24-05) SPECIAL PN 

Revised (02-15-19) PN 521 
HB-3-3560 

to work with a borrower, such as entering into a workout agreement, new property 

management, or utilizing other available servicing options outlined in Chapter 10.13 

Selecting Servicing Options. This section provides guidance in support of Chapter 10.15 

Enforcement Actions. 

After following proper loan servicing procedures outlined in Chapter 10 and an 

opportunity for a hearing, the Department’s Office of Administrative Law Judges may 

impose a civil monetary penalty in accordance with section 3560.461(b) 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 the Housing Act, the regulation issued by the Agency pursuant to the 

Housing Act, or agreements made in accordance to the Housing Act by: 

 Submitting information to the Agency that is false; 

 Providing the Agency with false certifications; 

 Failing to submit information requested by the Agency in a timely manner; 

 Failing to maintain the property subject to loans made under the Housing Act in good 

repair and condition, as determined by the Agency; 

 Failing to provide management for a project that received a loan made under the 

Housing Act that is acceptable to the Agency. Acceptable management can include 

providing sound fiscal management, maintaining the required project accounts, 

maintaining the required occupancy, and handling rent collection, in accordance with 

Agency regulation 7 CFR 3560, Subpart C - Borrower Management and Operations 

Responsibilities. 

 Failing to comply with the provisions of 7 CFR 3560.2 Civil Rights and applicable 

statutes and regulations therein. 

2. Amount 

Civil penalties shall be assessed and adjusted in accordance with 7 CFR part 3, 

subpart I, Adjusted Civil Monetary Penalties (7 CFR 3.91(b)(8)) or its successor 

regulation, and 543 (b)(3)(A) of the Housing Act, which states that a civil penalty 

imposed under this subsection shall not exceed the greater of twice the damages the 

Agency, the lender, or the project that is secured for the loan under this section suffered 

or would have suffered under the violation. The current maximum penalty per violation is 

$70,881.00. 

In determining the amount of a civil monetary penalty under section 3560.461, the 

Agency must take into consideration: 

 The gravity of the offense; 

9-32 
HB-3-3560 

 Any history of prior offenses by the violator (including offenses occurring prior to the 

enactment of this section); 

 Any injury to tenants; 

 Any injury to the public; 

 Any benefits received by the violator as a result of the violation; 

 Deterrence of future violations; and 

 Such other factors as the Agency may establish by regulation. 

To aid Loan Servicers in evaluating the decision to pursue CMP, review Attachment 

9-A, “Guide for Civil Monetary Penalty Recommendation and Assessment.” 

3. Agency Actions and Responsibilities 

a. The Loan Servicer will verify that the steps outlined in Chapter 10.9 “Key Steps 

in Addressing Compliance Violations and Defaults,” and Chapter 10.10 

“Notification to Borrower of Servicing Problems” have been completed before 

conducting the necessary investigation and referral. 

b. Due to potentially serious consequences for a borrower resulting from a civil 

monetary penalty action, and the possibility of a challenge to the Agency action, it 

is important that all recommendations for these actions be fully supported with 

current documentation. If the recommendation is more than three years old after 

the alleged wrongdoing, explanatory documentation must be provided indicating 

the reason(s) for the delay. If the State Director and the Office of General Counsel 

have access to all relevant information supporting the recommendation, the 

Agency will be more likely to withstand challenges to impose civil monetary 

penalty at the hearing. 

c. The materials submitted to the State Director and the Office of General Counsel 

will comprise the Agency record. The quality and accuracy of the narrative 

record can ultimately determine the success or failure of a case appealed to 

federal district court. 

d. The Agency must include all documents relating to the relationship between the 

civil monetary penalty violator(s) and the Agency including, but not limited to: 

mortgages, notes, contracts, loan agreements, and management or partnership 

agreements, and documentation listed in paragraph 5.e. Care should be exercised 

in identifying the correct person(s) or entity for civil monetary penalty to prevent 

losing a case on procedural error for failure to provide proper and timely notice. 

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(02-24-05) SPECIAL PN 

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HB-3-3560 

e. When a civil monetary penalty extends to partners or affiliates, including its 

owners, officers, directors, general partners, limited partners, or employees, any 

partnership agreements or articles of incorporation must be included to establish 

the relationship between parties. These documents are necessary to assist in 

correctly identifying the person(s) or entity to be penalized, and in making 

determinations about imputing actions to other individuals and affiliates. OGC 

can advise about whether and how such penalties may be enforced against entity 

members with limited liability. 

f. In addition to the causes outlined in to 7 CFR 3560.461 (b) and 7 CFR 3.91 (b) 

(8), it is imperative to compile civil monetary penalty file(s) in accordance with 

the standards outlined in paragraph 5 Format for Submission of Civil Monetary 

Penalties Case. 

g. Once the investigation and the assembly of documentation is completed, the Loan 

Servicer shall send the package of information to the State Director. The State 

Director will decide if the civil monetary penalty is appropriate. If so, the case 

will be forwarded to the appropriate local OGC office for a legal sufficiency 

review. 

4. Notification of Intent to Pursue Civil Monetary PenaltyAction (HB Letter 303-A) 

a. The Loan Servicer should follow the procedures for issuing Servicing Letters #1, 

#2, and #3, in accordance with HB-3-3560, Exhibit 10-2, Sequence of Servicing 

Letters. Handbook Letter 303-A (3560), “Notification Of Intent To Pursue Civil 

Monetary Penalty Action,” should be sent at least 60 days after the date of first 

letter and at least 15 days after Letter #2 notifying borrowers that they are in 

default and warning of enforcement action if problem is not corrected within 15 

days. Handbook Letter 303-A must be sent via Certified Mail. The Agency shall 

preserve all related documents and data upon the issuance of Handbook Letter 

303-A. 

 

______________________________________________________________________________ 9-34 
HB-3-3560 

b. During the 15-day response period, the Loan Servicer should begin assembling 

the documentary evidence supporting the case. The complete package of 

documentary evidence is needed by the State Director to submit to the RHS 

Administrator, the Regional OGC, and the Office of Administrative Law Judges 

for review and concurrence. 

c. Upon the expiration of the 15-day period in which the respondent is to contact the 

Agency, the Loan Servicer will develop a problem case report using Form RD 

3560-56, Report on Real Estate Problem Case, for the State Director’s approval. 

The problem case report contains the details of the case, and is used by Loan 

Servicers to recommend and obtain the State Director’s approval for an 

enforcement action. Loan Servicers will forward the problem case report 

describing the violations of Agency requirements by the borrower along with 

recommended enforcement actions within 120 days of concluding that efforts to 

achieve compliance have been unsuccessful. 

d. The State Director will review the problem case report and respond to the Loan 

Servicer within 30 days of receipt of the problem case report, indicating the action 

to be taken. Such determination shall be based upon a review of Handbook Letter 

303-A, the borrower’s response, if any, and the documents listed in paragraph 5, 

below. 

e. Upon the State Director’s consent to the civil monetary penalty action, indicated 

by marking the “Litigation For Performance” box on the problem case report, and 

absent any active settlement negotiations, the package of documentary evidence 

and the problem case report shall be submitted to the RHS Administrator for 

review and concurrence. Upon receiving concurrence from the RHS

Administrator, the State Director shall forward the recommendation and the 

package of documentary evidence to the local OGC office for legal sufficiency 

review and consent. Upon review by OGC, OGC shall draft a complaint, then 

forward it back to the State Director. The State Director shall review the 

complaint and forward it to the RHS Administrator for signature and filing with 

the Office of Administrative Law Judges, accompanied by a transmittal 

memorandum signed by the RHS Administrator recommending a civil monetary 

penalty. A copy of the signed transmittal memorandum should be sent to the local 

OGC office to serve as a notification that the case is moving forward and legal 

representation will be needed. 

5. Format for Submission of a Civil Monetary Penalties Case 

The documentary evidence package from the State Director to the RHS Administrator 

should be secured and tabbed, and in chronological order starting with the most recent 

documents, as follows: 

____________________________________________________________________________ 9-35 

(02-24-05) SPECIAL PN 

Revised (02-15-19) PN 521 
HB-3-3560 

a. Form RD 3560-56, “Report on Real Estate Problem Case,” which is the State 

Director’s recommendation and justification for a civil monetary penalty. A clear, 

cogent, and concise narrative setting out each person or entity in relation to the civil 

monetary penalty, the specific causes for civil monetary penalty, the specific actions 

which give rise to each specific cause for civil monetary penalty, an explanation as to 

why and how the specific action is a cause for civil monetary penalty. Include any 

weak points or extenuating circumstances which may be involved. Specific citations 

of each regulation at issue must also be included. 

b. Transmittal memorandums from the Servicing Office. 

c. Executive Summary, consisting of a brief history of events, and discussion of each 

factor going into fee determination. 

d. Include the following documents that are applicable to the civil monetary penalty plus 

any additional information that will support the State Office’s recommendation and 

assist the Administrator in the decision making process: 

 Agency letters to the respondents and their responses; 

 Borrower complaint letters to respondents and their responses;

 Copies of any articles of incorporation, loan agreements, by- laws or partnership 

agreements (including, but not limited to, documentation to establish relationships 

between the proposed civil penalty and the government and/or the transfer of 

federal funds); 

 Record of other Agency contacts with respondents (including printouts of emails/ 

notes from parties, if applicable); 

 Record of visits and copies of running record entries concerning aggrieved 

parties; 

 Inspection/Certifications; 

 Documentation concerning criminal indictments/convictions, Judgments, 

Settlements and Plea Bargain Agreements; recommendations of OIG

investigations; 

 Documentation to justify lapses in timeliness in the referral or processing of a 

case. 

 If Construction Matters are an issue include: 

___________________________________________________________________________ 9-36 
HB-3-3560 

o Contract and all written Agreements 

o Subcontracts 

o Amendments and Change Orders 

o Plans and Specifications 

o Warranty Documents 

o Payment Information Release of Claims, 

o Lien Waivers 

o Mechanics or Suppliers Liens and Judgments 

 If Application Matters are at issue also include: 

o Application 

o Verification of Employment 

o Interest Credit or 

o Subsidy Repayment Agreements 

o Conditional Commitment 

 OIG and Other Investigation Reports 

6. Complaint 

After allowing the violator the opportunity to offer a settlement, a complaint shall be 

served upon the respondent. The Agency, through the Regional OGC office, will follow 

the instructions provided by the Administrative Law Judges, in accordance with 7 C.F.R., 

part 1, subpart H of the Departmental Administrative Regulation. 

7. Response to the Complaint 

If the respondent does not respond to the Agency’s complaint as prescribed, then the 

Agency Official may file a motion for default judgment, in accordance with 7 C.F.R., 

Subtitle A, part 1, subpart H. 

8. Hearings 

Hearings under this part shall be conducted according to the procedures 

applicable to hearings, in accordance with 7 C.F.R., part 1, subpart H. A field office 

attorney will serve as the Agency representative for the hearing. 

9. Collection of Penalties 

 

No payment of a penalty assessed under section 3560.461(b) may be made from 

funds provided under the Housing Act or from funds of a project that serve as 

security for a loan made under the Housing Act. 

If the hearing results in a civil penalty assessed against the defendant, after such 

time as allowed in accordance with the administrative procedure in 7 C.F.R., part 1, 

subpart H, the Agency will proceed with seeking repayment of all penalties assessed, 

__________________________________________________________________________ 9-37 

(02-24-05) SPECIAL PN 

Revised (02-15-19) PN 521
HB-3-3560 

as a miscellaneous receivable through NFAOC. The collection of funds from the 

defendant may be either in a lump sum or from a monthly repayment schedule 

without the charging of interest if the defendant pays the debt in full within 90 days 

from the date of debt on Form RD 3560-65, “MFH Miscellaneous Receivable 

Notification/Repayment Agreement.” Otherwise, the debt will be submitted by the 

National Financial and Accounting Operations Center, Multi-Family Housing 

Servicing Branch (NFAOC/MFHSB) using Form RD 3560-65, to Treasury for Cross 

Servicing. 

10. Settlement of a Civil Money Penalty Action 

The State Director is authorized to enter into settlement agreements resolving 

civil money penalty actions that may be brought under this section. 

11. Remedies for Noncompliance 

If a person or entity fails to comply with a final determination by the Agency 

imposing a civil monetary penalty, the Agency may request the Attorney General of 

the United States to bring an action in an appropriate district court to obtain a 

monetary judgment against such an individual or entity and such other relief as may 

be available. The monetary judgment may, at the court’s discretion, include attorney’s 

fees and other expenses incurred by the United States in connection with the action. 

12. Conditions for Renewal Extension 

 

The Agency may require as part of the settlement process that expiring loan or 

assistance agreements entered into under the Housing Act 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. 

13. Appeal Rights

In an action under this paragraph, the validity and appropriateness of a 

determination by the Agency imposing the penalty will not be subject to 

administrative review before the National Appeals Division.

F. Money Laundering (7 CFR 3560.462) 

The Agency has the authority to pursue money laundering cases, when appropriate, 

per 11 U.S.C. section 1956(c)(7)(D). 

9-38 
HB-3-3560 

G. Obstruction of Federal Audits (7 CFR 3560.463) 

So long as the requirements of 18 U.S.C. section 1516(a) are met, the Agency will 

pursue a criminal action against a person who, with the intent to deceive or defraud the 

United States, endeavors to influence, obstruct, or impede a Federal Auditor. 

9-39 

(02-24-05) SPECIAL PN 

Revised (02-15-19) PN 521 
Guide for Civil Monetary Penalty Assessment and Recommendation 

Assessment of Civil Penalties 

Prior to recommending Civil Monetary Penalty (CMP) actions, Loan Servicers are required to make every 

possible effort to work with borrowers to resolve issues of noncompliance, including encouraging borrowers to 

enter into a Workout Agreement with the Agency. In accordance with 7 CFR 3560.461(b), the Agency may, 

after notice and opportunity for a hearing, impose a CMP 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: 

 Submitting information to the Agency that is false. 

 Providing the Agency with false certifications. 

 Failing to submit information (such as annual financial reports) requested by the Agency in a 

timely manner. 

 Failing to maintain the property subject to loans made under this title in good repair and 

condition, as determined by the Agency. 

 Failing to provide management for a project that received a loan made under this title that is 

acceptable to the Agency. 

 Failing to comply with the provisions of applicable civil rights statutes and regulations. 

Factors for Consideration 

Civil penalties will 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: 

A. The gravity of the offense; 

B. Any history of prior offenses by the violator (including offenses occurring prior to the enactment 

of this section); 

C. Any injury to tenants; 

D. Any injury to the public; 

E. Any benefits received by the violator as a result of the violation; 

F. Deterrence of future violations. 

HB-3-3560 

Attachment 9-A 

Page 1 of 8 

(02‐24‐05) SPECIAL PN 

Added (02‐15‐19)   PN 521 
HB-3-3560 

Attachment 9-A 

Page 2 of 8 

The Factors for Consideration (A. through E. above) are discussed in the CMP Damage Factors Matrix 

Guidelines below. Sufficient evidence of one or more of the factors should lead to the conclusion that a 

violation is material. These should be the only factors that Loan Servicers are to consider when determining the 

amount of the penalty to assess. Rural Development may establish other factors to consider by regulation. 

Damages Calculation 

The CMP Damage Factors Matrix calculation shall not be a substitute for sound judgement and reasoning. The 

Matrix calculation is a scoring method to ensure a degree of consistency in the civility penalty amounts. The 

Matrix score is calculated by using the best estimate of the actual cost to cure the violation, assessing the degree 

of potential risk or harm for each violation based on the individual circumstances and the Factors for 

Consideration. You would then apply the best and most appropriate Weight Level. Identical violations that span 

multiple years should be considered together as one violation. Different violation types should not be combined. 

Civil penalties typically should not be recommended for only a single violation, unless the dire nature of the 

severity, such as a criminal offense or heightened risk of financial or physical harm to tenants exists. Please see 

the “CMP Damage Factors Matrix Guidelines” and the “Penalty Assessment Calculation Worksheet” at the end 

of this attachment for instructions on calculating civil penalties. The State’s National Office loan servicing 

Portfolio Management Analyst should be contacted if there are questions. 

Non-Monetary Violations 

As stated in Chapter 10.7 of HB-3-3560, the Loan Servicer must determine whether an unresolved nonmonetary finding of non-compliance should be elevated to a violation status. A non-monetary finding may be 

elevated to a violation because of the severity of the finding or because of the type of servicing effort that will 

be utilized to obtain compliance. Borrowers who fail to fully correct a finding by a date specified by the Agency 

in a written notice may be heading towards a default of their loan or grant documents, as stated in Chapter 10.5 

of this Handbook. 

When the Agency elevates a finding to a violation, it indicates a willingness to pursue the finding to the point of 

acceleration or civil monetary penalties. If the Servicing Office is unable to resolve non-compliance at the field 

office level, and concludes that a non-monetary finding should be viewed as a violation that could potentially 

lead to a recommendation for Civil Monetary Penalties, the Loan Servicer must complete the process of issuing 

Servicing Letters #1 and #2 as described in Chapter 10.10 of HB-3-3560, and Exhibit 10-2 Sequence of 

Servicing Letters. Servicing Letter #3-A (Handbook Letter 303-A (3560)), shall be used to notify the borrower 

of the Agency’s intent to pursue a civil monetary penalty enforcement action when there has been no response, 

or an inadequate response to Servicing Letters #1 and #2. 

The below table gives examples of potential non-monetary violations for which civil penalties may be 

considered. It should be noted that these are guidelines and are not requirements. The Agency will not pursue 

enforcement against a borrower in non-monetary violation if an approved Work-out Agreement is in place and 

is on schedule. As stated in HB-3-3560, Chapter 10.5, a borrower is considered to be in non-monetary default if 

the identified deficiencies are not cured within 60 days of notification and there is no Workout Agreement 

approved by the Agency, or the approved Workout Agreement is not on schedule 
Potential Non-Monetary Violations

Financial Reporting Violations Owner and Management Violations Property Violations  Delinquent or Unacceptable RD Form 

3560-7 or 3560-10 

 Delinquent or Unacceptable Management 

Documents 

o Management Certification 

 Refusing to address multiple 

findings, including accessibilhealth & safety 

 Delinquent or Unacceptable Audited 

Financial Statements, Year End Reports, or Borrower Certification of Performance Standards (Attachment 4-C) 

 Unacceptable Management 

o Unresponsive management 

o Refusing to place acceptable 

management 

 Failing to comply with enviro

mitigation requirements (Conyour State Environmental Cofurther guidance) 

o Unallowable project expenditures 

o Unauthorized or Fraudulent use of 

Reserve Account funds 

o Delinquent property taxes 

 Failing to meet Civil Rights o

Housing requirements (ConsNational Civil Rights Office guidance) 

o Delinquent property insurance o Forgery of supervised banking 

documents and transactions 

o Non-disclosure of IOI relationships o Use of an IOI without Agency 

consent

 Knowingly submitting false or altered 

statements, reports or documents to the Agency 

 Changes in Ownership and Security 

Structure 

o Unauthorized loans to property 

owner, including notes payable that become debts against property, and 3rd party debts 

o Unauthorized General Partner 

substitutions and ownership transfers 

(02‐24‐05) SPECIAL PN Added (02‐15‐19)   PN 521 
CMP Damage Factors Matrix Guidelines

 Use with the Penalty Calculation Worksheet. 

 Determine the best estimate of the actual cost to cure the violation for all consecutive years of noncompliance that are associated with t

best estimate for each category is: 

o Financial Reporting violations - The actual cost of delivery of the final report or reports. 

o Owner and Management violations – The actual amount of the unauthorized or fraudulent expense, withdraw, or disbursemento Property violations - The full actual repair or replacement cost of physical findings, accessibility, and health & safety items. F

Rights, or Fair Housing violations, consult with your State Environmental Coordinator or Headquarters Civil Rights Office, as 

guidance. 

 Assess the degree of potential risk or harm for each violation based on the individual circumstances using the Factors for Considerati

best and most appropriate Weight Level. Choose either column B, C, or D. Different violations within the same category should be ass

violations within a category that span multiple years should be considered as one violation and assessed as such. Do not combined diffe

 Generally, do not recommend civil penalties for only a single violation, unless the nature of the severity or risk of financial or physical 

otherwise. 

 The state’s HQ loan servicing contact should be notified if there are questions.

A. 

Factors for Consideration 

(7 CFR 3560.461(b)) 

B. 

Weight Level 1 (Penalty equals the cost 

to cure multiplied by 1) 

C. 

Weight Level 2 (Penalty equals the 

cost to cure multiplied by 1.5) 

Weight Level 3 

cure 

A. Gravity of the offense 

 Does the offense impede the 

government’s ability to perform regulatory oversite, adequately assess risk, accurately determine fiscal or physical health, or measure performance? 

 Does the offense potentially 

jeopardize the value of RD’s security? 

Financial Violations - 1-2 years delinquent 

o Non-reporting o Unacceptable reporting 

Owner and Management Violations – 1-2 years delinquent 

o Non-submission of acceptable 

management documents 

o Unacceptable performance 

Financial Violations – 2-3 years delinquent 

o Non-reporting o Unacceptable reporting 

Owner and Management Violations – 2-3 years delinquent 

o Non-submission of 

acceptable management documents 

o Unacceptable performance 

Financial Violat

o Non-repo Unaccep

Owner and Man

years delinquent 

o Non-sub

documen

o Unaccep

HB-3-3560 Attachment 9-A Page 4 of 8 
Owner and Management Violation -no 

timeframe 

o Unauthorized use of reserve 

account funds 

Property Violations 

o Unresolved physical findings 

not related to health & safety or 

accessibility. 

Points = 2 

Owner and Management Violations – no timeframe 

o Non-disclosure of IOI 

relationships 

o Use of an IOI without 

Agency consent 

o Unallowable project 

expenditures 

Property Violations 

o Unresolved physical 

findings of accessibility, not related to health & safety. 

Points = 4 

Owner and Mantimeframe 

o Unautho

or securi

o Unautho

property 

o Knowin

or forger

Property Violati

o Unresolv

violation

o Failing t

environmrequiremState En

o Failing t

Housing with youOffice) 

Points = 6 

B. History of prior offenses 

 Are there repeated violations 

that remain after proper notice and opportunity to cure are given by the Agency? 

First offense. Owner/agent has a history of fully addressing open findings within the stated timeframe after the receipt of Servicing Letters. Points = 0 

Not a first offense. Agency has previously issued Servicing Letters, pursued civil monetary penalties or legal action for the same violation resulting in a partial resolution. Points = 2 

Not a first offenpreviously issuepursued civil maction for the saresolution. Points = 3 

(02‐24‐05) SPECIAL PN Added (02‐15‐19)   PN 521 
C. Injury to tenants 

 Violation of laws put into 

place to protect tenants. Physical or financial injury (includes increased rents or loss of housing). A breach of duty owed to tenants by not meeting the reasonable and expected standard of care (i.e., attentiveness, prudence, and caution). Injuries are foreseeable if left unresolved. 

Minimal likelihood of injury to tenants if left unresolved. Points = 3 

Reasonable expectation that if left unresolved the violation would result in injury to tenants. Points = 6 

Situation has retenants. Points = 9 

D. Injury to public 

 Assessment of the harm to/loss 

of program integrity, physical or financial injury, loss of security value, or an increase in program assistance/costs to the public. 

Minimal likelihood of injury to public if left unresolved. Points = 1 

Reasonable expectation that if left unresolved the violation would result in injury to public. Points = 2 

Situation has rePoints = 3 

E. Benefits received by 

violator 

 Implied or actual dollar value 

of benefit or savings realized by not complying. 

 Unauthorized distributions, 

increased cash position of project. 

There are no direct owner/agent benefits or the increase in cash position of project is $3000 or less. Points = 2 

There are no direct owner/agent benefits, but the benefit to the project is over $3000. Points = 4 

The owner/agenby unauthorized amount. Points = 6 

HB-3-3560 Attachment 9-A Page 6 of 8 
F. Deterrence from future 

violations 

 The likelihood that imposing 

civil monetary penalties will deter subsequent violations. 

The imposition of civil monetary penalties will likely deter subsequent offenses resulting in CMPs. Points = 1 

There is a reasonable expectation, but no certainty, that imposing civil monetary penalties will deter subsequent offenses resulting in CMPs. Points = 2 

It is unlikely thapenalties will deresulting in CMPoints = 3 

Minimum # of points = 09 Maximum # of points = 30 

Total points are 17 or less: Total points are 18-24: Total points ar

Level one violation. Penalty equals the cost to cure multiplied by a factor of 1 

Level two violation. Penalty equals the cost to cure multiplied 

by a factor of 1.5 

Level three violcost to cure mul

(02‐24‐05) SPECIAL PN Added (02‐15‐19)   PN 521 
Project Name_________________ 

RD Project ID________________ Date________________________ 

Penalty Assessment Calculation Worksheet 

(Use this worksheet to calculate civil penalty amounts.) 

Minimum # of points = 09 Maximum # of points = 30 

Total points are 17 or less: Total points are 18-24: Total points 

Level One Violation. Penalty equals the cost to cure multiplied by a factor of 1 

Level two violation. Penalty equals the cost to cure multiplied by a factor of 1.5 

Level three vito cure multip

Name of Non‐Monetary 

Violation 

Best Estimate of 

the Cost to Cure 

Severity Level based on CMP Damage 

Factors Matrix ( One, Two or Three) 

Severity Level 

Points Assessment 

Amount of 

_________________ 

FYs of violation 

$_____________ 

A. Gravity – Level _____ B. History – Level _____ C. Injury Tenants – Level _____ D. Injury Public – Level _____ E. Benefits – Level _____ F. Deterrence – Level _____ 

_____ pts _____ pts  _____ pts _____ pts _____ pts  _____ pts 

Total of Points Assessed                                    (froSeverity Level = ______                              (1, 1.5 Amount of Penalty = $_                                (cost t

_________________ 

FYs of violation 

$_____________ 

A. Gravity – Level _____ B. History – Level _____ C. Injury Tenants – Level _____ D. Injury Public – Level _____ E. Benefits – Level _____ F. Deterrence – Level _____ 

_____ pts _____ pts  _____ pts _____ pts _____ pts  _____ pts 

Total of Points Assessed                                    (fro

Severity Level = ______                              (1, 1.5 Amount of Penalty = $_                                (cost t

_________________ 

FYs of violation 

$_____________ 

A. Gravity – Level _____ B. History – Level _____ C. Injury Tenants – Level _____ D. Injury Public – Level _____ E. Benefits – Level _____ F. Deterrence – Level _____ 

_____ pts _____ pts  _____ pts _____ pts _____ pts  _____ pts 

Total of Points Assessed                                    (fro

Severity Level = ______                              (1, 1.5 Amount of Penalty = $_                                (cost t

_________________ 

FYs of violation 

$_____________ 

A. Gravity – Level _____ B. History – Level _____ C. Injury Tenants – Level _____ D. Injury Public – Level _____ E. Benefits – Level _____ F. Deterrence – Level _____ 

_____ pts _____ pts  _____ pts _____ pts _____ pts  _____ pts 

Total of Points Assessed                                    (fro

Severity Level = ______                              (1, 1.5 Amount of Penalty = $_                                (cost t

*Additional pages should be added as needed* 
HB-3-3560

CHAPTER 10: COMPLIANCE VIOLATIONS, 

DEFAULTS, AND WORK-OUT AGREEMENTS

[7 CFR 3560.453]

10.1 INTRODUCTION

When routine monitoring of projects reveals noncompliance with program requirements, 

the Field Office must take immediate steps to notify the borrower and state of the need for timely 

corrective actions. To protect the security value of a property, it is in the Agency’s best interest 

to work with the borrower to resolve any compliance violations. Resolving situations of 

noncompliance is the main subject of this chapter.

Loan Servicers should be firm in dealing with the borrower or the borrower’s 

representative in matters of compliance violations. Because the management agent is not the 

party ultimately responsible for the loan, it is imperative that the borrower be directly apprised of 

and fully understands the consequences of default. Therefore, whenever any written servicing 

notice is sent to a management agent who is not the borrower, the borrower must also receive a 

copy of the notice. Loan Servicers need to employ courtesy, cooperation, and sound judgment 

when interacting with borrowers and management agents in any servicing situation.

A noncompliance situation is often resolved or deterred through a work-out agreement. 

This is a plan for resolving or deterring noncompliance that is developed and presented by a 

borrower to the Agency for approval. The Agency may or may not approve the proposed workout agreement. This chapter discusses the Agency requirements for work-out agreements.

10.2 ADDRESSING COMPLIANCE VIOLATIONS AND DEFAULTS

Borrowers are in default of their loan or grant agreements whenever they are not in 

compliance with the terms of the loan or grant agreement. Such defaults may be of a monetary 

nature, such as when borrowers do not make their loan payments, or of a nonmonetary nature, 

such as when borrowers have not maintained projects properly. Default may be triggered by 

events that are beyond the borrower’s control, such as changing markets that lead to prolonged 

vacancies. Nevertheless, being in default is a serious situation for a borrower and requires that 

every effort be made to resolve it.

Defaults may lead to foreclosure, loan liquidation, or the assessment of civil penalties. 

One significant step that can be taken toward resolving the default is for the Agency and the 

borrower to agree to a work-out agreement. A work-out agreement may also be used in certain 

cases to avert a default situation. The Agency will not pursue enforcement against a borrower in 

default (monetary or nonmonetary) if an approved work-out agreement is in place and on 

schedule. Thus, it is in the borrower’s best interest to work with the Agency to resolve 

compliance issues through a work-out agreement.

A work-out agreement is a proposal that is submitted by the borrower to the Agency for 

approval of changes in project operations, for additional time to restore compliance, or for 

servicing actions to assist in correcting identified deficiencies. There are several servicing 

options available under a work-out agreement, and the borrower and Loan Servicer should 

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consider all of them and evaluate which are the most appropriate for a specific problem project. 

This chapter explains how borrowers may enter into default of their loan or grant 

agreement and the different types of defaults that may occur. It describes the process by which 

the Loan Servicer notifies the borrower of compliance violations and the options available to 

remedy the noncompliance. The chapter then discusses work-out agreements and includes a 

separate section on Special Note Rents (SNRs), which enable borrowers to reduce rents to attract 

tenants. By reading this chapter, the Loan Servicer will understand how to systematically work 

with the borrower to resolve noncompliance, when it is appropriate and feasible for a borrower to 

enter into a work-out agreement, what are the required terms of the agreement, and how to 

monitor borrower compliance with the work-out agreement.

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SECTION 1: TYPES OF DEFAULTS [7 CFR 3560.452]

10.3 OVERVIEW 

Borrowers in violation of the terms of the loan or grant documents for the project or 

applicable Federal regulations, including a work-out agreement, who fail to fully correct a 

deficiency by a date specified by the Agency in a written notice are in default of their loan or 

grant documents. 

Defaults can be of a monetary or nonmonetary nature. The Agency will initiate 

appropriate enforcement actions against any borrower in default. 

10.4 MONETARY DEFAULT 

A project that is in monetary default is defined as one that is delinquent for more than 60 

days. Projects with monetary violations include those for which the loans have been accelerated 

and of which the borrowers are in bankruptcy. A project is delinquent when a loan payment is 

more than 10 days past due. Project payments are due on the date specified on Form RD 3560-

52, Promissory Note. 

Monetary default may warrant the development of a work-out agreement or initiation of 

enforcement actions by the Agency that include termination of a management agreement, 

receivership, suing for performance, collection of unauthorized assistance, or denial of a rent 

increase. 

10.5 NONMONETARY DEFAULT 

Nonmonetary defaults include, but are not limited to, failing to maintain project reserves, 

failing to adequately maintain the physical condition of the property, failing to comply with 

environmental mitigation measures, occupying units with ineligible tenants without prior Agency 

approval, charging incorrect rents, failing to meet fair housing requirements, and failing to 

properly report to the Agency. A borrower will be considered in nonmonetary default if the 

identified deficiencies are not cured within 60 days of notification. 

Attempts to resolve nonmonetary defaults should be handled whenever possible at the 

Field Office level with appropriate guidance and assistance from the State Office. 

Environmental concerns, such as failure to comply with mitigation measures, should be reviewed 

with the State Environmental Coordinator for further guidance. The State Director should 

counsel with the Office of General Counsel (OGC) for advice, if needed, in servicing those cases 

where nonmonetary defaults cannot be resolved at the Field Office level. These actions may 

include liquidation of the account, see Chapter 12. 

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SECTION 2: CONDITIONS OF CONCERN, COMPLIANCE 

VIOLATIONS, AND DEFAULTS 

10.6 AGENCY CLASSIFICATION SYSTEM 

The Agency has developed a classification system that describes the servicing status of 

each operational multi-family housing project. This classification system provides a picture of 

the status of the housing portfolio and flags those projects that need special servicing and/or 

monitoring. Exhibit 10-1 shows how projects are classified. 

The Agency’s classification system is to be used to focus servicing efforts. Projects 

classified as a D or a C should receive first priority when allocating resources to address 

portfolio concerns. Internal supervisory reviews should primarily examine how Loan Servicers 

are working to address projects with servicing concerns. 

The classification system will be maintained on the Multi-Family Integrated System 

(MFIS). Servicing officials are responsible for making sure that MFIS is current and accurately 

reflects a project’s servicing status. The supervisory visit and engagement review are key events 

for updating a project’s servicing status. Chapter 9 of HB-2-3560 describes the Agency review 

process in more detail. 

Exhibit 10-1 

Classification System of Operational Projects 

Class D includes: 

• Projects in nonmonetary default having an unresolved violation for 

more than 60 days from the date of Handbook Letter 301 (3560), 

Servicing Letter #1; and 

• Projects in monetary default that are delinquent for more than 60 

days 

Class C includes: 

• Projects with an unresolved finding or violation not associated to a 

Workout Plan and/or Transition Plan; and 

• Projects with an unresolved violation for less than 60 days from the 

date of Handbook Letter 301 (3560). 

Class B includes: 

• Projects with findings or violations associated to an approved workout plan and/or transition plan that is on schedule. 

Class A includes: 

• Projects with no unresolved finding or violation. 

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10.7 FINDINGS 

A finding is determined when the Agency “finds” that a borrower is not operating in 

accordance with the loan or grant agreement, with Agency regulations, or with applicable local, 

state, or Federal laws. When the Agency discovers a deficiency in a project that requires 

correction but is not the equivalent of a violation or an unacceptable summary level finding 

during an inspection or review report, the Agency must notify the borrower of this finding. 

Depending on the severity of the finding, the servicing official may advise the borrower of the 

finding either orally, or in writing through a monitoring letter. Should the finding not be 

corrected after at least one written notice has been sent to the borrower with a specified date by 

which the finding must be corrected, the Loan Servicer must determine whether the issue should 

be elevated to a violation status. When the Servicing Office concludes that the finding should be 

viewed as a violation that could lead to a default, the Loan Servicer must begin the process of 

issuing the servicing letters described in Paragraph 10.10. 

10.8 VIOLATIONS 

A violation is a finding that the Servicing Office escalates because of its severity or 

because of the type of servicing effort that will be needed to obtain compliance. When the 

Agency designates a finding as a violation, it indicates a willingness to pursue the finding to the 

point of acceleration to have it corrected. Compliance violations include, but are not limited to, 

any unacceptable summary level finding on the physical inspection report, project management 

and occupancy review, or engagement review that could be updated at any time. Examples 

include failing to make required contributions to project reserves, failing to adequately maintain 

the exterior physical condition of the property under Agency standards, failing to comply with 

environmental mitigation measures, occupying units with ineligible tenants without prior Agency 

approval, charging incorrect rents, and failing to properly report to the Agency. 

10.9 KEY STEPS IN ADDRESSING COMPLIANCE VIOLATIONS AND DEFAULTS 

The Agency must respond quickly and systematically whenever a project is identified as 

being in noncompliance with program requirements. In responding to a noncompliance 

situation, the Loan Servicer will take some or all of the following steps and update the servicing 

status on MFIS: 

• Notify the borrower of the violation and request corrective action; 

• Meet with the borrower to discuss the problem and possible servicing actions to 

remedy the problem; 

• Review any proposed work-out agreement developed by the borrower and suggest 

acceptable servicing actions if appropriate; 

• Issue a problem case report; and 

• Initiate enforcement actions to motivate the borrower to restore compliance. 
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These steps are discussed in detail in the following sections. 

10.10 NOTIFICATION TO BORROWER OF SERVICING PROBLEMS 

The Agency must notify the borrower using formal servicing letters that state the need for 

corrective action to be taken. It is not the Agency’s responsibility to come up with solutions to 

the problems. Rather, it is the borrower who must identify what corrective actions will take 

place immediately or over time through a work-out agreement. 

The Field Office will use a series of servicing letters to communicate with the borrower 

until the problem is resolved. Copies of the letters must be sent to the management agent of the 

property that is the subject of the letters if the owner is not the management agent. Exhibit 10-2 

shows the sequencing of these servicing letters. 

Handbook Letter 301 (3560) serves to trigger the start of a 60-day period for 

nonmonetary violations and a 45-day period for monetary violations, at the end of which the 

borrowers are in default of their loan agreement if the situation has not been resolved. 

Resolution may take the form of action proposed by the borrower and approved by the Agency, 

or it may take the form of enforcement actions instituted by the Agency when the borrower fails 

to respond or responds inadequately. 

A. Preliminary Notification 

When a borrower becomes delinquent on a payment, an automatically generated 

Delinquency Billing Statement is mailed to the borrower. The borrower will be in default 

if the loan payment is not made in full within 60 days of this notice. If the borrower does 

not submit the loan payment before the payment is 30 days past due, the borrower 

receives Handbook Letter 301 (3560). If the borrower submits the full payment, 

including any applicable late fees (see Chapter 4, paragraph 4.4 on late fees) the Loan 

Servicer does not take any further servicing action. 

During an on-site monitoring visit the monitors should meet with the borrower to 

review the initial results of the visit, including a discussion of compliance violations. See 

Chapter 9, paragraph 9.6 B of HB-2-3560 for more information about on-site monitoring 

visits. 

Example: Borrower B’s project has several crumbling steps in the stairwell. Since 

this represents an unacceptable condition of exterior maintenance, which is a compliance 

violation, the Loan Servicer notifies the borrower during the on-site visit on this 

violation. 

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Exhibit 10-2 

Sequence of Servicing Letters 

Letter Nonmonetary Monetary 

Preliminary 

Notification 

The Loan Servicer informs the 

borrower of violations during a 

wrap-up meeting of a monitoring 

visit. 

A Delinquency Billing Statement 

is automatically sent to borrower 

when the borrower becomes 

delinquent (10 days past due). 

Letter #1 Sent upon evidence of violation and 

no later than 30 days after the 

monitoring visit. Date of letter 

signifies beginning of 60 day period 

to default. 

Sent no later than when payment is 

35 days past due. 

Letter #2 Sent sometime after 15 days if 

borrower fails to respond or responds 

inadequately to Letter #1. Notifies 

borrower of date by which they will 

be considered delinquent if violation 

not corrected (60 days after date of 

Letter #1). 

Sent after payment is 45 days past 

due. Notifies borrowers of date by 

which they will be classified a D 

project (60 days after payment due 

date). 

Letter #3 Sent at least 60 days after date of 

first letter and at least 15 days after 

Letter #2 notifying borrowers that 

they are in default and warning of 

enforcement action if problem is not 

corrected within 15 days. 

Sent 60 days after payment due 

date notifying borrower that the 

Agency will take legal action to 

cure the default and warning of 

enforcement action if payment is 

not made within 15 days. 

B. Borrowers with Multiple Servicing Issues 

If a borrower is in violation in several different areas, the Handbook Letter 301 

(3560) should identify all the violations. If sent, Handbook Letter 302 (3560) would 

reference “ongoing compliance violations” to cover multiple servicing issues. The series 

of letters continues until each violation has been resolved. 

A servicing letter may cite conditions of concern (see Paragraph 10.7) along with 

compliance violations. However, only the cited compliance violations could lead to a 

default status if left unresolved. If the borrower resolves all violations within 60 days, 

they will not default even if the conditions of concern have not been resolved. 

If at any time the Agency discovers that a borrower who has received a servicing 

letter has another problem that warrants a servicing letter, the letter will be sent, 

triggering a second series of letters. These letters can run separately from and 

independent of the first series of letters or they may be combined at some point. 

However, it is important that the Loan Servicer track the separate violations cited by the 

date of each Handbook Letter 301 (3560) so that Handbook Letter 303 (3560 correctly 

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identifies the violation that has resulted in the default by a certain date. 

10.11 EVALUATING THE PROJECT 

When the Loan Servicer has sent two servicing letters to notify a borrower of problems 

with a project, the Loan Servicer must evaluate the project to establish whether it is in the 

Agency’s best interests to attempt to work with the borrower to preserve the subject project. The 

Loan Servicer will use the procedures outlined in Chapter 6. Such an evaluation should come 

before any meeting with the borrower so that the Loan Servicer is familiar with the project and 

its status. 

10.12 MEETING WITH THE BORROWER 

When the borrower proposes a work-out agreement in response to Handbook Letter 301 

(3560), or when Handbook Letter 302 (3560) must be sent, the Loan Servicer must request a 

meeting with the borrower. The purpose of the meeting is to identify and agree upon the 

servicing problem, establish the underlying causes of the problem, and begin to develop the 

parameters of a work-out agreement. The Loan Servicer will discuss possible Agency servicing 

actions. 

It is the responsibility of the borrower—not the Agency—to propose and develop an 

acceptable work-out agreement. However, borrowers may delegate authority to their 

management agent to develop a work-out agreement. A borrower may do this by signing a 

statement in the management plan or certifying in a letter to the Agency that the management 

agent has the authority to act on their behalf. 

Once the work-out agreement is proposed, the Loan Servicer may propose servicing 

actions that are appropriate and acceptable to the Agency. Section 4 of this chapter describes the 

special servicing actions available to Loan Servicers. 

10.13 SELECTING SERVICING OPTIONS 

The Agency may agree to various servicing options to resolve the compliance problems 

depending upon the circumstances of the noncompliance. The deciding factor will often be the 

quality of management. 

A. Poor Management and Noncompliance with Program Requirements 

Where management is poor and/or there is noncompliance with program 

requirements, the Agency may agree to: 

• Borrower training. Training of resident managers may be charged as a project 

expense if directly related to improving project operations; 

• New management. Hiring or changing resident managers or management agents; 

• Improving maintenance. Change to normal, preventive, and long-term maintenance 

and repair programs to make the project more marketable; 

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• Improving budget and record keeping, and using monthly reports. Major 

expenditures should be reviewed for appropriateness; and 

• Improving outreach and marketing. Project marketing plans, including the 

Affirmative Fair Housing Marketing Plan, should be reviewed and updated as 

appropriate. 

B. Acceptable Management, but Marketability and Cash Flow Problems 

Where management is acceptable, marketability and cash flow problems may be 

resolved through one or more of the following actions. 

• Upgrading project desirability by: 

◊ Performing necessary and preventive maintenance; 

◊ Improving curb appeal at the project; 

◊ Improving security for tenants, such as installing deadbolts and more lighting; and 

◊ Improving communication between management, residents, and the community. 

• Reducing expenditures by reviewing the appropriateness of operating and expense 

levels in relation to services rendered. It is not intended that management fees be 

adjusted as a condition for consideration of servicing options. Operation and expense 

levels may be reduced by: 

◊ Containing operation and maintenance costs that will not disrupt project 

operations; 

◊ Renegotiating contracts with suppliers of material and services; and 

◊ Temporarily deferring noncritical maintenance, provided tenant safety and project 

marketability are preserved. 

• Temporarily reducing or deferring reserve contribution levels. 

• Increasing revenues by: 

◊ Injecting non-project revenues; 

◊ Requesting rental assistance; or 

◊ Permitting temporary incentives to improve occupancy. 

• Permitting a release of the rental assistance payments that would ordinarily go for 

debt service to be used for project operation and maintenance. 

C. Acceptable Management, but Lack of Project Demand 

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Where management is acceptable, but there is a lack of project demand or a problem 

of obtaining and/or retaining eligible tenants, the problems may be resolved by:

• Granting occupancy waivers;

• Changing the project designation; and

• Implementing a SNR, see Section 6 of this chapter.

10.14 THE PROBLEM CASE REPORT

The Loan Servicer must develop a problem case report using Form RD 3560-56 Report 

on Real Estate Problem Case for the State Director if the Loan Servicer has sent a borrower 

three letters requesting corrective action to a compliance violation and the borrower has failed to 

provide an adequate response.

Field office servicing officials will forward the problem case report describing the 

violations of Agency requirements by the borrower to the State Director along with 

recommended enforcement actions. The time frame for this action should be within 120 days of 

concluding that efforts to achieve compliance have been unsuccessful.

The State Director will review the problem case report and respond to the Field Office 

within 30 days of receipt of the problem case report indicating the action to be taken. The State 

Director’s response will be either:

• An agreement with the Loan Servicer’s proposal for enforcement; or

• A directive for alternative servicing.

10.15 ENFORCEMENT ACTIONS

If a borrower fails to provide an acceptable work-out agreement or fails to comply with 

the work-out agreement, the Agency will initiate enforcement actions when liquidation is not in 

the Government’s or the tenants’ best interests. This might occur in the case of defaults that do 

not affect the health and safety of tenants and where the cost of liquidation is significant relative 

to the violation, or where the costs of liquidation and providing adequate tenant protections is 

high. Available enforcement actions that the Agency can take include:

• Termination of the management agreement. The Agency may terminate the 

management agreement and require the borrower to hire new management;

• Receivership. The Agency may appoint a third party to manage the project. When 

this becomes necessary, the State Director must contact OGC for assistance and 

provide them with alternative management agents;

• Suing for performance under the loan document. The procedures for Civil 

Monetary Penalties are provided in Chapter 9.27. In such cases, the Office of General 

Counsel will provide assistance; and

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• Collection of unauthorized assistance. The procedures outlined in Chapter 9 will 

be followed.

A. Liquidation

When it is in the Government’s or the tenants’ best interest to liquidate, or if 

enforcement actions have been unsuccessful, the Agency will initiate liquidation through 

either:

• Voluntary liquidation; or 

• Foreclosure.

The Agency may proceed directly to liquidation if doing so will not adversely affect 

tenants. Normally this is reserved for cases where the borrower has abandoned the 

project or a partnership has been dissolved, leaving no legal entity in place to oversee the 

property. Properties where serious health and safety concerns exist are the most likely to 

go straight to enforcement or liquidation. Chapter 12 provides details on liquidation.

B. Debt Settlement

If the property is worth less than the outstanding Agency debt, it may be in the 

government’s best interest to settle the debt using its debt settlement procedures. 

Compromise offers to settle outstanding debts may be part of a work-out agreement 

accompanying a transfer. Chapter 12 provides further details on debt settlement.

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SECTION 3: DEVELOPING A WORK-OUT AGREEMENT 

[7 CFR 3560.453]

10.16 OVERVIEW OF WORK-OUT AGREEMENTS 

A work-out agreement is a proposal submitted by a borrower to the Agency for approval 

of changes in project operations, additional time to restore compliance, or other special servicing 

actions to assist in correcting identified deficiencies. A borrower may submit a work-out 

agreement at any time in response to Agency notification of compliance problems or prior to that 

if the borrower feels that noncompliance is imminent. 

The work-out agreement may be a very simple one page plan for resolving a single 

problem, or it may be a more complex document of several pages that describes several plans of 

action to resolve a more complicated problem. If a borrower does not develop a work-out plan, 

the Loan Servicer must develop a problem case report, in accordance with Paragraph 10.14. 

Acceptable and successful work-out agreements depend upon some flexibility on the part 

of the Loan Servicer and the borrower, thoughtful and project-specific servicing, and thorough 

and consistent monitoring that serves to track the progress of the agreement. 

10.17 CONDITIONS WARRANTING A WORK-OUT AGREEMENT 

Serious compliance deficiencies that cannot be resolved promptly may warrant the 

development of a work-out agreement. Such conditions may reflect a financial, physical, fair 

housing, or occupancy deficiency. 

A. Financial Deficiencies 

Financial deficiencies that may require a work-out agreement include: 

• Inadequate cash flow to meet project needs. Cash flow should be adequate to pay 

Agency debt, meet reserve requirements, pay taxes, pay insurance, pay other project 

expenses, and pay any authorized return on owner investment when earned; 

• Projects that are 60 days past due; 

• Seriously underfunded reserve accounts that cannot be brought up to required levels 

within a normal budget cycle or where unauthorized withdrawals have been made; 

and 

• Borrowers who have not adhered to program requirements such as paying taxes, 

maintaining insurance, or submitting required financial information. 

B. Physical Deficiencies 

Physical deficiencies that may require a work-out agreement include failure to 

maintain decent, safe, and sanitary housing opportunities for residents and maintenance 

that has been deferred for so long that it has become a financial burden to the project. 

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C. Fair Housing Deficiencies 

Fair housing or Section 504 violations and problems with tenant certification and 

project occupancy requirements may warrant the development of a work-out agreement. 

D. Occupancy Deficiencies 

Serious vacancies that threaten property viability where management can furnish 

evidence that they have made efforts to increase occupancy may warrant a work-out 

agreement. 

10.18 ELIGIBILITY FOR WORK-OUT AGREEMENTS 

The Agency will consider work-out agreements only for properties: 

• That are deemed to be program property; or 

• Whose owners demonstrate a commitment to correcting property deficiencies. 

A. Program Property 

The Loan Servicer must establish whether the project is suitable for the program 

using the guidance provided in Chapter 6. If the project is deemed to be non-program 

property, a work-out agreement must not be considered. 

B. Owner Evaluation 

An owner who has not maintained compliance with prior work-out agreements and 

has historically ignored Agency requests for corrective actions must not be considered 

eligible for a work-out agreement. 

10.19 CONTENT OF A WORK-OUT AGREEMENT 

All work-out agreements must be in writing and executed by the borrower, or the 

borrower’s designated representative, the management agent who manages the project (if 

different from the borrower), and the Agency before they take effect. The work-out agreement 

must correct all deficiencies that have been identified in a project. 

Exhibit 10-3 lists the information that must be included in a work-out agreement. 

10.20 CONDITIONS PLACED ON THE BORROWER 

Borrowers must forgo and cannot recoup the annual return to owner for the budget year 

in which a work-out agreement is in effect. 

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Exhibit 10-3 

Recommended Format for Servicing Work-out Plan (SWP) 

Background information. Provide history and describe past goals and accomplishments. 

Description of the problem(s) to be solved. Identify project weaknesses and needs making sure to cover: 

• Compliance deficiencies (e.g., delinquent amounts, underfunded reserves, nonpayment of taxes, deferred 

maintenance, unacceptable tenant file records, noncompliance with accessibility and fair housing issues, 

etc.); and 

• Serious financial concerns (e.g., high vacancies, inadequate cash flow, high Operations & Maintenance 

(O&M) expenses.). 

Underlying causes of problem. Attempt to identify the cause of the problem. Attempt to recognize when 

problems identified are symptoms or the results of the same underlying causes. 

Overview of plan to correct problem. Provide a summary of the plan and identification of key assumptions used 

in projections. 

How the plan will work. Provide details on how the plan will work with attached supporting documentation (i.e., 

budget), when appropriate. A timetable for completing the work-out plan and key components of the plan (i.e., 

plan calling for capital improvements should identify the improvement proposed, cost with supporting estimates, 

source of funds, and completion dates). 

Anticipated results. Clearly identify the goals to be reached. Have periodic, measurable interim goals to 

determine that full implementation is on track. 

Written work-out plans. All work-out plans must be in writing and must be executed by the borrower or the 

borrower’s designated representative, and Rural Development. A copy of the executed work-out plan will be 

placed in the case file; copies will be given to the borrower, management agent, and the State Director. 

Time frames for implementing and completing the plan. Prior to approval, all plans must be evaluated on 

whether the plan realistically achieves the objectives of the loan. All plans must be reevaluated at the end of the 

two-year period. If the plan includes a time frame for completion of more than two years, the plan must be revised 

and reexecuted at the end of each year to determine if satisfactory progress has been made. 

Monitoring working plans. The following statements must be a part of the plan immediately above the signatory 

line: 

“The management agent is responsible for making quarterly progress reports with regard to plan 

compliance to Rural Development and the borrower. The first report will be due no later than 

100 days from the date of Rural Development approval and every 100 days thereafter.” 

Check appropriate box: 

 Initial SWP 

 Renewal of SWP 

 Renegotiated SWP. There have been ______ previous SWPs on this account. 

10.21 PRIORITIES IN MEETING EXPENDITURES 

In developing work-out budgets for projects experiencing cash-flow difficulties, the 

following priorities will be used: 

• First priority is to meet obligations to the prior lienholder, if any; 

• Second priority is for critical project operating and maintenance expenses, including 

taxes and insurance; 

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Reserve Account Deficiencies 

When seriously underfunded reserve levels 

are involved in an extended work-out time 

period, the Loan Servicer should reassess the 

reserve level for the project and establish a new 

reserve level, if appropriate. A capital needs 

assessment can be useful to make this 

determination. If re-funding the reserve to its 

new level will require more than two years, the 

borrower and Loan Servicer may want to 

consider additional work-out terms so that the 

project is not in continual need of requiring a 

work-out agreement. 

• Third priority is for Agency debt payments; 

• Fourth priority is for reserves; and 

• Fifth priority is for other project needs. 

10.22 LENGTH OF TERM AND AUTHORITIES 

A. Term of Work-Out Agreement 

The maximum term of a work-out 

agreement is two years. All 

agreements must be reevaluated 

annually as well as at the end of the 

two-year period. The evaluation is 

based on whether the plan realistically 

achieves financial viability and 

otherwise meets the objectives for 

which the loan was made. If an 

approved work-out agreement calls for 

actions that extend beyond a two-year 

period, borrowers must submit an 

updated and if necessary, revised 

work-out agreement to the Agency for 

approval. The updated work-out 

agreement must be submitted to the Agency 30 days prior to the expiration of the workout agreement in effect. The Agency may reexecute the agreement if satisfactory 

progress has been made. 

Normally, work-out agreements should not exceed two years, especially if a plan calls 

for less than full payment on an Agency loan, or less than full contribution to the reserve 

account. Plans not meeting these criteria are normally not considered as viable and 

feasible. 

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B. Authority to Approve Work-Out Agreements

1. Field Offices

Delegated Field Office staff can approve work-out agreements that correct 

deficiencies within 12 months, except when the agreement includes a special servicing 

action per Section 4. 

2. State Offices

Delegated State Office Staff approves any work-out agreements that:

• Are for longer than 12 months;

• Require reduced or zero loan payments;

• Require contributions to reserves of less than that which is required plus 10 percent of 

the delinquent amount; or

• Include loan adjustments or writedowns.

3. National Office

State Office must have submitted to National Office for concurrence when borrowers

are requesting reduced or zero RHS loan payments. The following documents must be 

submitted to the National Office:

• Copy of the proposed Work-Out Agreement;

• Proposed Budget as part of the Work-Out Agreement;

• Pro Forma Budget once the Work-Out Agreement is completed; and

• Recommendation justification from State Office.

10.23 AGENCY REVIEW AND APPROVAL [7 CFR 3560.453(b)]

Work-out agreements are a tool that the Agency can use to work with the borrower to 

effectively resolve defaults if the borrower is acting in good faith to actively propose realistic 

corrective actions. Approval of a work-out agreement is not guaranteed to a borrower. Failure to 

approve a work-out agreement is not an adverse action by the Agency because the Agency is not 

required to grant approval of modifications to the terms of the loan for borrowers in default; thus, 

the Agency is not taking away any borrower rights by not approving the work-out agreement. 

Therefore, failure to approve a work-out agreement is not appealable by a borrower, although the 

Agency’s decision may be reviewed.

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A. Evaluation of Work-Out Agreement 

The Agency is under no obligation to offer or agree to any special servicing actions 

contained within a proposed work-out agreement. In evaluating the borrower’s proposal, 

the Agency will accept work-out agreements that meet the following criteria: 

• The proposed actions effectively correct the deficiency;

• The proposed time frame for correction is reasonable and realistic for correcting the 

deficiency;

• There is evidence of adequate borrower commitment of resources, considering the 

cause of the problem, (e.g., a lesser commitment may be appropriate if the problem 

was caused by circumstances beyond the borrower’s control);

• The proposed special servicing actions for the Agency (e.g., reamortization, 

writedown) is in the interest of the Government and the tenants, and the costs of 

• continuation are not more than the costs of liquidation and providing tenant 

protection; and

• The proposed actions are consistent with the borrower’s management plan. If the 

proposed actions are not consistent, the management plan must be updated. 

B. Procedures Following Approval of Agreement

The approved work-out agreement will be signed and dated by the Approval Official, 

the borrower, and the management agent, if different from the borrower, and will be 

attached as an addendum to the management plan for the project.

10.24 CANCELING A WORK-OUT AGREEMENT

A work-out agreement may be canceled by whoever approved it 10 days after 

discovering a borrower’s noncompliance with its terms. If the official who originally approved 

the work-out agreement is not available, then the official who has assumed that individual’s 

responsibilities will be responsible for canceling the agreement and notifying the borrower.

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SECTION 4: SPECIAL SERVICING ACTIONS 

10.25 SPECIAL SERVICING ACTIONS THAT MAY BE A PART OF A WORK-OUT 

AGREEMENT 

A number of special servicing actions may be proposed and approved as part of a workout agreement. As shown in Exhibit 10-4, these servicing actions may be divided into two broad 

categories: changes in project operations and changes to the loan account. This section 

describes other servicing actions, most of which are less extreme. 

A. Servicing Actions to Change Project Operations 

The borrower may propose one or more servicing actions that will produce a change 

in project operations. Some of these actions are discussed in detail in other sections. 

Exhibit 10-4 

Special Servicing Actions That May Be Part 

of an Approved Work-out Agreement 

Changes in Project Operations

• Rent changes and/or preparation of a 

new budget 

• Occupancy waivers 

• Temporary incentives to improve 

occupancy 

• Special note rents (SNRs) 

• Changing management agent or 

management plan 

• Changing project designation 

• Transfer of ownership 

• Substitution of partners 

Changes to the Loan Account

• Loan reamortizations 

• Loan adjustments (writedowns) 

• Loan consolidation 

• Deferral of payments 

• Prepayment/compromise offer 

• Providing rental assistance (if 

available) 

• Recasting the entire loan (i.e., “starting 

fresh”) 

1. Rent Changes or Preparation of a New Budget 

To achieve financial stability, the borrower may propose a new budget that shows a 

change in rents or operation costs. In evaluating the request, it may be appropriate for the 

Agency to analyze the current market in which the project is located to see whether the 

project rents compare favorably with rents for similar properties in the market. Rent 

incentives will be allowed as described in paragraph 10.25 A.3 of this section, but the 

change and accompanying budget will be conditionally approved by the Agency subject 

to meeting the requirements in Agency regulations, see Chapter 7 of HB-2-3560. If the 

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Agency receives comments from tenants that warrant a different decision from the one 

made when the work-out agreement was conditionally approved, the Agency must inform 

the borrower of these discoveries and make any needed adjustments to the conditionally 

approved budget. 

In reviewing these changes, the Loan Servicer must evaluate both short- and longterm budget projections so as to establish whether the project is likely to achieve its 

financial goals during the work-out period, and whether the project is likely to achieve 

and maintain financial viability in the long term. The Loan Servicer must evaluate 

whether projections show repayment ability after the work-out agreement objectives are 

met based on realistic vacancy, rent rate, and/or reamortization assumption. 

Any projected capital improvements shown in the budget must be accompanied by 

statements that describe the work to be done, the estimated costs with supporting 

material, the projected time frame for completing the work, and the source of funds to be 

used for the improvements. 

2. Occupancy Waivers 

When a project is experiencing high vacancies and eligible tenants are not available, 

the borrower may request to temporarily solve the problem by renting to ineligible 

tenants. Ineligible tenants might be individuals whose incomes or family sizes are above 

the maximum limits or who do not meet an occupancy requirement, such as an age limit. 

A request to rent to ineligible tenants may be approved by the Loan Servicer based on 

the following determinations: 

• There are no eligible persons on the waiting list; 

• The borrower has made a diligent but unsuccessful effort to rent any vacant units to 

an eligible tenant; and 

• The borrower will continue to seek eligible tenants and will submit the following to 

the Field Office; 

◊ Form RD 3560-29; and

◊ A report of efforts made to locate eligible tenants. 

The borrower must agree to the following conditions: 

• The units may be rented to ineligible tenants for no more than one year, following 

which the lease must convert to a monthly lease. A statement to this effect must be 

included in the lease; 

• Tenants who are ineligible because their household income exceeds the maximum for 

the project will be charged the Agency-approved SNR, if applicable; and 

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Temporary Incentives 

to Improve Occupancy 

1. Security deposit reductions or waivers 

and extended security deposit 

payment period. 

2. Reduced rents in the form of rebates, 

coupons, or a temporary agreement. 

3. Free rent. 

4. Reduced or free utilities. 

5. Referral fee payments. 

6. Rent-up gift to tenant, such as a 

savings bond or gift certificate. 

• Without Agency approval, management may assign a larger or smaller unit than the 

household needs if the household is otherwise eligible. Tenants must agree to transfer 

to a correctly sized unit when one becomes available and must pay all costs 

associated with moving. A statement to this effect must be included in the lease. 

3. Temporary Incentives to Improve Occupancy 

The borrower may request temporary incentives to improve project occupancy. 

These incentives may not exceed the life of the work-out agreement. The Agency may 

grant such incentives when project management has been acceptable and under the 

following conditions: 

• The project is encountering 

unacceptable vacancy levels. 

• The incentives are short-term, modest, 

and consistent with program objectives. 

• Recipients are given a clear 

understanding of the extents and limits 

of the incentives. 

• The use of incentives is fully accounted 

for on project budgets and annual 

reports. 

• Occupancy incentives will be paid from 

the following sources: 

◊ Non-project sources; 

◊ Forgone return to owner; and 

◊ Project funds when it can be shown to be cost-effective, which means that the 

revenues derived will outweigh the costs of providing the incentives. 

4. Special Note Rents 

The borrower may request a SNR to reduce the note rate rent to attract tenants who 

can afford to pay more than 30 percent of their incomes in rent and utilities but who will 

not pay the existing note rate rent. This servicing action is discussed in detail in Section 

6 of this chapter. 

5. Changing the Management Agent or Management Plan 

Where poor management is evidenced by a record of failing to comply with Agency 

requirements, the borrower may elect to change management. Where the Agency has 

notified the borrower of the need to change management, financial incentives under 

work-out agreement provisions may not be approved until the borrower changes 

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management, or agrees to change management within a reasonable time frame. 

6. Changing the Project Designation 

When a market has changed such that the type of tenant who would qualify for the 

project is no longer available and vacancies are resulting, the borrower may request a 

change in project designation. The State Director will consider such a change when the 

following information has been provided: 

• The complete borrower case files will be submitted together with the Loan Servicer’s 

specific recommendations and analysis of the present and long-term situation; 

• Market feasibility documentation, which may include inquiry lists from the project or 

waiting lists at other nearby and similar properties, which shows that other tenants are 

available to occupy the project. Market feasibility documentation must also clearly 

indicate that the present long-term marketability of the project is significantly 

changed from the original market, and must include the appropriate demographic 

information that reflects the population trends in the area. The market feasibility 

documentation must also show if the demand is for the bedroom-sized units in the 

project or if different sized units would be more desirable; 

• A summary of all servicing actions taken by the Agency to aid the borrower in 

maintaining the present designation; 

• A summary of all actions taken by the borrower to effectively market the units to 

potential eligible tenants; 

• A summary of the impact the change will have on any existing tenants, rent subsidy 

needs, and the community as a whole; and 

• A summary of any needed or required physical modifications and analysis of cost 

feasibility to complete the modifications, including modification to unit sizes in terms 

of number of bedrooms. 

7. Transfer of Ownership 

In some cases, the only means of addressing project concerns is through replacement 

of the borrower. Some reasons that may require a transfer of ownership include: 

• Illness or death of a borrower; 

• Financial difficulties that cause a borrower to terminate his or her business operation; 

and 

• Fraudulent activity, as determined by the Office of the Inspector General (OIG). 

Where work-out agreements call for a change in the borrower, the Agency may 

temporarily approve financial concessions contingent upon the borrower agreeing to seek 

a transfer of ownership. The borrower must agree to provide evidence that ownership 

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replacement is being actively pursued. Should ownership replacement not be achieved 

within an agreed-upon time frame, liquidation of the account may be appropriate.

When a transfer occurs as a result of noncompliance, the transferee (new borrower) 

must provide a plan for bringing the project into compliance as part of the application 

package. For example, the loan payments and reserve account may be behind schedule. 

The transferee provides a plan that identifies the source of funds to meet these conditions.

Chapter 7 provides the details on approving and processing transfers of ownership.

8. Substitution of Partners

The borrower may request a substitution of general partners as a way to inject new 

resources into the borrower entity. Chapter 5 provides the details on approving and 

processing substitution of partners.

B. Changes to the Loan Account

Proposed servicing actions may require changes to the loan account such as those that 

are described in Chapter 11.

1. Deferral of Payments

Deferring any debt payment to the Agency is an extreme measure that should be used 

as a last resort. Deferring a portion of the Agency debt and using this deferred amount to 

build up reserve funds may only be approved when the funds are being used to pay 

identified critical project needs. For example, when a roof must be replaced within the 

next two years, the work-out agreement may call for deferring payments in an amount 

equal to the cost of replacing the roof and this amount will be deposited into the reserve 

account. The critical need must be identified and closely monitored to ensure 

compliance.

Deferral of payment by the Agency should usually be accompanied by a borrower 

contribution of financial resources to the project.

Deferring debt payments should not exceed two years. National Office concurrence

must be obtained when borrowers are requesting reduced or zero loan payments.

2. Change of Payments

Scheduling loan payment in accordance with the borrower’s repayment ability. The 

provisions must be documented. The issuance of Form RD 3560-29A, Multiple Family 

Housing Statement of Payment Due, will normally be suppressed during the period in 

which a work-out agreement calling for less than the normal full scheduled installment is 

effective. To suppress issuance of Form RD 3560-29A, process by using the appropriate 

screen on the Automated Multi-Family Housing Accounting System (AMAS); see the 

AMAS manual for specific instructions on how this is done. Upon expiration of the 

work-out agreement, a review will be conducted to determine any further servicing 

actions that may be appropriate (e.g., reamortizing, rescheduling, executing a new 

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servicing plan and/or supplementary payment agreement that may call for higher than 

normal payments, preparing a problem case report, etc.). As long as a borrower is 

meeting the provisions of an approved work-out agreement calling for less than full 

installments, late fees will be waived. 

3. Prepayment

A borrower may offer to pay their loan in full, ahead of the scheduled loan repayment 

date and exit the program. In such an event, the project will no longer be a part of the 

Multi-Family Housing program, will no longer be subsidized by the Agency, and will no 

longer be subject to Agency regulations and procedures. Chapter 15 provides the details 

on approving and processing prepayment requests.

4. Voluntary Conveyance

Voluntary conveyance is a method of liquidation by which title to security is 

transferred to the Federal Government. The State Director is authorized to approve 

voluntary conveyance of property if the total indebtedness, including prior and junior 

liens, does not exceed their approval authority. Chapter 12 provides the details on 

approving and processing an offer of voluntary conveyance.

5. Provision of Rental Assistance

Where there is servicing rental assistance available, the State Director may agree to 

provide rental assistance to a project as part of a work-out agreement in order to enable 

tenants who could otherwise not afford the rents to move into a project and improve 

vacancy. 

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SECTION 5: MONITORING THE WORK-OUT AGREEMENT 

AND SUBSEQUENT SERVICING 

10.26 MONITORING WORK-OUT AGREEMENTS 

Once a work-out agreement has been developed and approved, the Loan Servicer must 

monitor the borrower’s progress and provide guidance as needed. This is an important and 

necessary component of ensuring the success of the work-out agreement. The monitoring serves 

to make sure not only that the terms of the agreement are being upheld, but that they are having 

the desired effect of moving the project back into compliance. If not, the Loan Servicer must 

work with the borrower to amend the agreement to incorporate servicing techniques that will 

achieve the desired goals or cancel the work-out agreement and move to implement enforcement 

measures. 

The Loan Servicer will conduct the monitoring in the following ways: 

• Reviewing the financial reports submitted by the borrower. These include Form 

RD 3560-7, which must be submitted on a quarterly basis and bank statements, if 

appropriate; 

• Holding quarterly meetings at the project site with the borrower to track the progress 

of the work-out agreement; and 

• Conducting supervisory visits to monitor progress with an agreement. Such visits are 

mandatory to determine if the work is being done when the work-out agreement 

includes correcting deferred maintenance or when reserve funds are being used for 

repairs. These supervisory visits should be held in conjunction with the quarterly 

meetings with the borrower. 

10.27 SUBSEQUENT SERVICING AND IMPACT ON FUTURE LOANS 

Any member of a borrower entity with a controlling interest in a property in which there 

are serious noncompliance issues and no work-out agreement is in place, or where the entity is in 

noncompliance with its work-out agreement, will not be eligible for further Agency loans. In a 

case such as this, the borrowers must make arrangements to restore compliance with Agency 

requirements and restore their financial viability. 

In cases where the borrower and the Agency work together to make an acceptable workout agreement, the borrower may be eligible to receive additional assistance after they have been 

in compliance with the work-out agreement for six consecutive months. In cases where workout arrangements cannot be made, the primary basis for denying such assistance would be based 

on the borrowers' inability to meet eligibility requirements, shown by their track record of failing 

to meet existing requirements and responsibilities for other projects. 

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SECTION 6: SPECIAL NOTE RENTS (SNR) 

10.28 OVERVIEW OF SPECIAL NOTE RENTS [7 CFR 3560.210]

When a project is experiencing severe vacancies due to market conditions, the State 

Director may allow a borrower to charge a SNR rent to attract and keep tenants who have the 

financial ability to pay more than basic rent but who will not pay the current note rate rent. An 

SNR addresses the situation where some existing and prospective tenants are not willing to pay 

30 percent of adjusted income or note rate rent because the rental rates would exceed those of 

other rental properties in the community. This action may only be taken after supervisory efforts 

by the Agency and management efforts by the borrower have not produced an acceptable level of 

occupancy. 

10.29 SNR ELIGIBILITY REQUIREMENTS 

A. Required Project Conditions 

The borrower must document that the following conditions exist in the project for the 

Loan Servicer to consider allowing an SNR to be implemented: 

• The project has been operational for at least 24 months (the borrower may request a 

waiver to this provision); 

• No more than 10 percent of budgeted expenses are reflected as unrestricted cash on 

hand, and reserve account balances do not exceed the required accumulation-to-date 

minus authorized withdrawals; 

• Over the most recent six-month period vacancy rates have averaged at least 15 

percent or the project shows revenue losses of at least 15 percent; 

• The loss of rents available is not a result of management’s failure to effectively 

market the units; and 

• Comparable rents in the area are lower than the previously approved note rate rents. 

B. Borrower Requirements 

To be eligible for the SNR, the borrower must: 

• Be in compliance with Agency regulations and encourage occupancy through good 

maintenance and positive relations with tenants; 

• Sign a statement agreeing to forgo return to owner for the duration of the SNR; 

• Submit a budget with only the minimal sufficient operation and maintenance 

expenses; 

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• Have engaged in aggressive marketing efforts, including: 

◊ Significant outreach efforts in the community, including, but not limited to, 

contacts listed in the AFHMP; or 

◊ Obtaining approval from the Agency for a servicing work-out plan, exclusive of 

SNR features, at least three months earlier. 

10.30 SUBMITTING AND PROCESSING SNR REQUESTS 

In making the request for an SNR, the borrower submits the same information as they 

would when requesting a rent change. See Chapter 7of HB-2-3560 and 7 CFR 3560.203. 

The Loan Servicer reviews the documentation from the borrower and forwards the 

information with a recommendation to the State Director, who makes the final decision. If the 

decision is to approve the SNR, the following steps will be taken: 

• Adjust the note rate column in the proposed changes to rent section of Form 

RD 3560-7 to reflect rents needed for payment to the Agency amortized at an interest 

rate that is less than the full note rate on the borrower’s Form RD 3560-52. The 

interest rate chosen may never be less than two percent. 

• Set the interest rate of the SNR budget at a level that will make project SNR rates 

comparable with community rental rates. 

• When an SNR is implemented in a Plan II Section 8/515 project, use lines 23 through 

29 of Form RD 3560-29 to report any additional payments to the reserve account 

required when HUD contract rents exceed SNR rates. 

When the Approval Official determines a request for an SNR is not justified on the basis 

of the information submitted, the Approval Official will notify the borrower in writing of the 

reason(s) why the SNR is not approved. The borrowers will be advised of their appeal rights in 

accordance with 7 CFR Part 11. 

10.31 CHANGES TO AND TERMINATION OF SNRS 

Borrowers must request changes to SNRs at the time of budget review. If the local 

market conditions have not changed since the SNR was implemented, then no change is made to 

the SNR. If the conditions have changed, then the SNR is changed accordingly. 

The borrower must notify tenants of the project in which the SNR is proposed to be 

changed just as would be done for tenants where a regular rent change request is made. 

An increase in an SNR will be handled in accordance with regular program requirements 

for a rent change. See Chapter 7 of HB-2-3560. 

An SNR is terminated when the note rate rent is regained. 

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10.32 RESTRICTION ON NEW UNITS 

While an SNR is pending or in effect, the Field Office must not review or approve any 

other projects—of any type—in the same market area. State Directors may seek National Office 

approval for a waiver from this provision when an SNR has been in effect for 24 months. 

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SECTION 7: ENFORCEMENT 

10.33 MULTI-FAMILY HOUSING ENFORCEMENT TEAM 

The Agency has established a Multi-Family Housing Enforcement Team to improve the 

Agency’s efforts to detect and eradicate fraud, waste, and abuse in the Multi-Family Housing 

program. The mission of the Enforcement Team is to protect the interests of residents; ensure 

quality housing; restore public trust in Government investments; and eliminate program fraud, 

waste, and abuse. Within the scope of its mission, the Enforcement Team provides the following 

services: 

• Performs problem property reviews including data reviews, site visits, interviews, 

reports on findings, recommendations for remedial actions, and follow-up actions to 

ensure problem resolution; 

• Coordinates multi–state reviews of problem borrowers and management agents; 

• Recommends enforcement actions to ensure borrower/agent compliance with 

regulatory and statutory program requirements; 

• Analyzes problem property data collected by Field Office Staff and provides 

feedback concerning administrative actions for Field Office Staff to pursue in relation 

to problem properties; 

• Coordinates enforcement efforts with the OIG, OGC, Department of Justice, 

Department of Housing and Urban Development, Federal Bureau of Investigation, 

and the Internal Revenue Service, as appropriate; 

• Provides technical assistance and advice to Field Office Staff; 

• Develops training materials and conduct training related to problem property analysis 

and enforcement techniques; 

• Develops a standardized process to deal with problem properties and ensure 

comparable actions are applied in similar cases; and 

• Guides field staff with appropriate actions to ensure resolutions of recommendations 

from OIG audits. 

10.34 REQUESTING ENFORCEMENT TEAM SERVICES 

Activities of the Enforcement Team may be initiated by the Deputy Administrator for 

Multi-Family Housing or by a request from a State Office. 

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CHAPTER 11: LOAN RESTRUCTURING 

11.1 INTRODUCTION 

During the term of an Agency loan, borrowers may request Agency consent to restructure 

the loan for their project that will simplify the operation of the project or help address financial 

distress due to factors beyond the borrower’s control. One example is when a borrower requests 

that loans be restructured to reduce administrative burden, improve cost-effectiveness and 

efficiency, or more effectively use the physical facilities common to projects. Another example 

is a project experiencing negative cash flow due to increases in local taxes and utilities that are 

rising faster than area rents. The methods used by the Agency to help accomplish the objectives 

stated above include loan agreement or loan resolution consolidation, loan consolidation, 

reamortization, and loan adjustments (writedowns). In addition to 7 CFR 3560 and the 

instructions provided below, the requirements of Attachment A to Chapter 7, "Transfer of Project 

Ownership" should also be used. 

This chapter describes the requirements for loan restructuring techniques and Agency 

procedures for reviewing, approving and implementing such requests. 

This chapter describes the requirements for each of these loan restructuring techniques, 

and Agency procedures for reviewing, approving, and implementing such requests. 

SECTION 1: ALLOWABLE TYPES OF RESTRUCTURING 

11.2 OVERVIEW 

As mentioned above, the loan restructuring activities that the Agency may approve 

include the following: 

• Loan agreement or loan resolution consolidation, which is an administrative action 

whereby the loan agreements, or loan resolutions, for multiple projects held by the 

same borrower are consolidated and assigned a single new project number. The 

borrower still has separate loan notes and the Agency still tracks each loan

individually, but all projects are administered by the Agency as if they were a single 

project; 

• Loan consolidation, which is the consolidation of multiple loans for a single 

property into a single loan, with one note and one payment; 

• Reamortization, which is a rescheduling of a borrower’s debt; and 

• Loan adjustments (writedowns), which are reductions of the amount of the 

borrower’s debt, allowing an otherwise sound project experiencing financial 

difficulties beyond its control to continue operating as a program property. 

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11.3 LOAN AGREEMENT OR LOAN RESOLUTION CONSOLIDATION 

REQUIREMENTS [7 CFR 3560.410]

The Agency may approve the consolidation of loan agreements or resolutions regardless 

of the total amount of debt being consolidated as long as the loan agreements being consolidated 

represent loans made for the same purpose, to the same borrower, with the same plan of 

operation (e.g., nonprofit, limited profit, full profit). The terms and the due date of the loans 

involved must not be altered, and other security instruments must remain unchanged and must 

not be released. 

Under no circumstances will loan agreements or loan resolutions be consolidated if the 

Agency’s security position will be adversely affected. Any applicable restrictive-use provisions 

of the existing notes will continue to apply following consolidation. 

11.4 LOAN CONSOLIDATION REQUIREMENTS [7 CFR 3560.410]

The Agency may approve loan consolidations under two circumstances: 

• The loans are being transferred on new terms; or 

• An initial and subsequent loan under one project number were closed on the same

date at the same rates and terms. 

The Agency may approve loan consolidations if, in addition to the above requirements, 

the following conditions are met: 

• Form RD 3560-52, Promissory Note and the loan agreements or resolutions will be 

consolidated; 

• Consolidation occurs on the Amortization Effective Date (AED) or as soon as 

possible after the AED is established;

• All project accounts being consolidated will be current after the consolidation 

process, unless otherwise authorized by the Administrator; and 

• The Agency’s security position will not be adversely affected. 

11.5 REAMORTIZATION REQUIREMENTS [7 CFR 3560.455 (b)]

The Agency may approve the reamortization of any Agency multi-family housing loan 

account, although it will not reamortize accounts solely to remove a delinquency. 

The Agency may reamortize accounts when doing so is in the best interest of the 

Government and when needed to improve the financial viability of the property and project 

operations. The Agency will not approve a loan reamortization if the reamortization will 

adversely affect the Government lien priority. 

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11.6 LOAN ADJUSTMENT (WRITEDOWN) REQUIREMENTS [7 CFR 3560.455(c)]

Borrower requests for loan writedowns must be part of an approved workout agreement 

with the Agency and be in the best interest of the Government. Writedowns are permitted with 

existing borrowers or transferees where: 

• The causes are beyond the borrower’s control—such as market weaknesses, 

unforeseen site problems, or natural disasters; and 

• Sound management is evident or unsound management practices can be resolved by 

the removal of the responsible individuals in accordance with an approved work-out 

agreement with the Agency. 

SECTION 2: LOAN AGREEMENT OR 

LOAN RESOLUTION/LOAN CONSOLIDATION 

11.7 OVERVIEW 

Loan agreement or loan resolution consolidation offers several advantages. For instance, 

following loan agreement or loan resolution consolidation, all reporting, accounting, and project 

management requirements for the various projects being consolidated are fulfilled as a single 

project. In other words, borrowers need to maintain only one set of books and one operating 

budget, and can track all rents as a single project. In addition, because rental assistance 

agreements are not consolidated, borrowers can apply rental assistance across projects following 

consolidation. That is, waiting lists for the projects being consolidated will be combined and 

rental assistance can be assigned to eligible tenants in the newly formed “project” per assignment 

priorities. 

Loan consolidation also offers several advantages. For instance, when consolidating a 

loan under new rates and terms in conjunction with a transfer, borrowers can combine notes and 

cost items. In addition, different portions of the property that may have been financed with 

separate loans can still be set up as distinct projects, but the borrower need track only one loan 

and one note. 

State Directors or their designees may approve project or loan consolidations with the 

advice of the Office of General Counsel (OGC) and when all required conditions outlined in this 

chapter are met. 

11.8 BORROWER SUBMISSIONS 

A. Loan Agreement or Loan Resolution Consolidation 

A borrower requests a loan agreement or loan resolution consolidation by submitting 

the following forms to the appropriate Field Office: 

• Form RD 3560-33A, Consolidated Loan Agreement;

• Form RD 3560-34A, Consolidated RRH Loan Agreement;

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• Form RD 3560-35A, Consolidated Loan Resolution; 

• Form RD 3560-7 as well as a project budget; 

• Updated loan agreements/resolutions; and 

• Management plans. 

B. Loan Consolidation

For loan consolidations, borrowers must execute a new Form RD 3560-9 for the new 

consolidated Form RD 3560-52, and submit it to the Field Office. The interest credit plan 

originally established for the project applies to the consolidated note. If the interest credit 

plan is changed by submitting a new Form RD 3560-9, Loan Servicers will enter the new 

plan for the project through the field office terminal. 

11.9 AGENCY PROCESSING OF BORROWER SUBMISSIONS 

A. Loan Agreement or Loan Resolution Consolidation 

1. Complete Form RD 3560-17A, Multi-Family Housing Consolidation of 

Projects/Loan Agreements/Resolutions 

The Servicing Office completes Form RD 3560-17A to show all notes for the projects 

being consolidated. 

2. Send Form to the State Office and St. Louis Office 

The Field Office sends Form RD 3560-17A and a letter recommending the 

consolidation to the State Office for approval. The State Office then forwards the 

materials to the St. Louis Office for processing. 

3. Obtain OGC Guidance 

OGC guidance is required to accomplish loan agreement or loan resolution 

consolidations. Under no circumstances will the Agency consolidate projects if the 

security position of the Agency will be adversely affected. If required by OGC, all of the 

loan agreements or loan resolutions being consolidated may be secured by one deed of 

trust or mortgage describing all of the loans for the projects. 

4. Maintain Loan Terms and Due Date 

The Agency alters neither the terms nor the due date of the loan(s) involved. Other 

security instruments also remain unchanged, and are not released following the 

consolidation. 

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B. Loan Consolidation

Loan Servicers should note that there are some potential obstacles to consolidating 

certain loans. For instance, the St. Louis Office is unable to consolidate loans unless the 

loans are on the same plan of operation. In addition, direct loans cannot be consolidated 

with interest credit loans, and loans with HUD Section 8 subsidy cannot be consolidated 

with insured loans. In all other cases, however, the procedures outlined in this chapter 

will apply to loan consolidations. 

1. Prepare Form RD 3560-52 

Loan Servicers prepare Form RD 3560-52 for the notes or assumption agreements 

being consolidated. If the Field Office does not have possession of the original note or 

assumption agreement, the Loan Servicer calls the St. Louis Office to request the return 

of the original form so it is in the Field Office before the Form RD 3560-52 is processed, 

or as soon as possible thereafter. Form RD 3560-52 should be prepared on a monthly 

payment basis, as appropriate. 

2. Prepare a Consolidated Loan Agreement or Resolution 

Loan Servicers prepare a consolidated loan agreement or resolution using Forms 

RD 3560-33A, 3560-34A, or 3560-35A, as appropriate, to reflect current reporting 

requirements and the authorized initial investment attributable to the owner after the 

consolidation has occurred. 

3. Obtain OGC Guidance 

Consolidation of notes may only occur with OGC guidance. Under no circumstances 

will the Agency approve consolidation of Form RD 3560-52 if the security position of the 

Agency will be adversely affected. 

4. Complete Form RD 3560-17, Multi-Family Housing Note Consolidation, and Send 

a Copy to the Finance Office 

Loan Servicers complete Form RD 3560-17 to show all of the notes that are 

consolidated on Form RD 3560-52. Loan Servicers send a copy of Form RD 3560-17 to 

the State Office for approval. The State Office forwards Form RD 3560-17 to the St. 

Louis Office for processing. 

5. Stamp Notes or Assumption Agreements “Consolidated” 

The original and Field Office copies of all notes or assumption agreements that are 

consolidated will be stamped “consolidated” by Loan Servicers. The original instruments 

being consolidated will be stapled to the “consolidated” note and filed in the safe in the 

Field Office. When the consolidated note has been paid in full or otherwise satisfied, 

Loan Servicers will handle it and all other instruments according to RD Instruction 

1951-A. 

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6. File New Security Instruments 

Loan Servicers file new security instruments that describe the consolidated note to 

perfect the Agency lien position. If the new lien position taken is junior only to the 

previous lien position, the previous security instruments may be released with the 

guidance and assistance of OGC. 

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SECTION 3: LOAN REAMORTIZATION 

11.10 OVERVIEW 

Reamortization is the process of revising an existing loan payment plan or schedule 

established for repayment of a loan. The new schedule is usually developed to enable the 

borrower to continue the objectives of the loan. 

State Directors or their designees may approve the reamortization of Agency loans within 

their approval authority for the type of loan involved. Reamortization will not subject the 

borrower to any additional restrictive-use provisions beyond those associated with the original 

loan. For example, if there were 10 years of restrictive use remaining on a loan prior to a 

reamortization, there would still be 10 years remaining following the action. If the original loan 

contained no restrictive-use provisions, the reamortization would not add new use restrictions. 

11.11 ACCEPTABLE USES OF REAMORTIZATIONS 

A. Allowable Conditions for Reamortizations 

The Agency may consider approving a reamortization if any of the following four 

conditions are met: 

1. Preventive Measure for a Borrower Likely to Experience Delinquency 

The State Director determines that the borrower and tenants cannot reasonably be 

expected to continue to meet their obligations unless the account is reamortized to reduce 

substantially the installments and rental rates. 

2. Corrective Measure to Help Delinquent Borrower Attain Successful Operation 

The borrower has a substantial delinquency that cannot be cured within one year. In 

addition, the borrower must have acted in good faith and maintained compliance with all 

applicable Agency policies and procedures. 

3. Incentive to a Borrower Requesting Prepayment 

The borrower has received an equity loan as an incentive to avert prepayment, or a 

subsequent loan has been made to a nonprofit corporation or public agency to purchase a 

project to avert prepayment. 

4. Measure to Improve Project Operations 

The borrower is not delinquent or likely to become delinquent, but proposes the 

reamortization to improve project operations. The State Director’s approval is required 

for such reamortization requests. 

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B. Requirements for Obtaining a Reamortization 

In addition, borrowers must demonstrate that the following criteria are satisfied 

before the Agency will approve a reamortization: 

• The reamortization must be in the best interest of the Government; 

• The reamortization will enable the borrower to operate successfully and carry out the 

purpose of the loan; 

• The Agency’s lien position remains unchanged; and 

• The action is not proposed solely to remove a delinquency. 

11.12 BORROWER SUBMISSIONS 

To request a reamortization, the borrower must complete and submit Form RD 3560-15, 

Reamortization Request to the Field Office. Loan Servicers review the form and determine 

whether the required conditions for a reamortization exist. 

11.13 AGENCY REVIEW AND APPROVAL 

A. Field Office Actions

When the Field Office receives a request to reamortize, Loan Servicers will take 

several actions, as follows: 

• Determine whether the conditions for a reamortization exist; 

• Document the request in the official case file and on Form RD 3560-15; and 

• Submit the request, the case file, and other pertinent information to the State Office 

for review. 

B. Evaluating Borrower Requests 

To receive Agency approval, Loan Servicers must review the borrower’s submission 

and Agency records to ensure that the reamortization meets all of the following 

requirements, and adequately document in the case file and on Form RD 3560-15 that the 

requirements are met. The analyses described below are used to evaluate all 

reamortization requests. Additional evaluation is required for requests involving projects 

with delinquencies or compliance violations (see Paragraph 11.14). 

1. Budget is Adequate 

The borrower’s budget or plan of operations must provide reasonable assurance of the 

following: 

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• The newly scheduled payments will be made according to the terms of the proposed 

reamortization; 

• The charges for the use of the facility or service are within the payment ability of

those it is intended to serve and are comparable to similar units in the area; and 

• Applicable rent increase procedures will be followed if any rent increase is required. 

2. Management is Adequate 

The borrower must demonstrate the following: 

• The Board of Directors and memberships will obtain membership and community 

support, and will provide competent management for the continued operation of the 

borrower entity and the facility financed with the loan; and 

• The borrower can provide acceptable management for the project and has corrected 

any management deficiencies identified by the Agency. Acceptable corrective 

actions may include revision of the management plan or employment of professional 

management services. 

3. Security is Adequate

The borrower must demonstrate that the security will be adequate to protect the 

Agency’s interests over the term of the reamortization. 

C. Approval Recommendation and State Office Review

If the Loan Servicer determines that a borrower’s request meets the requirements 

described in subparagraph B of this section, they must forward the case file with a 

recommendation for approval to the State Office for review. If the State Office concurs 

with the recommendation to reamortize, it will submit the request and any other pertinent 

information to OGC for legal advice and closing instructions, as needed. 

When the indebtedness to be reamortized exceeds the State Director’s approval 

authority but the State Director determines that the required conditions for approval can 

be met, the request for reamortization, the official case file, and all other pertinent 

information, along with complete comments and recommendations by both the State 

Office and Loan Servicers, is sent to the National Office. 

D. National Office Exception 

If the State Director concludes that the conditions for a reamortization cannot be met 

but a reamortization would be in the best interest of the Government, the file, along with 

recommendations from the Field Office, will be sent to the National Office for an 

exception. The State Director will submit all subsequent reamortization requests for the 

same project to the National Office for prior authorization. 

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E. OGC Guidance 

When OGC determines that the reamortization request is legally sufficient, the 

servicing official will execute the reamortization request. 

F. Agency Denial of Request 

If the Agency denies a request for a reamortization, it must send a formal letter to the 

applicant indicating the reasons for the Agency’s decision and informing the applicant of 

appeal rights. A copy of this letter should be placed in the case file. 

11.14 ADDITIONAL EVALUATION FOR REQUESTS INVOLVING 

DELINQUENCIES OR COMPLIANCE VIOLATIONS 

Reamortization requests to address a delinquency or compliance violations will be 

approved only as part of a work-out agreement acceptable to the Agency. Reamortization may 

be used to address reserve accounts that are not at the authorized levels, as long as the deficiency 

is not due to improper or unauthorized use of reserve funds. 

To obtain a reamortization to address a delinquency or compliance violations, the 

borrower must correct or be able to effectively address the cause of the deficiency, demonstrate 

that the objectives of the loan can be met following the reamortization, and meet the 

requirements described below. To show that the objectives of the loan can be met, borrowers 

must demonstrate the following: 

A. Project Feasibility 

Borrowers must demonstrate that they are operating on a financially sound basis and 

have adequate operating income to: 

• Repay the loan at the reamortized rate; 

• Fund reserve accounts adequately; 

• Fund tax and insurance accounts adequately; 

• Pay operation and maintenance expenses as they become due; and 

• Maintain an acceptable level of occupancy. 

B. Property is Adequately Maintained 

Borrowers must ensure that they provide modest, decent, safe, and sanitary housing 

by properly maintaining the property. 

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C. Housing Remains Affordable 

Borrowers must provide affordable housing opportunities/services to eligible 

residents. 

D. Compliance with Agency Regulations is Maintained 

Borrowers must be in compliance with all applicable Agency regulations, including: 

• Providing financial information to the Agency in a timely manner; and 

• Maintaining required records needed to ensure the eligibility of residents (e.g., tenant 

certifications). 

If the borrower cannot demonstrate the ability to meet the above-listed objectives, the 

Loan Servicer must reject the borrower’s request for reamortization of the Agency loan 

and provide the borrower all applicable appeal rights. 

11.15 PROCESSING REAMORTIZATIONS 

In general, to reamortize an account, Loan Servicers must ensure that they obtain, 

complete, and sign all relevant forms, and obtain OGC review of documents for legal 

sufficiency, if needed. To actually process a reamortization, Loan Servicers must take the 

following steps, as applicable. 

A. Complete Reamortization Agreement 

Loan Servicers will complete Form RD 3560-16 according to the FMI. The effective 

date and the due date for all payments will be the first of the month, except for labor 

housing loans, whose due date will be established in accordance with the FMI. Note: 

Appraisals will not be required in the case of reamortizations as long as there is adequate 

documentation that the Agency’s security interest is protected. 

B. Obtain Form RD 3560-52 and Assumption Agreement 

If the note or assumption agreement being reamortized is not held in the Field Office, 

the Loan Servicer will obtain the Form RD 3560-52 and any assumption agreement from

the St. Louis Office before processing the reamortization. 

On the back of the original note or assumption agreement, below all signatures and 

endorsements, the Loan Servicer will insert the following: “A reamortization agreement 

dated _____________, 20__, in the principal sum of $__________, has been given to 

modify the payment schedule of the note.” 

C. Establish End of the Reamortization Period 

The reamortization period will end on the final due date of the note being

reamortized, unless the term is extended with the advice and guidance of OGC and the 

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Agency’s lien position is not altered. Any extension of the final due date should not 

exceed the lesser of the remaining useful life of the security property or the maximum 

term granted by the respective loan program authorizations. 

The Agency may amortize the loan over a period not to exceed the remaining 

economic life of the project or 50 years, whichever is less. The Agency may extend the 

term of the loan to a period not to exceed 30 years or the remaining economic life of the 

project, whichever is less. 

D. Establish Interest Rate 

The interest rate for the account will remain unchanged except when the final due 

date has been extended. The interest rate charged by the Agency will be either the 

existing note rate, or the current rate at the time the reamortization request Form RD 

3560-15 is approved or closed, whichever is less. 

E. Address Delinquent Reserve Accounts 

The Agency may use reamortizations to address reserve accounts that are not at 

authorized levels, as long as the shortfall is not due to the borrower’s improper or 

unauthorized use of reserve funds. Loan Servicers should take the following steps to 

address delinquent reserve accounts: 

1. Modify the Loan Agreement or Resolution 

The Loan Servicer should modify the loan agreement or resolution, or execute a new 

agreement or resolution, that bases the new fully funded amount (i.e., 10 percent of the 

indebtedness) and annual reserve requirement (i.e., one-tenth of the fully funded amount) 

on the amount of the reamortization, rather than on the original amount of indebtedness. 

2. Establish Reserve Requirements 

The Loan Servicer may establish reserve requirements at a higher level than the 

amount required for the reamortization to allow for capital expenditures that have been 

identified and quantified, as long as the budget will support a higher level.

3. Begin the Reserve Account with a New Base

Since the fully funded amount and annual requirement are reestablished based on the 

amount of the reamortization, the reserve account will begin with a new base. That is, 

any underfunded reserves existing prior to the reamortization will no longer be 

considered underfunded. In essence, the reamortization allows the borrower to begin 

with a “clean slate.” 

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4. Allow the Borrower to Receive a Return on Investment 

When a newly established fully funded amount and annual requirement are based on 

the reamortization amount, the Loan Servicer may allow the borrower to receive a return 

on investment if all other applicable conditions for receiving a return have been met. 

F. Obtain OGC Guidance As Needed 

Loan Servicers may obtain OGC guidance in the review of documents for legal 

sufficiency. OGC also may offer further guidance to properly perfect the reamortization. 

G. Execute New Interest Credit Agreement 

If the borrower is to receive interest credit benefits following the reamortization of

the account, Loan Servicers will cancel the current interest credit agreement and prepare 

a new Form RD 3560-9. 

H. Close the Reamortization 

The Agency always closes reamortizations on the first day of the month. Unpaid 

interest to the date of closing may be capitalized. 

I. Meet Other Procedural Requirements 

In addition, Loan Servicers need to ensure that the following procedural requirements 

are met: 

• All reamortized loans must be closed on Predetermined Amortization Schedule 

System (PASS). All initial and subsequent loans must convert to PASS in connection 

with the reamortization; 

• When recoverable cost items are involved, they are first capitalized by adding them to 

the principal loan balance outstanding on the oldest loan and then the entire 

indebtedness (principal plus outstanding interest, overage, and late fees) is 

reamortized; and 

• Audit receivables and late fees may be reamortized. 

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SECTION 4: LOAN WRITEDOWNS 

11.16 OVERVIEW 

In cases of severe financial distress, the Agency may agree to a writedown of the debt, 

whereby the Agency agrees to reduce the outstanding loan amount. Writedowns should occur 

only when the value of the property is less than the outstanding Agency debt. 

Generally, writedowns will occur simultaneously with a transfer and assumption for less 

than the total amount of outstanding debt. However, the Agency may write down debts and 

continue the account with the same borrower if doing so is in the best interest of the Agency, the 

property, and tenants. 

In all cases, writedowns must be part of an approved work-out plan with the Agency, in 

the Government’s best interest, and designed to correct circumstances beyond the borrower’s 

control. Writedowns require approval by the State Director. The Agency should consider the 

project’s suitability in accordance with Chapter 6 before approving a writedown. 

Borrower equity in the project following the writedown will be no less than five percent 

of the amended loan balance for limited for-profit owners. The borrower may realize the eight 

percent return on investment on a maximum of five percent equity, if applicable. A reduced 

return may be authorized on amounts of equity contributed greater than five percent. Nonprofit 

and public agency borrowers may enter into workouts that propose loan-to-value ratios of 100 

percent. 

11.17 ALLOWABLE USES 

Writedowns may only be approved when the conditions leading to a default were beyond 

the borrower’s control and management is generally sound. Writedowns are used to address 

severe financial difficulties with a project and the Agency will consider all available servicing 

options before approving a writedown. Some examples of circumstances where a writedown 

might be an acceptable servicing solution include: 

• Sustained market weaknesses in the property’s community or region; 

• Unforeseen site problems; or 

• A natural disaster results in significant damage to the property. 

11.18 BORROWER SUBMISSIONS 

Borrowers requesting writedowns must submit the following documents to the Field 

Office: 

• Form RD 3560-15; and

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• A work-out plan, which includes:

◊ A revised budget; and

◊ A narrative description of project difficulties and proposed corrective actions.

11.19 AGENCY REVIEW AND APPROVAL 

A. Appraisal 

For a borrower to receive Agency approval for a writedown, the borrower is 

responsible for obtaining an “as-is” market value, subject to restricted rents. The Agency 

generally will not approve a writedown to an amount that is lower than the “as-is” 

unsubsidized value of the property. The Agency may require the general partner or 

primary person controlling the borrower to exit or waive equity, or both, to qualify for the 

writedown. 

B. OGC Advice 

OGC advice is required for all writedowns. The OGC review will primarily focus on 

the legal sufficiency of the transferee’s organizational documents in cases where the

writedown is occurring concurrently with a transfer. 

C. Approval 

As part of the writedown approval process, the State Office will review the following 

items: 

• Field Office recommendation;

• Eligibility review; and 

• An appraisal of the property. 

The State Director is the approval official. The State Director may determine whether 

a writedown that does not include a change in the management structure of the project is 

acceptable. 

11.20 PROCESSING WRITEDOWNS 

To process a writedown, borrowers must execute documents per guidance from OGC.

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CHAPTER 12: ACCOUNT 

LIQUIDATION [7 CFR 3560.456]

12.1 INTRODUCTION 

This chapter covers Agency procedures regarding account acceleration, foreclosure, and 

liquidation for projects in default. 

Loan Servicers should offer all appropriate special servicing tools to help borrowers with 

financial problems bring the account current. However, if it is clear that a borrower cannot 

continue with the loan, the Loan Servicer should analyze the feasibility of liquidation options 

and recommend the option that is in the Government’s best interest, defined as the option that 

will result in the greatest net recovery. 

Section 1 of this chapter describes how the Agency determines whether or not to 

liquidate, and if so, which of the available options would be least costly for the Government. 

This section provides a brief catalogue of liquidation options, a discussion of net recovery value 

and basic security loss, and an outline of how decisions to liquidate are ultimately made. 

Section 2 of the chapter contains information on liquidation procedures for voluntary 

liquidation and foreclosure. A discussion about the acquisition of chattel property is also 

included. Section 3 discusses debt settlement. 

SECTION 1: MAKING THE DECISION TO LIQUIDATE 

12.2 AN OVERVIEW OF LIQUIDATION OPTIONS 

When the Agency determines that liquidation is appropriate, it may accelerate the loan. 

The borrower must pay the full account balance and meet the other terms of the loan within the 

prescribed time frame, or the Agency may initiate foreclosure proceedings. Once the loan has 

been accelerated, the Agency will not accept partial payment unless required to do so by State 

law. 

A. Voluntary Liquidation 

1. Voluntary Sale 

Sale of the security property is generally the most desirable option for both the 

Agency and a borrower who is unable to continue the loan. For the Agency, a sale to 

another party avoids the costs of foreclosure, as well as the costs related to owning and 

disposing of a property. For the borrower, it offers the best opportunity for being 

released from the debt without a major credit history blemish. A borrower may sell the 

property to a third party even after the account is accelerated.

If the borrower sells or transfers title of a security property on which the loan has 

been accelerated, the Agency requires payment in full to release any Agency liens or to 

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stop foreclosure action. However, to facilitate a sale after acceleration, the Agency may 

agree to release Agency liens in return for payment of the estimated net recovery value. 

2. Deed in Lieu of Foreclosure 

After the account has been accelerated, the borrower can offer to convey the security 

property to the Agency. The Agency will accept the deed in lieu of foreclosure only if

the Agency will realize a greater net recovery value than would be obtained if foreclosure 

proceedings continued. 

3. Assignment to Junior Lien Holder 

The Agency may assign the note and mortgage to a junior lien holder, if such a lien 

holder makes an offer for the property in the amount of at least the net recovery value, 

and all appeal rights have expired. 

B. Foreclosure 

1. Agency Foreclosure 

When all reasonable efforts have failed to encourage the borrower to voluntarily 

liquidate the loan through sale of the property, deed in lieu of foreclosure, or by entering 

into an accelerated repayment agreement, the Agency may initiate foreclosure 

proceedings.

2. Foreclosure by a Another Lien Holder 

If there is a prior lien holder, the Agency must determine if the prior lien holder 

should have the opportunity to foreclose. Foreclosure by a prior lien holder may be a less 

costly alternative to Agency foreclosure. If the Agency intends to foreclose in cases in 

which there is a prior lien, the Agency must decide either to settle the lien or foreclose 

subject to the lien. 

C. Acquisition of Chattel Property 

The Agency will make determinations regarding disposition of chattel property that 

are in the best interest of the government. The Agency will make every effort to avoid 

acquiring chattel property by having the borrower or Field Office Staff liquidate the 

property. 

12.3 NET RECOVERY VALUE 

Estimated net recovery value represents the amount that the Agency could expect to 

recover from a property if it was liquidated after considering all costs associated with liquidating, 

holding, and selling the property. Attachment 12-A contains a net recovery value worksheet to 

aid in this calculation. Actual net recovery value is the amount the Agency does in fact recover 

from the sale of a property, after accounting for all costs. 

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The following sections provide guidance in estimating net recovery value. 

A. Establishing Market Value 

The market value of the property is the fundamental basis for establishing the 

estimated net recovery value. All calculations undertaken on the net recovery value 

worksheet provide additions or deductions from market value. 

Depending upon the likely method of liquidation and at what point in the process the 

calculation is being made, market value may be based on an estimated value, on an 

appraisal or on the actual sale price. Early in the process of determining which 

liquidation method should be followed, the Loan Servicer may need to make a rough 

estimate of the market value based on any available information. 

B. Environmental Considerations 

The Loan Servicer’s estimate of market value must take into consideration potential 

environmental hazards that may pose a liability issue for the Agency, and the presence of 

environmental resources for which the Agency will have an affirmative responsibility to 

take protective measures once it owns the property. Exhibit 12-1 provides a partial list of

environmental factors for consideration. 

To minimize Agency liability, the Agency must ensure, prior to acquiring property 

through foreclosure, that the property has been examined for potential contamination 

from hazardous substances, hazardous wastes, and petroleum products, including 

underground storage tanks. This should be accomplished by requesting that Field Office 

Staff complete the ASTM Standard E-1528 Transaction Screen Questionnaire, (TSQ). If 

the completed form raises any concerns it should be submitted to the State Environmental 

Coordinator for further evaluation and guidance. 

The Agency also should examine the property prior to acquisition and consider any 

costs associated with environmental resources the Agency might be required to protect. 

For additional information, see RD Instruction 1940-G. 

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Exhibit 12-1 

Environmental Considerations

Environmental Factors 

• Traffic or noise; 

• Hazardous materials or waste; 

• Radon, asbestos, or urea formaldehyde; and 

• Lead-based paint or other lead contaminants. 

Environmental Resources

• Aquifer recharge areas; 

• Coastal barrier resources; 

• Coastal zone management areas; 

• Endangered/threatened species or critical habitat; 

• Floodplains, wetlands, or flood hazard areas; 

• Historical or archaeological sites; 

• Important farmland, prime forestland, or prime rangeland; 

• National landmarks; 

• Wild and scenic rivers; and 

• Wilderness areas. 

C. Ordering an Appraisal 

Guidance about ordering appraisals is presented in Chapter 4 of HB-1-3560. The 

point at which a formal appraisal is actually conducted will vary. 

1. Valueless Lien 

If the Loan Servicer’s estimate suggests that the lien may be valueless, an appraisal 

should be obtained immediately. If the appraisal indicates that the lien is in fact 

valueless, it should be released without incurring servicing costs. 

2. Deed in Lieu of Foreclosure 

If, after acceleration, the borrower offers a deed in lieu of foreclosure, an appraisal 

should be obtained immediately so the Loan Servicer can determine whether it is in the 

government’s interest to accept the deed. 

3. Foreclosure 

If the property will be going to foreclosure, no appraisal should be obtained until 

shortly before the sale is scheduled to take place. In areas where the foreclosure process 

can be lengthy, the value of the property could change before the sale if the appraisal is 

conducted too far in advance. 

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D. Holding Period 

Nearly all costs and income used in the net recovery value calculation are affected by 

the holding period. For estimated net recovery value, the length of the holding period is 

estimated differently, depending on the likely method of disposition. The holding period 

should be estimated as the time between the date the net recovery worksheet is being 

filled out and the anticipated date for:

• Filing of the deed and the expiration of redemption rights (foreclosure); 

• Filing the warranty deed (deed in lieu of foreclosure); 

• Filing the release (release of valueless lien); or

• Payoff and release (debt settlement offer subsequent to acceleration). 

The time for marketing and disposition, if the property is acquired, should also be 

considered when estimating the holding period. 

E. Deductions from Market Value 

Numerous costs associated with liquidation must be considered when determining the 

net recovery value, including the following costs. 

• Prior liens to be paid by the Agency. In a case where a prior lien is involved, the 

amount required to repay the prior lien holder must be included in the calculation; 

• Junior liens to be paid by the Agency. If the Agency pursues foreclosure, junior 

liens are not paid. However, in the case of a deed in lieu of foreclosure, it may be to 

the Agency’s advantage to pay off a junior lien holder. The agency should conduct a 

title search to identify the position and the amount of each lien against the property;

• Selling expenses to be paid by the Agency. All transaction costs involved in selling

the property, including advertising, commissions for selling agents, required seller 

certifications, surveys, points, and closing costs paid by the Agency, whether on 

behalf of the borrower in a voluntary liquidation, or as an Agency expense for a real 

estate owned (REO) sale; 

• Holding costs. During the time that the Agency owns the property, the monthly 

interest accrued is multiplied by the number of months in the holding period; 

• Depreciation during the holding period. The property may depreciate in value 

while it is being held by the Agency; 

• Administrative costs. The administrative burden associated with holding a property 

includes the cost of liquidation, such as attorney fees, filing, recordation, advertising, 

and document service fees, that are customarily incurred in a foreclosure action; and 

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• Management costs. During the period the Agency holds the property it will accrue 

costs related to cleaning, securing, and maintaining the property such as utilities and 

real estate taxes. 

F. Additions to Market Value 

Although most of the adjustments to market value involve deductions to reduce the 

recovery amount, there are a few factors that can increase the market value. 

• Appreciation during the holding period. In markets that are strong, the property 

may appreciate while it is being held by the Agency; and 

• Income during the holding period. In general, the Agency does not lease 

properties. However, REO properties may be leased in limited circumstances, such 

as a property located in an area where keeping the property occupied could greatly 

reduce vandalism, or if there are tenants living in the property whom the Agency does 

not wish to displace. 

12.4 BASIC SECURITY LOSS 

The basic security loss is the difference between the property’s market value and the 

outstanding Agency debt on the property, including principal, and other recoverable costs. 

It is important for the Loan Servicer to consider the basic security loss in determining 

how to work with the borrower. For example, the debt settlement arrangements the Agency 

agrees to might be more lenient in the case of a borrower with a property that lost value through 

no fault of the borrower. This information can be used for portfolio analysis to help the Agency 

originate loans more effectively in the future. 

12.5 ACCOUNT LIQUIDATION 

A. Making the Decision to Liquidate 

In all liquidation cases, the State Director will be responsible for the final decision to 

liquidate the borrower’s account based on advice and counsel from the Office of General 

Counsel (OGC) and the following information supplied by the Loan Servicer: 

• An opinion by the Loan Servicer about whether the borrower is forcing an

acceleration to circumvent the prepayment process; 

• The specific recommendations of the Loan Servicer on the method of carrying out the 

liquidation;

• The case file and any other pertinent information developed in support of the 

accusations; 

• A summary of Agency efforts to work out an acceptable solution short of liquidation; 

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• A current appraisal of the security property will be completed by an Agency official 

authorized to make that particular type of appraisal and an estimate of the net amount 

that may be realized from the sale of the assets; 

• The most recent balance sheet or financial statement from the borrower; 

• A current statement of account from the St. Louis Office; and 

• A problem case report. 

• The Agency will handle liquidation, whether by voluntary liquidation or foreclosure, 

in accordance with the requirements at 7 CFR 3560.456(c) and (d). 

In all liquidation cases, the State Director is responsible for the final decision to 

liquidate the account based on an opinion from OGC and relevant information supplied 

by the Field Office (e.g., case files, summary of efforts to work out an acceptable 

solution, appraisals of the property, borrower’s financial statements and balance sheets, 

specific recommendations). If the Agency determines that the borrower has taken action 

to bring about the acceleration in an effort to avoid the prepayment process, the Agency 

will consider alternatives to acceleration, such as suing for specific performance under 

the loan and management documents. 

B. Possible Outcomes of Agency’s Decision to Liquidate 

If the Agency decides to liquidate, there are several possible outcomes, which are as 

follows: 

• The borrower may cure the default by developing 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 default; 

• The borrower can voluntarily convey the property to the Agency; 

• Transfer (sale or transfer and assumption of mortgage); 

• Foreclosure; 

• Payoff with use restriction; or 

• Debt settlement (cash only) for minimum bid or greater.

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SECTION 2: LIQUIDATION PROCEDURES 

12.6 OVERVIEW 

After the Loan Servicer exercises special servicing options and the borrower is still 

unable to continue with the loan, the Loan Servicer must determine the feasibility of liquidating 

the borrower's account. Any recommendation should result in the greatest net recovery to the 

Government. 

The borrower may liquidate voluntarily, either through sale of the property or deed in lieu 

of foreclosure. If it determined that the borrower’s account must be liquidated, the Agency may 

recommend foreclosure and accelerate the loan. 

12.7 VOLUNTARY CONVEYANCE 

After acceleration, borrowers may voluntarily liquidate through deed in lieu of 

foreclosure or an offer by a junior lien holder. In the case of voluntary liquidation, the borrower 

is responsible for all expenses associated with liquidation and acquisition. The Agency will only 

consider acceptance of an offer of voluntary conveyance if it is likely to receive a recovery on its 

investment. The Agency will not accept a voluntary conveyance offer if it is not in the 

Government’s best interest to do so. The Agency should refuse the voluntary conveyance if the 

Agency lien has neither present nor prospective value or recovery of the value would be unlikely 

or uneconomical. 

Voluntary sale of the security property may be the least onerous option for the borrower 

and the least costly option for the Government. If there is an interested buyer, procedures for 

property transfer that should be followed are described in Chapter 7 of this handbook. 

A. Payment of Liens 

If the Agency accepts a deed in lieu of foreclosure, it will pay prior liens if the 

Government’s investment and payment of the lien may be recovered. The Agency will 

accept conveyance subject to prior liens if the lien holder does not object. In this case, 

the Agency will make installment payments on the lien. 

Junior liens must be paid by the borrower. If the borrower does not agree to pay these 

obligations, the Government will do so if it is in its best interest in the long run. The 

State Director determines whether the Agency will settle junior liens. 

B. Required Components of an Offer of Voluntary Conveyance 

An offer of voluntary conveyance will consist of the following documentation:

• Form RD 3560-22, Offer to Convey Security; 

• Warranty Deed, which will be recorded only when the voluntary conveyance is 

accepted; 

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• A current financial statement, balance sheet, and information on present income and 

potential earning ability; 

• For organization borrowers, a resolution by the Board of Directors that authorizes 

conveyance of the property; and 

• Assignment of Housing Assistance Payments (HAP). 

C. Appraisals 

Prior to the Agency’s acceptance of an offer of a deed in lieu of foreclosure, the 

current market value of the property must be obtained through an appraisal by a qualified 

appraiser. 

D. Decisions 

The Loan Servicer will submit the case file of the borrower to the State Office. The 

State Office will review the file and make a decision, after having obtained advice from

the OGC. When the market value of the property is less than the Agency debt, the 

Agency must consider the borrower’s current situation and future prospects for paying 

this debt. 

Items to be included in the borrower’s case file are shown in Exhibit 12-2. 

Exhibit 12-2 

Liquidation Option - Borrower’s Case File 

• Report on Multi-family Housing Problem Case; 

• Liquidation and management plan; 

• Form RD 3560-22; 

• Resolution authorizing conveyance, if applicable; 

• Current title search; 

• Environmental review; 

• Form RD 3560-7;

• Form RD 3560-10;

• Current appraisal prepared by a qualified appraiser; 

• Due diligence report; 

• Balance of Rural Development account and other liens, if any;

• Assignment of HAP contracts, if applicable; 

• Current statement of account from the St. Louis Office; 

• Development plan with breakdown of costs, if applicable; and 

• Form RD 402-2, Statement of Deposits and Withdrawals, if applicable. 

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E. Closing of Conveyance 

Closing of conveyance will be complete when the recorded deed has been returned to

the Agency with no outstanding encumbrances other than Agency liens and/or previously 

approved prior liens. Costs incurred prior to the completion of the transaction will be 

charged to the borrower as recoverable costs. 

Upon closing of the transaction, if applicable, the Loan Servicer will release liens and 

inform the borrower of the release from liability. Borrowers must be notified whether or 

not they have been released from liability. 

The State Director will cancel any interest credit and suspend any rental assistance. 

Tenants must be informed of the possible consequences of liquidation. If the property 

will no longer participate in the Section 515, 514/516, or 521 programs, the tenants must 

be given a minimum of 180 days’ written notice. 

12.8 FORECLOSURE 

State laws pertaining to acceleration and foreclosure will affect the procedures the 

Agency is required to follow. OGC should be consulted to ensure that appropriate procedures 

are followed.

A. Making the Acceleration Decision 

The Agency must decide whether to accelerate the account and begin the foreclosure 

process. The decision to accelerate involves numerous considerations, many of which 

will vary case by case. The following issues should always be considered. 

1. OGC Concurrence 

Advice and counsel should be obtained from OGC before beginning the foreclosure 

process if: 

• The foreclosure is based on a nonmonetary default; or

• The property also serves as security for a loan under another USDA program, such as 

the FSA, since this may trigger liquidation of the other loan. 

2. Tribal Land 

If the security property is on tribal-allotted or trust land, the acceleration may be 

approved only after the Agency has offered, in writing, to transfer the account to an 

eligible tribal member, the tribe, and the Indian Housing Authority serving the tribe or

tribes. 

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3. Role of Other Lien Holders 

Depending upon the status of other liens on the security property, the Agency may 

invite other lien holders to join in the foreclosure action, or join in a foreclosure action 

initiated by another lien holder. 

B. Acceleration 

1. Acceleration Notice 

If the Agency determines that the appropriate approach to liquidation is foreclosure, 

the process begins with an acceleration notice (Guide Letter 1955-A-1, Notice of 

Acceleration to MFH Borrowers Liable for the Debt (Excludes Borrowers Who Were 

Discharged in Bankruptcy) or Guide Letter 1955-A-2, Notice of Acceleration to MFH 

Borrowers Discharged in Bankruptcy Who Have Not Reaffirmed the Debt). The 

acceleration notice demands full payment of the account, including unpaid principal and 

interest, advances, and subsidy subject to recapture. It notifies the borrower of: (1) the

reason for the acceleration, (2) the amount due, (3) the method of payment, (4) the 

opportunity for an informal review with the decision maker to seek mediation or 

alternative dispute resolution or to request an administrative appeal hearing, (5) and 

prepayment restrictions. The notice gives the borrower 30 days to pay in full or request a 

hearing. 

The acceleration notice must also include language regarding prepayment restrictions.

If a borrower prepays an Agency loan made before December 21, 1979, the tenants must 

be given 180 days’ notice that the project can be removed from the program. For 

information on these loans, see Chapter 15. 

The notice must be sent to the borrower and any cosigners simultaneously by both 

regular mail and certified mail, return receipt requested. If the property address is 

different from the address of the borrower, the notice should be sent to the property 

address as well. 

 2. Payment Subsidy 

If a borrower is receiving payment subsidy, the payment subsidy agreement will not 

be canceled when the debt is accelerated, but it will not be renewed unless the account is 

reinstated. 

3. Offers to Pay 

The decision to accelerate the account must not be made until the Loan Servicer has

made all reasonable efforts to help the borrower become successful. Therefore, once the 

account has been accelerated, borrower efforts to cure the default will not be accepted 

unless required by state law. If state law requires that foreclosure actions be halted if an 

account is brought current, partial payment of the accelerated amount must be accepted. 

Otherwise, any payment for less than the full amount required to close the account should 

be returned to the borrower. 

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The borrower’s account may be paid off by cash, transfer and assumption, sale of the 

property, or voluntary conveyance. The Agency may grant the borrower additional time

to voluntarily liquidate. If an offer is deemed unacceptable, the Agency’s denial is not 

appealable. 

C. Review of the Acceleration Decision 

Several remedies are available to borrowers who believe their accounts should not 

have been accelerated. These include an informal review, mediation or dispute 

resolution, and a formal appeal with the National Appeals Division (NAD) of the 

Department of Agriculture. Foreclosure actions will be held in abeyance while an appeal 

is pending. 

D. Transfers and Subsequent Loans During Foreclosure 

Properties can be transferred during the foreclosure process. However, the 

foreclosure process should not be stopped until the applicant is determined eligible and 

the transfer is determined to be feasible and in the best interest of the government. For a 

discussion of how the value of a property is determined, see Chapter 7, Section 7.26. 

E. Foreclosure Notice 

A foreclosure notice that includes the following must be published: 

• Projected sale date and location; 

• Fair market value of the property; 

When a property is liquidated through foreclosure action or other debt settlement 

actions, the property may be released without restrictive-use provisions. The appraiser 

will be given instructions to value the property as conventional nonsubsidized property 

without restrictive-use provisions. The encumbering restrictive-use provisions in the loan 

documents will be nullified by the foreclosure sale or debt settlement unless ownership is 

continued by the current borrower, and that borrower is currently subject to restrictiveuse as part of the original loan obligation or a subsequent servicing action. 

• The amount to be bid by the Agency; 

• The amount of Agency debt against the property; and 

• Use restriction provisions. 

For judicial foreclosure states, notices are to comply with State laws. 

Servicing Officials should take an aggressive approach to advertising foreclosure 

sales and marketing inventory properties. A list of potential buyers who would be 

interested in purchasing projects at foreclosure sale or inventory properties should be 

developed. Notices of scheduled foreclosure sales can then be sent to those interested 

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parties in addition to advertising in newspapers, notifying local real estate agents, and 

posting advertisements on the Agency’s Multi-Family Housing REO website at 

https://mfhreo.sc.egov.usda.gov. 

F. Determining the Government’s Bid at Foreclosure Sale

The Government’s bid should equal the amount of the Agency’s net recovery value or 

the market value of the security, whichever is less. 

The State Director will designate an individual to bid at foreclosure, unless prohibited 

by State law. If the Agency is the senior lien holder, it can only submit one bid. If the 

Agency is not the senior lien holder, the designated bidder may make incremental bids in 

competition with other bidders. 

If a project that is subject to restrictive-use provisions is sold outside the program at 

the foreclosure sale, the Agency has no means to continue to enforce the restrictive-use 

provisions after the purchase. 

G. After Foreclosure 

1. Agency Reporting 

After the property has been acquired, the Field Office must furnish the State Director 

with a report on the sale. Two forms must be filed: Form RD 3560-19, Status of REO 

Property, and, if applicable, Form RD 3560-55. 

2. The Property 

Upon acquisition, any existing leases must be transferred, and management

agreements must either be extended or canceled. 

3. The Borrower 

If the property is acquired by the Agency, the Agency must credit the borrower’s 

account with the Government’s maximum bid. If the property is not acquired by the 

Agency, the borrower’s account must be handled in accordance with State law. 

The Agency must make attempts to collect any unsatisfied balances. When deficiency 

judgments are sought, the State Director must prepare Form RD 1962-20, Notice of 

Judgment, which establishes how the account is to be handled by the Field Office. 

12.9 ACQUISITION OF CHATTEL PROPERTY 

The Agency will make every effort to avoid acquiring chattel property by having the 

borrower or Field Office Staff liquidate the property according to RD Instruction 1962-A, and 

applying the proceeds to the borrower’s accounts. Authorized methods of acquisition of chattel 

property include: 

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• Sales, including execution sales, Agency foreclosure sales, sale by trustee in 

bankruptcy, public sale by prior lien holder, and public sale conducted under 

voluntary liquidation. 

• Voluntary conveyance, which is acceptable only when the borrower can convey 

ownership free of other liens and the borrower can be released from liability under the 

conditions set forth in 7 CFR 3560.457. Payment of other lien holders’ debts by the 

Agency in order to accept voluntary conveyance of chattels is not authorized. If the 

Agency declines an offer of voluntary conveyance of chattels, the Loan Servicer will 

provide a copy of the rejection to the borrower. 

• Attending sales, which the Loan Servicer will attend unless it is deemed to be 

physically unsafe to do so or if attending the sale would cause unfavorable publicity. 

The Loan Servicer will attend a sale held by a prior lien holder if the market value of 

the chattel is significantly greater than the amount of the prior lien. 

• Appraising chattel property, which is the Loan Servicer’s responsibility prior to the 

sale. An outside contractor in accordance with RD Instruction 2024-A may conduct 

an appraisal. 

• Abandonment of security interest, should the chattel property have no market value 

and obtaining title would not be in the best interest of the Government. Such a 

situation might occur if costs of moving or rehabilitation are excessive. 

• Bidding at sale, which the Loan Servicer might do if there are no other bids or if the 

property may be sold at an amount which is less than the Government’s authorized 

bid. The Loan Servicer may not bid if the chattel property under prior lien is 

significantly less than the amount owed to the prior lien holder or if the Agency debt 

has been satisfied. Loan Servicers may not bid at a sale held by a junior lien holder 

or at a private sale.

Unless costs are incurred after the government acquires title to the chattel property, the 

borrower will pay all costs related to acquisition of the property. The Loan Servicer will use 

Form RD 3560-19, Status of REO Property, to report acquisition of chattel property. 

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SECTION 3: DEBT SETTLEMENT 

Debt settlement is a process in which the Agency attempts to maximize repayment of 

outstanding debts that are not satisfied through voluntary or involuntary liquidation. There are 

four types of debt settlement: compromise, adjustment, charge-off, and cancellation. The 

Agency complies with the Debt Collection and Improvement Act of 1996 in pursuing 

outstanding debt. However, a majority of MFH loans are to non-recourse borrowers for which 

no additional recovery is possible after liquidation. Therefore, the Agency primarily uses debt 

settlement in conjunction with voluntary liquidation. 

The State Director may approve or reject proposed debt settlements when the outstanding 

balance of the indebtedness amount in the offer is less than $1 million. The National Office must 

approve or reject any settlements totaling $1 million or more. 

12.10 BORROWER ELIGIBILITY 

A borrower may request debt settlement in conjunction with or after voluntary liquidation 

of security. The Agency may agree to settle a borrower’s debt if: 

• All liable parties apply for debt settlement; 

• The loan security is sold for cash or transferred to a third party; 

• The borrower pays a compromise or adjustment offer of the current market value of 

the security, less prior liens, plus any additional amount the Agency determines the 

borrower can pay; and 

• The initial payment, with a compromise or adjustment offer must be equal to or

greater than the value of the security, less prior liens. 

The Agency will not debt settle a borrower’s debt if: 

• The borrower possesses another Agency loan for which he or she cannot or will not 

settle the debt; 

• The Department of Justice has jurisdiction over the borrower’s loans or has a case 

pending against the borrower because of a suspected criminal violation in connection 

with the debt or security for the debt; or 

• The Agency requests the Department of Justice to institute a civil action against the 

borrower to protect its interests. 

12.11 APPLICATION REQUIREMENTS 

The Agency considers a borrower’s financial status when evaluating the borrower’s 

request for debt settlement. A borrower must submit complete and accurate information from

which the Agency can make a full determination of the borrower’s financial condition. This 

information must include the following items from all liable parties: 

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• A completed Form RD 3560-57, Application for Settlement of Indebtedness; 

• A current financial statement and cash flow projections; 

• Verification of income; 

• Verification of assets for the past 12 months; 

• Verification of debts greater than $1,000; 

• Tax returns for the past three years; and 

• Any other items requested by the Agency. 

12.12 COMPROMISE AND ADJUSTMENT 

A borrower is not required to dispose of security prior to application for debt settlement. 

However, if a borrower has disposed of security prior to applying for debt settlement, proceeds 

from the disposed security must first be applied to the borrower’s account. If the Agency 

approves a compromise or adjustment offer, the Agency will cancel any debt remaining after the 

compromise or adjustment offer is paid and applied to the debt. 

A. Secured Debts 

Secured debts may be compromised or adjusted as follows: 

• The debt is fully matured under the terms of the note or other instrument, or has been 

accelerated by the Agency prior to the settlement application;

• A compromise offer must at least equal the net recovery value of the security as 

determined by the Agency, less prior liens, plus any additional amount the Agency 

determines the borrower is able to pay based on a current financial statement; and 

• An adjustment offer must meet the requirements of a compromise offer, except the 

payments may be made over the shortest period the Agency determines is feasible, 

not to exceed five years 

B. Unsecured Debts 

Unsecured debts are most frequently account balances remaining after the borrower 

has voluntarily liquidated security property. The borrower’s compromise or adjustment 

offer must represent the maximum amount the Agency determines the borrower can pay 

based on a current financial statement and any other available information. An 

adjustment agreement may not exceed five years. 

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C. Handling Payments 

All compromise or adjustment payments will be recorded. The St. Louis Office will 

hold payments in the Deposits Fund Account until notification is received from the State 

Office of the approval or rejection of the offer. For approved offers, payments will be

applied in accordance with established policies, beginning with the oldest loan in the 

settlement. When the Agency accepts an adjustment offer, the St. Louis Office does not 

adjust the accounts involved until the borrower makes all the payments to the Agency. 

D. Delinquent Adjustment Agreement 

Adjustment payments that are more than 30 days past due are referred to the State 

Director. The State Director may: 

• Void the agreement; 

• Process a new debt settlement agreement; or 

• Grant a time extension. 

The borrower may appeal the cancellation of the adjustment agreement. 

12.13 CHARGE-OFF 

Charge-off is an administrative tool the Agency uses to write off nonperforming debt 

from the Agency’s portfolio. However, borrowers remain liable for charged-off debt, and the 

Government may continue to pursue collection. The Agency may charge off nonjudgment debt 

when: 

• The principal balance is $2,000 or less, and efforts to collect the debt have been 

unsuccessful or would not be economical; 

• OGC advises in writing that the Agency’s claim is legally without merit; 

• Efforts to induce voluntary repayment are unsuccessful and OGC advises in writing 

that evidence to prove the Agency’s claim in court cannot be produced; 

• The borrower is unable to pay any part of the debt and has no apparent future debt 

repayment ability; or

• There is no security for the debt. 

12.14 CANCELLATION 

When the Agency administratively extinguishes a debt owed to it, a cancellation occurs. 

Under these circumstances, the Agency releases the borrower from liability for the debt. 

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A. Cancellation with Application

When the borrower applies for debt settlement, the Agency may approve the request 

if the borrower’s application shows that the borrower cannot make any compromise or 

adjustment offer. The Loan Servicer must obtain documentation from the borrower that, 

due to unusual or extenuating circumstances, a compromise or adjustment offer is not 

feasible. 

B. Cancellation without Application 

The Loan Servicer may make a recommendation to cancel debt, without an 

application from the borrower in the following circumstances: 

• All liable entities no longer exist; 

• The 6-year statute of limitations of offset expires; 

• The borrower has been discharged of the debt in bankruptcy; 

• The debt, including a deficiency judgment, is otherwise legally without merit; or 

• The account has been returned to the Agency after cross-servicing by the Department 

of Treasury. 

C. Processing and Approving Cancellations 

The Loan Servicer must execute the completed Form RD 3560-57 and process the 

cancellation in accordance with the FMI. 

The Loan Servicer must notify the borrower in writing of the debt settlement approval 

and the approximate amount that the Agency will report to the IRS. When the Agency 

cancels debt without application from the borrower, the Agency must send a letter 

regarding the debt cancellation to the borrower’s last known address. 

The Agency must cancel any requests for offsets against the borrower after debt 

settlement approval. 

12.15 REFERRAL TO THE DEPARTMENT OF TREASURY 

Because most borrowers are nonrecourse borrowers, the Agency does not often refer 

accounts to the Department of Treasury for cross-servicing or offset as there are no liable parties 

for the debt. However, there may be times when it is appropriate to refer an account to the 

Department of Treasury for debt collection. The Agency should refer an account to the 

Department of Treasury when: 

• The debt is 180 days past due; 

• The security has been liquidated; and

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• The balance is due and payable. 

The Agency should not refer an account to the Department of Treasury when: 

• There are no liable entities to pursue; 

• An internal offset is sufficient to collect the debt within three years after the debt 

becomes past due; 

• The borrower is in compliance with an adjustment agreement; 

• The debt is in litigation or bankruptcy action is pending; or 

• The borrower is deceased. 

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Attachment 12-A 

Page 1 of 1 

ATTACHMENT 12-A 

NET RECOVERY VALUE WORKSHEET 

I. BACKGROUND

(1) Case Number: (2) Borrower Name/ID: 

(3) Proposed Liquidation Option: (4) Calculation Date: 

(5) Estimated Holding Period: 1

II. CALCULATION OF NET RECOVERY VALUE

(6) Market Value (use current appraisal)

(7) Deductions from Market Value 

 A. Liquidation costs $_________ 

 B. Acquisition cost $_________ 

C. Settlement cost of prior liens $_________ 

D. Estimated cost to operate during appraisal period2

 $_________

E. Cost to correct health and safety violations $_________ 

F. Cost to address environmental hazards (if different from E) $_________ 

 G. Selling costs $_________ 

(8) Additions to Present Market Value 

A. Appreciation during holding period 

B. Income during holding period 

C. Total Additions (sum of items 8A and 8B) 

 $________ 

 $________ 

 $________ 

(9) NET RECOVERY VALUE (6 minus Item 7G plus Item 8C) 

 

1

 The estimated inventory holding period prior to resale should be based upon previous experience in selling nonprogram property in the state and the availability of current funding for non-program inventory properties. If a state 

has not had experience in marketing non-program properties, the Multi-Family Housing Portfolio Management

(MFHPM) Division in the National Office should be contacted. 

2

 The cost to operate the project during the inventory holding period prior to resale should be based upon typical

operating costs, excluding debt payments to the government, for similar projects in the servicing jurisdiction. 

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CHAPTER 13: OTHER SPECIAL CASES 

[7 CFR 3560.458 THROUGH 3560.459]

13.1 INTRODUCTION 

There are a number of special circumstances that necessitate additional servicing 

procedures beyond those presented in previous chapters. Most of these cases involve 

characteristics unique to either a particular property or to a particular borrower. Property and 

borrower issues include a number of relatively uncommon, but nevertheless important, situations 

that Loan Servicers need to know how to address. Property issues include abandonment, 

valueless liens, and other security issues. Borrower issues include death, divorce, 

bankruptcy/insolvency, and membership liability agreements. 

This chapter presents the requirements for these other special servicing cases and Agency 

procedures for addressing them. 

SECTION 1: PROPERTY ISSUES 

13.2 OVERVIEW OF PROPERTY ISSUES 

The Agency’s servicing goal is to protect the physical and financial asset that each 

project represents, and ensure that each project is operated in a way that meets program

objectives. Sometimes, a property becomes troubled due to mismanagement, deferred 

maintenance, or market changes. As a result, the property may lose a significant share of its 

value. Whether a borrower chooses to abandon the property or to continue with its management, 

the Agency needs to address the situation created by the property’s problems with appropriate 

servicing measures that protect the interest of the tenants and the Government. This section 

describes those measures. 

In general, Loan Servicers should obtain the advice of the Office of General Counsel 

(OGC) as needed for handling the special circumstances addressed in this section. These 

circumstances include: 

• Abandonment; 

• Valueless liens; 

• Other security issues; and 

• Taking additional security to protect Agency interests. 

Prior to any decision involving real property under the above-listed special 

circumstances, Loan Servicers will complete an environmental review under The National 

Environmental Policy Act (NEPA), and a due diligence report. Refer to RD Instruction 1940-G 

and Chapter 3, Section 3 of HB-1-3560 for further information. 

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13.3 ABANDONMENT 

When the Agency believes that a borrower has abandoned a project, it will make an 

immediate check to determine if the borrower has moved and, if so, whether a forwarding 

address can be determined so that further servicing actions can be taken. The Agency will take 

the steps necessary to protect the Government’s security interest in the property. In general, the 

steps taken following abandonment are similar to those taken following foreclosure, once 

abandonment has been confirmed. 

A. Indicators of Abandonment 

The Agency considers a property to be abandoned when any or all of the following 

conditions exist: 

• The borrower cannot be located after the Loan Servicer has made diligent efforts to 

contact the borrower. This condition also applies to instances where the general 

partner(s) of a limited partnership cannot be located and the limited partners are 

unknown or cannot be located. 

• The project remains unoccupied for an extended period of time, and the borrower 

makes no effort to maintain the security property, secure eligible occupants, and/or 

comply with the objectives of the loan within a reasonable period of time as specified 

by the Loan Servicer in a certified letter sent to the borrower requesting compliance. 

B. Contacting Prior Lien Holders

If the property is not being maintained and the Loan Servicer determines that the 

borrower has abandoned the project, the Loan Servicer will attempt to contact any prior 

lien holders with a request that they take control of the property and make any emergency 

repairs necessary. 

If no prior lien holder is involved or the prior lien holder cannot immediately be 

contacted or refuses to make the emergency repairs, the Loan Servicer will immediately 

notify the State Director and request permission to: 

• Take possession of the property pending liquidation; 

• Make health and safety repairs to prevent further deterioration of the security; and 

• Enter into a management or caretaker’s agreement on behalf of the owner. 

C. Making Emergency Health and Safety Repairs 

When making necessary health and safety repairs where an emergency exists, Loan 

Servicers should recognize that the repairs need to be completed as quickly and 

effectively as possible. Accordingly, a commonsense approach that balances the health 

and safety of tenants with the price, speed, and quality of the repairs should be employed. 

Bids for specific services may be obtained from several local contractors only if the bid 

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process does not adversely affect the health and safety of the tenants. Loan Servicers 

must document the circumstances leading to the emergency situation, as well as the 

reasonable steps taken to address health and safety concerns in the case file, to later back 

up any costs incurred. 

All costs incurred at the project during the interim period between abandonment and 

eventual disposition by the Agency—including repair costs—are the responsibility of the 

borrower. The Agency treats the costs of managing abandoned property as a recoverable 

cost item. 

D. Appointing a Caretaker or Management Agent 

A caretaker or management agent will normally be appointed when the borrower has 

abandoned the security property or has failed to maintain its operation and the State 

Director determines, with the advice of OGC, that the Agency should take possession of 

the property to best protect the interest of the government. Selection of a caretaker or 

management agent is subject to the following requirements: 

• Qualifications. Persons or firms chosen as caretakers or management agents should 

have experience in operating and managing similar properties or have business 

experience that qualifies them to provide the needed services. They must be located 

near the property to provide day-to-day supervision, or be able to appoint a qualified 

local person to meet this requirement. Caretakers will normally be selected for 

unoccupied projects or those not suitable for occupancy. Management agents will 

only be selected for projects that are occupied or suitable for occupancy. The 

selection process—which must comply with all applicable Federal Acquisition 

Regulation (FAR) requirements—must be adequately documented by Loan Servicers 

in the case file. 

• Allowable fees. The amount of the management agent or caretaker fee must be set in 

accordance with Agency requirements for management fees. The requirements 

regarding management fees are established at 7 CFR 3560.102(i) and described in 

Chapter 3 of HB-2-3560. These fees will be paid as a project expense if project funds 

(e.g., reserve accounts) are available. If project funds are not available, fees will be 

paid with Government vouchers, considered a recoverable cost, and charged to the 

borrower’s account. The fees will be paid on a monthly basis.

• Rental rates. Rental rates at abandoned properties will normally remain the same for 

eligible occupants as when the project was under the control of the borrower, 

although revisions may be allowed under certain circumstances with the approval of 

the State Director. Such conditions include: 

◊ The lease agreement between the borrower and tenant permits changing the rates; 

◊ A change of rates is needed to provide income sufficient to pay operational and 

maintenance expenses, including the caretaker’s fee, and to repay the loan on 

schedule; or 

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◊ Any increase will not result in rental rates above the payment ability of eligible 

occupants, unless the State Director has given the authority to rent units to 

ineligible occupants. 

• OGC advice. The State Director should consult OGC for advice, including the 

possibility of having a receiver appointed, when the following conditions exist: 

◊ The project is occupied but rent is not paid or collected; 

◊ The eligibility of the occupants cannot be determined; and 

◊ The borrower has failed to comply with the objectives of the loan within a 

reasonable time frame as specified by the Loan Servicer in a certified letter to the 

borrower requesting compliance. 

E. Addressing the Agency’s Relationship with the Borrower 

To resolve the abandonment situation, the Agency must determine the cause of the 

abandonment. If a property is abandoned in accordance with Section 13.3 A of this 

chapter, Loan Servicers need to document that the Agency will proceed with one of three 

servicing options: foreclosure, acceptance of a deed in lieu of foreclosure, or debt 

settlement. The Agency normally will proceed with foreclosure unless one of the other 

two options is offered by the borrower. If the Agency determines after investigating the 

causes for the abandonment that the borrower entity is no longer viable, it will normally 

proceed to foreclosure or accept a deed in lieu of foreclosure, if debt settlement cannot be 

achieved. The Agency will consider negotiated debt settlement only in cases where a

default is evident and doing so is in the best interest of the Government. Properties in 

which debts are settled may be declared non-program properties. 

Upon foreclosure, the Agency has the authority to seize any project accounts on 

which the Agency has countersigned (e.g., reserve accounts). 

13.4 VALUELESS LIENS 

A valueless lien exists at a property where the recoverable value of the lien is less than 

the estimated cost of recovery. When the Agency determines that it has a valueless lien, it will 

prepare a written determination to that effect and release its lien. 

A. Declaring a Valueless Lien 

To declare a valueless lien, the Loan Servicer must provide the following submissions 

to the State Office: 

• Identification of property (legal description); 

• Description of the Agency’s lien position;

• Documentation of reasons that lien is determined to be without value; and 

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• Explanation of the reasons for releasing the lien and a description of the type of 

release sought (i.e., partial or full). 

B. Documenting Valueless Liens 

To document the reasons the lien on a project is determined to be valueless and to 

devise a strategy for releasing the lien, Loan Servicers should take the following steps: 

• Within the context of a problem case report, write up an assessment of the value of 

the project and forward it to the State Director for review and guidance on how to 

release the lien; and 

• Follow State Office instructions, as applicable. 

13.5 OTHER SECURITY 

The Agency also services other security instruments, such as collateral assignments, 

assignments of rents, Housing Assistance Payments (HAP) contracts, and notices of lien holder 

interest in a manner indicated by the agreements and according to acceptable practices in the 

respective states. When other security is taken, the Approval Official should develop a plan for 

servicing it at the outset.

• The State Director should develop any special servicing actions with the advice of 

OGC to protect the Agency’s interest.

• Loan Servicers should file evidence of the other security in the loan docket in the 

Field Office. 

• The Loan Servicer should make a notation on the management system card showing 

that the security has been retained. 

13.6 OBTAINING ADDITIONAL SECURITY TO PROTECT AGENCY INTERESTS 

The Agency generally does not need additional security to protect its interest. However, 

the Agency may negotiate with the borrower to obtain additional security in the form of real 

estate or other security when a decline in the value of the original security or other changes 

adversely affect the security available to the Agency in the event of a default. Examples of cases 

where the Agency may seek additional security include when the account is delinquent, the 

property has not been properly managed or maintained, or there is serious doubt that the 

borrower can carry out loan objectives. 

While the Agency has the authority to seek additional security in the circumstances listed 

above, it is generally a negotiated, nonforcible action. However, there may be instances where 

the Agency can use its leverage to obtain additional security (e.g., a case where loan funds are 

used to purchase land on which the borrower plans to build a parking lot). In such cases, the 

Agency might demand an interest in the parking lot as additional security for the entire project. 

Additional security is taken by executing a deed of trust with the borrower. 

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A. State Director Authorization 

In cases where taking additional security is warranted, the Loan Servicer must 

forward the borrower’s case file to the State Director for authorization, along with a 

memorandum providing the following information: 

• The facts that justify the taking of additional security; 

• A conservative estimate of the market value of any real estate to be mortgaged (Note: 

It is not necessary to obtain an appraisal of the property to be mortgaged unless 

required by the State Director.); 

• A brief description of any existing liens on the additional security, including the 

repayment terms and the unpaid balance; 

• The name of the title holder and how the title to the property is held (Note: Title 

evidence is not required.); 

• A plan for servicing the additional security to be taken; and 

• A description of other servicing alternatives available to ensure that the objectives of 

the loan will be met and to protect the Government from loss. 

The highest quality security available should be taken whenever additional security is 

considered. This means that if several security options are available, the option that has 

the least amount of risk associated with it (and would thus be easiest to liquidate if 

necessary) should be chosen. Security property with known environmental hazards or 

other risks generally should not be taken as additional security. Such risks will generally 

be identified when the Loan Servicer conducts due diligence, including an environmental 

review. When the Agency chooses not to acquire additional security property, whether in 

whole or in part due to the presence of or potential for release of hazardous substances or 

petroleum products, the Loan Servicer will notify the appropriate regulatory authority of 

the Agency’s findings and actions. 

B. OGC Advice 

Loan Servicers should obtain OGC advice and assistance whenever additional 

security is taken. Specifically, OGC can provide a title opinion, which will advise Loan 

Servicers as to what lien position is available to the Agency. 

13.7 SECURITY ISSUES INVOLVING PROJECTS WITH PARTICIPATION LOANS 

The Agency’s rule states that when other participation is involved, the Agency will 

service the account in accordance with appropriate Agency servicing regulations and the 

agreements made with the other participants at the time of loan origination. 

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SECTION 2: BORROWER ISSUES 

13.8 OVERVIEW OF BORROWER ISSUES 

Borrowers may occasionally experience special circumstances that affect their ability to 

operate the property and, thus, the Agency’s approach to servicing their accounts. Bankruptcy, 

death, and divorce are events that require special attention to ensure that the interests of the 

tenants and the Government are protected. Similarly, special agreements that borrowers may 

have with members of the organization may affect the Agency’s servicing approaches and 

decisions. This section addresses such special cases. 

13.9 REQUIREMENTS FOR ADDRESSING BORROWER ISSUES 

The Agency will address borrower accounts affected by special circumstances, such as 

death, bankruptcy, insolvency, and divorce, on a case-specific basis. The Agency will make 

servicing decisions in such cases that are in the best interest of the tenants and the Government. 

The Agency will bring legal action questioning the legal capacity of the borrower to administer 

the project if found necessary to protect the Government’s interest. The borrower or the 

borrower’s representative will provide to the Agency information concerning the:

• Evidence of legal action, due to a will or court actions that establish who is to become

the owner, on the part of the heirs or trustee following the borrower’s death; 

• Financial status of the borrower; 

• Status of the security property; and 

• Impact of the identified actions on the project’s operation. 

In general, Loan Servicers should obtain the advice of OGC as necessary to handle 

circumstances involving death, bankruptcy, insolvency, and divorce. 

A. Bankruptcy 

The handling of bankruptcy cases varies from state to state. Therefore, the State 

Director may issue State Supplements providing more specific guidance to expedite the 

handling of those cases. In general, however, Loan Servicers should obtain and follow 

the advice of OGC as necessary whenever general partners file for bankruptcy. 

B. Divorce 

When individual borrowers with loans are involved in a divorce action, the Loan 

Servicer will review the case after the final divorce decree has been granted to determine 

if any action is needed for the future servicing of the account. The Loan Servicer will 

submit the case file to the State Director for advice if the Loan Servicer is uncertain of 

the servicing actions needed to protect the Agency’s interest, or if continuation of the

loan with the remaining borrower is not authorized. The Agency will not make 

subsequent loans to pay equity as a result of a divorce action. 

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C. Membership Liability Agreements 

As a loan approval requirement, some borrowers may have special 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 a default. Alternatively, they may have 

instruments commonly referred to as individual liability agreements, which are usually 

assigned to and held by the Agency as additional security for the loan. In other cases, the 

borrower’s note may be endorsed by individuals. The Agency will service these security 

and liability instruments in a manner indicated by the agreements to adequately protect 

the Agency’s interest. The State Director will develop servicing actions with the advice 

of OGC. 

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CHAPTER 14: MANAGEMENT AND 

DISPOSAL OF REAL ESTATE OWNED PROPERTY 

14.1 INTRODUCTION 

When the Agency takes ownership of a project, adding the property to its inventory 

through liquidation proceedings, the project becomes real estate owned (REO). When the title 

transfers to the Agency, the property becomes an Agency asset. The Agency’s objectives in 

managing and selling its inventory of REO properties include: 

• Preserving affordable, decent, safe, and sanitary housing for tenants or potential 

tenants; 

• Maintaining the value of the housing project; 

• Protecting the Agency’s financial interests; 

• Ensuring that the properties comply with state and local code requirements and 

applicable environmental regulations; and 

14.2 OVERVIEW OF THE CHAPTER 

This chapter is divided into five sections. 

• Section 1 describes the management of custodial and REO property. It describes 

acceptable management methods; discusses issues related to taking possession of 

custodial and REO properties, such as disposing of nonsecurity property and paying 

taxes and insurance premiums; and explains requirements related to maintenance, 

environmental concerns, and other management issues. 

• Section 2 covers the disposition of REO property. It describes the methods for 

pricing and selling the properties and outlines procedures for accepting bids from

potential purchasers. It also describes the standards the property must meet before 

being sold. 

• Section 3 describes the environmental requirements that must be fulfilled before 

selling an REO property. These include requirements related to flood and mudslide 

hazard areas, wetlands, coastal barrier resources systems, historic places, protective 

covenants and easements, underground storage tanks, and hazardous substances. 

• Section 4 outlines the procedures for processing and closing the sale of an REO 

property. These procedures are similar to the procedures for closing other Agency 

loans. This section also highlights some of the special considerations for REO 

properties. 

• Section 5 provides instructions on processing credit sales for non-program terms. 

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SECTION 1: MANAGEMENT OF CUSTODIAL AND REO PROPERTY 

14.3 OVERVIEW 

The Agency assumes management responsibility for two types of properties: custodial 

and REO. Custodial property is borrower-owned property that has been abandoned. REO is 

Agency-owned property to which the Agency has acquired title, either as a result of foreclosure 

or conveyance by deed in lieu of foreclosure. This section outlines the requirements for 

management of each type of property. 

Loan Servicers are responsible for ensuring that custodial and REO properties are 

appropriately managed and maintained. The goal of property management is to protect the 

tenants and the interests of the Government. Consequently, Agency efforts to secure and manage 

these properties are to begin immediately once the following occurs: 

• The property title is conveyed to the Agency; or 

• The Agency determines property is abandoned. 

14.4 MANAGEMENT METHODS AND CONTRACTS 

The Agency has the authority to contract with qualified management entities to perform 

the management activities discussed in this section. The extent of management is dependent on 

factors such as: 

• The nature of the project; 

• The project’s location; 

• The condition of the project; 

• Necessary maintenance; and 

• Availability of acceptable management entities. 

In some cases, the existing management agent can be maintained; in others, the Agency 

must hire a new management agent to provide all property management services on behalf of the 

Agency. 

A. Selecting a Management Contractor 

Management contractors are selected in accordance with Agency procurement 

procedures outlined in RD Instruction 2024-A. Alternative methods for selecting a 

management contractor may be established by the Agency if it is in the best interest of

the Government. Alternative selection methods require advice from the Office of 

General Counsel (OGC). Prior to obtaining a management agent for custodial property, 

the Agency should determine if court approval is required. 

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B. Management Contract Requirements 

At a minimum, management contracts must: 

• Allow for properties to be added or removed from the contractor’s assignment, 

whenever necessary, such as when a property is taken into custody, acquired, or sold 

during the period of a contract; 

• Prohibit the contractor or associates of the contractor from performing repairs if the 

executed agreement calls for the contractor to provide detailed repair specifications; 

• Require the management agent to hold security deposits in trust and handle them in 

accordance with the tenant’s lease or occupancy agreement; and 

• Require compliance with environmental laws. 

The management agent must develop an Affirmative Fair Housing Marketing Plan 

(AFHMP), in accordance with RD Instruction 1901-E. The AFHMP must be submitted to 

the loan office. The AFHMP must receive written approval from the Civil Rights 

Coordinator in the Rural Development State Office. Form RD 1955-62, Request for 

Contract Services for Custodial/Inventory Property or Program Services is a sample

statement of work for a project management contract. 

C. Management Costs 

The costs of management services related to REO property will be paid out of income

generated by the housing project being managed. If income from the housing project is 

inadequate to pay for management services, Agency resources may be used to pay for 

management services. 

D. Project Funds 

When a property becomes REO, the Agency transmits operating and maintenance, 

reserve accounts, and escrow funds to the St. Louis Office. The former borrower’s 

account is credited for these amounts. If there is a surplus of funds, the St. Louis Office

will forward a refund check payable to the former borrower. 

14.5 TAKING POSSESSION 

A. Taking Custodial Possession 

The Agency is authorized to take custody of security property when a borrower 

becomes incapacitated, dies, or has abandoned a security property. When the Field 

Office has attempted for more than 30 days and is unable to contact a borrower, the Loan 

Servicer must inspect the property to determine its status and attempt to locate and

contact the borrower. The Field Office should seek the advice of OGC in making its 

determination and recommendation.

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1. Determining Whether a Property Has Been Abandoned 

The determination that a property has been abandoned requires significant 

investigation and documentation. In addition to the actions described in this paragraph, 

Field Office Staff must follow any procedures required by state or local law in order to 

confirm the determination of abandonment and to take custodial possession. The Agency 

cannot act to obtain possession of a property as long as a lien holder has legal possession 

of the property, or the borrower or the lien holder has a right to lease proceeds. Field 

Office Staff cannot classify a property as “abandoned” prior to documenting attempts to: 

• Determine that there is no clear evidence of management presence at the project. For 

example, a site visit indicates that tenants are unable to contact borrower or property 

manager regarding repairs or rent collection, the project has fallen into disrepair due 

to a total lack of maintenance activities, or the Loan Servicer cannot locate the 

borrower or property manager; 

• Locate the borrower through sources including, but not limited to, tenants, the postal 

service, utility companies, business associates, relatives, insurance agents, and tax 

authorities; and 

• Determine whether there are other liens on the property. If liens exist, whether the

lien holder(s) are willing to work with the Agency to secure the property. 

2. Recommendation for Taking Custody 

The Field Office will report its findings to the State Director. The report will 

recommend that a property be taken into custodial possession if it appears that the 

property has been completely abandoned and the Agency needs to assume responsibility 

for it to protect the security. Alternatively, if the Field Office reports that the property is 

occupied, the report will give details as to whether the occupants are under a lease or are 

unauthorized. The Field Office will provide any other relevant details and recommend 

future action. When appropriate, the State Director will authorize the Field Office to take 

custodial possession. When the Field Office believes that a property is abandoned, it 

must prepare a report that provides evidence of a property’s abandonment. The report is 

placed in the borrower’s case file, and a copy of the report is forwarded to the State 

Office. 

3. Liquidation 

The need to take custodial possession of a property may occur before or after a loan 

has been accelerated. If liquidation is not already in progress, taking custodial possession 

should initiate the process. Field Office Staff are responsible for conducting liquidation 

activities. 

B. Acquiring an REO Property 

When a Field Office acquires a property, Field Office Staff must notify the State 

Director. An additional REO case file should be created from the original case. The 

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REO case file should include the property title, recent inspection reports, appraisals, 

environmental reviews, and any other documentation related to the physical condition or 

value of the property. No information related to the borrower is needed in the REO file. 

14.6 INSPECTING AND SECURING CUSTODIAL AND REO PROPERTY 

Once REO property is acquired, Field Office Staff must inspect the property to determine 

what steps need to be taken to further ensure its security and maintain its value. The inspection 

will allow Field Office Staff to designate the property as program or non-program and evaluate 

the need for repairs. 

A. Inspecting and Classifying the Property 

Field Office Staff must perform an on-site field inspection of REO property to: 

• Determine repair needs; 

• Gather information to assist in completing the environmental review; 

• Assist in updating the due diligence report and appraisal, as necessary; and 

• Take necessary actions to secure and maintain the housing project. 

Based on the results of the inspection, Field Office Staff designate REO property as 

program or non-program property after considering factors such as size; design; possible 

health and/or safety hazards; and obsolescence due to functional, economic, or locational 

conditions. REO property may be sold as non-program property it any of the following 

conditions exist: 

• The housing project does not meet Agency requirements and the cost of bringing 

the housing into compliance is determined, by the Agency, to be economically 

unfeasible based on the amount of funds available to the Agency and the housing 

needs in the market area where the housing is located; 

• Attempting to sell the property on program terms is not in the best interest of the 

Federal Government; or 

• Hazardous substances or petroleum products have been released on the property 

and the cost of cleanup is estimated to exceed the dollar value the Agency will 

recover through sale of the property. 

REO property in an area no longer designated rural is treated as if it were still in a 

rural area. 

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B. Securing Custodial and REO Property 

When the Field Office assumes management responsibility and takes possession of 

REO or custodial property, immediate steps must be taken to inspect and secure the 

property whether by Field Office Staff or management contractor. 

1. Physical Security of Vacant Properties 

If the property is vacant, it should be locked or otherwise secured and a no trespassing 

notice should be posted. For REO only, after an inspection determines utility systems are 

in safe operable condition, utility companies should be contacted to maintain or reinstate 

utility service. An inventory should be made of any nonsecurity personal property left on 

the premises and efforts made to identify any owners or lien holders. 

2. REO Properties Occupied by Tenants 

REO property may be occupied by tenants with leases executed by the former 

borrower. The Agency may require tenants to sign a new lease, but if it is in the best 

interest of the Government, the Agency may honor existing leases. The Agency may 

evict unauthorized tenants. 

When units in an REO property are under an existing lease and the Agency decides to 

continue the lease, the tenant must be notified, in writing, that the Agency has acquired 

the former owner’s rights under the lease and that all payments should be remitted to the 

Agency’s management agent. If a lease is to be terminated, the tenant must be notified, 

in writing, that their lease is being terminated in 30 days, and they must vacate. The OGC 

should be contacted for advice and assistance prior to evicting a tenant in order to obtain 

possession of an REO property. 

Rent payments due and payable before the date the Agency acquired the property are 

applied to the borrower’s account. Any surplus funds will remain with the project. 

14.7 DISPOSITION OF NONSECURITY PROPERTY 

The Agency has no legal claim to any nonsecurity, owner, or tenant property left on the 

premises. State or local law may affect procedures for disposing of personal property left on the 

premises of an REO or custodial property. Field Office Staff must comply with any state or local 

requirements, as well as the procedures discussed in this paragraph. If the owners or lien holders 

of any personal property that remains custodial or REO property can be identified and located, 

Field Office Staff must offer them a reasonable opportunity to remove the property. Any 

conversations with the owner of the property should be documented and placed in the case file. 

A. Custodial Property 

The Agency may remove any nonsecurity personal property from custodial properties 

as long as such property can be safely stored. Personal property cannot be removed and 

stored if: 

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• The storage facility presents a hazard to the security of the property, such as a 

leaking roof or unsecured area, which allows access to the property by 

unauthorized persons; and 

• The personal property itself presents a hazard, such as flammables or explosives. 

Hazardous materials must be managed in compliance with Paragraph 14.10. 

B. REO Property 

1. Notice to Owners or Lien Holders of Personal Property 

If the property is not retrieved after the initial notification, a certified letter should be 

sent, return receipt requested, notifying the owner or lien holder of the date on which the 

Agency will dispose of the property, and that the property may be retrieved before the 

disposition upon payment of any expenses incurred by the Agency related to the personal 

property, such as advertisement or storage. 

2. Disposal of Unclaimed Property 

The Field Office will dispose of unclaimed property in accordance with its value and 

conforming with local practices. For example, if there are items of significant value, an 

advertisement may be placed in the local newspaper. Unclaimed tenant property will be 

disposed of in accordance with the terms of the lease. 

3. Income from Disposition 

Proceeds from the sale of items under lien should be paid to any owner or lien holder 

after deducting Agency selling expenses. If there is no known owner or lien holder, 

proceeds are applied to the REO account. 

14.8 TAXES AND INSURANCE 

A. Taxes 

REO property is subject to taxation by state and local political jurisdictions in the 

same manner and to the same extent as other properties, unless state law specifically 

exempts property owned by the Federal Government. If a jurisdiction changes the law to 

begin taxing Government-owned property, only taxes accrued after the effective date of 

the change will be paid. Field Office Staff must notify the taxing authority, in writing, 

when title to real estate is acquired and provide the Field Office address to which tax bills 

should be sent during Agency ownership. 

If the value of the property is significantly less than the value at which it is being 

taxed, as soon as it is acquired the Agency may request a new assessment by the local 

taxing authority. Management contracts between the Agency and property managers

may include provisions allowing the management agent to request a new tax assessment. 

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If property is acquired subject to a prior lien, before the Agency pays taxes, Field 

Office Staff must contact the prior lien holder to determine if that lien holder will pay the 

taxes. 

Taxes on program property are paid when due. Taxes on non-program property may 

be deferred until the property is sold if the taxes that accrue before disposition exceed the 

value of the property. If the taxing authority schedules a tax sale before the Agency can 

sell the property, Field Office Staff will determine what is in best interest of the 

Government. To make this determination the Field Office Staff will calculate the net 

recovery value that would result from paying the taxes and continuing sales efforts. This 

calculation will be compared with the net recovery value if the Agency allowed the 

property to be sold for delinquent taxes. (See Chapter 12 for a more detailed discussion of 

net recovery value.) 

B. Insurance 

1. Custodial Property 

Insurance on custodial property will be maintained per program instructions. 

2. REO Property 

Insurance will not be canceled when property is acquired. However, the Agency will 

pay additional premiums to continue coverage only when it is in the best interest of the 

Federal Government. If it is necessary to file a claim, Field Office Staff should submit 

the claim and direct that insurance proceeds be forwarded to the St. Louis Office. 

14.9 PHYSICAL MAINTENANCE AND REPAIR

Custodial property will be maintained and repaired only as needed to protect the security 

of the property and to prevent deterioration. In the case of historic buildings, such repair and 

maintenance will be done in a manner that preserves the design integrity. Consult with the SEC 

and/or SHPO to resolve any issues in this regard. In the event of damage or theft, the procedures

described under subparagraph A of this section should be followed. 

All contracts for management or lease of REO property will contain provisions that 

protect environmental resources determined to be present in keeping with Section 3, 

Environmental Requirements 

REO property designated to be sold as program property must be repaired, as necessary 

to meet the Agency’s requirements for decent, safe, and sanitary housing.

REO property designated to be sold as non-program property will be managed in a 

manner that: 

• Removes health and safety hazards; 

• Prevents deterioration; and 

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• Complies with state and local requirements for the sale of the property. 

Additional repairs or renovations will only be made if they will enhance the sale value of

the property and are determined, by the Agency, to be in the best interest of the Government. 

A. Vandalism and Theft 

Field Office Staff will report any willful damage or theft to the local law enforcement 

authorities and in whatever manner necessary, to attempt to resolve the incident, 

including signing complaints and testifying at hearings or trials. 

Field Office Staff should send a written report of the incident to the State Director 

and a copy to the Regional Office of the Inspector General (OIG). The State Director, in 

consultation with the OGC as necessary, will advise and assist the Field Office Staff. 

Damage to REO program property as a result of vandalism and theft may be repaired 

as necessary to continue marketing. Repairs may include cost-effective improvements to 

minimize the likelihood of future damage, such as increased lighting, security fencing, 

and removal of shrubs that limit visibility. Non-program property should be broom

swept, but generally will not be repaired unless necessary to prevent deterioration. 

Custodial property should be repaired only to protect the security and prevent 

deterioration.

B. Off-Site Repairs or Improvements 

The Agency may require off-site repairs or improvements to protect property from

damage, to protect the Government’s interest or enhance the marketability of property. 

Off-site improvements must be approved by the State Office. To obtain approval, Field 

Office Staff must prepare a justification that demonstrates failure to make the 

improvements would likely result in a loss in property net recovery value greater than the 

expenditure, and that there are no other feasible means with state or local entities to 

accomplish the same result. 

To obtain off-site improvements, the Agency may enter into a contract with a private 

company or enter into a cooperative agreement with a state or local government, or other 

entity to obtain repairs or improvements. Under a cooperative agreement, the entity will 

provide money, property, services, or other items of value to the entity to accomplish a 

public purpose. While cooperative agreements are not a contract action, the authority, 

responsibility, and administration of a cooperative agreement must be consistent with 

contract action. OGC should be consulted when a cooperative agreement is considered. 

14.10 SPECIAL USES OF REO 

A. Transitional Housing for the Homeless 

By a Memorandum of Understanding (MOU) between the Agency and the 

Department of Health and Human Services, REO property that is not under lease or sales 

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agreement may be leased to public bodies and nonprofit organizations to provide 

transitional housing for the homeless. 

B. Mineral Leases 

When it is in the best interest of the Government, the Agency may lease mineral 

rights associated with REO property. OGC should be contacted for assistance in 

preparing the lease agreement. The appropriate level of environmental review must be 

completed prior to any agreement to lease mineral rights. Since such actions may be 

controversial and may have the potential for significant impact on the environment, prior 

consultation with the State Environmental Coordinator is required. 

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SECTION 2: DISPOSITION OF REO PROPERTY [7 CFR 3560.503]

14.11 OVERVIEW 

The Agency will make every effort to sell REO properties quickly and at the best 

possible price. Whenever possible, preference will be given to selling REO program property to 

a program borrower. 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. 

A. Sale Methods and Pricing 

Most REO properties are sold through public drawing. However, the Agency may 

sell properties through auction, sealed bid, negotiation, or agreements with other Federal 

Agencies, such as the Department of Housing and Urban Development (HUD). 

REO properties are initially priced for sale at their present market value, as 

determined by appraisal. Administrative price reductions may be taken over time to 

facilitate sale of the property (see Paragraph 14.14 for a discussion of price reduction). A 

schedule is published that restricts sales of program property to program-eligible buyers 

for a period of time before any offering to the general public, and whenever there is a 

reduction in price. 

An Affirmative Fair Housing Marketing Plan, as described in Paragraph 14.15, must 

be prepared for REO multi-family housing properties of four or more units. 

B. Financing 

When funds are available, the Agency may offer financing to buyers of REO 

property. When program credit is offered, the loan is processed following the procedures 

described in HB-1-3560. 

Non-program credit terms are offered when the buyer is not eligible for a Section 514 

or 515 loan, or the property does not qualify as a program property. Section 5 provides 

instructions for credit sales on non-program terms. Buyers who receive financing on 

non-program terms must be advised that they are not eligible for interest credit or rental 

assistance. 

C. Warranty 

The Agency does not provide a warranty of either the title or the physical condition of 

any REO property. 

14.12 PRICING AND SALES SCHEDULES 

REO housing is priced and initially offered for sale at its present market value, based on a 

current appraisal. Administrative price reductions may reduce the offering price to facilitate the 

sale. Mineral, water, and similar rights are generally sold with the property and are not sold 

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separately except when the Government’s security interest will not be jeopardized. Lease or 

royalty interests that do not pass by deed are assigned to the buyer. 

A. Appraisals 

To determine the property’s present market value, the Field Office must arrange for 

an appraisal in accordance with the procedures described in Chapter 4, Notice of Funding 

Availability (NOFA) and Initial Application Process. If repair or improvement is 

planned, the appraisal must provide both as-is and as-improved values. Each asimproved appraisal must include a list of the planned repairs. Any special flood or 

mudslide hazard areas or wetlands and related use restrictions must be reflected in the 

appraisal. All REO property considered for disposal or lease must be evaluated for 

possible contamination from hazardous substances or petroleum products through the 

process of due diligence and completion of the Transaction Screen Questionnaire (TSQ) 

as described in Paragraph 14.26. This will normally be completed at the same time as, or 

prior to, the appraisal. 

A property must be reappraised whenever its condition has deteriorated, it has been 

significantly damaged or vandalized, additional repairs and improvements have been 

made, cleanup of hazardous material or lead-based paint, or there has been a change in 

market conditions. Refer to Section 3 for detailed environmental requirements. 

B. Sales Schedules and Administrative Price Reductions 

The sale of REO program property is restricted to program-eligible buyers when a 

property is offered for sale and any time an administrative price reduction is taken. 

Exhibit 14-1 provides the sales schedule for program property. The sales price is fixed 

when a sales contract is executed and does not decrease further based upon scheduled 

price reductions. 

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Exhibit 14-1 

Sales Schedule for Multi-family Housing REO Property Program Property

Days from Initial Offer Action

Day 1 Initial offer (appraised as-is value with subsidy). 

Day 45 If no acceptable offer, reduce price by 10 percent and offer 

again. 

Day 91 

If no acceptable offer, reduce price by another 10 percent or use 

other methods (additional 10 percent price reductions allowable 

after 45 days) 

Day 180 

If no acceptable offer, submit REO case file with 

documentation of marketing efforts to State Office for further 

advice on sales incentives or to authorize sealed bid/auction. 

Loan Servicer may reevaluate whether the project should be 

classified as a program property.

Exhibit 14-2 provides the sales schedule for non-program properties. If a program

property has not sold following active marketing efforts and two price reductions, Field 

Office Staff will reevaluate the property to determination if it should continue to be 

marketed as a program property. The reevaluation process may include an updated 

appraisal. 

Exhibit 14-2 

Sales Schedule for Non-Program REO Property

Days from Initial Offer Action

Day 1 Initial offer (appraised as-is value without subsidy). 

Day 45 

If no offer, reduce price by 10 percent and offer again. 

Additional 10 percent price reductions are allowable after 45 

days. 

Day 91 If no acceptable offer, reduce the price by another 10 percent or 

use other sale methods. 

Day 180 

Submit REO case file with documentation of marketing efforts 

to State Office for further advice on sales initiatives to 

authorize sealed bid/auction. 

14.13 MARKETING AND ADVERTISEMENT 

A good marketing plan is the key to reaching the maximum number of potential buyers 

and to ensuring that eligible program applicants have an opportunity to purchase REO properties. 

The Agency may advertise directly or contract for advertising services. Broker contracts may 

include advertising services. All advertisements must state occupancy or environmental 

restrictions.

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A. Fair Housing and Affirmative Fair Housing Marketing Plan 

All advertising must meet equal housing opportunity requirements and contain the 

equal housing opportunity statement and logo. 

B. Truth in Lending Requirements 

If the availability of Agency financing will be advertised, marketing efforts must 

conform to the requirements of the Truth in Lending Act. Exhibit 14-3 highlights these 

requirements, see RD Instruction 1940-I for additional information. 

Exhibit 14-3 

Truth in Lending Highlights 

• Advertisements that state specific credit terms must state only terms that 

will actually be offered. 

• Any finance charge listed must be stated as an annual percentage rate. 

• Key terms related to financing used in the advertisement must be defined 

C. Advertising and Marketing Methods 

Advertising efforts should be designed to reach a broad audience. Each Field Office 

should identify appropriate marketing efforts and tailor them for each market area. At a 

minimum, advertisements must be placed in newspapers of general circulation and posted 

on the Field Office bulletin board. Other marketing efforts that may be appropriate 

include: 

• Posting an advertisement on the Agency’s multi-family housing REO Web site at 

https://mfhreo.sc.egov.usda.gov. This site allows staff to upload, modify, and delete 

properties. The general public will view multi-family housing REO properties for 

sale at: http://www.resales.usda.gov; 

• Posting advertisements in public locations accessible to prospective purchasers, 

including community bulletin boards and major employment sites; 

• Broadcasting announcements on radio or television; or 

• Informing potential program applicants or investors of the availability of REO 

properties. 

Advertisements must include the following:

• Appropriate language, stressing the need for potential buyers to complete and submit 

an application and other required documentation; 

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• Any restrictive-use requirements that will be attached to the project and added to the

property’s title; 

• Sale price; and 

• Date, time, and location of drawing. The date and time must allow adequate time for 

advertising and review of application packages.

D. Review of Marketing for Unsold Properties 

At least quarterly, the State Director must review the status of unsold REO property 

to ensure that acquired properties are being placed on the market promptly, properties on 

the market are selling within a reasonable time frame, and that properties under contract 

are closed in a timely manner. Of particular concern are: 

• Properties acquired more than 90 days ago that have not yet been made available for 

sale; 

• Program properties that have been available for sale for 6 months or more and are not 

under contract; 

• Non-program properties that have been available for sale for 4 months or more and 

are not under contract; and 

• Properties that have been under contract for more than 60 days and have not closed. 

14.14 SPECIAL MARKETING TECHNIQUES 

A. Buyer Incentives 

The State Director may authorize buyer incentives when Field Office Staff provide 

evidence that a specific market area is depressed and the incentives are required to 

stimulate buyer interest. To request approval for buyer incentives, the Field Office must 

describe past efforts to sell the property and explain why the proposed incentives are 

expected to produce improved results. Incentives, such as the payment of closing costs, 

may be appropriate for any property. Amortization schedules longer than the standard 

term may be offered for non-program properties. 

B. Broker Incentives 

When an additional broker incentive is needed, such as when a very low-value 

property offers an inadequate commission; the State Director may authorize a minimum 

commission or fixed-amount sale bonus. To request the incentive, the Field Office must 

describe the past efforts to sell the property and justify the amount and the purpose of the 

incentive. Upon the approval of the State Director, a written offer of the incentive that 

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specifies the requirements and circumstances in which the incentive will be given must 

be provided to the broker. 

C. Acquisition of Land, Easements, or Rights-of-Way to Effect Sale 

When it will help the sale of REO property and it is in the best interest of the 

Government, the State Director may authorize the acquisition of adjacent land, 

easements, or rights-of-way in order to cure title defects or encroachments. Additional 

land may not be acquired at a cost in excess of its appraised market value. 

14.15 REO PROPERTY NOT MEETING PHYSICAL STANDARDS 

When REO property does not meet the Agency’s dwelling standards, and making repairs 

that will allow the property to meet these standards is not economically feasible for the 

Government, the property is listed, advertised, and sold with specific occupancy restrictions. 

Housing that does not meet the Agency’s dwelling standards may still be considered 

decent, safe, and sanitary if it: 

• Is structurally sound and habitable; 

• Has a potable water supply; 

• Has functionally adequate, safe, and operable heating, plumbing, electrical, and 

sewage disposal systems; 

• Meets the Agency’s thermal performance standards; and 

• Is safe—that is, a hazard does not exist that would endanger the health or safety of 

occupants. 

The deed by which such a property is conveyed will contain a covenant restricting the 

new owner from allowing occupancy of affected residential units until it those units meet the 

Agency’s dwelling standards, as discussed in Chapter 3 of HB-1-3560. Property that is not 

decent, safe, and sanitary must still meet the Agency’s environmental requirements, including 

the management of hazardous substance requirements discussed in Paragraph 14.10. 

In the event that the Agency has acquired property that is unsafe and cannot feasibly be 

made safe, for reasons that are environmental in nature or relate to contamination from

hazardous substances or petroleum products, Field Office Staff will provide appropriate 

information to the State Director, including the observations and recommendations of the State 

Environmental Coordinator. The State Director will submit the case file, along with complete 

documentation of the problem and a recommended course of action, to the Deputy 

Administrator, Multi-Family Housing, with a copy to the Director, Program Support Staff, for 

their joint review and guidance. 

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A. Notice of Occupancy Restriction 

The notice of sale and sale contract must describe the specific conditions that prohibit 

occupancy and the items necessary for the property to meet decent, safe, and sanitary 

standards, using language similar to the following: 

“Pursuant to Section 510(e) of the Housing Act of 1949, as 

amended, 42 U.S.C. 1480, RHS has determined dwelling unit or 

units on this property inadequate for residential occupancy. The 

quitclaim deed by which this property will be conveyed will 

contain a covenant excluding the inadequate residential unit(s) 

from residential use until the dwelling unit(s) is repaired or 

renovated as follows:” (insert the items necessary for the property 

to meet decent, safe, and sanitary standards, clearly indicating the 

inadequate unit(s) and necessary repairs for each unit). 

For purposes of advertising, the list of specifications may be replaced with a 

statement to contact the Agency, or the real estate broker under an exclusive listing 

contract or “any real estate broker” for open listing agreements, whichever is relevant, for 

a list of specific items necessary for the property to meet decent, safe, and sanitary 

standards. 

B. Quitclaim Deed Restrictive Covenant 

The quitclaim deed must contain a covenant restricting residential occupancy if units 

within the project fail to meet the Agency’s dwelling standards. The covenant must 

describe the conditions that prohibit occupancy of specific units and specify the 

improvements that are necessary for the property to fully comply with Agency standards 

for housing that is decent, safe, and sanitary. The covenant may use language in a State 

Supplement, similar to the following:

“Pursuant to Section 510(e) of the Housing Act of 1949, as 

amended, 42 U.S.C. 1480, the purchaser (‘Grantee’ herein) of the 

above described property (‘subject property’ herein) covenants and 

agrees with the United States acting by and through the U.S. 

Department of Agriculture (‘Grantor’ herein) that the inadequate 

dwelling unit(s) located on the subject property as of the date of 

this quitclaim deed will not be occupied or used for residential 

purposes until the item(s) listed at the end of this paragraph have 

been accomplished. This covenant shall be binding on Grantee 

and Grantee’s heirs, assigns, and successors and will be construed 

as both a covenant running with the subject property and as 

equitable servitude. This covenant will be enforceable by the 

United States in any court of competent jurisdiction. When the 

existing dwelling unit(s) on the subject property complies with the 

aforementioned standards of the U.S. Department of Agriculture in 

accordance with its regulations, the subject property may be 

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released from the effect of this covenant and the covenant will 

thereafter be of no further force or effect. The property must be 

repaired as follows: .” (insert the items referenced in the 

notice of sale and sale contract, necessary for the property to meet 

decent, safe, and sanitary standards) 

C. Release of Restrictive Covenant 

When the owner requests a release of the restrictive covenant, the Agency inspects 

the property. The Agency will release the covenant if the conditions that prohibited 

occupancy have been corrected; the specific items necessary for the property to meet 

decent, safe, and sanitary standards have been provided; or the structure necessitating the 

restrictive covenant has been removed from the site. Restrictive covenants, established as 

environmental mitigation measures, will not be released without the concurrence of the 

State Director. 

14.16 DISPOSITION BY PUBLIC DRAWING 

Public drawing is the preferred and most common method of sale for REO properties. 

Exhibit 14-4 outlines the public drawing process. Use of any other sale method requires 

approval from the State Office. 

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Exhibit 14-4 

The Disposition by Public Drawing Process

Step 1 The property is offered for sale at market value. Loan Servicer 

completes Form RD 1955-40, Notice of Real Property for Sale. 

Step 2 The Loan Servicer advertises the property. Contacting known 

interested parties is part of advertising efforts. Program properties are 

offered exclusively to program applicants for the first 45 days, after 

which the property is available to anyone. The Agency may accept 

offers from program applicants prior to the advertised drawing date. 

Non-program purchase offers cannot be accepted prior to the drawing 

date. 

Step 3 Offers are accepted and stamped with the date and time of receipt.

Step 4 Agency reviews offers. If only one offer is received and the offer 

meets Agency requirements, that single offer may be accepted. If 

more than one offer is received, the Agency will accept the offer that 

is in the best interest of the Government. If acceptable offers are 

comparable, these will be sealed, placed in a receptacle, and drawn 

sequentially. 

Step 5 If no acceptable offer is received, reduce price by 10 percent or use 

other incentives. Repeat steps 1 through 4. 

Step 6 If no acceptable offer is received, submit REO case file with 

documentation of marketing efforts to the State Office for further 

advice on sales incentives or to authorize sealed bid/auction. Loan 

Servicer may reevaluate whether the project should be classified as a 

program property.

A. Listing the Property 

REO property is offered for sale 

using Form RD 1955-40. The date 

indicated on Form RD 1955-40 is the 

effective date of the offer to sell. An 

offer to purchase may be submitted at 

any time after the effective date listed in 

the notice. 

When an offer is accepted, the notice 

of sale is revised to indicate that only 

back-up offers will be taken. The notice 

is not withdrawn until the sale is closed, 

except when the offer is from a nonprofit 

organization or a public body for 

transitional housing for the homeless. 

REO Property Subject to Redemption Rights 

REO property subject to redemption rights 

may still be sold if Field Office Staff determine 

that there is no probability of its redemption and 

state law permits its sale. In states where such 

sales are permitted, a State Supplement will be 

issued with the specific state law requirements. 

The buyer must sign a statement acknowledging 

sale conditions under state law. The original 

signed statement will be filed in the REO case 

file and transferred to the borrower’s case file if 

it is Agency financed. 

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B. Submission Requirements 

An offer to buy must be submitted on Form RD 1955-45, Standard Sales Contract, 

Sale of Real Property of the United States. Offers received in any other form must be 

returned to the offeror. Any offer to buy that is contingent upon Agency credit must be 

accompanied by a completed Form SF 424, Application for Federal Assistance. 

Applications are considered completed and acceptable only if they include the required 

attachments. To establish borrower eligibility, the following attachments must be 

included when the application is submitted: 

• Financial statements for the past two years; 

• Credit report for each general partner (if limited partnership) or each officer (if 

corporation); 

• Proposed limited partnership agreement and certificates of limited partners, if 

applicable; 

• Tax-exempt ruling from the IRS designating the borrower organization as a 501(c)(3) 

or 501(c)(4) if applicant is nonprofit (if designation is pending, a copy of the 

designation request); 

• Mission statement; 

• Evidence of organization under state and local law or copies of pending applications; 

and 

• List of board members 

Those requesting Agency credit must meet the applicant eligibility requirements as 

outlined in Paragraph 4.16 of HB-1-3560. 

C. Receiving and Considering Offers 

Each offer must be date stamped when it is received. Offers received on the same

day will be selected for consideration by lot. Names will be placed in a receptacle, 

drawn, and numbered sequentially. Offers drawn after the first are held as backup and 

the offeror so notified. 

The Agency selects the first minimum acceptable offer received and executes Form 

RD 1955-45. The form is then sent to the bidder along with a letter to indicate 

acceptance of the offer. A letter is also sent to notify all unsuccessful bidders of the 

status of their offers. 

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D. Cancellation of Sales Contracts 

If an offer contingent upon obtaining Agency financing on program terms is selected 

and the credit request is subsequently rejected, the next offer is considered. Property is 

not held off the market pending the outcome of an appeal. If there are no backup offers, 

the notice of sale is revised to indicate the new status of the property. 

When a sales contract is canceled due to offeror default, any earnest money collected 

is forwarded to the Field Office where it will in turn be forwarded to the St. Louis Office 

for application to the General Fund. 

14.17 DISPOSITION BY SEALED BID OR AUCTION 

Any use of the sealed bid or auction methods must be authorized by the State Director. 

Program properties may be sold using these methods only after regular sales efforts have been 

unsuccessful for six months. Either method may be used as the initial sale effort for nonprogram properties when regular sale efforts are not likely to result in prompt sale (such as when 

structures have been substantially destroyed by fire). 

A. Establishing the Minimum Acceptable Offer 

Field Office Staff must develop and document the recommendation for the minimum 

acceptable bid or sales price using the net recovery value worksheet provided in Chapter 

12, Attachment 12-A. 

B. Publicizing the Sale

The Agency solicits sealed bids or publicizes an auction by public notice. The notice 

must include the date, time, and place of the bid opening or auction and describe how 

bids are to be made, the required percentage of bid deposit, the maximum credit terms, 

the cash preference percentage described in subparagraph C.3 of this section, and other 

pertinent information, such as a notice of special flood or mudslide hazard area or

wetland and any related use restrictions. 

C. Sealed Bid Procedures 

1. Submission Requirements 

Sealed bids must be made on Form RD 1955-46, Invitation, Bid, and Acceptance, 

Sale of Real Property of the United States, and be accompanied by a deposit provided in 

the form specified in the bidding instructions. No deposit is required from bidders who 

are eligible program purchasers. A minimum deposit of 10 percent is required for nonprogram loans. 

Bidders must submit their bids in a sealed envelope marked: “SEALED BID OFFER 

 * ” (*insert Property Identification Number). 

Bids may be submitted for individual properties or a group of properties.

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2. Receiving and Opening Bids 

All bids will be date and time stamped when they are received. Sealed bids will be 

held in a secured file before bid opening. If the bidder wants to withdraw their bid, this 

must be done prior to the drawing date. The bid opening will be held publicly at the 

place and time specified in the notice with at least two Agency employees present. Each 

bid received will be recorded showing the name and address of the bidder, the amount of 

the bid, the amount and form of deposit, and any conditions of the bid. The record of 

bids will be signed by the staff person conducting the bid opening and retained in the 

REO file. 

3. Reviewing and Accepting Bids 

Only responsive bids will be considered. To be considered responsive, bids must be 

signed and dated by the offeror, include any required deposit, and be for an amount at 

least equal to the established minimum bid. Minor deviations or defects in the bid 

submission may be waived by the Approval Official so long as the bid meets these 

minimum requirements. 

Generally, the highest bid will be selected. However, cash bids will be given 

preference over bids that are contingent upon the offeror obtaining financing if the cash 

offer is at least equal to a specified percentage of the highest offer. Exhibit B of RD 

Instruction 440.1 specifies the applicable percentage. 

In the case of two identical bids for a program property, program-eligible purchasers 

will be selected before bidders who are not program-eligible.

4. No Acceptable Bid 

If no acceptable bids are received, the Agency may negotiate a sale at the best price 

possible in accordance with Paragraph 14.18. All bidders must be informed, in writing, 

of any anticipated negotiations. Deposits must be returned to all bidders by certified 

mail, return receipt requested. 

5. Notification to Bidders 

Field Office Staff also must notify unsuccessful bidders in writing that their bids were 

not accepted and who the successful bidder was. Deposits must be returned to all 

unsuccessful bidders by certified mail, return receipt requested. 

When a bid is accepted, Field Office Staff must execute Form RD 1955-46 and send a 

written acceptance of the bid. 

6. Failure to Close 

If a successful bidder fails to perform under the terms of the offer, for any reason 

other than denial of credit by the Agency, the bid deposit will be forfeited and forwarded 

to the St. Louis Office for application to the General Fund. 

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Upon determination that the successful bidder will not close, the State Director may 

authorize direct negotiations with the next highest bidder, authorize another sealed bid 

sale, or authorize negotiations with other interested parties, as described in Paragraph 

14.18. 

D. Auction Procedures

The State Director will determine whether an Agency employee will conduct the 

auction or whether the complexity of the sale requires the services of a professional 

auctioneer. Form RD 1955-46 is used for auction sales. 

1. Selecting a Professional Auctioneer 

Auctioneers are selected through a competitive process using the procedures 

described in RD Instruction 2024-A. The commission will be set as part of the auctioneer 

solicitation. If an auctioneer submits a bid with a commission rate that is significantly 

lower than other bids, detailed documentation will be provided attesting that they have

successfully sold properties at the lower rate with no compromise in service. 

2. Bid Deposits 

Successful bidders will be required to make a bid deposit of 10 percent of the 

purchase offer. This fee will be waived for program-eligible bidders, pending final 

determination of eligibility. Deposits should be in the form of cashier’s check, certified 

check, postal or bank money order, or bank draft payable to the Agency. Cash and/or 

personal check may be accepted only if deemed necessary for a successful auction to 

occur by the person conducting the auction. 

Where program financing is authorized, all notices and publicity should provide for a 

method of prior approval of credit and the credit limit for potential program-eligible 

purchasers. This may include submission of letters of credit or financial statements prior 

to the auction. The auctioneer should not accept bids that request program financing in 

excess of the market value. 

3. Accepting Bids 

When the highest bid is lower than the minimum amount acceptable to the Agency, 

negotiations should be conducted with the highest bidder or, in turn, the next highest 

bidder(s) or other persons known to be interested in obtaining an executed bid at the 

predetermined minimum. 

4. Purchaser’s Default 

Upon purchaser’s default, the Field Office Staff will remit the bid deposit to the St. 

Louis Office as a miscellaneous collection. The property may than be disposed of 

through a negotiated sale. 

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14.18 NEGOTIATED SALE 

If no acceptable bid is received either from a sealed bid sale or at a public auction, the 

State Director may negotiate a sale at the best price possible without further public notice by 

negotiating with interested parties, including previous bidders. 

A sale made through negotiation will be documented and accepted by the Approval 

Official on Form RD 1955-46 and must be accompanied by a bid deposit of 10 percent of the 

negotiated sales price, except that the deposit will be waived for program-eligible buyers. 

14.19 DISPOSAL OF PROPERTY FOR SPECIAL PURPOSES 

REO properties may benefit people in need of housing who can be reached in cooperation 

with other programs or Federal agencies. Cooperative agreements with other Federal or stateassisted housing programs will be announced and updated with administrative notices. 

14.20 DISPOSAL AS CHATTEL OR SALVAGE 

If the Agency is unable to sell non-program property by regular sale, sealed bid, or public 

auction, the structure may be sold as chattel or salvage to be removed from the site. Form 

RD 1955-47 is used to transfer title of real property converted to chattel to the purchaser. 

If no offer is received to remove the structure, the State Director may contract or arrange 

to have it demolished, in exchange for the salvaged materials or otherwise as determined 

appropriate. For example, the local fire-fighting unit may be permitted to use a structure slated 

for demolition as a burn for fire fighting practice. Once the structure is disposed of, the lot is 

offered for sale as non-program REO property. 

If REO property is a vacant lot, the lot is offered for sale as non-program property. 

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SECTION 3: ENVIRONMENTAL REQUIREMENTS 

14.21 OVERVIEW 

The Agency must complete the appropriate level of environmental review under the 

National Environmental Policy Act for disposal of REO property in accordance with RD

Instruction 1940-G prior to determining the disposition of the property. The proposed disposal 

of REO property will normally qualify as a categorical exclusion. However, an environmental 

assessment and an environmental impact statement (EIS), when deemed necessary, is required 

for any proposed disposal of REO property that meets one of the following criteria: 

• The Agency has evidence that the transaction would result in a change in use of the 

REO property (for example, residential to commercial); 

• The transaction is controversial for environmental reasons; 

• The original environmental assessment for the project contains mitigation measures 

requiring an on-going managerial action (such as preservation of an historic building 

or setbacks from wetlands); 

• The transaction affects environmental resources identified in 1940-G, or 

• The property is contaminated with hazardous substances or petroleum products. 

This section summarizes the basic environmental information that pertains to disposal of 

REO properties. For more detailed information and assistance, refer to RD Instruction 1940-G 

and the State Natural Resource Management Guide. 

14.22 PROPERTY LOCATED WITHIN A SPECIAL FLOOD OR MUDSLIDE 

HAZARD AREA OR CONTAINS WETLANDS 

Prospective buyers will be provided written notice that the REO property is in a special 

flood or mudslide hazard area. 

Form RD 1955-46 , “Invitation, Bid, and Acceptance, Sale of Real Property of the United 

States” must include notice of special flood or mudslide hazard areas, wetlands and other 

environmental use restrictions. Prospective purchasers, auctioneers, and brokers must be 

provided a copy of this information. 

The conveyance instrument for disposal of REO property containing wetlands or located 

in a special flood or mudslide hazard area must specify those uses of the property that are 

restricted under any Federal, state or local floodplain and wetland regulations, as well as other 

relevant restrictions. Use restrictions will relate to the use of the property by the purchaser and 

any successors as determined by the Agency. See 14.28. 

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14.23 COASTAL BARRIER RESOURCES SYSTEMS 

REO property located within a Coastal Barrier Resource System (CBRS) will not be sold 

until the Agency completes consultation with the USFWS Regional Director, and agreement is 

reached that the proposed sale does not violate the provisions of the CBRS. 

No continued Federal financing is permitted for REO property located within a CBRS. 

14.24 NATIONAL REGISTER OF HISTORIC PLACES 

When REO property has been determined to be listed on (or eligible to be listed on) the 

National Historic Register, the Loan Approval Official must consult with the SHPO. This 

consultation will establish any necessary restrictions on future use of the property to maintain 

compatibility with preservation objectives per 14.28. 

A property that is listed or eligible for listing on the National Register of Historic Places 

may be leased or operated by management contract, the lease or management contract will 

contain provisions that the use will preserve property’s condition and historic character. 

14.25 UNDERGROUND STORAGE TANKS (UST) 

USTs found on the property will be investigated to determine the contents of the tank and 

whether the tank has leaked or is leaking. Investigations will include the extent of contamination 

and methods of remediation. Such investigations will be undertaken by persons authorized by 

state law and provided to the appropriate state regulatory agency for consultation on appropriate 

steps to take. The report will be made a part of public information provided to prospective 

buyers and lenders. Notice of cleanup will be made a part of covenants to the deed to assure 

notice to future buyers as further discussed at 14.28. When a UST is leaking, the tank will be 

removed and the areas of contamination cleaned up in accordance with state regulations. If the 

UST is replaced, the work will be in accordance with state and local requirements 

14.26 MANAGEMENT OF HAZARDOUS SUBSTANCES AND PETROLEUM 

PRODUCTS

All property considered for disposal or lease must be evaluated for possible hazardous 

substance contamination as part of the Agency’s environmental due diligence. The minimum 

level of documentation of due diligence is the Transaction Screen Questionnaire (TSQ), which 

will be prepared by the Agency or an environmental professional under contract to the Agency. 

If the TSQ indicates the possibility of contamination a Phase I Environmental Site Assessment 

(ESA) will be prepared to determine the types of contamination present. If determined necessary 

by the ESA, a Phase II ESA will be prepared to determine the extent and potential costs for 

remediation. An environmental professional will prepare the ESA. The SEC should be 

consulted during this process for guidance and assistance in review and acceptability of the 

reports. 

Environmental due diligence is normally conducted prior to the Agency taking action to 

foreclose and the reports previously prepared should be reviewed and supplemented as necessary 

prior to sale or lease. 

14-28 
HB-3-3560

14.27 LEAD-BASED PAINT 

All projects constructed prior to 1978 will be assessed for the presence of lead-based 

paint in accordance with the Rural Development adopted portions of the HUD “Lead Safe 

Housing Rule.” To assist staff in determining the requirements for compliance the “Lead-Based 

Paint Compliance Key” is available at the RHS Intranet site. This automated tool should be run 

and a copy saved for records and any requirements for investigation and remediation included in 

the scope of work for repair prior to sale. The costs of the lead-based paint work should also be 

included in the appraisal of property value. 

Prospective purchasers must be notified of the results of the inspection inspection and 

any remediation efforts. Attachment 14-A is a sample disclosure format to provide purchasers 

with information about known lead-based paint hazards in the property. 

14.28 PROTECTIVE COVENANTS RESTRICTIONS AND EASEMENTS 

The Agency has a responsibility to take actions to protect environmental resources on 

REO property. Protective actions or mitigation measures on future use of the property may take 

the form of covenants, restrictions or conservation easements and will be filed with the deed. 

Such protection may be used to limit use of and to protect: 

• Floodplains; 

• Wetlands; 

• Coastal barrier systems; 

• Historic and cultural resources; 

• Endangered or threatened species; 

• Critical habitat; 

• Wilderness areas; 

• Wild or scenic rivers; 

• Natural landmarks listed in the National Register of Natural Landmarks; Sole source 

aquifer recharge areas designated by EPA; 

• Designated national trails; 

• Important farmland; or 

• Other resources identified in 1940-G or protected under state law. 

The appropriate state and Federal agencies should be consulted for determinations of 

effect. The advise of the State Environmental Coordinator should be sought if it appears that 

14-29 

(02-24-05) SPECIAL PN
HB-3-3560

disposal of the REO property may affect any of these resources and the environmental review 

raised as indicated in 1940-G. 

Examples of use restrictions include prohibition of draining, filling or building in a 

floodplain or wetland area, maintaining the property in keeping with results of consultation with 

the SHPO or notifications on hazardous material remediation on the site. 

In any case in which a property has been contaminated with hazardous materials or

petroleum products, notice shall be provided to prospective buyers and a covenant attached to the 

deed providing notice to future buyers. The notice shall include all findings and actions to 

cleanup taken by the Agency. Any information from Agency site reconnaissance, investigations 

and clearances provided by independent environmental professionals will be made a part of 

presale notices and covenants or restrictions in the deed. In addition, the Agency is obligated to 

cleanup any materials found on site in the future provided that the materials were in place prior 

to the date of conveyance. Covenants and restrictions to address the specific conditions will be 

developed with the assistance of OGC, the SEC and National Office environmental staff. 

14-30 
HB-3-3560

SECTION 4: PROCESSING AND CLOSING 

14.29 OVERVIEW 

If the Agency is closing the sale with program financing, the sale is closed in accordance 

with program closing instructions provided in Chapter 8 of HB-1-3560. If other financing is 

being used, the financing agent’s closing procedures should be followed. Cash sales are closed 

by the Agency collecting the sale price and delivering the quitclaim deed to the buyer. 

Title clearance and property insurance requirements for a program-financed sale are the 

same as for a program loan. 

14.30 SPECIAL NOTICES AT SALE 

In accordance with the Residential Lead-Based Paint Hazard Reduction Act of 1992, 

sellers of housing built before 1978 receiving Federal assistance must provide the purchasers of 

such housing with specific information about the housing’s lead history and general information 

on lead exposure prevention. As seller the Agency must: 

• Provide the buyer with the lead hazard information pamphlet, Protect Your Family 

from Lead in Your Home, available from the National Lead Information 

Clearinghouse at 1-800-424-LEAD, or a similar EPA-approved pamphlet developed 

by the State; 

• Permit the buyer a 10-day opportunity to conduct a risk assessment or inspection for 

the presence of lead-based paint hazard; and 

• Include in the sales contract: (1) disclosure of any lead-based paint hazard or a 

statement that the Agency has no knowledge of such hazard; (2) a list of any 

information about the hazard available to the seller and passed on to the buyer; and 

(3) a Lead Warning Statement and acknowledgment, signed by the buyer. A sample

disclosure format, including the required Lead Warning Statement, is provided in 

Attachment 14-A. 

• Notice shall be provided to prospective buyers of all hazardous material activities and 

findings. This shall include access to records of Agency site reconnaissance and 

investigations by environmental professionals. If hazardous materials have been 

found in performance of due diligence, notification of remediation results will be 

provided. Covenants or restrictions to the deed will be developed with the assistance 

of OGC to address the specific conditions. The National Office environmental staff 

and the SEC should be consulted in the preparation of all environmental covenants or 

restrictions.

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(02-24-05) SPECIAL PN
HB-3-3560

14.31 INSPECTION 

An inspection of the property by the buyer should be scheduled immediately before 

closing to ensure satisfactory condition of the property and the resolution of any problems or 

discrepancies. 

14.32 PRORATING REAL ESTATE TAXES AND/OR ASSESSMENTS 

When REO property is subject to taxation and/or assessment, they are prorated between 

the Agency and the buyer, as of the date the title is conveyed. The Agency is responsible for all 

taxes and assessments accrued as of the settlement date, and the buyer is responsible for all taxes 

and assessment that accrue after the closing date. The Agency’s pro rata share is deducted from

the proceeds of the sale at closing, if sufficient funds are available, or is paid under 

RD Instruction 2024-A.

14.33 COMMISSIONS 

Commissions are paid at closing if there is sufficient cash from sale proceeds to cover the 

commission. If not, the Agency will pay the commission and charge it to the REO account as a 

recoverable cost. 

14.34 TRANSFERRING TITLE 

The Agency conveys the property to the buyer by Form RD 1955-49, Quitclaim Deed, or 

other form of non-warranty deed approved by OGC. The State Director signs the conveyance 

instrument, a copy of which is retained in the REO case file. The buyer is responsible for 

recording the instrument. 

14.35 REPORTING SALE 

When the transaction is closed and the conveying instrument has been delivered, the 

disposition is recorded in the REO system. Real property that has been disposed of by means 

other than sale, including total loss or destruction, will also be reported in the REO system. Sale 

proceeds are forwarded to the St. Louis Office to be credited to the General Fund. 

14-32 

(02-24-05) SPECIAL PN
HB-3-3560

SECTION 5: PROCESSING CREDIT SALES ON 

NON-PROGRAM TERMS 

14.36 OVERVIEW 

The sale of non-program properties is conducted in a manner similar to other sales; 

however, there are some differences in the terms of the sale, the processing of the offers, loan 

closing, and the treatment of the property after the sale is complete. This section highlights these 

differences. See HB-1-3560 for processing credit sales for program properties. 

14.37 TERMS OF A NON-PROGRAM CREDIT SALE 

The following provisions apply to credit sales on non-program terms. 

• Interest rate. The Section 515 interest rate plus 0.5 percent will be charged on all 

types of housing credit sales. Refer to Exhibit B of RD Instruction 440.1 (available in 

any Field Office) for interest rates. Loans made on non-program terms will be equal 

to the lesser of the prevailing interest rate at the time of loan approval or loan closing; 

and 

• Term of note. The note amount will be amortized over a period not to exceed 10 

years. If the State Director determines more favorable terms are necessary to 

facilitate the sale, the note amount may be amortized using a 30-year factor with 

payment in full (balloon payment) due not later than 10 years from the date of 

closing. In no case will the term be longer than the period for which the property will 

serve as adequate security. 

Agency loans to finance the purchase of non-program REO property are subject to the 

availability of funds. 

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 project’s non-program designation 

and will be given an opportunity to obtain a Letter of Priority Entitlement (LOPE). 

14.38 ACCEPTING OFFERS 

The sale of a non-program property is similar to other sales. Field Office Staff publicize 

the sale, accept bids, and choose a bid from the first acceptable bids received. 

• Documenting offers and acceptance. Field Office Staff must use Forms RD 

1955-45 and 1955-46, as appropriate, to document the offer and acceptance. Field 

Office Staff must accept the contract prior to processing a request for credit on nonprogram terms. 

• Cash sales. If the offeror can purchase the property without Agency assistance, Field

Office Staff will simply collect the purchase price (less any deposits) and deliver the 

deed to the purchaser. 

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(02-24-05) SPECIAL PN
HB-3-3560

• Purchase with non-program credit. Purchasers requesting credit on non-program

terms will be required to submit documentation to establish financial stability, 

repayment ability, and creditworthiness: 

◊ The borrower may submit the standard forms used to process program

applications or comparable documentation. Field Office Staff may request 

additional information as needed to support loan approval. 

◊ Field Office Staff will order individual credit reports for each individual applicant 

and each principal within an applicant entity. Commercial credit reports will be 

ordered for profit corporations and partnerships, and organizations with a 

substantial interest in the applicant entity. 

14.39 APPROVAL 

Field Office Staff must use Form RD 3560-51 to approve a credit sale even though no 

obligation of funds is involved. For guidance on how to complete the form, see the special 

instructions on the FMI pertaining to non-program credit sales. 

The Loan Servicer must review Form RD 1910-11 with the applicant, and the form must 

be signed by the applicant. 

14.40 CLOSING SALE 

The Loan Servicer will provide the closing agent with necessary information for closing 

the sale. Title clearance, loan closing, and property insurance requirements for a credit sale are 

similar to those for program loans. As for program sales, OGC assistance will be requested to 

provide closing instructions. 

The following are the highlights of the closing process for non-program sales: 

• Closing costs. The purchaser will pay their own closing costs. Earnest money, if 

any, will be used to pay purchaser's closing costs with any balance of closing costs 

being paid by the purchaser. Any closing costs which are legally or customarily paid 

by the seller will be paid by the Agency from the down payment; 

• Down payment. A down payment of not less than 10 percent of the purchase price is 

required at closing and will be remitted by the Field Office Staff;

• Modification of security instruments. Field Office Staff must modify security 

instruments as necessary: 

◊ On the Form RD 3560-52, Promissory Note and/or security instrument (mortgage 

or deed of trust) any covenants relating to graduation to other credit, restrictiveuse provisions, personal occupancy, inability to secure other financing, and 

restrictions on leasing may be deleted; and 

14-34 
HB-3-3560

◊ Deletions are made by drawing a line through the specific inapplicable language. 

The borrower and an Agency representative must initial the changes. 

• Purchase of more than one property. When more than one property is bought by 

the same buyer and the transactions are closed at the same time, a separate Form RD 

3560-52 will be prepared for each property, but one mortgage will cover all the 

properties; and 

• Reporting sale. When the transaction is closed and the conveying instrument has 

been delivered, Field Office Staff will report the sale like all other sales. They will 

process Form RD 3560-19, Status of REO Property, in accordance with the respective 

FMI. 

14.41 SERVICING THE NON-PROGRAM LOAN 

Credit sales on non-program terms will be classified as non-program loans and serviced 

accordingly. The project is not subject to any rent, occupancy, or other program requirements. 

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14-36 
HB-3-3560

Attachment 14-A 

Page 1 of 2 

ATTACHMENT 14-A 

LEAD-BASED PAINT DISCLOSURE FORM 

SAMPLE Disclosure Form for Target Housing Sales

Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards 

This form is also available at HUD’s Lead Safe Housing website. 

LEAD WARNING STATEMENT

Every purchaser of any interest in residential real property on which a residential dwelling was 

built prior to 1978 is notified that such property may present exposure to lead from lead-based 

paint that may place young children at risk of developing lead poisoning. Lead poisoning in 

young children may produce permanent neurological damage, including learning disabilities, 

reduced intelligence quotient, behavioral problems, and impaired memory. Lead poisoning also 

poses a particular risk to pregnant women. The seller of any interest in residential real property is 

required to provide the buyer with any information on lead-based paint hazards from risk 

assessments or inspections in the seller's possession and notify the buyer of any known leadbased paint hazards. A risk assessment or inspection for possible lead-based paint hazards is 

recommended prior to purchase. 

SELLER'S DISCLOSURE (INITIAL) 

__________(a) Presence of lead-based paint and/or lead-based paint hazards (check one below): 

 Known lead-based paint and/or lead-based paint hazards are present in the housing 

(explain). 

________________________________________________________________________

________________________________________________________________________

____________________ 

 Seller has no knowledge of lead-based paint and/or lead-based paint hazards in the 

housing 

 __________(b) Records and reports available to the seller (check one below): 

 Seller has provided the purchaser with all available records and reports pertaining to leadbased paint and/or lead-based paint hazards in the housing (list documents below). 

________________________________________________________________________

________________________________________________________________________

____________________ 

 Seller has no reports or records pertaining to lead-based paint and/or lead-based paint 

hazards in the housing. 

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(02-24-05) SPECIAL PN
HB-3-3560

Attachment 14-C

Page 2 of 2 

 Purchaser's Acknowledgment (initial) 

__________ (c) Purchaser has received copies of all information listed above. 

__________ (d) Purchaser has received the pamphlet Protect Your Family From Lead in Your 

Home. 

__________ (e) Purchaser has (check one below): 

 Received a 10-day opportunity (or mutually agreed upon period) to conduct a risk 

assessment or inspection for the presence of lead-based paint and/or lead-based paint 

hazards; or 

 Waived the opportunity to conduct a risk assessment or inspection for the presence of 

lead-based paint and/or lead-based paint hazards.

AGENT'S ACKNOWLEDGMENT (INITIAL) 

____ (f) Agent has informed the seller of the seller's obligations under 42 U.S.C. 4852d and is 

aware of his/her responsibility to ensure compliance. 

CERTIFICATION OF ACCURACY 

The following parties have reviewed the information above and certify, to the best of their 

knowledge, that the information provided by the signatory is true and accurate. 

___________________ __________ _____________________ ________ 

Seller Date Seller Date 

___________________ __________ _____________________ ________ 

Purchaser Date Purchaser Date 

___________________ __________ _____________________ ________ 

Agent Date Agent Date 

14-38 
Office of Rental Housing Preservation (ORHP)

ORHP was established to ensure a standard 

approach to the prepayment decision-making 

process. ORHP will approve all incentive offers 

made by the Field Offices and authorize the closing 

of these offers.

Through Prepayment Tracking and Concurrence 

(PRE-TRAC), ORHP should be kept informed of 

the prepayment request’s progress through the 

process. Field Offices should inform ORHP when:

• A prepayment request is received;

• A request is to be removed from the list;

• An incentive offer is developed and ready for 

ORHP approval before being offered;

• A borrower accepts incentives;

• A borrower rejects an incentive offer;

• The State Office is ready to process a transfer to 

a non-profit or public body; or

• The State Office requests prepayment with or 

without restrictive-use provisions.

15.1 INTRODUCTION

 Some borrowers may want to prepay their Agency loans and convert their properties to 

conventional use. To protect the supply of affordable housing and to ensure that tenants of 

multi-family housing properties do not suffer from rent overburden or the loss of their units; the 

Agency requires that borrowers obtain approval before prepaying their loans [7 CFR part 3560, 

subpart N]. The approval process allows the Agency to offer the borrower incentives to forgo 

prepayment and maintain the affordability of the housing. This chapter explains prepayment 

requirements and describes the prepayment request and approval process.

15.2 OVERVIEW OF THE CHAPTER

The key decision points in the prepayment 

process are shown in Exhibit 15-D of this 

section. For an overview of the process, see 

Attachment 15-A. 

This chapter addresses the process in 

five parts:

• Section 1 outlines the key 

eligibility requirements for 

participating in the process and 

obtaining approval to prepay. 

• Section 2 describes requirements 

and procedures for processing and 

evaluating prepayment requests 

for loans closed before 1979 or 

loans with no restrictive 

covenants. 

• Section 3 describes requirements 

and procedures for processing and 

evaluating prepayment requests 

for loans closed between 1979 

and 1989 that have restrictive 

covenants. This section also describes the process of offering the property for sale to 

non-profit organizations and public agencies. 

• Section 4 discusses properties subject to special circumstances, including foreclosure, 

bankruptcy, acceleration and the advance payment of accounts. 

 Loan Servicers should use PRE-TRAC, which is an Internet-ready database application 

that allows Loan Servicers to process multi-family housing prepayment requests. 

CHAPTER 15: PROJECT RESERVATION

HB-3-3560

(02-24-05) SPECIAL PN 15-1

Revised (11-07-08) SPECIAL PN
HB-3-3560

15-2
SECTION 1: PRESERVATION AND 

ELIGIBILITY FOR PREPAYMENT

15.3 OVERVIEW

 This section covers key eligibility requirements that apply to prepayment process, 

including: 

• Determining eligibility to submit a prepayment request;

• Meeting with the borrower; 

• Notifying tenants; 

• Receiving a prepayment request and conducting a completeness review; and 

• Determining prepayment feasibility. 

15.4 BORROWERS ELIGIBLE TO REQUEST PREPAYMENT [7 CFR 3560.652]

Before submitting a prepayment request, borrowers should confirm that they are eligible 

to prepay and that they are required to submit a written prepayment request. All loans approved 

prior to December 15, 1989, are subject to prepayment regulations and must file a prepayment 

application to request payoff of the loan(s). Loans made on or after December 15, 1989, to build 

or acquire new multi-family housing units are prohibited from prepayment.

15.5 MEETING WITH THE BORROWER

 Whenever Loan Servicers receive an inquiry concerning prepayment, they should invite 

the borrower to a meeting. If the borrower begins the prepayment request process with an 

understanding of the steps involved and the incentives available, the process is more likely to 

proceed with fewer miscommunications and delays. 

 At the meeting, the Loan Servicers should: 

• Provide the borrower with the items necessary to constitute a prepayment request in 

accordance with 7 CFR 3560.653 and review the list of items to be submitted. 

Answer any questions regarding the submissions. Make clear that a complete request 

includes evidence that the borrower is able to prepay the loan; 

• Explain the prepayment process, including the procedures for requesting prepayment, 

the offer of incentives, and the sale to non-profit organizations or public agencies; 

• Recommend that the borrower hold a meeting with tenants to inform them of the 

prepayment request and explain the implications of the prepayment process for 

tenants. The borrower may invite other affordable housing agencies to this meeting 

to discuss options with the tenants. The Loan Servicer may attend this meeting as 

well;

HB-3-3560

(02-24-05) SPECIAL PN 15-3

Revised (11-07-08) SPECIAL PN
Tenants are often alarmed by the 

prospect of prepayment and uninformed 

about its implications for their housing 

situation. The Agency recommends that 

owners hold a meeting early in the request 

process. Items to cover at such a meeting 

include:

• The meaning of the first tenant 

notification letter;

• The steps in the prepayment process;

• Potential outcomes for the property;

• Alternative housing options for the 

tenants; and

• Tenants’ eligibility for LOPE letters.

• Describe the incentives that are available and explain that the offer will depend on the 

value of the borrower’s project and its potential conventional use (Attachment 15-B

provided a description of incentives and the incentive development process that can 

be given to the borrower); and 

• Explain the restrictive use covenants that will apply if the borrower accepts the 

Agency’s offer of incentives (see Attachment 15-E).

15.6 TENANT NOTIFICATION REQUIREMENTS [7 CFR 3560.654]

Throughout the prepayment process, the Agency 

and the borrower both have a responsibility to 

inform tenants of the status of the prepayment 

request.

• Initial notice. Within 30 days of the 

receipt of a written request to prepay 

the loan, the Loan Servicer must send 

a notification to each tenant in the 

project. A sample letter is attached as 

Attachment 15-C. 

 The Agency may deliver the 

notices to the borrower by mail or 

directly.

 The Agency should also send 

copies of the notification to the borrower and the management agent because the 

borrower must post copies of the notifications in public areas in the project. 

These notices must remain posted until the next notice providing an update on the 

status of the prepayment request is sent.

 The borrower must provide copies of the notifications to any tenants who occupy 

units after these notices were sent.

• Subsequent notices. To keep the tenants informed of the progress of the prepayment 

request, additional notifications are sent after key decisions in the process are made. 

These notices should be sent, posted and provided to new tenants, as described for the 

initial notice. A list of appropriate times to send these notices is provided in Exhibit 

15-2. 

• Other interested parties. Whenever Loan Servicers provide notices to tenants 

regarding the prepayment process, they must also notify other interested parties such 

as non-profit organizations and public bodies. 

HB-3-3560

15-4
Exhibit 15-2

List of Notices to be Provided to Tenants

During the Prepayment Process

The following notifications must be sent to tenants at the times indicated below. These notices must be 

sent to individual tenant households and posted in the project.

1. Within 30 days of receipt of the prepayment request:

Tenant Notification #1: This notice must be sent within 30 days of receipt of a complete prepayment 

request. This letter informs tenants that the borrower has submitted a request to prepay. This letter 

may be coordinated with a meeting including the borrower, the tenants, and the Agency. [7 CFR 

3560.654(a)]

2. After a decision has been made to accept prepayment or offer incentives:

Tenant Notification #2A: If the borrower’s prepayment request is withdrawn, the Loan Servicer will 

send a letter to the tenants informing them that prepayment will not take place. If there is an appeal, 

this letter should be delayed until the outcome of the appeal is known. [7 CFR 3560.654(d)]

Tenant Notification #2B: If the borrower is permitted to prepay with or without use restrictions, the 

Loan Servicer will send a letter to the tenants informing them of the prepayment and providing them 

information on their rights (such as reimbursement of relocation costs). This letter must be sent 60 

days prior to prepayment. [7 CFR 3560.654(c)]

3. After the offer of incentives has been accepted or rejected:

Tenant Notification #3A: If the borrower accepts the incentives and related use restrictions, the Loan 

Servicer will send tenants a letter informing them of the outcome and describing the use restrictions. 

[7 CFR 3560.654(e)]

Tenant Notification #3B: If the borrower rejects the incentives, the Agency will decide if prepayment 

will be accepted with or without use restrictions. The Loan Servicer will send letters to the tenants 

informing them that the borrower is prepaying with or without and explaining their rights under the 

use restrictions. This letter must be sent 60 days prior to prepayment. [7 CFR 3560.654(c)]

Tenant Notification #3C: If the borrower chooses to offer the property for sale to a non-profit 

organization or a public agency, the Loan Servicer will send a letter to the tenants informing them that 

the borrower is offering the property for sale and explaining the sale process. [7 CFR 3560.654(f)]

4. After the offer for sale is complete:

Tenant Notification #4A: If the borrower does not receive a good faith offer within 180 days and is 

proceeding to prepay the loan, the Loan Servicer will notify tenants of the prepayment. This letter 

must be sent 60 days prior to prepayment (i.e., 60 days prior to the end of the 180-day marketing 

period). If a good faith offer is received within the final 60 days of the marketing period, a new letter 

must be sent to the tenants as described in Tenant Notification #4B. [7 CFR 3560.654(h)]

Tenant Notification #4B: 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. [7 CFR 3560.654(g)]

(02-24-05) SPECIAL PN 15-5

Revised (11-07-08) SPECIAL PN

HB-3-3560
Good Practice-Notification to Borrowers

Some borrowers may pay their loans on 

an accelerated schedule. As these borrowers 

approach 180 days from their last payment, 

the Agency should notify them of their status 

and of their obligation to submit a 

prepayment request. See Paragraph 15.33 

for more information on the advance 

payment of accounts.

15.7 REQUIREMENTS FOR PREPAYMENT REQUEST [7 CFR 3560.653]

 To be considered for prepayment, the borrower must submit a complete written request at 

least 180 days before the expected date of prepayment. This timeframe allows the Agency time 

to review the request, complete the application analyses, and offer incentives, if appropriate, 

prior to the prepayment date. If all required 

procedures can be completed in fewer than 180 

days, the prepayment may occur at an earlier date. 

 A copy of all items to be submitted by the 

borrower can be found in PRE-TRAC on the 

Prepayment Application Checklist Screen.

15.8 RECEIPT OF PREPAYMENT 

REQUESTS

When a request for prepayment is received, the Loan Servicer must take the following 

steps to establish the date of receipt and begin a project file.

• Immediately upon receipt of a written prepayment request, date stamp the request and 

enter the date of receipt in PRE-TRAC on the Timeline Screen at Activity A00. If the 

completeness review shows the request to be complete (as described in Paragraph 15.9) 

the date stamped on the request will be used as the date of receipt. (This date will be the 

date the Agency receives written notification of the owner’s intent to prepay.) 

• Begin a project file. The Agency should have a separate file on each prepayment request 

that includes:

 Application (with coversheet that summarizes all key project information);

 Tenant notifications; 

 Project appraisal; 

 Documentation of all analysis performed;

 Communications with the borrower; and

 The mortgage. 

• Enter prepayment-related project data info Multi-Family Information System (MFIS) and 

PRE-TRAC.

15.9 COMPLETENESS REVIEW

Within 10 days of receiving the prepayment request, the Loan Servicer must review it for 

completeness. This entails a brief look at the submission to ensure that all the items listed in the 

PRE-TRAC Prepayment Application Checklist Screen are included. 

• Complete request. If the Loan Servicer determines that the request is complete, the 

Loan Servicer must:

HB-3-3560

15-6
 Send a letter to the borrower providing the date of receipt of the request, and 

informing the borrower that the Agency is reviewing the request and may ask for 

additional information;

 Send a letter to tenants informing them that the borrower has submitted a request 

to prepay. This letter must be sent within 30 days of receiving the request (as 

described in Paragraph 15.6). Also notify other interested parties at this time; and 

 Complete a review of the request for the feasibility of prepayment. This review 

must be completed within 60 days of the receipt of the complete request and is 

described in Paragraph 15.10. 

• Incomplete requests. If the Loan Servicer finds that all items are not included, the 

incomplete request must be returned to the borrower with a letter listing the missing 

items. The borrower may submit a new request to begin the prepayment request process 

again. 

15.10 DETERMINATION OF PREPAYMENT REASIBILITY

To receive an offer of incentives, the borrower must demonstrate the ability to prepay the 

Agency loan. Within 60 days of the receipt of a complete application, the Loan Servicer must 

review the prepayment request to determine the feasibility of prepayment and enter the date of 

complete application into PRE-TRAC on the Timeline Screen at Activity A06. 

To determine the feasibility of prepayment, the Loan Servicer must review the 

borrower’s ability to prepay. To be considered “feasible”, the borrower must have the ability to 

prepay the loan, as discussed below. It is not in the Agency’s best interest to offer incentives to a 

borrower who does not have the financial capacity to prepay the loan since there is little risk that 

the borrower will actually prepay and remove the project from the program.

 The borrower may be planning to refinance the prepayment in one of three ways: 

• From the borrower’s own resources; 

• With financing from a lender or other third-party; or

• By selling the project.

 Regardless of the source of funds, the borrower must be able to show that the proposed 

source of financing is available. The Loan Servicer must review the borrower’s prepayment 

request to ensure that the borrower has submitted sufficient evidence that the funding is 

available, as described below.

A. BORROWER’S FUNDS

 If using their own funds, the borrower must provide: 

 A balance sheet and income statement showing that sufficient cash is available to pay the 

loan principal or that assets of sufficient value are available and can be readily converted 

to cash; and

HB-3-3560

(02-24-05) SPECIAL PN 15-7

Revised (11-07-08) SPECIAL PN
 Certification that the income or assets are not pledged elsewhere (e.g., to other 

prepayment requests or other loans).

B. THIRD-PARTY LENDER

If obtaining a loan, the borrower must provide an original copy of the precommitment 

letter from the lender, stating:

 The rates and terms of loan;

 The amount financed; and 

 A description of the security of the loan.

C. SALE

If the borrower is planning to sell the project, the borrower must submit a purchase 

agreement and documentation of the purchaser’s ability to pay. The purchaser’s ability to pay 

can be documented in the same manner as the borrower’s, as described in Paragraph 15.10 A.

15.11 ELIGIBILITY DETERMINATION

If the Loan Servicer determines that the borrower is eligible with a complete prepayment 

request and prepayment is feasible, the Loan Servicer continues to process the request. If the 

borrower is not eligible for prepayment, the Loan Servicer notifies the borrower in writing 

stating the reasons that the borrower is not eligible for prepayment. 

 For loans that were closed prior to 1979, or if the loan does not have any existing 

restrictive covenants, the Loan Servicer follows the process described in Section 2 of this 

chapter. If the borrower’s loan closed between 1979 and 1989 and has a restrictive agreement, 

the Loan Servicer follows the process described in Section 3 of this chapter.

SECTION 2: LOANS CLOSED BEFORE 1979

OR LOANS WITH NO RESTRICTIVE COVENANTS

15.12 PREPAYMENT WAITING LIST

 For borrowers who meet the eligibility requirements of Section 1 of this chapter and who 

have loans that closed prior to 1979 or have no restrictive covenants, the Loan Servicer will 

place the borrower on an initial prepayment waiting list using PRE-TRAC.

15.13 MAKING THE INCENTIVE OFFER-OVERVIEW

 To encourage borrowers to forgo prepayment, the Agency offers incentives to all 

borrowers applicable under this section. Paragraph 15.14 through 15.21 of this section describes 

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the process for offering incentives and responding to the borrower’s acceptance or rejection of 

Agency incentives. 

15.14 GENERAL INCENTIVE OFFER

 At the discretion of the Agency, the Loan Servicer may make a general incentive offer to 

the borrower before developing the specific incentive package. The Loan Servicer should make 

a general offer only if the borrower indicates that any specific incentive offer will be rejected. 

From the date of the general offer, the borrower has 30 calendar days to accept or reject the offer.

• If the borrower rejects the general offer in writing, the Agency will not develop a specific 

incentive offer. The Agency will determine the impact of prepayment as described in 

Paragraph 15.22. 

• If the borrower accepts the general offer, the Agency will develop a specific incentive 

offer in accordance with this section.

• If the borrower rejects the general offer in writing after 30 calendar days, the Agency will 

not complete the specific incentive offer and will consider all incentives rejected.

15.15 SPECIFIC INCENTIVE REQUIREMENTS [7 CFR 3560.656] 

Specific incentive offers are subject to the following requirements.

• Value of incentive offer. The incentive offer must be based on the Agency’s assessment 

of: 

 The amount necessary to provide a fair return on the investment of the borrower; 

 An amount that will not cause project rents to increase above the Conventional 

Rents for Comparable Units (CRCU) standard in accordance with Chapter 4 of 

HB-2-3560; and 

 The lease costly alternative for the Federal Government that is consistent with 

extending the low-income use of the property. 

• Eligible recipients. The Agency will offer incentives only to borrowers who have met 

the requirements outlined in Section 1 of this chapter. 

• Timeframe for offer response. The Agency must develop the offer within 60 days of 

completing the review for feasibility and impact. The borrower must respond to an 

incentive offer within 30 calendar days. If no answer to the offer is received within 

30 calendar days, the Agency must consider the incentive offer rejected. 

• Reserve requirements. At the time the incentive is developed, the maximum reserve 

amount must be adjusted to include the costs of any deferred maintenance items or 

expected long-term repair or replacement costs of the project based on the project’s 

capital plan. The Agency may require an additional deposit to the reserve account from 

the incentive package and/or reduce the incentive in order to allow the rents to be 

increased to fund the reserve at a level necessary to meet capital needs.

• Capital improvements. Any necessary capital improvements must be addressed 

(monies set-aside) prior to receiving any incentives.

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Revised (11-07-08) SPECIAL PN
• Consolidation and reamortization of loans. If a project has more than one Agency 

loan, existing project loans must be consolidated and reamortized unless consolidation is 

not necessary to maintain feasibility of the project for the current tenants or the level of 

monthly rental subsidies must be reduced. 

• Appraisal requirements. An appraisal is required to provide the Agency the 

information needed to establish the appropriate value of the incentive offer. It is the 

Agency’s responsibility to assure that an appraisal is obtained. 

15.16 TYPES OF INCENTIVES [7 CFR 3560.656(C)]

 The Agency may offer the borrower one or more of the items discussed below as 

incentives to forgo prepayment. The following considerations apply to the development of the 

incentive package: 

• Incentive offers must not be made without sufficient Rental Assistance (RA) to protect 

current tenants against rent overburden. Unused State RA may be used to facilitate these 

transactions; alternatively, borrowers may elect to be placed on the Agency waiting list 

until RA is available.

• If the incentive package involves a rent increase, the Agency must approve the rent 

increase in accordance with budget approval procedures outlined in Chapter 4 of HB-2-

3560. In no case may the rent increase cause rents to increase above the CRCU standard; 

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 unit rent level; and 150 percent 

of the comparable rents for conventional unit level, as discussed in Chapter 4 of HB-2-

3560 [7 CFR 3560.656(b)(3)]; and 

• An Agency equity loan must be the last incentive option considered in developing an 

offer.

A. Rental Assistance

 The Agency may offer RA if the project tenants will experience rent overburden as a 

result of the incentive offer.

B. Increase in Annual Return

 The Agency may offer an increase in the amount of the borrower’s annual return on 

investment by one or both of the following methods: 

• The Agency may recognize the borrower’s current equity in the project at the original 

rate of return; and/or

• The Agency may increase the borrower’s rate of return on the original equity. 

The actual withdrawal of the return remains subject to conditions specified in Chapter 4 

of HB-2-3560. 

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C. Excess HUD Section 8 Rents

For projects with project-based HUD Section 8 assistance, the Agency may permit the 

borrower to receive rents paid to the project in excess of the amounts needed to meet annual 

project operating and maintenance expenses, debt service and reserve requirements. This 

payment is received in a lump sum.

 In these cases, the reserve account will be adjusted to provide adequate funding for longterm capital repairs and maintenance based on the project’s capital plan.

D. Project Conversion or Modifications of Interest Rate

 The Agency may agree to convert full-profit loans to limited profit Plan II loans or 

increase the interest subsidy for loans with HUD Section 8 assistance to lower the interest rate on 

the loan and make basic rents more financially feasible.

E. Agency Equity Loans 

 The Agency may make an equity loan to the borrower. The Agency may offer an equity 

loan only after it determines that all other incentive options will not result in an adequate 

incentive offer. The equity loan may not exceed the difference between the current unpaid loan 

balance and 90 percent of the project’s value appraised as unsubsidized conventional housing. 

 The following requirements apply to equity loans: 

• Labor housing projects are not eligible for equity loans; 

• The loan must not adversely affect the borrower’s prepayment ability; 

• Equity loans may be processed and closed with the current borrower or any eligible 

transferee; and

• If the equity loan is made in conjunction with excess HUD Section 8 funds, the equity 

will be paid using excess reserves before an equity loan is made.

F. Third-Party Equity Loans 

A third-party equity loan is not considered an incentive, but it is an option the Agency 

may give the borrower at the same time it makes an incentive offer.

• All incentive requirements described in Paragraph 15.15 apply to third-party equity loans;

• An offer to allow the borrower to receive a third-party equity loan must be included in the 

incentive calculation worksheet located in PRE-TRAC or by completing and Excel 

spreadsheet version for consideration in the Agency’s incentive offer; 

• In exchange for taking a third-party equity loan, the borrower must agree to the 

applicable 20-year use restrictions and all relevant requirements under this chapter;

• The Agency may subordinate its lien position on third -party transactions. 

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Revised (11-07-08) SPECIAL PN
• The third-party lender must agree 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

• A third-party equity loan may be associated with a transfer of ownership. 

15.17 DEVELOPMENT OF THE INCENTIVE OFFER

 Loan Servicers will develop the incentive offer based on calculation outlined in PRETRAC or using the electronic version in the form of an Excel spreadsheet. Loan Servicers 

should complete the worksheet, according to the directions in PRE-TRAC (also provided in 

Attachment 15-D for the electronic version) and submit it to ORHP prior to making the offer to 

the borrower. 

 To help ensure the consistency of incentive offers, ORHP will review each completed 

worksheet and approve the proposed incentives before the offer is made to the borrower. 

15.18 AGENCY OFFER OF INCENTIVES

Once ORHP approves the incentive package, the Loan Servicer must send a letter 

(located in REP-TRAC) to the borrower outlining the choice of incentives and informing the 

borrower that they must respond to the offer within 30 days. 

15.19 BORROWER ACCEPTANCE OF INCENTIVES AND SUBSEQUENT ACTIONS

 [7 CFR 3560.657]

 If a borrower accepts the Agency’s offer of incentives, both the borrower and the Loan 

Servicer have a number of responsibilities.

A. Borrower Acceptance

If the borrower accepts the Agency’s offer of incentives, the borrower must complete the 

following actions:

• The borrower must agree to restrictive use covenants that prohibit prepayment for 

20 years and adopt appropriate amendments to the project’s loan documents and RA 

agreements;

• If the incentive offer accepted includes an Agency equity loan, the borrower must 

complete an application for the equity loan and the borrower must remain eligible for it. 

For additional information on how to process the equity loan, see Chapter 10 of HB-1-

3560; and 

• If the incentive offer accepted includes rent increases, the borrower must follow program 

requirements for rent increases. See Chapter 4 of HB-2-3560. 

B. Closing the Incentive Offer

To close the incentive offer, the Loan Servicer must take the following steps: 

HB-3-3560

15-12
• Prior to closing, notify ORHP via PRE-TRAC that the borrower has accepted the 

incentive offer and to request the allocation of equity loan funds or RA (as appropriate); 

• ORHP will authorize all incentives and notify the State Office of the authorization;

• Insert appropriate restrictive-use provisions in the loan documents and RA agreements 

(e.g., the deed, security instruments, loan agreement/resolution, assumption agreement 

and/or reamortization agreement) with consultation from the Office of the General 

Counsel: 

 For equity loans. Execute a new loan agreement/resolution, Form RD 3560-52, 

Promissory Note, and mortgage and convert to Plan II if needed. Follow other 

loan closing procedures as described in Chapter 8 of HB-1-3560; and 

 For RA or increase in owner return. Execute a new Form RD 3560-9, Interest 

Credit and Rental Assistance Agreement, with the borrower and change the loan 

agreement/loan resolution as necessary.

• Notify tenants and other interested parties that prepayment will not take place. 

C. Transfers

If a transfer is to take place simultaneously with the Agency incentive offer, a complete 

transfer application package must be submitted as described in Chapter 7 of this handbook. 

• 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 reconsider whether to accept the 

original incentive offer or find another transferee; and

• In some cases, the Agency may make an offer of incentives contingent on the successful 

transfer of the project to an acceptable purchaser. The Agency may offer a smaller 

incentive if the transfer does not take place.

15.20 INSUFFICIENT FUNDING FOR INCENTIVES

In some cases, the borrower may be offer incentives that can not be provided 

immediately. For example, the Agency may lack funding for equity loans or sufficient RA. If a 

borrower accepts an incentive offer but the Agency is unable to fund the incentive within 

15 months, the borrower will be removed from the incentive waiting list. The borrower then has 

three options:

• The borrower may offer to sell the project to a non-profit or public agency as described in 

Section 3 of this chapter; 

• The borrower may stay on the list of borrowers awaiting incentives until the borrower’s 

incentive offer is funded. If this option is chosen, the Agency will not renegotiate the 

incentive offer; and 

• The borrower may withdraw the prepayment request and be removed from the list of 

borrowers awaiting incentives. If the borrower chooses this option, the borrower may 

submit a new request for prepayment and repeat the prepayment process. 

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(02-24-05) SPECIAL PN 15-13

Revised (11-07-08) SPECIAL PN
15.21 BORROWER REJECTION OF INCENTIVE OFFER AND SUBSEQUENT

ACTIONS [7 CFR 3560.658]

If the borrower rejects the incentive offer, the Loan Servicer must make a determination 

of the project’s impact and whether it is needed, in accordance with Paragraph 15.22 

 If the Agency determines that the project is not needed and that there is no adverse 

impact on minorities, the borrower may prepay without restrictions. After prepayment, the 

property leaves the program. Processing the prepayment request is described in 15.22. 

 If the project is needed, or there is an adverse impact on minorities, the Loan Servicer 

must send the borrower a letter informing the borrower of four options:

• The borrower may prepay the Agency loan subject to use restrictions. The letter should 

describe the applicable use restrictions. Guidance on how to determine the appropriate 

use restriction is described in Paragraph 15.22 A. 

• If the borrower does not want to accept the use restrictions, the borrower may offer the 

property for sale to non-profit organizations and public agencies. This process is 

described in Section 3 of this chapter.

• The borrower may forgo prepayment and stay in the program. 

• The borrower may appeal the decision to prepay with use restrictions. The borrower and 

Agency follow the appeal procedures described in Chapter 1. 

 The letter should also request the borrower to send a written response indicating the 

borrower’s intentions within 30 days. 

If the borrower chooses to prepay the loan subject to restrictive-use provisions, the Loan 

Servicer must determine the appropriate use restrictions to apply. The analysis for making this 

determination follows:

• For prepayments that will have an adverse impact on minorities. If the borrower 

chooses to prepay subject to use restrictions, the Agency must make a determination 

regarding the impact of the prepayment on minorities. Loan Servicing Staff should 

consult with the Civil Rights Staff to make this determination. The Civil Rights Staff’s 

role is limited to the assessment of prepayment impact on minorities. Accepting 

prepayment with or without restrictions is an Agency determination. Relevant factors 

include: 

 The percentage of minorities residing in the project and the percentage of 

minorities residing in the projects in the market area where displaced tenants are 

most likely to move; 

 The impact of prepayment on minority residents in the project and in the market 

area. Determine whether displaced minority tenants will be forced to move to 

other low-income housing in areas not convenient to their places of employment, 

to areas with a concentrated minority population and/or to areas with a 

concentration of substandard housing; 

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15-14
 The vacancy trends and number of potential minority tenants on the waiting list at 

the project being prepaid and at other projects in the market that might attract 

minority tenants; and

 The impact prepayment will have on the opportunity for minorities residing in 

substandard housing in the market area to have comparable decent, safe and 

affordable housing, as is offered by the project being prepaid. 

If Civil Rights Staff determine that the prepayment will have a negative impact on 

minorities, the borrower must adopt use restrictions that protect the affordability of the project 

over the long term. 

• For prepayments that will have an adverse impact on the adequate supply of 

affordable housing. In projects where the prepayment does not have an adverse impact 

on minorities, the borrower is required to adopt use restrictions that protect the access of 

current tenants to adequate affordable housing. The rent will remain at the subsidized 

amount even though the tenant will no longer receive RA. These provisions prohibit the 

borrower from raising rents for tenants who live in the property at the time of prepayment 

unless the rent increase is necessary to meet the operating cost of the project. (Their rents 

can not be raised as a result of actions associated with prepayment.)

15.22 DETERMINATION OF PREPAYMENT IMPACT

 One of the Agency’s key goals in the prepayment process is to ensure that affordable 

housing opportunities exist for program eligible tenants. Therefore, one of the most important 

issues to address is the impact of the prepayment on project tenants. In cases where prepayment 

will have little or no impact on project rents or availability of units, the Agency has less interest 

in keeping the property in the program than in cases where prepayment will likely result in the 

displacement of project tenants.

To make this determination, the Loans Servicer will review the following information:

• Existence of comparable conventional units, their rents and vacancy rates; 

• Any plans to build a similar project in the market area; and

• Other subsidized units and the availability of RA.

The goal of this analysis is to determine if tenant will lose their units or suffer from rent 

overburden. The steps involved in the analysis of impact depend on whether the project has RA. 

A. Prepayment Impact on Projects without Rental Assistance

 For these projects, the Loan Servicer must review the prepayment request, including 

market information and address the following items:

• Change in rents or loss of units. The Loan Servicer must look at the impact of the 

prepayment on tenant’s ability to stay in the project. This analysis depends on the 

proposed use of the project after prepayment and rents for comparable conventional units 

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Revised (11-07-08) SPECIAL PN
in the market area. (For example, if the proposed use of the project is conventional rental 

units, the Loan Servicer should compare rents in the project to conventional rents in the 

market area.) Likely rents should be compared to tenant’s income to ensure that a change 

in rents will not result in rent overburden.

 If prepayment is not likely to result in an increase in rents above current rents or 

30 percent of tenant’s adjusted incomes, the prepayment is considered to have no 

adverse impact on project tenants; and

 If prepayment is likely to result in an increase in rents that will create rent 

overburden, the Loan Servicer must consider the availability of alternative 

comparable housing as described below.

• Availability of alternative housing. If the proposed us of the project after prepayment 

is likely to cause an increase in rents or a loss of units, the Loans Servicer must assess the 

availability of comparable housing in the community. The Loan Servicer must determine 

if there is sufficient housing that is comparable in size and rent to house project tenants in 

local communities without causing them rent overburden. 

 If there is sufficient comparable housing in the local community to replace the 

units that will be lost after prepayment, then the prepayment is considered to have 

no adverse impact on project tenants; and

 If sufficient comparable housing is not available in the local community, the 

prepayment is considered to have an adverse impact on project tenants.

B. Prepayment Impact on Projects with Rental Assistance

If project tenants have RA, the Loan Servicer must conduct the same analysis as 

described in Paragraph 15.22 A. However, in assessing the availability of comparable affordable 

units, the Loan Servicer must identify comparable units with RA or other rental subsidy such as 

HUD Section 8 (as long as the tenants will have priority for these units).

• If sufficient comparable units with RA are available in the local community to house all 

tenants with RA (for example, if another Section 515 project in the local community has 

vacancies to house the tenants from this prepaid property), the prepayment is considered 

to have no adverse impact. 

• If insufficient units with RA are available, the prepayment is considered to have an 

adverse impact on project tenants.

 Exhibit 15-3 of this section provides an overview of the full analysis of impact. 

15-16

HB-3-3560
Exhibit 15-3

Analysis of Impact on Tenants

Step 1: Answer the following questions about rents and loss of units.

Will prepayment result in an increase in tenant payments and if so, will this new 

payment be higher than 30 percent of the current tenant’s incomes?

OR

A. Will prepayment result in a loss of units?

 If the answer to both A and B is no, there is no adverse impact on tenants.

 If the answer to either A or B is yes, proceed to step 2

Step 2: Answer the following questions about the availability of alternative 

housing:

A. Are there sufficient comparable vacant units in the market area for 

 displaced tenants to find alternative housing?

AND

B. Are the tenants paying in these units equal to or less than the greater of their

 current rent of 30 percent of their income?

 If the answer to both C and D is yes, there is no adverse impact on tenants.

 If the answer to either C or D is no, there is an adverse impact on tenants.

C. Processing the Prepayment

Prior to prepayment, the Loan Servicer must take the following steps:

• Establish the target date for the prepayment to occur;

• Prepare the prepayment figures based on the borrower’s outstanding balance on the 

Agency loan; and 

• Notify tenants and other interested parties of the prepayment and its implications. 

Tenants must be notified 60 days in advance of the prepayment date. 

• To finalize the prepayment, the Loan Servicer must: 

• Document the borrower’s satisfaction of the mortgage; and 

• Place a deed restriction on the property to establish the use restrictions. Third-party 

subsidy (e.g., Section 8) will not be used as a substitute for Restrictive-Use Provisions 

(RUPs). 

D. Monitoring Compliance with the Use Restrictions

 If a borrower prepays a loan and the project remains subject to continued RUPs, the 

following requirements apply after prepayment:

• The owner of the prepaid project (formerly the borrower) is responsible for ensuring that 

the RUPs agreed to as a condition of prepayment are observed and must retain 

appropriate documentation to demonstrate compliance with the use restrictions; 

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Revised (11-07-08) SPECIAL PN
• The 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 RUPs establishing that 

these provisions are being met; 

• The Loan Servicer must visit the site on an as needed basis to perform a physical 

inspection; 

• The Loan Servicer must also investigate any complaints from tenants or other parties 

regarding the violation of the use restriction; and

• The State Director must establish a notification system to alter Agency personnel of 

upcoming annual certification due dates on all prepaid loans. The Loan Servicer must 

keep owner certifications and records of visits in the project file.

SECTION 3: LOANS CLOSED BETWEEN

1979 AND 1989 WITH A RESTRICTIVE AGREEMENT

15.23 APPLICABILITY

 For borrowers whose loans have restrictive covenants and which closed between 1979 

and 1989, Loan Servicers should follow the procedures in this section. For loans closed between 

1979 and 1989 with no restrictive covenants, follow the procedures in Section 2 of this chapter. 

15.24 REQUEST BORROWER TO REMAIN IN PROGRAM

The Agency will make an effort to enter into a restrictive-use agreement with borrowers 

who received Section 514 or 515 loans on which RUPs are still in place, who received 

“restricted” loans, or who make a prepayment request and prepayment is feasible. If a borrower 

accepts the Agency’s request to enter into a 20-year restrictive-use agreement, without 

prepayment, no further action is necessary. 

 After receiving a complete application to prepay and determining the borrower’s ability 

to prepay, the Agency must make a reasonable effort to enter into a new restrictive-use 

agreement with the borrower before accepting prepayment of a restricted loan.

 If a borrower declines the Agency’s offer, the Loan Servicer should document this in 

writing, noting the date on which this information was obtained. The document should be 

included in the case file. The Loan Servicer should then proceed to review the prepayment 

process to determine the impact of prepayment.

15.24 SALE TO A NON-PROFIT OR PUBLIC BODY [7 CFR 3560.659]

A borrower who rejects the Agency’s offer to enter into a restrictive-use agreement may 

offer the project for sale to non-profit or public agencies. A borrower who is being processed 

under Section 2 of this chapter, where the Agency’s incentive offer is rejected may offer the 

project for sale to non-profit or public agencies. A borrower, who accepts the incentives but 

does not receive them within 15 months of accepting them, may offer the project for sale to nonHB-3-3560

15-18
profit and public agencies. This process can take up to 30 months to complete. At the end of 

this process, if the property has not been purchased, the borrower is permitted to prepay without 

RUPs.

The sale process has several steps:

• The property must be marketed for 180 days as described in Paragraph 15.27. Marketing 

for 180 days means that an advertisement must appear in newspapers, periodicals, 

newsletters, or be listed with a real estate agent for 180 days consecutively;

• The marketing information must include the following statement of the availability of 

financing from USDA Rural Development: USDA Rural Development may provide 

funding to make this purchase possible. Funding includes 100 percent RA a one percent 

loan for purchase and a $50,000 grant for purchase expenses; 

• The borrower must provide copies of documentation, e.g., copies of advertisements and 

marketing letters, a list of interested non-profit organizations and public bodies to which 

the marketing information was provided will be submitted to the Agency during the 

180 days to verify marketing met all requirements.

• The first 60 days, the borrower will market to local non-profits and public agencies. 

After 60 days, the borrower will market to regional and national non-profit organizations

and public bodies. It should also state local non-profit organizations and public agencies 

have priority over regional and national non-profit organizations and public agencies. 

• If no offer is made within 180 days, the borrower may prepay the loan without use 

restrictions (see Paragraph 15.31); 

• Offers received within the 180 days must be treated as described in Paragraph 15.28; 

• If an offer is accepted, the purchaser must finalize the sale within 24 months. If the sale 

is not finalized, the borrower may prepay the loan without use restrictions (see 

Paragraph 15.31); and 

• After a sale is completed, the Loan Servicer must oversee the transfer of the property and 

continue to monitor the project as a program property (see Paragraph 15.30). 

15.26 ESTABLISHING THE PROJECT VALUE

 To establish the value of the property (as an unsubsidized conventional property) and 

determine an acceptable offer, two independent “as-is” market value appraisals will be 

completed in accordance with Chapter 7 of HB-1-3560. The borrower must pay the expense of 

the borrower’s appraisal. The appraiser selected may not have an identity-of-interest with the 

borrower. 

If the two appraisers fail to agree on the fair market value, the Agency and the borrower 

will jointly select an appraiser whose appraisal will be binding. The Agency and the borrower 

will jointly fund the cost of the appraisal.

15.27 MARKETING REQUIREMENTS

The Loan Servicer must ensure that the borrower takes appropriate actions to inform 

appropriate entities of the sale. The borrower must provide the Loan Servicer with appropriate 

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Revised (11-07-08) SPECIAL PN
documentation (e.g., copies of advertisements) to demonstrate that the following actions 

occurred: 

• The borrower must contact interested non-profit organizations and public agencies from 

the list maintained by ORHP.

• The borrower must provide these entities with sufficient information regarding the 

project and its operations for interested purchasers to make an informed decision. This 

information must include. It should include project name, project address (city, state, 

zip), the minimum acceptable bid prices based on the appraised market value (as 

discussed in Paragraph 15.26), total number of units, bedroom types, basic and market 

rents, owner’s name, owner’s address (city, state, zip), phone and fax number, borrower’s 

contact person/representative, and the name of the Rural Development Office that 

services the loan, address (city, state, zip), and phone number. If a picture of the project 

is available; it should be included. It should also state the preference for local entities, as 

described in Paragraph 15.28. 

• If an interested purchaser requests additional information concerning the project, the 

borrower must promptly provide the requested materials. 

• 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. 

15.28 SELECTING AN OFFER

 The borrower must accept any good faith offer at or above the minimum acceptable bid 

price.

• Requirements for non-profit organizations and public agencies to purchase. To buy 

and operate a multi-family housing project, a non-profit organization or public agency 

must meet the requirements listed in Exhibit 15-4. 

15-20

HB-3-3560
Exhibit 15-4

Requirements for Non-profit Organizations and 

Public Agencies to Purchase

• The purchaser must agree to maintain the housing for very low- and lowincome families or persons for the remaining useful life of the project and 

related facilities. However, currently eligible moderate-income tenants 

will not be required to move;

• The purchaser must agree that no subsequent transfer of the housing and 

related facilities will be permitted for the remaining useful life of the 

housing and related facilities unless the Agency determines that the 

transfer will further the provision of housing and related facilities for lowincome families and persons, or there is no longer a need for such housing 

and related facilities;

• The purchaser must show financial feasibility of the project including 

anticipated funding;

• The purchaser must certify on Form RD 3560-30 that there are no identityof-interest relationships;

• The purchaser must complete an Agency-approved application and obtain 

Agency approval in accordance with 7 CFR part 3560, subpart I; and 

• To be eligible to purchase properties, non-profit organizations must meet 

the criteria outlined in 7 CFR part 3650, subpart B. These requirements 

are discussed in Chapter 4 of HB-1-3560.

• Preference for local non-profit and public agencies. Local non-profit organizations 

and public agencies have priority over regional and national non-profit and public 

agencies. The borrower may not accept an offer from a regional or national non-profit 

organization or public agency during the first 60 days that the property is advertised.

 If no offer from a local non-profit or public agency is received in the first 

60 days, the borrower may accept an offer from a regional or national nonprofit organization or public agency. 

 If more than one qualified non-profit organization or public agency submits an 

offer to purchase the project, the Agency will give priority to qualified local 

non-profit organizations and public agencies over regional and national nonprofit organizations and public agencies. 

 If additional criteria are needed to make a selection, the borrower must 

consider the organization’s past success in developing and maintaining 

subsidized housing and the length of experience in developing and 

maintaining subsidized housing. Past success is given priority over length of 

experience when comparing equal offers. 

HB-3-3560

(02-24-05) SPECIAL PN 15-21

Revised (11-07-08) SPECIAL PN
• Approving an offer. The Loan Servicer must approve the borrower’s acceptance or 

rejection of any offer for purchase. If the borrower receives an offer, they must notify the 

Loan Servicer of the offer and whether or not they want to accept the offer. The Loan 

Servicer must review the borrower’s decision.

 If the borrower wants to reject the offer, the Loan Servicer must concur with the 

borrower’s reasons for rejection. If the Loan Servicer does not concur, the 

borrower must accept the offer.

 If the offer is to be accepted, the proposed purchaser must submit appropriate 

documentation to the Agency to demonstrate eligibility for the transfer. The Loan 

Servicer must approve the transfer and then take appropriate steps to close the 

transfer (see Chapter 7 for the procedures for transfer).

15.29 LOANS MADE BY THE AGENCY OR OTHER SOURCES TO NON-PROFIT

ORGANIZATIONS AND PUBLIC AGENCIES

 The Agency may make loans to non-profit organizations or public agencies to facilitate 

the purchase of the project. Alternatively, the Agency may approve a loan from another entity. 

These loans must be approved as described in HB-1-3560. They may be made for either of the 

purposes described below. 

• A loan may be made to enable the non-profit organization or public agency to purchase a 

project at the appraised value; and

• With proper justification, a loan may be made to help meet the project’s first-year 

operating expense if current operating funds are not sufficient. This loan may not exceed 

two percent of the project’s appraised value.

 The Agency may also make an advance of up to $50,000 to a non-profit organization or 

public agency to cover the costs to develop a loan application package or close a loan to 

purchase a property.

15.30 POST SALE REQUIREMENTS

 Once the property has been sold to a non-profit or public agency, the new owner of the 

property is subject to all applicable program requirements and use restrictions that applied to the 

property prior to the sale.

• The Loan Servicer must ensure that the transfer of the property takes place according to 

Agency rules and that the new owner is made subject to all applicable use restrictions 

(see Chapter 7) 

• The Loan Servicer must notify tenants and other interested parties that the sale will take 

place; and

• The Loan Servicer will monitor this property as it monitors all other program properties 

(see Chapter 9 of HB-2-3560). 

15-22

HB-3-3560
15.31 REQUIREMENTS FOR BORROWERS IF AN ACCEPTABLE PURCHASER IS 

NOT FOUND

 If no purchaser is found for the property within the 180-day period or if any offer is made 

but the purchaser fails to come up with the funds to complete the purchase within 24 months, the 

borrower is considered to have fulfilled the requirements for offering the property for sale. At 

this time, the borrower is permitted to prepay the Agency loan without use restrictions. 

 The Loan Servicer must: 

• Send a letter to the borrower notifying him or her that prepayment is permitted; and

• Close out the application in PRE-TRAC.

SECTION R: SPECIAL CIRCUMSTANCES

15.32 PROPERTIES UNDER BANKRUPTCY ON FORECLOSURE

Bankruptcy proceedings will have no effect on contractual requirements for restrictive 

use.

If a project that is subject to restrictive-use provisions is sold outside the program at a 

foreclosure sale, the Agency has no means to continue to enforce restrictive-use provisions after 

the purchase.

15.33 ADVANCE PAYMENT OF ACCOUNTS

 When an Agency loan, which is not subject to prepayment prohibitions, reaches or falls 

below six remaining payments due to a borrower’s voluntary advance payments or extra 

payments required by the Agency, the borrower will be notified that the final payment on the 

account can not be accepted unless a prepayment request is made. The borrower will be required 

to submit all applicable information to a prepayment request.

HB-3-3560

(02-24-05) SPECIAL PN 15-23

Revised (11-07-08) SPECIAL PN
This page intentionally left blank 

HB-3-3560

15-24
ATTACHMENT 15-A 

OVERVIEW OF PREPAYMENT PROCESS

Outlined below is a summary of the conditions to be met for making key decisions related to the 

prepayment process.

What are the criteria for accepting a prepayment request?

• The borrowers’ loans were closed before 1989; 

• All items on the application checklist have been submitted; and 

• The borrowers submit proof of their ability to prepay their loans. 

You may issue a general or specific incentive offer to a borrower if the following conditions 

are met:

• The application has been accepted (see criteria listed above);

• The existing loan is a Rural Rental Housing (RRH) loan or an Off-Farm Labor Housing 

loan; 

• The loan closed prior to 1979; and 

• There are no restrictive-use provisions associated with the loan. 

Note: If the borrower is inclined not to accept a specific incentive offer, you may proffer a 

general offer and proceed from there when the borrower declines the offer. If, however, the 

borrower accepts the general offer, you must then proceed with a specific incentive offer.

A borrower may prepay WITHOUT use restrictions when the following conditions are 

met:

• If the borrower rejects the general and/or specific incentive offers and the property is not 

needed; 

• If the borrower appeals the decision to prepay with use restrictions, when the property is 

needed, and wins the appeal; 

• If the borrower markets the property to a non-profit organization and a buyer is not found 

within 180 days; and 

• If the borrower markets the property and a buyer is found, but the deal fails to close. 

A borrower may prepay WITH use restrictions when the following conditions are met:

• If the borrower rejects the general or specific incentive offer and the property is needed.

A borrower can market the property to a non-profit organization under the following 

circumstances:

HB-3-3560

Attachment 15-A 

Page 1 of 2

(02-24-05) SPECIAL PN

Revised (11-07-08) SPECIAL PN
• If the borrower’s loan closed between 1979 and 1989 and the borrower does not wish to 

continue in the program, but agrees to sell the property to a non-profit organization; 

• If the borrower’s loan closed between 1979 and 1989 and the borrower does not wish to 

continue in the program or sell to a non-profit organization. However, a subsequent 

needs assessment reveals that minority tenants will be materially affected. In this case, 

the borrower is obligated to sell to a non-profit organization;

• If a pre-1979 borrower declines both the general and specific incentive offers, but a needs 

assessment reveals that the property is needed. The borrowers can then appeal the 

decision. However, if they lose the appeal or choose not to appeal, they can agree to sell 

to a non-profit organization if they do not wish to prepay with use restrictions. 

A request is returned to the borrower under the following circumstances:

• If the borrower’s loan closed after 1989;

• If the borrower’s prepayment request is withdrawn or rejected; and

• If the project is needed, the borrower is obligated to prepay with use restrictions. The 

borrower can then appeal. It the borrower loses the appeal, he or she may decide to 

withdraw the application rather than have to sell to a non-profit organization.

HB-3-3560

Attachment 15-A 

Page 2 of 2
Attachment 15-B 

EXPLANATION OF INCENTIVE OFFERS

A. 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 7 CFR part 3560 subpart G of this part. 

B. 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 

MARKET value.

C. When a current appraisal indicates an equity loan can not 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.

D. 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 HUD 

Section 8 assistance to lower the interest rate on the loan and make basic rents more 

financially feasible.

E. The Agency may offer additional rental assistance, or an increase in assistance provided 

under existing contracts under §§ 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. § 1437f]. 

F. 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:

 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 7 CFR part 3560 subpart P. 

1. Borrowers with farm labor housing loans are not eligible to receive equity loans 

as incentives.

2. If an incentive offer for an equity loan is accepted, the equity loan may be 

processed and closed with the borrower or any eligible transferee.

3. Excess reserve funds will be used to reduce the amount of an equity loan offered 

to a borrower. 

4. 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.

G. 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 to protect tenants 

who are currently paying more than 30 percent of their annual adjusted income. 

HB-3-3560

Attachment 15-B 

Page 1 of 2

(02-24-05) SPECIAL PN

Revised (11-07-08) SPECIAL PN
All incentives will be processed using the Incentive Calculation Worksheet. The 

Worksheet has two versions: 

• A Stand Alone Excel Spreadsheet located on the Agency's Intranet; or 

• The PRE-TRAC version.

HB-3-3560

Attachment 15-B 

Page 2 of 2
SAMPLE LETTER TO TENANTS

Initial Tenant Notification of Owner’s Intent to Prepay and Voucher Availability

[7 CFR 3560.654(a)] 

Date:

RE: Prepayment Request Notice

 XXXXX Apts., XXXXXXXXX, XX-X 

Dear Tenants of ___________________ Apts.: 

The apartment complex known as ______, located in _______, in which you reside was developed 

with a loan financed through USDA Rural Development’s Section 515 Rural Rental Housing 

Program. The owners of the property recently submitted a request to USDA for permission to pay 

off their loan prior to the maturity date of the loan. This is a process known as prepayment. 

Based on communication with the owner so far, it is not clear whether: 

• The owner plans to continue to operate the apartments as affordable housing. Or, 

• The owner wants to pay their USDA loan in full and then either sell or 

operate the apartments as conventional, market rate apartments. USDA 

would no longer be involved in the oversight of the apartment’s 

management, leases and rent structure. Or, 

• The owner wants to sell the property to a new owner who is willing to 

continue to operate the apartments as affordable rental housing. Or, 

 

• The owner has requested to pay their loan in full to qualify for financial 

incentives from USDA and DOES NOT plan to pay the USDA loan in 

full. In return for the incentives, the owner will agree to remain in the 

USDA program and continue to operate the apartments as affordable 

rental housing, including the continued availability of Rental Assistance, 

if the property has Rental Assistance available, and continued oversight 

by USDA. 

USDA would like to know your concerns if the owner pays the loan in full prior to the maturity 

date, as well as how it would affect the other tenants in the apartments, other people in the market 

area, and any minorities living in the apartments and in the market area. Upon request, tenants may 

review the information submitted with the prepayment request. 

We ask that you send us your written comments and concerns regarding the owner’s request to pay 

the USDA loan in full within 30 days from the date of this letter. Please send comments to: 

HB-3-3560

Attachment 15-C 

Page 1 of 6

(02-24-05) SPECIAL PN

Revised (09-27-23) PN 592
USDA, Rural Development 

 FIRST LAST, Finance & Loan Analyst

 Portfolio Management Branch, AMD 

 STREET ADDRESS

 CITY STATE ZIP

 EMAIL

 PHONE NO.

 

A tenant meeting will be held via a conference call on____________ at ______- [Include TIME 

ZONE]. Call _________and enter _________to join the meeting. A representative of USDA 

will be available to answer questions and provide an overview of the prepayment request 

process. A ________ language interpreter will be available at the meeting for translation of 

comments, questions, and answers. If you need a reasonable accommodation to access the call 

or respond to this letter, please contact the Finance & Loan Analyst listed above. 

USDA follows a very careful process before deciding to allow apartment owners to pay their 

USDA loan(s) in full. The process evaluates the effect to minorities and the availability of other 

affordable housing units in the market area if the Owner is approved to pay the loan in full. 

USDA will provide future notifications of the status of the Owner’s request to pay the loan in 

full, including if the Owner is approved to make the final loan payment. 

Rural Development may offer various financial incentives to the owners to encourage them to 

remain in the Rural Development program and to continue to operate the apartments as 

affordable rental housing under the Rural Development program. Often such incentives are 

sufficient to prevent the owner from paying the loan in full, and the apartment will continue to be 

operated without change for the tenants. 

However, if the owner is not interested in the financial incentive(s) that Rural Development may 

offer, the Agency will evaluate how accepting the final loan payment will affect the tenants of 

the apartments.

Your current lease will remain in effect for the term stated in the lease and may not be modified 

or terminated except as stated in the lease. Without good cause, the lease may not be 

terminated, and the owner may not evict you. 

USDA Rural Development has developed a Voucher Program that is available to eligible tenants, 

who are residing at the property at the time of the acceptance of the final loan payment. To be 

eligible to receive a Rural Development Voucher, the head of household must be a United States 

citizen, a United States non-citizen National, or a qualified alien in residence. The intent of the 

Rural Development Voucher Program is to offer some assistance to eligible tenants who may be 

subject to the loss of affordable housing assistance through the acceptance of the final USDA 

loan payment. 

HB-3-3560

Attachment 15-C 

Page 2 of 6
The Rural Development Voucher Program will pay the difference between the area market rent, 

of the unit you currently reside, as determined by Rural Development, and the tenant’s 

contribution toward rent on the date of the final loan payment. Additional information on the 

Rural Development Voucher Program and your eligibility will be sent if the final loan payment 

from the owner is approved and accepted. 

The prepayment process to evaluate the owner’s request to pay the loan in full will take a 

minimum of 90 days. However, based on processing time and the decisions of the Agency and 

the owner, the process may be extended for additional months. 

If you should have questions regarding this notification, or the prepayment process please 

contact __________________. 

Sincerely, 

 

 

 

FIRST LAST, Branch Chief

Portfolio Management Branch

Multifamily Asset Management Division

Email: 

cc: , Team Lead, Field Office Division

, Loan Specialist, Field Office Division

Enclosure: DEFINITIONS

HB-3-3560

Attachment 15-C 

Page 3 of 6

(02-24-05) SPECIAL PN

Revised (09-27-23) PN 592
DEFINITIONS: 

Agency: The Rural Housing Service within the Rural Development (RD) mission area of the 

United States Department of Agriculture which administers programs authorized by sections 

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

Covenant: A covenant is an agreement. 

HUD Section 8 Vouchers: HUD Section 8 vouchers are administered by HUD or other 

authorized agencies and are awarded to a specific tenant or applicant who brings the voucher to 

the Rural Development property. Project accepting tenants who use such vouchers assigned by a 

local public housing agency will also comply with any requirements imposed by that agency. 

Letter of Priority of Entitlement (LOPE): A letter issued by Rural Development to provide a 

tenant with priority entitlement to rental units in other Rural Development-financed housing 

properties. The LOPE letter is used to place a tenant for 120 days at the top of the waiting list(s), 

for the tenant’s income category, of any Rural Development financed property located in the 

United States and its territories. The tenant must meet the eligibility requirements of the 

property. If a tenant needs additional time to secure an apartment, Rural Development may, at 

the tenant’s request, extend the priority period under the LOPE. With no extension of the 

priority period, after 120 days the tenant may continue to be placed on a waiting list(s) for 

apartments for which they are eligible, but without priority. The LOPE letter may also provide 

preference in HUD apartments, if allowed by their occupancy policy. The tenant will have up to 

ONE-YEAR from the date of the Prepayment Acceptance Notice to request a LOPE letter. The 

letter will be issued in accordance with all Civil Rights requirements. 

Loan Maturity: Loan maturity is the date on which a borrower’s final loan payment is due. 

Prepayment: Payment in full of the outstanding balance on an Agency loan prior to the 

promissory note’s original scheduled maturity date. To pay the loan in full prior to the maturity 

date, the owner must make a request to Rural Development through a process known as 

prepayment. If the owner is approved by Rural Development to pay the loan in full, when the 

final payment is made, Rural Development will no longer provide oversight on the property’s 

operations and the property will no longer receive Rental Assistance to assist tenants with their 

rent. 

Project-based HUD Section 8 assistance: A tenant rental subsidy provided under a contract with 

the United States Department of Housing and Urban Development (HUD). Rural Development 

has a responsibility to monitor the contract known as the Housing Assistance Payments (HAP) 

contract, in particular the expiration date. In properties with HUD Section 8 project-based 

HB-3-3560

Attachment 15-C 

Page 4 of 6
 

assistance, HUD sets the rents and utility allowances, and tenants pay the greater of 30% of 

monthly adjusted income or 10% of gross income, welfare rent, or $25. The project-based 

Section 8 assistance stays with the Rural Development property. 

Rental Assistance: A subsidy provided to Agency-financed multi-family projects to subsidize 

the rents of qualified tenants. With Rental Assistance, a qualified tenant pays no more than 30% 

of his or her income for housing. The subsidy is only available to Agency financed multi-family 

housing. 

Restrictive Use Covenant: A written covenant, signed by the owner who has been approved to 

pay the loan in full. Through the prepayment request process, Rural Development determines if 

the property may pay the loan in full with or without a restrictive use covenant. The covenant 

must be filed with the County Recorder’s Office and runs concurrent with the land. With this 

Restrictive Use Covenant, the owner, and all successors of interest, agree to protect those tenants 

living at the property on the day the final loan payment is accepted by Rural Development. The 

Restrictive Use Covenant provides that tenants’ rents will continue to be calculated as if the 

property were still in the Rural Development program. 

Rural Development (RD): A Federal Agency within the United States Department of 

Agriculture (USDA).

Rural Development Voucher Program (RDVP): Rural Development has developed a Voucher 

Program that is available to eligible tenants, who are residing at the property at the time of the 

acceptance of the final loan payment. To be eligible to receive a Rural Development Voucher, 

the head of household must be a United States citizen, a United States non-citizen National, or a 

qualified alien in residence. The intent of the Rural Development Voucher Program is to offer 

some assistance to eligible tenants who may be subject to the loss of affordable housing 

assistance through the acceptance of the final Rural Development loan payment. 

The Rural Development Voucher Program will pay the difference between the area market rent, 

of the unit you currently reside, as determined by Rural Development, and the tenant’s 

contribution toward rent on the date of the final loan payment. Additional information on the 

Rural Development Voucher Program and your eligibility will be sent if the final loan payment 

from the owner is approved and accepted. 

Section 515 – Rural Rental Housing Program: The Section 515 direct loan program [7 CFR 

3560] provides financing to support the development of rental units in rural areas that need 

housing affordable for very-low-; low-, and moderate-income households.

HB-3-3560

Attachment 15-C 

Page 5 of 6

(2-24-05) SPECIAL PN

Revised (09-27-23) PN 592
This page intentionally left blank. 

HB-3-3560

Attachment 15-C 

Page 6 of 6
TO: The Tenants of 

SUBJECT: Notice of Prepayment Request Withdrawal

Your apartment was developed with assistance from a loan made by U.S. Department of 

Agriculture (USDA) Rural Development, an Agency of the United States Government. The 

owners of your apartment complex recently asked USDA for permission to pay off their USDA 

loan ahead of schedule.

Based on USDA’s communications with the owner so far, the owner plans to continue to operate 

the apartments as affordable rental housing and has withdrawn their prepayment request. You 

may remain as long as you are eligible and wish to occupy your apartment. 

If you have any questions, please contact me at

Sincerely,

___________________________________________ 

(Servicing Official)

HB-3-3560

Attachment 15-C-1 

Page 1 of 1

(02-24-05) SPECIAL PN

Revised (11-07-08) SPECIAL PN
This page intentionally left blank 

HB-3-3560
 SAMPLE LETTER TO TENANTS

Final Tenant Notification of Prepayment Acceptance Notice to Owner’s

[7 CFR 3560.654(c)] 

Date:

RE: Prepayment Acceptance Notice

 XXXXX Apts., XXXXXXXXX, XX-X 

Dear Tenants of ___________________ Apts.: 

This letter is a follow up on the letter you should have received on or about _________________ or 

when you moved into the property after this date. The apartment complex known as 

___________________ was developed with a loan financed through USDA Rural Development’s 

Section 515 Rural Rental Housing program. 

USDA has reviewed the information concerning the owner's request to pay the loan in full prior to 

the maturity date in a process called prepayment and will be accepting the final loan payment 

sometime between xx/xx/xxxx [60 days from today’s date] and xx/xx/xxxx. [6 months from 

today’s date] 

USDA has approved the Owner's request to pay the loan in full prior to the maturity date, based 

upon the following: 

Choose option – delete the one(s) that do/does not apply – 

[The Portfolio Management Branch staff will select the appropriate paragraph(s) and provide this 

letter to the FOD staff, with their handoff letter, for mailing and delivery to tenants. The inapplicable 

bulleted paragraphs will be removed from the letter.] 

• USDA has determined there is not an adequate number of 

available affordable units in the market area. The owner has 

agreed to accept restrictions and to sign a legally binding 

“restrictive use covenant” protecting the tenants who are living at 

the property on the day the USDA loan is paid in full. The 

protected tenants’ rents will continue to be calculated as if the 

property were still in the Rural Development program in 

accordance with 7 CFR 3560, for as long as the tenant continues to live at the 

property. The owner also has agreed to keep the apartment as a suitable place to 

live. Any tenant, as well as Rural Development, may enforce the restrictive use 

covenant. The owner cannot evict a protected tenant or refuse to renew a 

protected tenant’s lease without good cause. See the enclosed Fact Sheet “What 

You Can Do To Protect Yourself After the Final Loan Payment is Accepted” for 

your options. 

HB-3-3560

Attachment 15-C-2 

Page 1 of 10

(02-24-05) SPECIAL PN

Revised (09-27-23) PN 592

This paragraph is inserted 

when the Owner has agreed 

to prepay with the “Last 

Existing Tenant” use 

restrictions. Attachment 

15-E-2. 
• The property is subsidized by HUD through the project-based Section 8 

program. Part of your rent will continue to be paid by a project-based HUD 

Section 8 Contract. However, even if the project-based HUD Section 8 

Contract stops, the owner will have to continue to calculate your rent in the 

 same manner it is calculated now.

• USDA has determined there are enough available, vacant units like yours 

in quality, size, location and rent in ________________ and in the surrounding 

area to allow for the acceptance of the final loan payment without any 

restrictions placed on the future operation of the property. See the enclosed 

Fact Sheet “What You Can Do To Protect Yourself After the Final Loan 

 Payment is Accepted” for your options. 

• The Owner has advertised for 180 days to non-profit organizations and 

public bodies and no offer was received and accepted to purchase the property. 

The Owner may pay the USDA loan in full, with no further restrictions. See 

the enclosed Fact Sheet “What You Can Do To Protect Yourself After the 

Final Loan Payment is Accepted” for your options. 

• The property has an existing use restriction in place that legally requires 

the Owner to continue to rent to very-low; or low-; or moderate-income 

tenants. Tenants’ rents will continue to be calculated as if the property were 

still in the Rural Development program until xx/xx/xxxx (date restrictions 

expire). Annually, your income will be verified, and your rental payment will 

be calculated in the same manner as it is today, in accordance with the 7 CFR 

3560. The owner must keep the apartment as a suitable place for you to live. Any tenant, as 

well as Rural Development, may enforce the owner’s existing use restriction. The owner 

cannot evict you or refuse to renew your lease without good cause. See the enclosed Fact 

Sheet “What You Can Do To Protect Yourself After the Final Loan Payment is Accepted” for 

your options. 

After the loan is paid in full, the rent for your apartment will remain the amount stated in your 

lease. If you decide to remain in your apartment, your current lease will remain in effect for the 

term stated in the lease and may not be modified or terminated except as stated in the lease. You 

cannot be evicted without good cause. Your landlord cannot require you to sign a new lease that 

starts before your current lease ends. 

To help protect you from the impact of the owner’s final loan payment, you may be eligible for a 

Rural Development Voucher. See the enclosed Fact Sheet “What Can You Do To Protect 

Yourself After the Final Loan Payment is Accepted” for details. 

[PMB Staff: Use this sentence only if the property has project-based HUD Section 8 that will 

continue: Because this property receives project-based HUD Section 8 rental subsidy, only one 

type of rental subsidy may be utilized.] 

HB-3-3560

Attachment 15-C-2 

Page 2 of 10

This paragraph is inserted 

when the property has 

project-based HUD 

Section 8 assistance. 

This paragraph is inserted 

when the Owner is 

approved to prepay 

without use restrictions. 

This paragraph is inserted 

when the Owner has 

advertised for 180 days to 

NFP’s and public bodies 

and no good faith offer has 

been received. 

This paragraph is inserted 

when the Owner has been 

approved to prepay with 

an existing use restriction. 
A tenant meeting, to discuss your options, will be scheduled with Rural Development staff when 

the date of the final loan payment has been determined. 

If you have any questions, please contact FIRST LAST, Loan Specialist at the following:

USDA Rural Development 

Name, Loan Specialist

Field Operations Division (FOD)

Address 

City, State Zip

Phone: 

Email:

 

If you need a reasonable accommodation to participate in the meeting or respond to this letter, 

please contact the Loan Specialist listed above. 

Sincerely, 

 

 

 

FIRST LAST, Branch Chief

Portfolio Management Branch

Multifamily Asset Management Division

Email: 

Enclosures: 1. DEFINITIONS

 2. FACT SHEET: WHAT CAN YOU DO TO PROTECT YOURSELF AFTER THE FINAL 

 LOAN PAYMENT IS ACCEPTED

(02-24-05) SPECIAL PN

Revised (09-27-23) PN 592

HB-3-3560

Attachment 15-C-2 

Page 3 of 10
DEFINITIONS: 

Agency: The Rural Housing Service within the Rural Development (RD) mission area of the United 

States Department of Agriculture which administers programs authorized by sections 514, 515, 516 

and 521 of the Housing Act of 1949, as amended. 

Covenant: A covenant is an agreement. 

HUD Section 8 Vouchers: HUD Section 8 vouchers are administered by HUD or other authorized 

agencies and are awarded to a specific tenant or applicant who brings the voucher to the Rural 

Development property. Project accepting tenants who use such vouchers assigned by a local public 

housing agency will also comply with any requirements imposed by that agency. 

Letter of Priority of Entitlement (LOPE): A letter issued by Rural Development to provide a tenant 

with priority entitlement to rental units in other Rural Development-financed housing properties. 

The LOPE letter is used to place a tenant for 120 days at the top of the waiting list(s), for the tenant’s 

income category, of any Rural Development financed property located in the United States and its 

territories. The tenant must meet the eligibility requirements of the property. If a tenant needs 

additional time to secure an apartment, Rural Development may, at the tenant’s request, extend the 

priority period under the LOPE. With no extension of the priority period, after 120 days the tenant 

may continue to be placed on a waiting list(s) for apartments for which they are eligible, but without 

priority. The LOPE letter may also provide preference in HUD apartments, if allowed by their 

occupancy policy. The tenant will have up to ONE-YEAR from the date of the Prepayment 

Acceptance Notice to request a LOPE letter. The letter will be issued in accordance with all Civil 

Rights requirements. 

Loan Maturity: Loan maturity is the date on which a borrower’s final loan payment is due. 

Prepayment: Payment in full of the outstanding balance on an Agency loan prior to the promissory 

note’s original scheduled maturity date. To pay the loan in full prior to the maturity date, the owner 

must make a request to Rural Development through a process known as prepayment. If the owner is 

approved by Rural Development to pay the loan in full, when the final payment is made, Rural 

Development will no longer provide oversight on the property’s operations and the property will no 

longer receive Rental Assistance to assist tenants with their rent. 

Project-based HUD Section 8 assistance: A tenant rental subsidy provided under a contract with the 

United States Department of Housing and Urban Development (HUD). Rural Development has a 

responsibility to monitor the contract known as the Housing Assistance Payments (HAP) contract, in 

particular the expiration date. In properties with HUD Section 8 project-based assistance, HUD sets 

the rents and utility allowances, and tenants pay the greater of 30% of monthly adjusted income or 

10% of gross income, welfare rent, or $25. The project-based Section 8 assistance stays with the 

Rural Development property. 

HB-3-3560

Attachment 15-C-2 

Page 4 of 10
 

Rental Assistance: A subsidy provided to Agency-financed multi-family projects to subsidize 

the rents of qualified tenants. With Rental Assistance, a qualified tenant pays no more than 30% 

of his or her income for housing. The subsidy is only available to Agency financed multi-family 

housing. 

Restrictive Use Covenant: A written covenant, signed by the owner who has been approved to 

pay the loan in full. Through the prepayment request process, Rural Development determines if 

the property may pay the loan in full with or without a restrictive use covenant. The covenant 

must be filed with the County Recorder’s Office and runs concurrent with the land. With this 

Restrictive Use Covenant, the owner, and all successors of interest, agree to protect those tenants 

living at the property on the day the final loan payment is accepted by Rural Development. The 

Restrictive Use Covenant provides that tenants’ rents will continue to be calculated as if the 

property were still in the Rural Development program. 

Rural Development (RD): A Federal Agency within the United States Department of 

Agriculture (USDA).

Rural Development Voucher Program (RDVP): Rural Development has developed a Voucher 

Program that is available to eligible tenants, who are residing at the property at the time of the 

acceptance of the final loan payment. To be eligible to receive a Rural Development Voucher, 

the head of household must be a United States citizen, a United States non-citizen National, or a 

qualified alien in residence. The intent of the Rural Development Voucher Program is to offer 

some assistance to eligible tenants who may be subject to the loss of affordable housing 

assistance through the acceptance of the final Rural Development loan payment. 

The Rural Development Voucher Program will pay the difference between the area market rent, 

of the unit you currently reside, as determined by Rural Development, and the tenant’s 

contribution toward rent on the date of the final loan payment. Additional information on the 

Rural Development Voucher Program and your eligibility will be sent if the final loan payment 

from the owner is approved and accepted. 

Section 515 – Rural Rental Housing Program: The Section 515 direct loan program [7 CFR 

3560] provides financing to support the development of rental units in rural areas that need 

housing affordable for very-low-; low-, and moderate-income households.

HB-3-3560

Attachment 15-C-2 

Page 5 of 10

(2-24-05) SPECIAL PN

Revised (09-27-23) PN 592
FACT SHEET

WHAT YOU CAN DO TO PROTECT YOURSELF AFTER

THE FINAL LOAN PAYMENT IS ACCEPTED

Choose one of the following options – 

[The Portfolio Management Branch staff will select the appropriate paragraph (option 1 or 2) of 

this fact sheet to include with the handoff letter to the FOD staff for mailing and delivery to 

tenants. The inapplicable option will be deleted from the fact sheet.] 

(Option 1) 

The Owner has been approved to pay the loan in full with a restrictive use covenant. Until 

you voluntarily move, your rent will continue to be calculated as if the property were still 

in the Rural Development program in accordance with 7 CFR 3560. Annually, your 

income will be verified, and your rental payment will be calculated in the same manner as 

it is today, in accordance with the 7 CFR 3560. 

If you are not receiving Rental Assistance on the day the final loan payment is accepted, at 

the expiration of your lease you may be subject to rent adjustments to the extent permitted 

by 7 CFR 3560. Applying for a Rural Development Voucher may provide some rent 

protection. See Rural Development Assistance No. 3 listed below. 

Any tenant may pursue legal enforcement of the recorded Restrictive Use Covenant until 

the Restrictive Use Covenant is released by Rural Development. 

(Option 2) 

The Owner has been approved to pay the loan in full, without a restrictive use covenant. At 

the expiration of your lease, you may be subject to future rent increases. The owner is not 

required to renew your lease at the end of the lease term. 

Applying for a Rural Development Voucher may provide some rent protection. See Rural 

Development Assistance No. 3 listed below.

Your current lease will remain in effect for the term stated in the lease and may not be modified 

or terminated except as stated in the lease. Without good cause, the lease may not be terminated, 

and the owner may not evict you. 

HB-3-3560

Attachment 15-C-2 

Page 6 of 10
WHEN THE FINAL LOAN PAYMENT IS ACCEPTED, THERE ARE THREE TYPES

OF RURAL DEVELOPMENT ASSISTANCE YOU MAY BE ELIGIBLE TO RECEIVE: 

USDA ASSISTANCE NO. 1 

LETTER OF PRIORITY ENTITLEMENT (LOPE) TO ANOTHER RURAL 

DEVELOPMENT FINANCED UNIT

You may request a letter called a Letter of Priority Entitlement (LOPE). You may use the 

LOPE letter to be placed at the top of the waiting list(s), for your income category, at any 

USDA financed property located in the United States and its territories if you meet the 

eligibility requirements of the property. You will have up to ONE-YEAR from the date of this 

letter to request a LOPE letter. 

The LOPE letter issued by Rural Development will provide you with priority entitlement to 

rental units in other USDA-financed housing properties for 120 days from the date of the 

LOPE letter. If additional time is needed to secure an apartment, Rural Development may, at 

the tenant’s request, extend the priority period under the LOPE letter. With no extension, after 

120 days, you may continue to be placed on waiting lists for apartments for which you are 

eligible, but without priority. This letter may also give you preference in a Department of 

Housing and Urban (HUD) assisted apartment, if allowed by their occupancy policy. The letter 

will be issued in accordance with all Civil Rights requirements. To request or to learn more 

about the LOPE letter, please contact the person listed in the enclosed letter identified as the 

Loan Specialist or the Team Lead. 

A list of Rural Development properties where a LOPE letter can be used is available at this 

link: https://rdmfhrentals.sc.egov.usda.gov/RDMFHRentals/select_state.jsp or the list may be 

requested from the person listed in the enclosed letter, identified as the Loan Specialist or the 

Team Lead.

USDA ASSISTANCE NO. 2 

TRANSFER OF RENTAL ASSISTANCE TO ANOTHER RURAL DEVELOPMENT 

PROPERTY

If you are receiving Rural Development Rental Assistance (RA) at the time the USDA final loan 

payment is accepted, RA will no longer be available at the property where you currently reside. 

However, at your request, the RA you are currently receiving can be transferred to another Rural 

Development financed property to which you may want to move. This may be used in 

combination with a LOPE letter (see above).

HB-3-3560

Attachment 15-C-2 

Page 7 of 10 

(02-24-05) SPECIAL PN

Revised (09-27-23) PN 592
• You have up to four months after the USDA loan(s) are paid in full to request the transfer 

and use of the RA. 

• If the RA on your unit is transferred, your rent will continue to be calculated in the same 

manner as it is today. 

• RA cannot be transferred to a USDA financed property that has 100 percent Rental 

Assistance, as the property already has RA you may be eligible to receive. 

• RA cannot be transferred to a USDA financed property that has a 100 percent project-based 

HUD Section 8 Contract, as the property already has assistance you may be eligible to 

receive. (The property manager can confirm the availability and type of subsidy at the 

property.) 

• RA cannot be used in combination with a Rural Development Voucher. 

• You cannot request the transfer of RA unless you were receiving rental assistance on the 

actual date the final payment is accepted on the USDA loan(s).

For more information on the transfer of Rental Assistance, please contact the person listed in the 

enclosed letter identified as the Loan Specialist or the Team Lead. 

A list of Rural Development properties is available at this link: 

https://rdmfhrentals.sc.egov.usda.gov/RDMFHRentals/select_state.jsp or the list may be requested 

from the person listed in the enclosed letter, identified as the Loan Specialist or the Team Lead. 

USDA ASSISTANCE NO. 3 

AVAILABILITY OF THE RURAL DEVELOPMENT VOUCHER

The Rural Development Voucher Program was created to offer some protection to eligible 

multifamily housing tenants of properties financed through USDA who may be subject to the loss of 

affordable housing assistance through the prepayment of the USDA loan. The Rural Development 

Voucher provides monthly payments of rental subsidy that will supplement your rent payment. 

Tenants living in the property on the day the final loan payment is accepted may be eligible to 

receive a Rural Development Voucher to assist in the payment of rent. The Rural Development 

Voucher may be used at your current unit or taken to any rental unit in the United States and its 

territories, regardless of whether the property is financed through USDA or not. To be eligible to 

receive a Rural Development Voucher, the head of household must be a United States citizen, United 

States non-citizen National, or qualified alien in residence. 

The owner of the rental property must be willing to accept a Rural Development Voucher and the 

unit must pass an inspection. 

The Rural Development Voucher will pay the difference between the area market rent of the unit 

where you currently reside, as determined by Rural Development, and your contribution toward rent 

on the date the final loan payment is accepted. The maximum amount of the Rural Development 

Voucher is permanently set and cannot be increased. More information will follow regarding the 

Rural Development Voucher after the loan has paid in full. 

HB-3-3560

Attachment 15-C-2 

Page 8 of 10
Tenants who were not previously receiving Rural Development Rental Assistance may be 

eligible to receive a Rural Development Voucher. Rural Development Voucher assistance is 

available regardless of whether the USDA loan(s) is paid in full with restrictions or without 

restrictions. 

When a Rural Development Voucher is accepted, a new lease will be signed between you and 

the owner. 

TO SUMMARIZE THE CHOICES OF THE AVAILABLE RURAL DEVELOPMENT ASSISTANCE:

(Some choices may be combined.) 

1. Choose to apply for a Rural Development Voucher and stay at the current property that 

is paying the USDA loan(s) in full, if the Voucher is accepted by the owner and the unit 

passes an inspection. 

2. Choose to apply for a Rural Development Voucher and move and use the Voucher at 

another property, where the owner will accept the Voucher, and the unit passes an 

inspection. 

3. Request a LOPE letter to be placed at the top of the waiting list, for your income 

category, at any USDA financed property located in the United States and its territories, 

if you meet the eligibility requirements of the property. 

4. If you are receiving Rural Development Rental Assistance (RA) at the time the USDA 

final loan payment is accepted, you may request the RA be transferred to another 

USDA financed property to which you may want to move. 

5. Choose to continue to live at the property where the USDA loan has been paid in full 

with a restrictive use covenant, and continue to have the rent calculated in the same 

manner as if the property were still in the Rural Development program.

6. Choose to continue to live at the property where the USDA loan has been paid in full 

without a restrictive use covenant, and be subject to future rent increases. 

When USDA accepts the final loan payment from the Owner,

an additional letter will be sent on how to apply for a Rural Development Voucher,

the eligibility requirements, and the amount of the voucher for which you may qualify.

HB-3-3560

Attachment 15-C-2 

Page 9 of 10

(02-24-05) SPECIAL PN

Revised (09-27-23) PN 592
This page intentionally left blank. 

HB-3-3560

Attachment 15-C-2 

Page 10 of 10
Si le gustaría recibir una copia de este documento en español,

llame a RD Voucher Program a nuestra línea gratis al 1-844-857-5386 o envie un correo 

electronico a rdvoucher@usda.gov.

Date

Tenant Name

Address 

City, State, Zip Code 

Tenant ID: ________________ 

RE: RURAL DEVELOPMENT (USDA)VOUCHER INFORMATION – ELIGIBILITY AND VOUCHER 

AMOUNT DETERMINATION

Dear Tenant:

The purpose of this letter is to notify you that you may be eligible for additional housing assistance, 

as a result of the property owner paying off the USDA, Rural Development (RD) loan(s). The date 

USDA accepted the final loan payment was [mm/dd/yyyy]. This means the USDA loan(s) on the 

property no longer exists and the rent for your unit may change at the expiration of your current 

lease.

There are three types of USDA assistance you may be eligible to receive as a result of this action: 

• Letter of Priority Entitlement (LOPE), if eligible, this places you at the top of the waiting list 

for your income category in another USDA financed property. 

• Transfer of Rental Assistance (RA), which allows your rent payment to remain the same if 

you move to another USDA property. 

• Rural Development Voucher, which provides monthly subsidy payments at most rental units 

anywhere in the United States and its territories, if accepted by the property owner. 

If the owner was approved to pay the USDA loan in full with a restrictive use covenant (see 

previously received Prepayment Acceptance Notice), until you voluntarily move, your rent will 

continue to be calculated in the same manner as it was prior to the owner paying the USDA loan in 

full.

Regardless of whether you apply for and receive a Rural Development Voucher, the restrictive use 

covenant provides you the right to pursue legal enforcement of the recorded restrictive use covenant, 

until released by USDA. 

(02-24-05) SPECIAL PN

Revised (11-07-08) SPECIAL PN

(02-24-05) SPECIAL PN

Revised (11-07-08) SPECIAL PN

HB-3-3560

Attachment 15-C-3 

Page 1 of 12

(02-24-05) SPECIAL PN

Added (09-27-23) PN 592
If the owner was approved to pay the USDA loan in full without a restrictive use covenant, at the 

expiration of your lease (see previously received Prepayment Acceptance Notice), the rent may 

increase. The owner is not required to renew your lease at the end of the lease term. 

The Rural Development Voucher Program was created to offer some protection to eligible 

tenants who are subject to loss of affordable housing assistance as a result of a USDA loan that is 

paid in full (or the property was removed from the USDA program through a servicing action). 

The Rural Development Voucher provides monthly payments of rental subsidy that will 

supplement your rent payment. 

Rural Development (USDA) has developed a voucher program that is available to eligible 

tenants who are residing at the property at the time of the acceptance of the final loan payment. 

Rural Development Voucher assistance is available regardless of whether the USDA loan(s) was 

paid in full with or without restrictions. If you are eligible, and choose to apply for a Rural 

Development Voucher, you will receive the benefits of the Rural Development Voucher 

Program. You may use the Rural Development Voucher at your current property, if accepted by 

the owner, or you may move to another rental property within the United States and its territories 

that will accept the Rural Development Voucher.

Carefully read the following information regarding the three types of USDA Assistance you 

may be eligible to receive.

USDA ASSISTANCE NO. 1 

LETTER OF PRIORITY ENTITLEMENT (LOPE) TO ANOTHER USDA FINANCED 

UNIT

A Letter of Priority Entitlement (LOPE) will place you at the top of the waiting list for your 

income category at other USDA-financed properties if you meet the eligibility requirements of 

the property. You have up to one year from the date of the Prepayment Acceptance Notice letter 

to request a LOPE letter. 

The LOPE letter issued by USDA will provide you with priority entitlement to rental units in 

other USDA-financed housing properties for 120 days from the date of the LOPE letter. If 

additional time is needed to secure an apartment, USDA may, at the tenant’s request, extend the 

priority period under the LOPE letter. With no extension, after 120 days, you may continue to be 

placed on waiting lists for apartments for which you are eligible, but without priority. This letter 

may also give you preference in a Department of Housing and Urban (HUD) assisted apartment, 

if allowed by their occupancy policy. The letter will be issued in accordance with all Civil 

Rights requirements.

To request a LOPE letter or learn more about your eligibility, contact [insert RD LOPE contact 

name] at [insert phone number (XXX) XXX-XXXX and extension or email]. 

HB-3-3560

Attachment 15-C-3 

Page 2 of 12
A list of USDA properties where a LOPE letter can be used is available at 

this link: https://rdmfhrentals.sc.egov.usda.gov/RDMFHRentals/select_state.jsp or the list may be 

requested from [insert RD RA contact name] at [insert phone number (xxx) xxx-xxxx or email]. 

USDA ASSISTANCE NO. 2 

TRANSFER OF RENTAL ASSISTANCE TO ANOTHER USDA PROPERTY

If you were receiving USDA Rental Assistance (RA) to help pay your rent on the date the final 

USDA loan payment was accepted, the rental assistance is no longer available at the property. 

However, at your request, the RA that was assigned to your unit can be transferred to another USDAfinanced property to which you may want to move. This may be used in combination with a LOPE 

letter (see above).

• You have up to four months after the USDA loan(s) was paid in full to request the transfer 

and use of the RA. 

• If the RA on your unit is transferred, your rent will continue to be calculated in the same 

manner as it was prior to the final USDA loan(s) payment. 

• RA cannot be transferred to a USDA financed property that has 100 percent Rental 

Assistance, as the property already has RA you may be eligible to receive. 

• RA cannot be transferred to a USDA-financed property that is 100 percent project-based 

HUD Section 8 Contract, as the property already has assistance you may be eligible to 

receive. (The property manager can confirm the availability and type of subsidy at the 

property.) 

• RA cannot be used in combination with a Rural Development Voucher. 

• You cannot request the transfer of RA unless you were receiving rental assistance on the date 

the final loan payment was accepted on the USDA loan(s). 

For more information on the transfer of Rental Assistance, contact [insert RD RA contact name] at 

[insert phone number (xxx) xxx-xxxx or email].

A list of USDA properties is available at this link: 

https://rdmfhrentals.sc.egov.usda.gov/RDMFHRentals/select_state.jsp or the list may be requested 

from [insert RD RA contact name] at [insert phone number (xxx) xxx-xxxx or email]. 

USDA ASSISTANCE NO. 3 

AVAILABILITY OF RURAL DEVELOPMENT VOUCHER

The Rural Development Voucher Program was created to offer some protection to eligible 

multifamily housing tenants who are subject to loss of affordable housing assistance as a result of a 

USDA loan that is paid in full (or the property was removed from the USDA program through a 

servicing action). The Rural Development Voucher provides monthly payments of rental subsidy that 

will supplement your rent payment. Rural Development Voucher assistance is available regardless 

of whether the USDA loan(s) was paid in full with or without restrictions.

(02-24-05) SPECIAL PN

Added (09-27-23) PN 592

HB-3-3560

Attachment 15-C-3 

Page 3 of 12
If you are eligible for a Rural Development Voucher, you have 10 months from the date of the 

final loan payment (or foreclosure) to return the Voucher Obligation Form (VOF), described 

below. After the VOF is returned and if you are determined eligible, USDA will set aside 12 

months of rental subsidy. The Voucher may be renewed annually. 

Eligible tenants may use the Rural Development Voucher to supplement rent at any rental unit in 

the United States and its territories, including your current unit, if:

1. The owner of the unit will accept a Rural Development Voucher, and 

2. The unit is in acceptable physical condition, and 

3. The unit is not already subsidized by HUD Section 8 or as a public housing unit. 

Other important information:

• The head of household must be a United States (U.S.) citizen, United States non-citizen 

national or qualified alien to be eligible for the Rural Development Voucher Program. 

• A citizenship or eligible immigration status declaration form is enclosed. The Rural 

Development Voucher cannot be issued until we receive this form completed and signed 

by the tenant (Rural Development Voucher holder).

• Even if you were not previously receiving USDA Rental Assistance (RA), you may be 

eligible to receive a Rural Development Voucher. 

• A Rural Development Voucher provides 12 months of subsidy. Vouchers may be 

renewed annually. 

• The Rural Development Voucher is portable, meaning if you choose to move the voucher 

can move with you, if the owner of the new unit will accept the Rural Development 

Voucher and the new unit is in acceptable physical condition. 

• If you receive a HUD Housing Choice Voucher or live at a HUD subsidized property, 

you cannot use a Rural Development Voucher in combination with the HUD subsidy. In 

some instances, it may be more beneficial for you to give up your Rural Development 

Voucher than to keep it. 

• Rural Development Voucher availability depends on funding. Rural Development 

Vouchers are only issued if funding is available when your Voucher Obligation Form 

(VOF) is returned. Lack of funding will cause a delay in Voucher use, which means that 

Voucher payments cannot begin timely.

• You must use your Rural Development Voucher within 60 days of issuance. See 

additional information below in “Next Steps” for what this timeframe means to you.

HB-3-3560

Attachment 15-C-3 

Page 4 of 12
The maximum amount of your Rural Development Voucher (noted below in the “FINAL 

RURAL DEVELOPMENT VOUCHER ELIGIBILITY DETERMINATION” section) is 

permanently set and cannot be increased. Therefore, if the rent amount is higher than the 

maximum amount of your Rural Development Voucher, you are responsible for the rent 

difference. If the rent amount is lower than the maximum amount of your Rural Development 

Voucher, the Voucher payment will be reduced to the rent amount. 

This letter provides your final Rural Development Voucher eligibility and award amount 

determination based on your circumstances on the day the final loan payment was accepted (or 

foreclosure). If you moved from the property prior to the day of the final loan payment was 

accepted (or foreclosure), you are not eligible to receive a Rural Development Voucher. If your 

net tenant contribution changed prior to the day the final loan payment was accepted (or 

foreclosure), you may be ineligible to receive a Rural Development Voucher, or your Voucher 

amount may change.

TO SUMMARIZE THE CHOICES OF THE AVAILABLE USDA ASSISTANCE: 

(Some choices may be combined.) 

1. Choose to apply for a Rural Development Voucher and stay at the current property that 

made their final USDA loan payment, if the Voucher is accepted by the owner and the 

unit passes an inspection. 

2. Choose to apply for a Rural Development Voucher, move and use the Voucher at another 

property where the owner will accept the Voucher, and the unit passes an inspection. 

3. Request a LOPE letter to be placed at the top of the waiting list, for your income 

category, at any USDA financed property located in the United States and its territories, 

if you meet the eligibility requirements of the property. 

4. If you were receiving Rural Development Rental Assistance (RA) at the time the USDA 

final loan payment was accepted, you may request the RA be transferred to another 

USDA financed property to which you may want to move. 

5. Choose to continue to live at the property where the USDA loan has been paid in full 

with a restrictive use covenant, and continue to have the rent calculated in the same 

manner as if the property were still in the USDA program. 

6. Choose to continue to live at the property where the USDA loan has been paid in full 

without a restrictive use covenant, and be subject to future rent increases. 

FINAL VOUCHER AMOUNT DETERMINATION

The value of the Rural Development Voucher for which you are eligible is $[insert dollar 

amount] per month (this is also referred to as the maximum amount of your Rural Development 

Voucher). See the enclosed Final Rural Development Voucher Eligibility Determination 

document for an explanation of how this amount was determined. 

HB-3-3560

Attachment 15-C-3 

Page 5 of 12

(2-24-05) SPECIAL PN

Added (09-27-23) PN 592
If this amount is $0, this is either because you are ineligible (your annual income is above 80 

percent of the median family income, as explained in the enclosure), or because your tenant 

contribution at the prepaying (or foreclosed) property was equal to or greater than the area 

market rent for your unit. See the enclosed Final Rural Development Voucher Eligibility 

Determination for an explanation of how this Voucher amount was calculated. 

As stated above, the amount of your Rural Development Voucher cannot exceed the rent for your 

unit. If you want to use this Voucher at a property where the amount of the Voucher exceeds the 

rent, the Voucher will be reduced to equal the rent. Once established, the maximum amount of 

your Rural Development Voucher will not change.

NEXT STEPS (THESE STEPS DO NOT APPLY TO YOU IF YOUR VOUCHER 

AMOUNT IS $0)

If you are interested in receiving a Rural Development Voucher, you must sign the enclosed 

“Voucher Obligation Form” (VOF) and return the original document along with the 

completed Citizenship or Eligible Immigration Status Declaration document to USDA at 

the following address:

United States Department of Agriculture

Attention: USDA RD Voucher Program 

P.O. Box 775220 

St. Louis, MO 63177 

You have 10 months from the date the final loan payment was accepted to return the original, 

signed VOF and Citizenship or Eligible Immigration Status Declaration document to USDA. 

Returning the Voucher Obligation Form (VOF) and Citizenship or Eligible Immigration Status 

Declaration document will begin the determination of your eligibility and multi-step Voucher 

process. You will receive the Rural Development Voucher form and the Request for Tenancy 

Approval form. You will have 60 days upon issuance of these forms to determine if you plan to 

stay at your current location or if you plan to move to a new location that will accept the 

Voucher. If needed, you can submit a written request for a 60-day extension. 

Once you have made the determination of where you plan to reside (current location or new 

location), you will return the Rural Development Voucher form and the Request for Tenancy 

Approval form at least 90 days before you expect to use the Rural Development Voucher. The 

Voucher payment cannot begin until the Voucher and lease up process has been completed, 

including an acceptable inspection of the selected unit.

HB-3-3560

Attachment 15-C-3 

Page 6 of 12
If you disagree with either the income eligibility determination or the Voucher amount 

determination, or if you have any questions about the Rural Development Voucher Program, call 

the Rural Development Voucher Program Office toll-free at (844) 857-5386 or contact by email 

at RDVoucher@usda.gov. If you need a reasonable accommodation to access or respond to this 

letter, or if you need this letter provided in a language other than English, please contact the 

Rural Development Voucher Program Office at the phone number or email listed above. 

Sincerely,

Julie Felhofer 

Branch Chief 

Policy and Budget Branch, Asset Management Division 

Multifamily Housing, Rural Development 

United Stated Department of Agriculture

Enclosures: Final Rural Development Voucher Eligibility Determination, 

RD Voucher Program Initial Lease-Up Voucher Obligation Form (not enclosed if 

your voucher amount is $0), 

RD Voucher Program Citizenship or Eligible Immigration Status Declaration Document (not 

enclosed if your voucher amount is $0)

HB-3-3560

Attachment 15-C-3 

Page 7 of 12 

(2-24-05) SPECIAL PN

Added (09-27-23) PN 592
FINAL RURAL DEVELOPMENT VOUCHER ELIGIBILITY DETERMINATION

Eligibility to receive a Voucher is based on your adjusted income, found on the Tenant 

Certification in effect on the date the final loan payment was accepted (or foreclosure). Only 

those tenants who are low-income are eligible to receive a Rural Development Voucher. “Lowincome” is defined as an annual adjusted income at or below 80 percent of median family 

income. 

The median family income for your area is $[insert dollar amount] and 80 percent of that figure 

is $[insert dollar amount].

If your adjusted income is at or below 80 percent of the median family income, you are income 

eligible for the Rural Development Voucher Program.

If your adjusted income exceeds 80 percent of median family income, you are not income 

eligible for the Rural Development Voucher Program.

FINAL RURAL DEVELOPMENT VOUCHER AMOUNT DETERMINATION

The amount of your Rural Development Voucher is calculated as follows:

$[insert dollar amount] Area market rent for your unit in the area where you rent at the time 

of prepayment (or foreclosure)

$[insert dollar amount] (less) net tenant contribution toward rent on date of prepayment (or 

foreclosure)

$[insert dollar amount] Maximum Amount of your Rural Development Voucher

Remember: The maximum amount of your Rural Development Voucher is permanently 

set and cannot be increased. Therefore, if the rent amount in the proposed lease is higher 

than the maximum amount of your Rural Development Voucher, you are responsible for 

the rent difference. If the rent amount is lower than the maximum amount of your Rural 

Development Voucher, the Voucher payment will be reduced to the rent amount. 

If the Prepayment Acceptance Notice letter you previously received indicated the USDA 

financed property agreed to pay the USDA loan in full with tenant protections (known as a 

restrictive use covenant), this means if you choose not to apply for the Rural Development 

Voucher program, the amount of rent you pay will continue to be calculated in the same manner 

as it was prior to the USDA loan prepayment.

Regardless of whether you apply for and receive a Rural Development Voucher, if the owner 

agreed to pay the USDA loan in full with a restrictive use covenant, it provides you the right to 

pursue legal enforcement of the recorded restrictive use covenant, until the covenant is released 

by USDA.

HB-3-3560

Attachment 15-C-3 

Page 8 of 12
Rural Development (RD) Voucher Program

Initial Lease-Up Voucher Obligation Form (VOF)

Tenant Name: Name 

Tenant ID: xxxxxxx

Tenant Address: Address

 

Tenant Instructions:

To receive a Voucher, please sign and date this Voucher Obligation Form and return it and your 

RD Voucher Program Citizenship or Eligible Immigration Status Declaration document before 

the expiration date shown above. Once approved, USDA will issue a Voucher that needs to be 

used within 60 days. 

Your signature certifies that your family income is at or below 80% of the Family Median 

income in your area as shown below. 

After you sign this document, please mail it to the following address: 

United States Department of Agriculture

Attn: USDA RD Voucher Program 

PO Box 775220 

St. Louis, MO 63177 

If you have any questions, need assistance completing this form, or need this form in a language 

other than English, please call the RD Voucher Program office toll-free at 1-844-857-5386. 

Certification Approval 

I hereby certify that my family income is at or below $00,000.00; I meet the requirements of the 

Rural Development Voucher Program; and I resided at the above address on [date of 

prepayment]. 

* Required Fields

_________________________________ ________________ 

Tenant Signature* Date*

_________________________________ ____________________________ 

Tenant Phone #1 Tenant Phone #2 

_________________________________ 

Tenant E-Mail Address

HB-3-3560

Attachment 15-C-3 

Page 9 of 12

VOF Type: Initial Lease-Up

Issue Date: 00/00/0000

Expiration Date: 00/00/0000

Maximum Monthly Voucher: $000.00

12 Month Total Obligation: $00,000.00

(02-24-05) SPECIAL PN

Added (09-27-23) PN 592
This page intentionally left blank.

HB-3-3560

Attachment 15-C-3

Page 10 of 12
Rural Development (RD) Voucher Program 

Citizenship or Eligible Immigration Status Declaration

Head of Household Instructions: Complete this three-page Citizenship or Eligible 

Immigration Status Declaration. Then mail the completed, original form(s) to the 

following address. If you have any questions, need assistance completing this form, or need 

this form in a language other than English, please call the Rural Development Voucher 

Program Office at 1-844-857-5386. 

United States Department of Agriculture 

Attn: USDA RD Voucher Program

PO Box 775220 

St. Louis, MO 63177 

Last Name: ___________________________ First Name: ______________________ 

Gender: __ Male __ Female __ Prefer not to Answer Date of Birth: _____________ 

Alien Registration No. (if applicable): ______________________________________________ 

Admission Number (if applicable): ________________________________________________

(This is an 11-digit number found on DHS Form I-94, Departure Record) 

Nationality: __________________________________________________________________ 

(Enter the foreign nation or country to which you owe legal allegiance. 

This is normally but not always the country of birth.) 

DECLARATION

INSTRUCTIONS: Complete the Declaration below by printing or by typing the person's first 

name, middle initial and last name in the space provided. Then review the blocks shown below 

and complete either block number 1, 2, or 3: 

I, __________________________________ hereby declare, under penalty of perjury, that I am: 

 _____ 1. A United States (U.S.) citizen or national of the United States.

__________________________________________ ______________________ 

Signature Date

______ 2. A noncitizen with eligible immigration status as evidenced by one of the 

documents listed below:

HB-3-3560

Attachment 15-C-3 

Page 11 of 12

(02-24-05) SPECIAL PN

Added (09-27-23) PN 592
If you checked this block and you are 62 years of age or older, you need only submit a proof of age 

document together with this form, and sign below. If you checked this block and you are less than 62 

years of age, you should submit one of the following documents: 

(1) Form I-551, Alien Registration Receipt Card (for permanent resident aliens). 

(2) Form I-94, Arrival-Departure Record, with one of the following annotations: 

(a) "Admitted as Refugee Pursuant to section 207"; 

(b) "Section 208" or "Asylum"; 

(c) "Section 243(h)" or "Deportation stayed by Attorney General"; or 

(d) "Paroled Pursuant to Sec. 212(d)(5) of the INA." 

(3) If Form I-94, Arrival-Departure Record, is not annotated, it must be accompanied by one of 

the following documents: 

(a) A final court decision granting asylum (but only if no appeal is taken); 

(b) A letter from an DHS asylum officer granting asylum (if application was filed on or 

after October 1, 1990) or from an DHS district director granting asylum (if 

application was filed before October 1, 1990); 

(c) A court decision granting withholding or deportation; or 

(d) A letter from an DHS asylum officer granting withholding of deportation (if 

application was filed on or after October 1, 1990). 

(4) Form I-766, Employment Authorization Card, which must be annotated "Provision of Law 

274a.12(11)" or "Provision of Law 274a.12." 

(5) A receipt issued by the DHS indicating that an application for issuance of a replacement 

document in one of the above-listed categories has been made and that the applicant's 

entitlement to the document has been verified. 

If this block is checked, sign and date below and submit the documentation required above with this 

declaration and a verification consent format to the name and address specified on the enclosed VOF 

document. If this block is checked on behalf of a child, the adult who will reside in the assisted unit 

and who is responsible for the child should sign and date below. 

____________________________________________ ______________________ 

Signature Date

 

 _____ 3. I am not contending eligible immigration status and I understand that I am not 

eligible for financial assistance. 

If you checked this block, no further information is required, and the person named above is not 

eligible for assistance. Sign and date below and forward this format to the name and address 

specified on the enclosed VOF document. 

_____________________________________________ ______________________ 

Signature Date

HB-3-3560 

Attachment 15-C-3 

Page 12 of 12
This page intentionally left blank.

HB-3-3560

Attachment 15-C-4

Page 1 of 1
TO: Tenants of [Project Name]

SUBJECT: Notification of Acceptance of Incentives to Avert Prepayment

Rural Development has reviewed information concerning a request from your landlord [Insert 

Owner’s Name] to pay off the Rural Development loan on [Insert Project Name]. This letter 

is to inform you that your landlord will not be paying the loan off. The owner has legally agreed, 

through a Restrictive-Use Agreement, to continue to rent to very-low-/low-/ moderate-income 

individuals and families and those wanting to move into the property. You may remain as long 

as you are eligible and wish to occupy your apartment. 

Rents can not be higher than what the Government says you can afford and will be calculated the 

same way as they are now until [Insert Date (end of the 20-year RUP)]. Additionally, the 

owner can not change any conditions or charges to tenants so that the project would no longer be 

a suitable place for you to live. [Insert Owner’s Name] would only be released from this 

agreement when the Government determines that 1) there is no longer a need for the housing; 

and 2) that other financial assistance provided to the residents of the housing will no longer be 

needed or provided due to no fault, action, or lack of action on the part of [Insert Owner’s 

Name]. This agreement is intended to protect only very-low-/low-/ moderate-income individuals 

and families and those wanting to move into the property for the next 20 years. Any tenant, as 

well as the Government, may pursue legal enforcement of this agreement. In order to comply 

with this agreement, the owner will continue to certify your income every year. 

If you have any questions, please contact me prior to [enter date]. 

Sincerely, 

________________________________________ 

(Servicing Official)

________________________________________ 

(02-24-05) SPECIAL PN

Revised (11-07-08) SPECIAL PN

HB-3-3560

Attachment 15-C-5 

Page 1 of 1
This page intentionally left blank 

HB-3-3560
 TO: The Tenants of 

SUBJECT: Notice of Offer to Sell to a Non-profit 

Rural Development has reviewed the information concerning your landlord’s request to pay off 

the loan on [Project Name]. This letter is following up on the letter you should have received

[Insert Date of Initial Tenant Notification Letter].

You landlord has chosen to advertise the property for sale to a non-profit organization or Public 

Housing Authority (PHA) who is willing to continue to operate the apartments as affordable 

rental housing. Your landlord will advertise the property for sale for a minimum of 180 days. 

Your landlord may suspend advertising and other sales efforts while eligibility of an interested 

purchaser is determined. If the purchaser is determined to be ineligible, your landlord must 

resume advertising for the balance of the required 180 days. 

The property will first be offered to local non-profit and public bodies. If no eligible local nonprofit and public bodies are found, the property will be offered for sale to regional or national 

non-profit organizations or public bodies. 

To purchase and operate a housing complex, a non-profit or public body must agree to subsidize 

the housing complex for very low- and low-income families or persons for the remaining useful 

life of the housing and related facilities similar to how it is used now. Rural Development will 

notify you as soon as the 180 advertisement is concluded and a decision has been reached. 

If you have any questions, please contact me at [insert contact information].

Sincerely,

_________________________________________________ 

(Servicing Official)

HB-3-3560

Attachment 15-C-6 

Page 1 of 1

(02-24-05) SPECIAL PN

Added (11-07-08) SPECIAL PN
This page intentionally left blank 

HB-3-3560
This page intentionally left blank. 

HB-3-3560

Attachment 15-C-7 

Page 1 of 1
RE: Prepayment Request for [Name of Property]

Dear Mr./Mrs. [Owner/Designee’s Name]:

Rural Development has completed its analysis of your request to prepay your Rural Rental 

Housing (RRH) loan on the above named property located in [City, State]. This loan is currently 

subject to Restrictive-Use Provisions (RUP) until [Enter date]. Until the RUP expires, you are 

ineligible for any incentives to avert prepayment. If prepayment is approved, you must agree to 

enter into a new RUP and sign a restrictive-use agreement (RUA) which will extend the current 

restrictive-use period for a period of 20 years from the date on which the new RUP and RUA are 

executed.

If you are unwilling to sign the new RUA, you must consider either withdrawing your 

prepayment request or offer to sell the property to a non-profit organization or public body. 

Otherwise your prepayment request will be denied. Please indicate your preference by initialing 

below. 

Extend RUP Sell to NP/PB

Agree Disagree Agree Disagree

If you choose to offer to sell to a non-profit organization or public body and no bona fide offer is 

received after 180 days has elapsed, you may prepay your loan without further restrictions. 

Please contact our office via fax, e-mail, or letter to let us know if you are willing to accept the 

provisions stated herein. If you have any questions regarding this matter, please contact our 

office at [enter phone number].

Sincerely,

HB-3-3560

Attachment 15-C-8 

Page 1 of 1

(02-24-05) SPECIAL PN

Revised (11-07-08) SPECIAL PN
This page intentionally left blank 

HB-3-3560
ATTACHMENT 15-D 

INCENTIVE CALCULATION WORKSHEET AND DIRECTIONS 

INSTRUCTIONS FOR RHS INCENTIVE CALCULATION WORKSHEET 

HB-3-3560 

Attachment 15-D 

Page 1 of 3 

(02-24-05) SPECIAL PN 

Added (11-07-08) SPECIAL PN 
INSTRUCTIONS FOR RHS INCENTIVE CALCULATION WORKSHEET 

1. GO TO PROJECT LIST SCREEN 

2. CLICK ON QUERY 

3. TYPE IN “OR” 

4. CLICK ON QUERY AGAIN - this will give you a listing of every application in the 

State of Oregon. 

5. ONCE YOU HAVE THE PROJECT NAME AND BORROWER NAME FROM 

THE PROJECT LISTING - CLICK ON SCREENS; THEN CLICK ON 

“BORROWER” 

6. WHEN YOU GET TO THE BORROWER SCREEN, CLICK ON QUERY, TYPE 

IN OR IN THE STATE FIELD, CLICK ON QUERY AGAIN. 

7. THE FIRST BORROWER WILL APPEAR FOR THE STATE OF OREGON 

8. CLICK ON THE “DOWN” BUTTON UNTIL YOU SEE THE BORROWER YOU 

ARE LOOKING FOR. 

9. PRINT THAT PAGE; THEN CLICK ON THE GREEN RECTANGULAR 

BUTTON THAT SAYS “PROJECT” AND PRINT THAT SCREEN 

10. THEN CLICK ON THE “EXT” BUTTON (NOTE: You'll see a dialogue box that 

asks if you want to continue working with this borrower/application) CLICK YES 

11. THIS WILL TAKE YOU BACK TO THE PROJECT LIST; CLICK ON 

TIMELINE FOR THAT APPLICATION 

12. CLICK ON THE GREEN BUTTON THAT SAYS “TIMELINE TREE” 

13. CLICK ON “TIMELINE TREE” 

14. CLICK ON “TIMELINE RPT” 

15. THE TIMELINE REPORT WILL APPEAR IN A SEPARATE ACROBAT 

WINDOW; CLICK ON THE “PRINTER” ICON 

16. ONCE THE REPORT HAS PRINTED, CLOSE THE ACROBAT WINDOW. 

HB-3-3560 

Attachment 15-D 

Page 2 of 3 
17. CLICK ON “TIMELINE” AND ONCE BACK TO THE TIMELINE SCREEN 

CLICK ON THE GREEN “NEXT” BUTTON (this will take you to the Application 

Checklist Screen) 

18. PRINT PAGE 1 OF THE CHECKLIST SCREEN 

19. CLICK ON THE GREEN RECTANGULAR “PROJECT NEEDED” BUTTON 

20. PRINT PAGE 2 OF THE CHECKLIST SCREEN 

21. CLICK ON THE GREEN “NEXT” BUTTON (this will take you to the Prepayment 

Information Screen) 

22. PRINT PAGE 1 OF THE PREPAYMENT INFORMATION SCREEN 

23. CLICK ON THE GREEN RECTANGULAR “PREPAY, PAGE 2” BUTTON 

24. PRINT PAGE 2 OF THE PREPAYMENT INFORMATION SCREEN 

25. CLICK ON THE GREEN “NEXT” BUTTON (this will take you to the Incentive 

Calculation Worksheet) 

26. PRINT ALL 11 PAGES OF THE INCENTIVE CALCULATION 

WORKSHEETTHAT'S IT. 

PLEASE PRINT THE SCREEN EVEN IF IT IS BLANK. 

NOTE: CHECK THE TIMELINE SCREEN TO SEE IF ANY OF THE PROJECTS 

HAVE REHAB/REPAIR/DEFERRED MAINTENANCE; IF SO, PRINT THOSE 2 

SCREENS AS WELL. 

HB-3-3560 

Attachment 15-D 

Page 3 of 3 

(02-24-05) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
RESTRICTIVE-USE COVENANTS (RUC) MATRIX

SITUATION RUC TO USE 

 

When Borrower Rejects Incentives 15-E-1 

To Protect Existing Tenants 15-E-2 

Transfers 15-E-3 

Currently Restricted Loans 15-E-4 

If Restrictions are not in Place 15-E-5 

All Other Cases (i.e. incentives) 15-E-6 

 

HB-3-3560 

Attachment 15-E 

Page 1 of 1 

(02-24-05) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
RESTRICTIVE-USE COVENANT - 10-YEAR 

Use After Borrower Rejection of the Incentive Offer (7 CFR 3560.662(b)(1)) 

WHEREAS, _________________________ [insert borrower’s name and address] “Owner”, or 

a predecessor in interest, received a loan from the United States of America, acting through the 

Rural Housing Service in Rural Development (Agency), U.S. Department of Agriculture which 

was evidenced by a promissory note or assumption agreement dated __________, in the original 

amount of _______________ and secured by a certain Deed of Trust or Mortgage dated 

__________________, and recorded in the land records for the City or County of 

_______________ for the purpose of providing housing in accordance with Section 42 U.S.C. 

1484 (Section 514) or 1485 (Section 515), whichever is applicable, and Title V of the Housing 

Act of 1949, as amended “Program”; and 

NOW, THEREFORE, in consideration of the restrictions on the property as further described in 

Exhibit A, the sum of Ten Dollars ($10) and other good and valuable consideration, the receipt 

and sufficiency of which are hereby acknowledged, the parties, for themselves and for their 

respective successors and assigns, hereby covenant and agree as follows:

(1) Term. The period of the restriction will be 10 years from the date this covenant is signed, 

unless sooner terminated under paragraph 7. 

(2) Use Requirement. The owner, and any successors of interest, agree to use the property 

in compliance with 42 U.S.C. § 1484 or § 1485, whichever is applicable, and 7 CFR part 

3560, and any other available regulations and amendments, for the purpose of housing 

program eligible very low-, low- or moderate-income tenants. In accordance with 7 CFR 

3560.658(a)(1) or (a)(2), the undersigned agrees that at the end of the expiration of the period 

described in paragraph 1 of this agreement, the property will be offered for sale to a qualified 

non-profit organization or public body, in accordance with previously cited statutes and 

regulations.

(3) Enforcement. The Agency and program eligible tenants or applicants may enforce these 

restrictions as long as the Agency has not terminated the Restrictive Use Agreement pursuant to 

paragraph 7 below.

(4) Displacement Prohibition. The Owner agrees not to refuse to lease a dwelling unit offered 

for rent, or otherwise discriminate in the terms of tenancy, solely because any tenant or 

prospective tenant is the recipient of housing assistance from the Agency or any other Federal 

agency.

(5) Owner’s Responsibilities. The Owners agrees to: set rents, other charges, and conditions of 

occupancy in a manner to meet the restrictions required in this restrictive use covenant, post an 

Agency approved notice of these restrictions for the tenants of the property; to adhere to 

applicable local, State, and Federal laws; and to obtain Agency concurrence for any rental 

procedures that deviate from those approved at the time of prepayment, prior to implementation. 

(6) Civil Rights Requirements. The Owner will comply with the provisions of any applicable 

Federal, State or local law prohibiting discrimination in housing on the basis of race, color, 

religion, sex, national origin, handicap or familial status, including but not limited to: Title VI of 

the Civil Rights Act of 1964 (Public Law 90-284, 82 Stat. 73), the Fair Housing Act, Executive 

Order 11063, and all requirements imposed by or pursuant to the Agency regulations 

implementing these authorities, including, but not limited to, 7 CFR 3560.104. 

(7) Release of Obligation. The Owner will be released from the obligations under this 

Restrictive Use Covenant before the termination of the period in paragraph 1 only when the 

Agency determines that there is a no longer a need for the housing or that HUD Section 8 

vouchers provided the residents of the housing will no longer be provided due to no fault, action 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 

HB-3-3560 

Attachment 15-E-1 

Page 1of 3 
or lack of action on the part of the Owner. 

(8) Violations; the Agency’s Remedies. The parties further agree that upon any default under 

this covenant, the Agency may apply to any court, State or Federal, for specific performance of 

this Agreement, for an injunction against violation of this covenant or for such other equitable 

relief as may be appropriate, since the injury to the Agency arising from a violation under any of 

the terms of this covenant would be irreparable and the amount of damage would be difficult to 

ascertain. 

(9) Covenants to Run with Land. The Owner hereby subjects the property to the covenants, 

reservations and restrictions set forth in this covenant. The Owner hereby declares its express 

intent that the covenants, reservations and restrictions set forth herein shall be deemed covenants 

running with the land to the extent permitted by law and shall pass to and be binding upon the 

successors in title to the property throughout the term. Each and every contract, deed, mortgage 

or other instrument hereafter executed covering or conveying the property or any portion thereof 

shall conclusively be held to have been executed, delivered and accepted subject to such 

covenants, reservations and restrictions, regardless of whether such covenants, reservations and 

restrictions are set forth in such contract, deed or other instrument. The Agency hereby agrees 

that, upon the request of the Owner made after the Term of this covenant, the Agency shall 

execute a recordable instrument approved by the Agency for purposes of releasing this covenant

of record. All costs and expenses relating to the preparation and recording of such release shall 

be paid by the Owner. 

(10) Superiority. The document hereto constitutes a restrictive covenant that is filed of record, 

with all other Deeds of Trusts or Mortgages, and that, notwithstanding a foreclosure or transfer of 

title pursuant to any other instrument or agreement, the restrictive covenants and provisions 

hereunder shall remain in full force and effect. 

(11) Subsequent Modifications and Statutory Amendments. The Agency may implement 

modifications necessitated by any subsequent statutory amendment without the consent of any 

other party, including those having the right of enforcement, to require that any third-party 

obtained prior to Agency approval for any enforcement action concerning preexisting or future 

violations of this covenant. 

(12) Other Agreements. The Owner represents and warrants that it has not and will not execute 

any other agreements with provisions contradictory or in opposition to the provisions of this 

covenant and that, in any event, the provisions of this covenant are paramount and controlling as 

to the rights and obligations set forth herein and supersede any other conflicting requirements. 

(13) Binding Effect. Upon conveyance of the property during the term, the Owner shall require 

its successor or assignee to assume its obligations under this covenant. In any event, this 

covenant shall be binding upon and shall inure to the benefit of the parties hereto and their 

respective successors and/or assigns. 

(14) Amendment. This covenant may not be modified except by an instrument in writing 

executed by each of the parties that are signatories hereto. 

(15) Severability. Notwithstanding anything herein contained, if any one or more of the 

provisions of this covenant shall for any reason whatsoever be held to be illegal, invalid or 

unenforceable in any respect, such illegality, invalidity or unenforceability shall not affect any 

other provision of this covenant, but this covenant shall be construed as if such illegal, invalid or 

unenforceable provision had never been contained herein. 

(16) Headings. The headings and titles to the sections of this covenant are inserted for 

convenience only and shall not be deemed a part hereof nor affect the construction or 

interpretation of any provisions hereof. 

(17) Governing Law. This covenant shall be governed by all applicable Federal laws. 

HB-3-3560 

Attachment 15-E-1 

Page 2of 3 
IN WITNESS WHEREOF, the parties hereto have caused this Restrictive Use Covenant to be 

executed and made effective as of the date first above written. 

OWNER:__________________________, 

a ___________________________ 

Date: ___________________________ 

 By:________________________________ 

Name:______________________________ 

Title:_______________________________ 

 WITNESS/ATTEST: _________________________ 

[[insert appropriate acknowledgment form]] 

EXHIBIT A 

LEGAL DESCRIPTION 

[attached] 

HB-3-3560 

Attachment 15-E-1 

Page 3 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
RESTRICTIVE USE COVENANT - THE LAST EXISTING TENANT 

Use if No Impact on Minorities but There is Not an Adequate Supply of Housing 

(7 CFR 3560.662(b)(2)) 

WHEREAS, _________________________ [insert borrower’s name and address] “Owner”, or 

a predecessor in interest, received a loan from the United States of America, acting through the 

Rural Housing Service in Rural Development (Agency), U.S. Department of Agriculture which 

was evidenced by a promissory note or assumption agreement dated ______________, in the 

original amount of _______________ and secured by a certain Deed of Trust or Mortgage dated 

__________________, and recorded in the land records for the City or County of 

________________ for the purpose of providing housing in accordance with Section 42 U.S.C. 

1484 (Section 514) or 1485 (Section 515), whichever is applicable, and Title V of the Housing 

Act of 1949, as amended “Program”; and 

NOW, THEREFORE, in consideration of the restrictions on the Property as further described 

in Exhibit A, the sum of Ten Dollars ($10) and other good and valuable consideration, the receipt 

and sufficiency of which are hereby acknowledged, the parties, for themselves and for their 

respective successors and assigns, hereby covenant and agree as follows:

(1) Use Requirement. The Owner, and any successors in interest, agree to use the Property in 

compliance with 42 U.S.C. § 1484 or § 1485, whichever is applicable, and 7 CFR part 3560, and 

any other applicable regulations and amendments, for the purpose of housing program eligible 

very low-, low-, or moderate-income tenants.

(2) Enforcement. The Agency and program eligible tenants or applicants may enforce these 

restrictions as long as the Agency has not terminated the Restrictive Use Agreement pursuant to 

paragraph 7 below.

(3) Displacement Prohibition. The Owner agrees not to refuse to lease a dwelling unit offered 

for rent, or otherwise discriminate in the terms of tenancy, solely because any tenant or 

prospective tenant is the recipient of housing assistance from the Agency or any other Federal 

agency.

(4) Owner’s Responsibilities. The Owners agrees to: set rents, other charges, and conditions of 

occupancy in a manner to meet the restrictions required by this Restrictive Use Covenant; post an 

Agency approved notice of these restriction for the tenants of the property; to adhere to applicable 

local, State, and Federal laws; and to obtain Agency concurrence for any rental procedures that 

deviate from those approved at the time of prepayment, prior to implementation. 

(5) Civil Rights Requirements. The Owner will comply with the provisions of any applicable 

Federal, State or local law prohibiting discrimination in housing on the basis of race, color, 

religion, sex, national origin, handicap or familial status, including but not limited to: Title VI of 

the Civil Rights Act of 1964 (Public Law 90-284, 82 Stat. 73), the Fair Housing Act, Executive 

Order 11063, and all requirements imposed by or pursuant to the Agency regulations 

implementing these authorities, including, but not limited to, 7 CFR 3560.104. 

(6) Release of Obligation. The Owner will be released from the obligation under this 

Restrictive Use Covenant when the Agency has determined that the last existing tenant at the date 

of prepayment has left or when the Agency determines that there is a no longer a need for the 

housing or that HUD Section 8 vouchers 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 Owner. 

(7) Violations; the Agency’s Remedies. The parties further agree that upon any default under 

this covenant, the Agency may apply to any court, State or Federal, for specific performance of 

this Agreement, for an injunction against violation of this covenant or for such other equitable 

relief as may be appropriate, since the injury to the Agency arising from a violation under any of 

HB-3-3560 

Attachment 15-E-2 

Page 1 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
the terms of this covenant would be irreparable and the amount of damage would be difficult to 

ascertain. 

(8) Covenants to Run with Land. The Owner hereby subjects the Property to the covenants, 

reservations and restrictions set forth in this covenant. The Owner hereby declares its express 

intent that the covenants, reservations and restrictions set forth herein shall be deemed covenants 

running with the land to the extent permitted by law and shall pass to and be binding upon the 

successors in title to the Property. Each and every contract, deed, mortgage or other instrument 

hereafter executed covering or conveying the Property or any portion thereof shall conclusively 

be held to have been executed, delivered and accepted subject to such covenants, reservations and 

restrictions, regardless of whether such covenants, reservations and restrictions are set forth in 

such contract, deed or other instrument. The Agency hereby agrees that, upon the request of the 

Owner made after the release of obligations established in paragraph 7 of this covenant, the 

Agency shall execute a recordable instrument approved by the Agency for purposes of releasing 

this covenant of record. All costs and expenses relating to the preparation and recording of such 

release shall be paid by the Owner. 

(9) Superiority. The document hereto constitutes a restrictive covenant that is filed of record, 

with all other Deeds of Trusts or Mortgages, and that, notwithstanding a foreclosure or transfer of 

title pursuant to any other instrument or agreement, the restrictive covenants and provisions 

hereunder shall remain in full force and effect. 

(10) Subsequent Modifications and Statutory Amendments. The Agency may implement 

modifications necessitated by any subsequent statutory amendment without the consent of any 

other party, including those having the right of enforcement, to require that any third-party obtain 

prior Agency approval for any enforcement action concerning preexisting or future violations of 

this covenant. 

(11) Other Agreements. The Owner represents and warrants that it has not and will not execute 

any other agreements with provisions contradictory or in opposition to the provisions of this 

covenant and that, in any event, the provisions of this covenant are paramount and controlling as 

to the rights and obligations set forth herein and supersede any other conflicting requirements. 

(12) Binding Effect. Upon conveyance of the Property during the term, the Owner shall require 

its successor or assignee to assume its obligations under this covenant. In any event, this 

covenant shall be binding upon and shall inure to the benefit of the parties hereto and their 

respective successors and/or assigns. 

(13) Amendment. This covenant may not be modified except by an instrument in writing 

executed by each of the parties that are signatories hereto. 

(14) Severability. Notwithstanding anything herein contained, if any one or more of the 

provisions of this covenant shall for any reason whatsoever be held to be illegal, invalid or 

unenforceable in any respect, such illegality, invalidity or unenforceability shall not affect any 

other provision of this covenant, but this covenant shall be construed as if such illegal, invalid or 

unenforceable provision had never been contained herein. 

(15) Headings. The headings and titles to the sections of this covenant are inserted for 

convenience only and shall not be deemed a part hereof nor affect the construction or 

interpretation of any provisions hereof. 

(16) Governing Law. This covenant shall be governed by all applicable Federal laws. 

HB-3-3560 

Attachment 15-E-2 

Page 2 of 3 
IN WITNESS WHEREOF, the parties hereto have caused this Restrictive Use Covenant to be 

executed and made effective as of the date first above written. 

OWNER:__________________________, 

a ___________________________ 

Date: ___________________________ 

 By:________________________________ 

Name:______________________________ 

Title:_______________________________ 

 WITNESS/ATTEST: 

 _________________________ 

[[insert appropriate acknowledgment form]] 

EXHIBIT A 

LEGAL DESCRIPTION 

[attached] 

HB-3-3560 

Attachment 15-E-2 

Page 3 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
RESTRICTIVE-USE COVENANT - TRANSFEREES ASSUMING AGENCY LOANS 

(Including loans approved prior to December 21, 1979) (§3560.662(b)(3)) 

WHEREAS, _________________________ [insert borrower’s name and address] “Owner”, or 

a predecessor in interest, received a loan from the United States of America, acting through the 

Rural Housing Service in Rural Development (Agency), U.S. Department of Agriculture which 

was evidenced by a promissory note or assumption agreement dated __________, in the original 

amount of _______________ and secured by a certain Deed of Trust or Mortgage dated 

__________________, and recorded in the land records for the City or County of 

_______________ for the purpose of providing housing in accordance with Section 42 U.S.C. 

1484 (Section 514) or 1485 (Section 515), whichever is applicable, and Title V of the Housing 

Act of 1949, as amended “Program”; and 

NOW, THEREFORE, in consideration of the restrictions on the Property as further described 

in Exhibit A, the sum of Ten Dollars ($10) and other good and valuable consideration, the receipt 

and sufficiency of which are hereby acknowledged, the parties, for themselves and for their 

respective successors and assigns, hereby covenant and agree as follows:

(1) Term. The period of the restriction will be until [date]. [The date used should be the date 

agreed to in approving the transfer pursuant to 7 CFR 3560.406, which when an equity loan is 

being provided, must be 30 years in the future.] 

(2) Use Requirement. The Owner, and any successors in interest, agree to use the Property in 

compliance with 42 U.S.C. § 1484 or § 1485, whichever is applicable, and 7 CFR part 3560, and 

any other applicable regulations and amendments, for the purpose of housing program eligible 

very low-, low-, or moderate-income tenants.

(3) Enforcement. The Agency and Program eligible tenants or applicants may enforce these 

restrictions as long as the Agency has not terminated the Restrictive Use Agreement pursuant to 

paragraph 7 below.

(4) Displacement Prohibition. The Owner agrees not to refuse to lease a dwelling unit offered 

for rent, or otherwise discriminate in the terms of tenancy, solely because any tenant or 

prospective tenant is the recipient of housing assistance from the Agency or any other Federal 

agency.

(5) Owner’s Responsibilities. The Owners agrees to: set rents, other charges, and conditions of 

occupancy in a manner to meet the restrictions required by this Restrictive Use Covenant; post an 

Agency approved notice of these restrictions for the tenants of the property; to adhere to 

applicable local, State, and Federal laws; and to obtain Agency concurrence for any rental 

procedures that deviate from those approved at the time of prepayment, prior to implementation. 

(6) Civil Rights Requirements. The Owner will comply with the provisions of any applicable 

Federal, State or local law prohibiting discrimination in housing on the basis of race, color, 

religion, sex, national origin, handicap or familial status, including but not limited to: Title VI of 

the Civil Rights Act of 1964 (Public Law 90-284, 82 Stat. 73), the Fair Housing Act, Executive 

Order 11063, and all requirements imposed by or pursuant to Agency regulations implementing 

these authorities, including, but not limited to, 7 CFR 3560.104. 

(7) Release of Obligation. The Owner will be released from the obligations under this 

Restrictive Use covenant before the termination period set in paragraph 1 only when the Agency 

determines that there is a no longer a need for the housing or that HUD Section 8 vouchers 

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 Owner. 

HB-3-3560 

Attachment 15-E-3 

Page 1of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
(8) Violations; the Agency’s Remedies. The parties further agree that upon any default under 

this covenant, the Agency may apply to any court, State or Federal, for specific performance of 

this Agreement, for an injunction against violation of this covenant or for such other equitable 

relief as may be appropriate, since the injury to the Agency arising from a violation under any of 

the terms of this covenant would be irreparable and the amount of damage would be difficult to 

ascertain. 

(9) Covenants to Run with Land. The Owner hereby subjects the Property to the covenants, 

reservations and restrictions set forth in this covenant. The Owner hereby declares its express 

intent that the covenants, reservations and restrictions set forth herein shall be deemed covenants 

running with the land to the extent permitted by law and shall pass to and be binding upon the 

successors in title to the Property throughout the Term. Each and every contract, deed, mortgage 

or other instrument hereafter executed covering or conveying the Property or any portion thereof 

shall conclusively be held to have been executed, delivered and accepted subject to such 

covenants, reservations and restrictions, regardless of whether such covenants, reservations and 

restrictions are set forth in such contract, deed or other instrument. The Agency hereby agrees 

that, upon the request of the Owner made after the term of this covenant, the Agency shall 

execute a recordable instrument approved by the Agency for purposes of releasing this covenant

of record. All costs and expenses relating to the preparation and recording of such release shall 

be paid by the Owner. 

(10) Superiority. The document hereto constitutes a restrictive covenant that is filed of record, 

with all other Deeds of Trusts or Mortgages, and that, notwithstanding a foreclosure or transfer of 

title pursuant to any other instrument or agreement, the restrictive covenants and provisions 

hereunder shall remain in full force and effect. 

(11) Subsequent Modifications and Statutory Amendments. The Agency may implement 

modifications necessitated by any subsequent statutory amendment without the consent of any 

other party, including those having the right of enforcement, to require that any third-party obtain 

prior Agency approval for any enforcement action concerning preexisting or future violations of 

this covenant. 

(12) Other Agreements. The Owner represents and warrants that it has not and will not execute 

any other agreements with provisions contradictory or in opposition to the provisions of this 

covenant and that, in any event, the provisions of this covenant are paramount and controlling as 

to the rights and obligations set forth herein and supersede any other conflicting requirements. 

(13) Binding Effect. Upon conveyance of the Property during the term, the Owner shall require 

its successor or assignee to assume its obligations under this covenant. In any event, this 

covenant shall be binding upon and shall inure to the benefit of the parties hereto and their 

respective successors and/or assigns. 

(14) Amendment. This covenant may not be modified except by an instrument in writing 

executed by each of the parties that are signatories hereto. 

(15) Severability. Notwithstanding anything herein contained, if any one or more of the 

provisions of this covenant shall for any reason whatsoever be held to be illegal, invalid or 

unenforceable in any respect, such illegality, invalidity or unenforceability shall not affect any 

other provision of this covenant, but this covenant shall be construed as if such illegal, invalid or 

unenforceable provision had never been contained herein. 

(16) Headings. The headings and titles to the sections of this covenant are inserted for 

convenience only and shall not be deemed a part hereof nor affect the construction or 

interpretation of any provisions hereof. 

(17) Governing Law. This covenant shall be governed by all applicable Federal laws. 

HB-3-3560 

Attachment 15-E-3 

Page 2 of 3 
IN WITNESS WHEREOF, the parties hereto have caused this Restrictive Use Covenant to be 

executed and made effective as of the date first above written. 

OWNER:__________________________, 

a ___________________________ 

 Date: ____________________________ 

By:________________________________ 

Name:______________________________ 

Title:_______________________________ 

 WITNESS/ATTEST: 

 _________________________ 

[[insert appropriate acknowledgment form]] 

EXHIBIT A 

LEGAL DESCRIPTION 

[attached] 

HB-3-3560 

Attachment 15-E-3 

Page 3of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
RESTRICTIVE USE COVENANT - AGENCY REQUESTED EXTENSION 

Use of Housing is Currently Restricted (7 CFR 3560.662(b)(4)) 

WHEREAS, _________________________ [insert borrower’s name and address] “Owner”, or 

a predecessor in interest, received a loan from the United States of America, acting through the 

Rural Housing Service in Rural Development (Agency), U.S. Department of Agriculture which 

was evidenced by a promissory note or assumption agreement dated __________, in the original 

amount of _______________ and secured by a certain Deed of Trust or Mortgage dated 

__________________, and recorded in the land records for the City or County of 

_______________ for the purpose of providing housing in accordance with Section 42 U.S.C. 

1484 (Section 514) or 1485 (Section 515), whichever is applicable, and Title V of the Housing 

Act of 1949, as amended “Program”; and 

NOW, THEREFORE, in consideration of the restrictions on the Property as further described 

in Exhibit A, the sum of Ten Dollars ($10) and other good and valuable consideration, the receipt 

and sufficiency of which are hereby acknowledged, the parties, for themselves and for their 

respective successors and assigns, hereby covenant and agree as follows:

(1) Term. The period of the restriction will be until [date]. [The date that is inserted is 

calculated by taking the date the current restrictions expire and adding to that date any agreed 

upon extension. For instance, if the restrictions expire a year from now [July 1, 2007] and 

borrower agrees to a 10-year extension, you would insert [July 1, 2017]. 

(2) Use Requirement. The Owner, and any successors in interest, agree to use the Property in 

compliance with 42 U.S.C. § 1484 or § 1485, whichever is applicable, and 7 CFR part 3560, and 

any other applicable regulations and amendments, for the purpose of housing program eligible 

very low-, low-, or moderate-income tenants.

(3) Enforcement. The Agency and program eligible tenants or applicants may enforce these 

restrictions as long as the Agency has not terminated the Restrictive Use Agreement pursuant to 

paragraph 7 below.

(4) Displacement Prohibition. The Owner agrees not to refuse to lease a dwelling unit offered 

for rent, or otherwise discriminate in the terms of tenancy, solely because any tenant or 

prospective tenant is the recipient of housing assistance from the Agency or any other Federal 

agency.

(5) Owner’s Responsibilities. The Owners agrees to: set rents, other charges, and conditions of 

occupancy in a manner to meet the restrictions required in this Restrictive Use Covenant; post an 

Agency approved notice of these restrictions for the tenants of the property; to adhere to 

applicable local, State, and Federal laws; and to obtain Agency concurrence for any rental 

procedures that deviate from those approved at the time of prepayment, prior to implementation. 

(6) Civil Rights Requirements. The Owner will comply with the provisions of any applicable 

Federal, State or local law prohibiting discrimination in housing on the basis of race, color, 

religion, sex, national origin, handicap or familial status, including but not limited to: Title VI of 

the Civil Rights Act of 1964 (Public Law 90-284, 82 Stat. 73), the Fair Housing Act, Executive 

Order 11063, and all requirements imposed by or pursuant to Agency regulations implementing 

these authorities, including, but not limited to, 7 CFR 3560.104. 

(7) Release of Obligation. The Owner will be released from these obligations under the 

Restrictive Use Covenant before the termination of the period in paragraph 1 only when the 

Agency determines that there is a no longer a need for the housing or HUD Section 8 vouchers 

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 Owner. 

HB-3-3560 

Attachment 15-E-4 

Page 1 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
(8) Violations; the Agency’s Remedies. The parties further agree that upon any default under 

this covenant, the Agency may apply to any court, State or Federal, for specific performance of 

this Agreement, for an injunction against violation of this covenant or for such other equitable 

relief as may be appropriate, since the injury to the Agency arising from a violation under any of 

the terms of this covenant would be irreparable and the amount of damage would be difficult to 

ascertain. 

(9) Covenants to Run with Land. The Owner hereby subjects the Property to the covenants, 

reservations and restrictions set forth in this covenant. The Owner hereby declares its express 

intent that the covenants, reservations and restrictions set forth herein shall be deemed covenants 

running with the land to the extent permitted by law and shall pass to and be binding upon the 

successors in title to the Property throughout the Term. Each and every contract, deed, mortgage 

or other instrument hereafter executed covering or conveying the Property or any portion thereof 

shall conclusively be held to have been executed, delivered and accepted subject to such 

covenants, reservations and restrictions, regardless of whether such covenants, reservations and 

restrictions are set forth in such contract, deed or other instrument. The Agency hereby agrees 

that, upon the request of the Owner made after the Term of this covenant, the Agency shall 

execute a recordable instrument approved by the Agency for purposes of releasing this covenant

of record. All costs and expenses relating to the preparation and recording of such release shall 

be paid by the Owner. 

(10) Superiority. The document hereto constitutes a restrictive covenant that is filed of record, 

with all other Deeds of Trusts or Mortgages, and that, notwithstanding a foreclosure or transfer of 

title pursuant to any other instrument or agreement, the restrictive covenants and provisions 

hereunder shall remain in full force and effect. 

(11) Subsequent Modifications and Statutory Amendments. The Agency may implement 

modifications necessitated by any subsequent statutory amendment without the consent of any 

other party, including those having the right of enforcement, to require that any third-party obtain 

prior Agency approval for any enforcement action concerning preexisting or future violations of 

this covenant. 

(12) Other Agreements. The Owner represents and warrants that it has not and will not execute 

any other agreements with provisions contradictory or in opposition to the provisions of this 

covenant and that, in any event, the provisions of this covenant are paramount and controlling as 

to the rights and obligations set forth herein and supersede any other conflicting requirements. 

(13) Binding Effect. Upon conveyance of the Property during the term, the Owner shall require 

its successor or assignee to assume its obligations under this covenant. In any event, this 

covenant shall be binding upon and shall inure to the benefit of the parties hereto and their 

respective successors and/or assigns. 

(14) Amendment. This covenant may not be modified except by an instrument in writing 

executed by each of the parties that are signatories hereto. 

(15) Severability. Notwithstanding anything herein contained, if any one or more of the 

provisions of this covenant shall for any reason whatsoever be held to be illegal, invalid or 

unenforceable in any respect, such illegality, invalidity or unenforceability shall not affect any 

other provision of this covenant, but this covenant shall be construed as if such illegal, invalid or 

unenforceable provision had never been contained herein. 

(16) Headings. The headings and titles to the sections of this covenant are inserted for 

convenience only and shall not be deemed a part hereof nor affect the construction or 

interpretation of any provisions hereof. 

(17) Governing Law. This covenant shall be governed by all applicable Federal laws. 

HB-3-3560 

Attachment 15-E-4 

Page 2 of 3 
IN WITNESS WHEREOF, the parties hereto have caused this Restrictive Use Covenant to be 

executed and made effective as of the date first above written. 

OWNER:__________________________, 

a ___________________________ 

Date: ___________________________ 

 By:________________________________ 

Name:______________________________ 

Title:_______________________________ 

 WITNESS/ATTEST: 

 _________________________ 

[[insert appropriate acknowledgment form]] 

EXHIBIT A 

LEGAL DESCRIPTION 

[attached] 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 

HB-3-3560 

Attachment 15-E-4 

Page 3 of 3 
This page intentionally left blank 

HB-3-3560 
RESTRICTIVE USE COVENANT - THE REMAINING USEFUL LIFE 

Use if Restrictions are not in Place (7 CFR 3560.662(b)(5)) 

WHEREAS, _________________________ [insert borrower’s name and address] “Owner”, or 

a predecessor in interest, received a loan from the United States of America, acting through the 

Rural Housing Service in Rural Development (Agency), U.S. Department of Agriculture which 

was evidenced by a promissory note or assumption agreement dated __________, in the original 

amount of _______________ and secured by a certain Deed of Trust or Mortgage dated 

__________________, and recorded in the land records for the City or County of 

_______________ for the purpose of providing housing in accordance with Section 42 U.S.C. 

1484 (Section 514) or 1485 (Section 515), whichever is applicable, and Title V of the Housing 

Act of 1949, as amended “Program”; and 

NOW, THEREFORE, in consideration of the restrictions on the Property as further described 

in Exhibit A, the sum of Ten Dollars ($10) and other good and valuable consideration, the receipt 

and sufficiency of which are hereby acknowledged, the parties, for themselves and for their 

respective successors and assigns, hereby covenant and agree as follows:

(1) Use Requirement. The Owner, and any successors in interest, agree to use the Property in 

compliance with 42 U.S.C §1484 or §1485, whichever is applicable, and 7 CFR 3560, and any 

other applicable regulations and amendments, for the purpose of housing program eligible very 

low-, low-, or moderate-income tenants.

(2) Enforcement. The Agency and program eligible tenants or applicants may enforce these 

restrictions as long as the Agency has not terminated the Restrictive Use Agreement pursuant to 

paragraph 7 below.

(3) Displacement Prohibition. The Owner agrees not to refuse to lease a dwelling unit offered 

for rent, or otherwise discriminate in the terms of tenancy, solely because any tenant or 

prospective tenant is the recipient of housing assistance from the Agency or any other Federal 

agency.

(4) Owner’s Responsibilities. The Owners agrees to: set rents, other charges, and conditions of 

occupancy in a manner to meet the restrictions required in this Restrictive Use Covenant; post an 

Agency approved notice of these restrictions for the tenants of the property; to adhere to 

applicable local, State, and Federal laws; and to obtain Agency concurrence for any rental 

procedures that deviate from those approved at the time of prepayment, prior to implementation. 

(5) Civil Rights Requirements. The Owner will comply with the provisions of any applicable 

Federal, State or local law prohibiting discrimination in housing on the basis of race, color, 

religion, sex, national origin, handicap or familial status, including but not limited to: Title VI of 

the Civil Rights Act of 1964 (Public Law 90-284, 82 Stat. 73), the Fair Housing Act, Executive 

Order 11063, and all requirements imposed by or pursuant to Agency regulations implementing 

these authorities, including, but not limited to, 7 CFR 3560.104. 

(6) Release of Obligation. The Owner will be released from these obligations only when the 

Agency determines that the useful life of the housing and related facilities has passed, there is no 

longer a need for the housing, or that HUD Section 8 vouchers 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 

Owner. If the Agency determines the useful life of the housing and related facilities has passed, 

in accordance with 7 CFR § 3560.658(a)(1) or (a)(2), the undersign agrees that the Property will 

be offered for sale to a qualified non-profit organization or public body, in accordance with 

previously cited statues and regulations. 

HB-3-3560 

Attachment 15-E-5 

Page 1 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
(7) Violations; the Agency’s Remedies. The parties further agree that upon any default under 

this covenant, the Agency may apply to any court, State or Federal, for specific performance of 

this Agreement, for an injunction against violation of this covenant or for such other equitable 

relief as may be appropriate, since the injury to the Agency arising from a violation under any of 

the terms of this covenant would be irreparable and the amount of damage would be difficult to 

ascertain. 

(8) Covenants to Run with Land. The Owner hereby subjects the Property to the covenants, 

reservations and restrictions set forth in this covenant. The Owner hereby declares its express 

intent that the covenants, reservations and restrictions set forth herein shall be deemed covenants 

running with the land to the extent permitted by law and shall pass to and be binding upon the 

successors in title to the Property. Each and every contract, deed, mortgage or other instrument 

hereafter executed covering or conveying the Property or any portion thereof shall conclusively 

be held to have been executed, delivered and accepted subject to such covenants, reservations and 

restrictions, regardless of whether such covenants, reservations and restrictions are set forth in 

such contract, deed or other instrument. The Agency hereby agrees that, upon the request of the 

Owner made after the release of obligations established in paragraph 7 of this covenant, the 

Agency shall execute a recordable instrument approved by the Agency for purposes of releasing 

this covenant of record. All costs and expenses relating to the preparation and recording of such 

release shall be paid by the Owner. 

(9) Superiority. The document hereto constitutes a restrictive covenant that is filed of record, 

with all other Deeds of Trusts or Mortgages, and that, notwithstanding a foreclosure or transfer of 

title pursuant to any other instrument or agreement, the restrictive covenants and provisions 

hereunder shall remain in full force and effect. 

(10) Subsequent Modifications and Statutory Amendments. The Agency may implement 

modifications necessitated by any subsequent statutory amendment without the consent of any 

other party, including those having the right of enforcement, to require that any third-party obtain 

prior Agency approval for any enforcement action concerning preexisting or future violations of 

this covenant. 

(11) Other Agreements. The Owner represents and warrants that it has not and will not execute 

any other agreements with provisions contradictory or in opposition to the provisions of this 

covenant and that, in any event, the provisions of this covenant are paramount and controlling as 

to the rights and obligations set forth herein and supersede any other conflicting requirements. 

(12) Binding Effect. Upon conveyance of the Property during the Term, the Owner shall require 

its successor or assignee to assume its obligations under this covenant. In any event, this 

covenant shall be binding upon and shall inure to the benefit of the parties hereto and their 

respective successors and/or assigns. 

(13) Amendment. This covenant may not be modified except by an instrument in writing 

executed by each of the parties that are signatories hereto. 

(14) Severability. Notwithstanding anything herein contained, if any one or more of the 

provisions of this covenant shall for any reason whatsoever be held to be illegal, invalid or 

unenforceable in any respect, such illegality, invalidity or unenforceability shall not affect any 

other provision of this covenant, but this covenant shall be construed as if such illegal, invalid or 

unenforceable provision had never been contained herein. 

(15) Headings. The headings and titles to the sections of this covenant are inserted for 

convenience only and shall not be deemed a part hereof nor affect the construction or 

interpretation of any provisions hereof. 

(16) Governing Law. This covenant shall be governed by all applicable Federal laws. 

HB-3-3560 

Attachment 15-E-5 

Page 2 of 3 
IN WITNESS WHEREOF, the parties hereto have caused this Restrictive Use Covenant to be 

executed and made effective as of the date first above written. 

OWNER:__________________________, 

a ___________________________ 

Date: ___________________________ 

 By:________________________________ 

Name:______________________________ 

Title:_______________________________ 

 WITNESS/ATTEST: _________________________ 

[[insert appropriate acknowledgment form]] 

EXHIBIT A 

LEGAL DESCRIPTION 

[attached] 

HB-3-3560 

Attachment 15-E-5 

Page 3 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
RESTRICTIVE USE COVENANT - 20-YEAR 

Use in all Other Cases (7 CFR 3560.662(b)(6)) 

WHEREAS, _________________________ [insert borrower’s name and address] “Owner”, or 

a predecessor in interest, received a loan from the United States of America, acting through the 

Rural Housing Service in Rural Development (Agency), U.S. Department of Agriculture which 

was evidenced by a promissory note or assumption agreement dated __________, in the original 

amount of _______________ and secured by a certain Deed of Trust or Mortgage dated 

__________________, and recorded in the land records for the City or County of 

_______________ for the purpose of providing housing in accordance with Section 42 U.S.C. 

1484 (Section 514) or 1485 (Section 515), whichever is applicable, and Title V of the Housing 

Act of 1949, as amended “Program”; and 

NOW, THEREFORE, in consideration of the restrictions on the Property as further described 

in Exhibit A, the sum of Ten Dollars ($10) and other good and valuable consideration, the receipt 

and sufficiency of which are hereby acknowledged, the parties, for themselves and for their 

respective successors and assigns, hereby covenant and agree as follows:

(1) Term. The period of the restriction will be for 20 years, from the date this Restrictive Use 

Covenant was signed. 

(2) Use Requirement. The Owner, and any successors in interest, agree to use the Property in 

compliance with 42 U.S.C. § 1484 or § 1485, whichever is applicable, and 7 CFR part 3560, and 

any other applicable regulations and amendments, for the purpose of housing program eligible 

very low-, low-, or moderate-income tenants.

(3) Enforcement. The Agency and program eligible tenants or applicants may enforce these 

restrictions as long as the Agency has not terminated the Restrictive Use Agreement pursuant to 

paragraph 7 below.

(4) Displacement Prohibition. The Owner agrees not to refuse to lease a dwelling unit offered 

for rent, or otherwise discriminate in the terms of tenancy, solely because any tenant or 

prospective tenant is the recipient of housing assistance from the Agency or any other Federal 

agency.

(5) Owner’s Responsibilities. The Owners agrees to: set rents, other charges, and conditions of 

occupancy in a manner to meet the restrictions required in this Restrictive Use Covenant; post an 

Agency approved notice of these restrictions for the tenants of the property; to adhere to 

applicable local, State, and Federal laws; and to obtain Agency concurrence for any rental 

procedures that deviate from those approved at the time of prepayment, prior to implementation. 

(6) Civil Rights Requirements. The Owner will comply with the provisions of any applicable 

Federal, State or local law prohibiting discrimination in housing on the basis of race, color, 

religion, sex, national origin, handicap or familial status, including but not limited to: Title VI of 

the Civil Rights Act of 1964 (Public Law 90-284, 82 Stat. 73), the Fair Housing Act, Executive 

Order 11063, and all requirements imposed by or pursuant to Agency regulations implementing 

these authorities, including, but not limited to, 7 CFR 3560.10.4. 

(7) Release of Obligation. The Owner will be released from these obligations before the 

termination period set in paragraph 1 only when the Agency determines that there is a no longer a 

need for the housing or that HUD Section 8 vouchers 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 Owner. 

(8) Violations; the Agency’s Remedies. The parties further agree that upon any default under 

this covenant, the Agency may apply to any court, State or Federal, for specific performance of 

this Agreement, for an injunction against violation of this covenant or for such other equitable 

relief as may be appropriate, since the injury to the Agency arising from a violation under any of 

HB-3-3560 

Attachment 15-E-6 

Page 1 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
the terms of this covenant would be irreparable and the amount of damage would be difficult to 

ascertain. 

(9) Covenants to Run with Land. The Owner hereby subjects the Property to the covenants, 

reservations and restrictions set forth in this covenant. The Owner hereby declares its express 

intent that the covenants, reservations and restrictions set forth herein shall be deemed covenants 

running with the land to the extent permitted by law and shall pass to and be binding upon the 

successors in title to the Property throughout the term. Each and every contract, deed, mortgage 

or other instrument hereafter executed covering or conveying the Property or any portion thereof 

shall conclusively be held to have been executed, delivered and accepted subject to such 

covenants, reservations and restrictions, regardless of whether such covenants, reservations and 

restrictions are set forth in such contract, deed or other instrument. The Agency hereby agrees 

that, upon the request of the Owner made on or after the term of this covenant, the Agency shall 

execute a recordable instrument approved by the Agency for purposes of releasing this covenant

of record. All costs and expenses relating to the preparation and recording of such release shall 

be paid by the Owner. 

(10) Superiority. The document hereto constitutes a restrictive covenant that is filed of record, 

with all other Deeds of Trusts or Mortgages, and that, notwithstanding a foreclosure or transfer of 

title pursuant to any other instrument or agreement, the restrictive covenants and provisions 

hereunder shall remain in full force and effect. 

(11) Subsequent Modifications and Statutory Amendments. The Agency may implement 

modifications necessitated by any subsequent statutory amendment without the consent of any 

other party, including those having the right of enforcement, to require that any third-party obtain 

prior Agency approval for any enforcement action concerning preexisting or future violations of 

this covenant. 

(12) Other Agreements. The Owner represents and warrants that it has not and will not execute 

any other agreements with provisions contradictory or in opposition to the provisions of this 

covenant and that, in any event, the provisions of this covenant are paramount and controlling as 

to the rights and obligations set forth herein and supersede any other conflicting requirements. 

(13) Binding Effect. Upon conveyance of the Property during the term, the Owner shall require 

its successor or assignee to assume its obligations under this covenant. In any event, this 

covenant shall be binding upon and shall inure to the benefit of the parties hereto and their 

respective successors and/or assigns. 

(14) Amendment. This covenant may not be modified except by an instrument in writing 

executed by each of the parties that are signatories hereto. 

(15) Severability. Notwithstanding anything herein contained, if any one or more of the 

provisions of this covenant shall for any reason whatsoever be held to be illegal, invalid or 

unenforceable in any respect, such illegality, invalidity or unenforceability shall not affect any 

other provision of this covenant, but this covenant shall be construed as if such illegal, invalid or 

unenforceable provision had never been contained herein. 

(16) Headings. The headings and titles to the sections of this covenant are inserted for 

convenience only and shall not be deemed a part hereof nor affect the construction or 

interpretation of any provisions hereof. 

(17) Governing Law. This covenant shall be governed by all applicable Federal laws. 

HB-3-3560 

Attachment 15-E-6 

Page 2 of 3 
IN WITNESS WHEREOF, the parties hereto have caused this Restrictive Use Covenant to be 

executed and made effective as of the date first above written. 

OWNER:__________________________, 

a ___________________________ 

Date: __________________________ 

 By:________________________________ 

Name:______________________________ 

Title:_______________________________ 

 WITNESS/ATTEST: 

 _________________________ 

[[insert appropriate acknowledgment form]] 

EXHIBIT A 

LEGAL DESCRIPTION 

[attached] 

HB-3-3560 

Attachment 15-E-6 

Page 3 of 3 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
BORROWER PREPAYMENT APPLICATION CHECKLIST 

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. 

Prior to submitting a prepayment request, borrowers must take whatever actions necessary 

to provide the following items. 

Name of Borrower ____________________________________________________

Name of Project ______________________________________________________

Case and Project Number ______________________________________________

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. If 

applicable, a refinancing letter from a financial institution detailing proposed rates and 

terms, sales agreement, or financial statement. 

3. A certification that the borrower will comply with any Federal, State, or local laws or 

regulations that may relate to the prepayment request and a statement of actions 

needed to assure such compliance. 

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 consent letter along 

with the prepayment request. The Agency will notify non-profit 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 non-profit organizations and public bodies whenever a borrower, 

who has requested prepayment, is required or elects to offer their property for sale to a 

non-profit 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 and a 

statement specifying how long financial assistance from such parties will be provided to 

tenant 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. 

HB-3-3560 

Attachment 15-F 

Page 1 of 1 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
LEASE ADDENDUM

1. Properties that have had their application to prepay accepted by the Agency. The 

following language needs to be added or attached to the lease of any tenants coming into the 

property between the initial submission of the prepayment application and the final resolution of 

the prepayment application: 

 a. Properties with no existing RUP:

“The mortgage on this project may be repaid to the Federal Government on or after 

____________. At that time, your rent may be raised to comparable market rate rents in 

the area, or you may be asked to move from the project.” 

b. Properties with an existing RUP not yet expired: 

“Although prepayment of the loan to the U.S. Department of Agriculture, Rural 

Development, may occur on or after _____________, you are protected under 42 U.S.C. 

1485. Rents, other charges, and conditions of occupancy will not differ from what would 

have been had the project remained in the Rural Development program. This protection 

continues until you voluntarily vacate your apartment or the expiration of the exiting 

restriction which will occur on _____________________ (expiration of existing RUP), 

which ever occurs first.” 

2. Properties that prepay with new RUPs (Attachment 15-E-2), the following language will 

be attached to the lease of each tenant in occupancy at the time of prepayment as an addendum: 

 

“Although prepayment of the loan to the U.S. Department of Agriculture, Rural Development, 

occurred on _____________, you are protected under 42 U.S.C. 1485. Rents, other charges, and 

conditions of occupancy will not differ from what would have been had the project remained in 

the Rural Development program. This protection continues until you voluntarily vacate your 

apartment.” 

HB 3-3560 

Attachment 15-G 

Page 1 of 1 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
This page intentionally left blank 

HB-3-3560 
PREPAYMENT AND DISPLACEMENT PREVENTION GRANT AGREEMENT

THIS GRANT AGREEMENT (Agreement) dated ____________________________, 20__, 

between [Insert Borrower Name] which is organized and doing business [insert State] as 

[Insert Legal Entity Name] “Grantee”, and the United States of America, acting through the 

Rural Development, U.S. Department of Agriculture, “Grantor”, WITNESSETH: 

WHEREAS: 

Grantee has determined to undertake acquisition of a multi-family housing project financed by 

the Grantor to house rural residents located at _________________________ ______________ 

and more specifically described in Exhibit A and duly authorized the undertaking of such a 

project. 

Grantee wishes to obtain grant funds to assist in the costs of acquisition of such property in 

accordance with Section 502﴾c﴿ (5) ﴾ C﴿ (i) of the Housing Act of 1949, as amended, and 7 CFR 

3560.659(h). 

Grantor has agreed to grant the Grantee a sum not to exceed $ _______________ subject to the 

terms and conditions established in this Agreement. Provided, however; that any grant funds 

actually advanced and not needed for grant purposes shall be returned immediately to the 

Grantor. The Grantor may terminate the grant in whole, or in parts, at anytime, if it is 

determined that the Grantee has failed to comply with the conditions of the grant or 7 CFR parts 

3015, 3016, and 3019, as applicable. 

NOW, THEREFORE, in consideration of this grant, to be made pursuant to Section 502 of the 

Housing Act of 1949, to cover any direct costs (other than the purchase price) incurred by the 

Grantee in purchasing and assuming responsibility for the housing and related facilities involved 

as explained in 7 CFR 3560.659. Such costs may include, among other things, written estimates 

for legal, architectural, engineering fees, and closing costs. 

I. GRANTEE AGREES THAT GRANTEE WILL: 

A. Acquire said project in accordance with the Grantor’s regulations. If said property is not 

acquired within 60 days from the date of this Agreement, the money shall be returned by 

Grantee to Grantor. 

B. Contract, manage, operate, and maintain the project continuously in an efficient and 

economic manner. 

C. Make services of said project available to all eligible rural residents in compliance with 

Executive Order 12898, the Americans with Disabilities Act of 1990, Title VI of the Civil 

Rights Act of 1964, and Section 504 of the Rehabilitation Act of 1973. 

D. Provide Grantor with such periodic reports as it may require in accordance with 7 CFR 

3015 and 3016, and permit periodic inspections of its operations by a representative of 

the Grantor. 

HB-3-3560 

Attachment 15-H 

Page 1 of 4 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
E. To execute the following: 

• Form Rural Development 400-1, “U.S. Department of Agriculture Equal 

Opportunity Agreement,” 

• Form Rural Development 400-4, “Assurance Agreement,” and 

• To execute any other agreements required by the Grantor which the Grantee is 

legally authorized to execute. 

F. Upon any violation of Grantee’s agreements set forth in this instrument, Grantor may 

seek enforcement of the Grant pursuant to 7 CFR parts 3015, subparts N, 7 CFR 3016.43 

and 7 CFR 3019.62, as applicable, as may be deemed necessary by the Grantor to assure 

compliance with the provisions of this grant Agreement and the laws and regulations 

under which this grant is made. 

G. Return immediately to the Grantor, as required, by the regulations of the Grantor, any 

grant funds advanced and not needed by the Grantee for approved purposes. 

H. Provide Financial Management Systems, as more specifically provided in 7 CFR parts 

3015.61, 3016.20 and 3019.21, which will include: 

• Accurate, current and complete disclosure of the financial results of each grant. 

Financial reporting will be on an accrual basis. 

• Records which identify adequately the source and application of funds for grantsupported activities. Those records shall contain information pertaining to grant 

awards and authorizations, obligations, unobligated balances, assets, liabilities, 

outlays, and income. 

• Effective control over and accountability for all funds. Grantee shall adequately 

safeguard all such funds and shall assure that they are used solely for authorized 

purposes. 

• Accounting records supported by source documentation. 

I. Retain financial records, supporting documents, statistical records, and all other records 

pertinent to the grant for a period of at least 3 years after grant closing except that the 

records shall be retained beyond the 3-year period if audit findings have not been 

resolved. Microfilm copies or other electronic media (i.e., Compact Disks) may be 

substituted in lieu of original records. The Grantor and the Comptroller General of the 

United States, or any of their duly authorized representatives, shall have access to any 

books, documents, papers, and records of the Grantee which are pertinent to the specific 

grant program for the purpose of making audits, examinations, excerpts, and transcripts. 

J. Provide an audit report pursuant to 7 CFR parts 3016.26, 3019.26 and 3052, as 

applicable, prepared in sufficient detail to allow the Grantor to determine that funds have 

been used in compliance with the proposal, any applicable laws and regulations and this 

Agreement. 

K. Account for and return to the Grantor interest earned on grant funds pending their 

disbursements for program purposes when the Grantee is a unit of local Government. 

States and agencies or instrumentalities of States shall not be held accountable for interest 

earned on grant funds pending their disbursement. 

HB-3-3560 

Attachment 15-H 

Page 2 of 4 
L. Except as specifically provided in this Agreement, comply with the applicable provisions 

of USDA’s general grant regulations set out in 7 CFR 3015, 3016, 3019, and 3052, as 

applicable. 

M. Comply with the requirements of 7 CFR part 3021, relating to drug-free workplace 

requirements, and 7 CFR part 3018 relating to restrictions on lobbying. 

II. GRANTOR AGREES THAT IT WILL: 

A. Make available to Grantee for the purpose of this Agreement not to exceed 

$_________________________ which it will advance to the Grantee in accordance with 

the actual needs of the Grantee as determined by the Grantor. 

B. At its sole discretion and at any time may give consent to defer, release, satisfy, or 

terminate any or all of the Grantee’s grant obligations, with or without available 

consideration, upon such terms and conditions as the Grantor may determine to be (1) 

advisable to further the purpose of the grant or to protect the Grantor’s financial interest 

therein and (2) consistent with both the statutory purposes of the grant and the limitations 

of the statutory authority under which it is made. 

III. TERMINATION OF THIS AGREEMENT: 

This Agreement may be terminated for cause in the event of default on the part of the Grantee as 

provided in paragraph 1 of the Agreement or for convenience of the Grantor and Grantee prior to 

the date of completion of the grant purpose. Termination for convenience will occur when both 

the Grantee and Grantor agree that the continuation of the grant will not produce beneficial 

results commensurate with the further expenditure of funds. 

IN WITNESS WHEREOF: Grantee on the date first above written has caused this Agreement to 

be executed: 

ATTEST: 

_________________________________ 

BY: _____________________________ BY: ____________________________ 

________________________________ ____________________________ 

Title Title 

HB-3-3560 

Attachment 15-H 

Page 3 of 4 

(02-24-02) SPECIAL PN 

Revised (11-07-08) SPECIAL PN 
UNITED STATES OF AMERICA 

RURAL HOUSING SERVICE 

RURAL DEVELOPMENT 

BY: __________________________________ 

______________________________________ 

Title 

HB-3-3560 

Attachment 15-H 

Page 4 of 4 
SUBORDINATION AGREEMENT

THIS SUBORDINATION AGREEMENT is entered into this _____ day of 

_______________, ____ by and among _____ (insert Lender Name) _____________, (“Senior 

Lender”), Rural Development, acting through the Rural Housing Service, U. S. Department of 

Agriculture, United States of America or successor Agency, _________(Insert Borrower Name). 

Recitals

A. Rural Development previously made a loan to, or permitted the assumption of a loan by, 

the Borrower in the original principal amount of $______________ (the “Rural 

Development Loan”) which loan is currently secured by a mortgage (the “Rural 

Development Mortgage”) on a multifamily housing project located in (Insert City or 

County and State)(the “Property”). The Property is more fully described in the attached

Exhibit A. 

B. The Senior Lender is about to make a loan (the “First Mortgage Loan”) to the Borrower 

in the original principal amount of $_________________. The First Mortgage Loan will 

be secured by a first mortgage lien (the “First Mortgage”) on the Property. The 

Borrower’s obligation to repay the First Mortgage Loan is evidenced by a Promissory 

Note dated __________________, _____ (the “First Mortgage Note”). 

C. The Borrower has requested Rural Development, and Rural Development has agreed, to 

subordinate the Rural Development Mortgage to the First Mortgage. 

NOW, THEREFORE, in order to induce Rural Development to subordinate its 

HB-3-3560 

Attachment 15-I 

Page 1 of 12 

(02-24-05) SPECIAL PN 

Added (12-17-08) PN 425 
Rural Development Mortgage to the First Mortgage Lien, and in consideration thereof, 

the Senior Lender, Rural Development and the Borrower agree as follows: 

Subordination

Rural Development hereby subordinates its Rural Development Loan and the lien 

of its Rural Development Mortgage on the Property to the First Mortgage Loan and the 

lien of the First Mortgage in an amount not to exceed $ (“Subordination Cap”) 

subject to the terms and conditions set forth herein. 

1. Status of Rural Development Mortgage. 

 The Senior Lender understands that the Property is subject to the lien of the Rural 

Development Mortgage. The existence of the Rural Development Mortgage shall not 

constitute an event of default under the first Mortgage Loan Documents. 

2. Terms of Subordination.

a. Agreement to Rural Development. The Senior Lender and Rural 

Development agree that: (i) the indebtedness evidenced by the Rural Development Loan 

Documents is and shall be subordinate in right of payment, to the extent and in the 

manner provided in the Subordination Cap and in the manner set forth in this Agreement, 

to the prior payment in full of the indebtedness secured by the First Mortgage, and (ii) the 

Rural Development Mortgage and the other Rural Development Loan Documents are and 

shall be subject in all respects to the liens, terms, covenants and conditions of the First 

Mortgage and such other sums which may hereafter be made pursuant to the First 

HB-3-3560 

Attachment 15-I 

Page 2 of 12 
Mortgage for the purposes of protecting the lien of the First Mortgage, curing defaults by 

the Borrower under the First Mortgage or for any other purpose expressly permitted by 

the First Mortgage. 

b. Loan Payments and Servicing. Rural Development and the Senior 

Lender shall each service and collect payments on their respective loans. 

3. Default under Rural Development Loan Documents. 

a. Notice of Default and Cure Rights. Rural Development shall deliver to 

the Senior Lender a notice of Rural Development Loan Default within five Business 

Days in each case where Rural Development has given a notice of Rural Development 

Loan Default to the Borrower. The Senior Lender shall have the right, but not the 

obligation, to cure any Rural Development Loan Default within 60 days following the 

date of such notice; provided, however that Rural Development shall be entitled, during 

such 60-day period, to continue to pursue its rights and remedies under the Rural 

Development Loan Documents. All amounts paid by the Senior Lender in accordance 

with the First Mortgage Loan Documents to cure a Rural Development Loan Default 

shall be deemed to have been advanced by the Senior Lender pursuant to, and shall be 

secured by the lien of, the First Mortgage. Failure of Rural Development to send a notice 

of Rural Development Loan Default to the Senior Lender shall not prevent the exercise of 

Rural Development’s rights and remedies under the Rural Development Loan 

Documents, subject to the provisions of this Agreement. 

HB-3-3560 

Attachment 15-I 

Page 3 of 12 

(02-24-05) SPECIAL PN 

Added (12-17-08) PN 425 
b. Rural Development's Exercise of Remedies After Notice to Senior 

Lender. If an Rural Development Loan Default occurs and is continuing, Rural 

Development agrees to notify the Senior Lender, in writing, of its intent to commence 

foreclosure proceedings with respect to the Property under Rural Development Loan 

Documents or exercise any other rights or remedies it may have under Rural 

Development Loan Documents, including, but not limited to accelerating the Rural 

Development Loan, collecting rents, appointing (or seeking the appointment of) a 

receiver or exercising any other rights or remedies thereunder unless and until it has 

given the Senior Lender at least 60 days' prior written notice; during such 60 day period, 

however, Rural Development shall be entitled to exercise and enforce all other rights and 

remedies available to Rural Development under Rural Development Loan Documents 

and/or under applicable laws, including without limitation, rights to enforce covenants 

and agreements of the Borrower relating to income, rent, or affordability restrictions 

including the imposition of civil monetary penalties. 

4. Default under First Mortgage Loan Documents. 

Notice of Default and Cure Rights. The Senior Lender shall deliver to Rural 

Development a default notice within five business days in each case where the Senior Lender has 

given a notice of First Mortgage Loan Default to the Borrower. Rural Development shall have 

the right, but not the obligation, to cure any such monetary First Mortgage Loan Default within 

60 days following the date of such notice; provided, however, that the Senior Lender shall be 

entitled during such 60-day period to continue to pursue its remedies under the First Mortgage 

Loan Documents. Rural Development may have up to 90 days from the date of the notice of 

First Mortgage Loan default to cure a non-monetary default. In the event the Senior Mortgagee 

commences an enforcement action under the Senior Loan Documents following the occurrence 

of a Senior Mortgage Default the Subordinate Mortgagee agrees to cooperate with the Senior 

HB-3-3560 

Attachment 15-I 

Page 4 of 12 
Mortgagee in maintaining the rental assistance agreements as permitted by the applicable 

regulatory and statutory requirements. 

5. Conflict. 

 The Borrower, the Senior Lender and Rural Development each agrees that, in the event of 

any conflict or inconsistency between the terms of the First Mortgage Loan Documents, 

Rural Development Loan Documents and the terms of this Agreement, the Agreement 

shall govern and control solely as to the following: (a) the relative priority of the security 

interests of the Senior Lender and Rural Development in the Property; (b) the timing of 

the exercise of remedies by the Senior Lender and Rural Development under the First 

Mortgage and Rural Development Mortgage, respectively; and (c) solely as between the 

Senior Lender and Rural Development, the notice requirements, cure rights, and the other 

rights and obligations which the Senior Lender and Rural Development have agreed to as 

expressly provided in this Agreement. Borrower acknowledges that the terms and 

provisions of this Agreement shall not, and shall not be deemed to extend time to cure 

any First Mortgage Loan Default or Rural Development Loan Default, as the case may 

be, give the Borrower the right to notice of any First Mortgage Loan Default or Rural 

Development Loan Default, as the case may be other than that, if any, provided, under 

the First Mortgage Loan Documents or Rural Development Loan Documents; or create 

any other right or benefit for Borrower as against Senior Lender or Rural Development. 

6. Rights and Obligations of Rural Development under Rural Development Loan 

Documents and of the Senior Lender under the First Mortgage Loan Documents. 

HB-3-3560 

Attachment 15-I 

Page 5 of 12 

(02-24-05) SPECIAL PN 

Added (12-17-08) PN 425 
 Subject to each of the other terms of this Agreement, all of the following 

provisions shall supersede any provisions of Rural Development Loan Documents 

covering the same subject matter: 

a. Insurance; Condemnation or Casualty. (i) The Senior Lender agrees that, in addition 

to the Senior Lender, Rural Development shall be listed as loss payee as its interest appears on 

all insurance policies maintained on the Property; (ii) In the event of a taking or threatened 

taking by condemnation or other exercise of eminent domain of all or a portion of the Property or 

the occurrence of a fire or other casualty resulting in damage to all or a portion of the Property 

(collectively, a “Casualty”), at any time or times when the First Mortgage remains a lien on the 

Property the following provisions shall apply: 

i. The Rural Development hereby agrees that its rights (under the Rural 

Development Loan Documents or otherwise) to participate in any proceeding or 

action relating to a Casualty, or to participate or join in any settlement of, or to 

adjust, any claims resulting from a Casualty shall be and remain subordinate in all 

respects to the Senior Lender’s rights under the First Mortgage Loan Documents 

with respect thereto; provided, however, this subsection or anything contained in 

this Agreement shall not limit the rights of the Rural Development to file any 

pleadings, documents, claims or notices with the appropriate court with 

jurisdiction over the proposed Casualty; 

HB-3-3560 

Attachment 15-I 

Page 6 of 12 
ii. All proceeds received or to be received on account of Casualty, shall be applied 

(either to payment of the costs and expenses of repair and restoration or to 

payment on the First Mortgage Loan) in the manner determined by the Senior 

Lender; provided, however, that if the Senior Lender elects to apply such 

proceeds to payment on the principal of, interest on and other amounts payable 

under the First Mortgage Loan, any proceeds remaining after the satisfaction in 

full of the principal of, interest on and other amounts payable under the First 

Mortgage Loan shall be paid to, and may be applied by, Rural Development in 

accordance with the applicable provisions of the Rural Development Loan 

Documents. 

7. Interference with Rural Development Loan Obligations. 

 The Senior Lender will take no action that would preclude Borrower from being 

able to comply with applicable government statutes, regulations, instructions and terms of 

Rural Development’s loan documents. 

8. Notices. 

 Each notice, request, demand, consent, approval or other communication 

(hereinafter in this Section referred to collectively as “notices” and referred to singly as a 

“notice”) which the Senior Lender or Rural Development is required or permitted to give 

to the other party pursuant to this Agreement shall be in writing and shall be deemed to 

have been duly and sufficiently given if: (a) personally delivered with proof of delivery 

thereof (any notice so delivered shall be deemed to have been received at the time so 

delivered); or (b) sent by Federal Express (or other similar national overnight courier) 

designating early morning delivery (any notice so delivered shall be deemed to have been 

HB-3-3560 

Attachment 15-I 

Page 7 of 12 

(02-24-05) SPECIAL PN 

Added (12-17-08) PN 425 
received on the next Business Day following receipt by the courier); or (c) sent by United 

States registered or certified mail, return receipt requested, postage prepaid, at a post 

office regularly maintained by the United States Postal Service (any notice so sent shall 

be based upon the date of actual receipt), addressed to the respective parties as follows: 

SENIOR LENDER: 

 (LENDER NAME)

 _________________________________________ 

 _________________________________________ 

 _________________________________________ 

 Attention: __________________________________ 

With a copy to: 

SENIOR LENDER 

Insert Name of Senior Lender 

RURAL DEVELOPMENT: 

 UNITED STATES OF AMERICA, acting through the 

RURAL DEVELOPMENT 

RURAL HOUSING SERVICE, 

U. S. DEPARTMENT OF AGRICULTURE 

 _________________________________________ 

 _________________________________________ 

HB-3-3560 

Attachment 15-I 

Page 8 of 12 
 _________________________________________ 

 Attention: __________________________________ 

 Either party may, by notice given pursuant to this Section, change the person or persons and/or 

address or addresses, or designate an additional person or persons or an additional address or 

addresses for its notices, but notice of a change of address shall only be effective upon receipt. 

9. General. 

a. Assignment/Successors. This Agreement shall be binding upon and inure to the 

heirs, executors, administrators, successors and assigns of the respective parties. 

 b. No Partnership or Joint Venture. The Senior Lender's permission for the 

subordination of Rural Development Loan Documents does not constitute the Senior Lender as a 

joint venturer or partner of Rural Development. Neither party hereto shall hold itself out as a 

partner, agent or affiliate of the other party hereto. 

c. Senior Lender's and Rural Development's Consent. Wherever the Senior 

Lender's consent or approval is required by any provision of this Agreement, such 

consent or approval may be granted or denied by the Senior Lender in its sole and 

absolute discretion, unless otherwise expressly provided in this Agreement. Wherever 

Rural Development 's consent or approval is required by any provision of this 

HB-3-3560 

Attachment 15-I 

Page 9 of 12 

(02-24-05) SPECIAL PN 

Added (12-17-08) PN 425 
Agreement, such consent or approval may be granted or denied by Rural Development in 

its sole and absolute discretion, unless otherwise expressly provided in this Agreement. 

d. Further Assurances. Rural Development, the Senior Lender and the Borrower 

each agree, at the Borrower's expense, to execute and deliver all additional instruments 

and/or documents reasonably required by any other party to this Agreement in order to 

evidence that the Rural Development Mortgage is subordinate to the lien, covenants and 

conditions of the First Mortgage, or to further evidence the intent of this Agreement. 

e. Amendment. This Agreement shall not be amended or terminated except by 

written instrument signed by all parties hereto. 

f. Governing Law. This Agreement shall be governed by federal law and disputes 

will be resolved in Federal Court. 

g. Severable Provisions. If any provision of this Agreement shall be invalid or 

unenforceable to any extent, then the other provisions of this Agreement shall not be affected 

thereby and shall be enforced to the greatest extent permitted by law. 

h. Term. The term of this Agreement shall commence on the date hereof and shall 

continue until the earliest to occur of the following events: (i) the payment of all of the principal 

of, interest on and other amounts payable under the First Mortgage Loan Documents; (ii) the 

payment of all of the principal of, interest on and other amounts payable under Rural 

HB-3-3560 

Attachment 15-I 

Page 10 of 12 
Development Loan Documents, other than by reason of payments which Rural Development is 

obligated to remit to the Senior Lender pursuant to Section 4 hereof; (iii) the acquisition by the 

Senior Lender of title to the Property pursuant to a foreclosure or a deed in lieu of foreclosure of, 

or the exercise of a power of sale contained in, the First Mortgage; or (iv) the acquisition by 

Rural Development of title to the Property pursuant to a foreclosure or a deed in lieu of 

foreclosure of, or the exercise of a power of sale contained in, Rural Development Mortgage, but 

only if such acquisition of title does not violate any of the terms of this Agreement. 

i. Counterparts. This Agreement may be executed in any number of counterparts, 

each of which shall be considered an original for all purposes; provided, however, that all such 

counterparts shall together constitute one and the same instrument. 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and 

year first written above. 

SENIOR LENDER: 

(LENDER NAME)

By: _____________________________________ 

Name: ___________________________________ 

Title: ____________________________________ 

RURAL DEVELOPMENT: 

UNITED STATES OF AMERICA, acting through the 

RURAL DEVELOPMENT 

RURAL HOUSING SERVICE, 

(02-24-05) SPECIAL PN 

Added (12-17-08) PN 425 

HB-3-3560 

Attachment 15-I 

Page 11 of 12 
U. S. DEPARTMENT OF AGRICULTURE 

By: ______________________________________ 

Name: ___________________________________ 

 Title: _____________________________________ 

BORROWER: 

(BORROWER NAME)

By: _____________________________________ 

Name: ___________________________________ 

Title: ____________________________________ 

[Jurats to be added] 

EXHIBIT A

HB-3-3560 

Attachment 15-I 

Page 12 of 12 
HB-3-3560

Appendix 1

Page 1 of 202

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

(02-24-05) SPECIAL PN 
HB-3-3560

Appendix 1

Page 2 of 202

Sec. Page

(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
HB-3-3560

Appendix 1

Page 3 of 202

Sec. Page

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

(02-24-05) SPECIAL PN

Revised (02-15-19) PN 521
HB-3-3560

Appendix 1

Page 4 of 202

Sec. Page

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

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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 decisionmaking 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.

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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. 

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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 MFHMFH 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 MFHMFH 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 MFHMFH 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 MFHMFH 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.

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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 MFHMFH 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 MFHMFH 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 MFHMFH 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.

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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:

(02-24-05) SPECIAL PN

Revised (04-01-16) SPECIAL PN
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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 caseby-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.

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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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Revised (03-31-22) SPECIAL PN
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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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Revised (03-31-22) SPECIAL PN
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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 lowincome households on the housing project's waiting list or that occupancy by lowincome 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, 

SPECIAL PN.)
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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.
 

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APPENDIX 2 

7 CFR Part 11—NATIONAL APPEALS DIVISION 

Subpart A – National Appeals Division Rules of Procedure 

Sec. 

11.1 Definitions. 

11.2 General Statement. 

11.3 Applicability. 

11.4 Inapplicability of other laws and regulations. 

11.5 Informal review of adverse decisions. 

11.6 Director review of agency determination of appealability and right of participants to 

Division hearing. 

11.7 Ex parte communications. 

11.8 Division hearings. 

11.9 Director review of determinations of Hearing Officers. 

11.10 Basis for determinations. 

11.11 Reconsideration of Director determinations. 

11.12 Effective date and implementation of final determinations of the Division. 

11.13 Judicial review. 

11.14 Filing of appeals and computation of time. 

AUTHORITY: 5 U.S.C. 301; Title II, Subtitle H, Pub. L. 103-354, 108 Stat. 3228 (7 U.S.C. 

6991 et seq.); Reorganization Plan No. 2 of 1953 (5 U.S.C. App.). 

§ 11.1 Definitions. 

For purposes of this part: 

Adverse decision means an administrative decision made by an officer, employee, or committee 

of an agency that is adverse to a participant. The term includes a denial of equitable relief by an 

agency or the failure of an agency to issue a decision or otherwise act on the request or right of 

the participant within timeframes specified by agency program statutes or regulations or within a 

reasonable time if timeframes are not specified in such statutes or regulations. The term does not 

include a decision over which the Board of Contract Appeals has jurisdiction. 

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Agency means: 

1. The Agricultural Stabilization and Conservation Service (ASCS); 

2. The Commodity Credit Corporation (CCC); 

3. The Farm Service Agency (FSA); 

4. The Federal Crop Insurance Corporation (FCIC); 

5. The Natural Resources Conservation Service (NRCS); 

6. The Risk Management Agency (RMA); 

7. The Rural Business-Cooperative Service (RBS); 

8. Rural Development (RD); 

9. The Rural Housing Service (RHS); 

10. The Rural Utilities Service (RUS) (but not for programs authorized by the Rural 

Electrification Act of 1936 or the Rural Telephone Bank Act, 7 U.S.C. 901 et 

seq.); 

11. The Soil Conservation Service (SCS); 

12. A State, county, or area committee established under section 8(b)(5) of the Soil 

Conservation and Domestic Allotment Act (16 U.S.C. 590h(b)(5)); and 

13. Any predecessor or successor agency to the above-named agencies, and any other 

agency or office of the Department which the Secretary may designate. 

Agency record means all the materials maintained by an agency related to an adverse decision 

which are submitted to the Division by an agency for consideration in connection with an appeal 

under this part, including all materials prepared or reviewed by the agency during its 

consideration and decisionmaking process, but shall not include records or information not 

related to the adverse decision at issue. All materials contained in the agency record submitted to 

the Division shall be deemed admitted as evidence for purposes of a hearing or a record review 

under §11.8. 

Agency representative means any person, whether or not an attorney, who is authorized to 

represent the agency in an administrative appeal under this part. 

Appeal means a written request by a participant asking for review by the National Appeals 

Division of an adverse decision under this part. 

Appellant means any participant who appeals an adverse decision in accordance with this part. 

Unless separately set forth in this part, the term "appellant" includes an authorized representative. 

Authorized representative means any person, whether or not an attorney, who is authorized in 

writing by a participant, consistent with §11.6(c), to act for the participant in an administrative 

appeal under this part. The authorized representative may act on behalf of the participant except 

when the provisions of this part require action by the participant or appellant personally. 
 

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Case record means all the materials maintained by the Secretary related to an adverse decision. 

The case record includes both the agency record and the hearing record. 

Days means calendar days unless otherwise specified. 

Department means the United States Department of Agriculture (USDA). 

Director means the Director of the Division or a designee of the Director. 

Division means the National Appeals Division established by this part. 

Equitable relief means relief which is authorized under section 326 of the Food and Agriculture 

Act of 1962 (7 U.S.C. 1339a) and other laws administered by the agency. 

Ex parte communication means an oral or written communication to any officer or employee of 

the Division with respect to which reasonable prior notice to all parties is not given, but it shall 

not include requests for status reports, or inquiries on Division procedure, in reference to any 

matter or proceeding connected with the appeal involved. 

Hearing, except with respect to §11.5, means a proceeding before the Division to afford a 

participant the opportunity to present testimony or documentary evidence or both in order to 

have a previous determination reversed and to show why an adverse determination was in error. 

Hearing Officer means an individual employed by the Division who conducts the hearing and 

determines appeals of adverse decisions by any agency. 

Hearing record means all documents, evidence, and other materials generated in relation to a 

hearing under §11.8. 

 

Implement means the taking of action by an agency of the Department in order fully and 

promptly to effectuate a final determination of the Division. 

Participant means any individual or entity who has applied for, or whose right to participate in 

or receive, a payment, loan, loan guarantee, or other benefit in accordance with any program of 

an agency to which the regulations in this part apply is affected by a decision of such agency. 

The term does not include persons whose claim(s) arise under: 

1. Programs subject to various proceedings provided for in 7 CFR part 1; 

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2. Programs governed by Federal contracting laws and regulations (appealable under other 

rules and to other forums, including to the Department's Board of Contract Appeals under 

7 CFR part 24); 

3. The Freedom of Information Act (appealable under 7 CFR part 1, subpart A); 

4. Suspension and debarment disputes, including, but not limited to, those falling within the 

scope of 7 CFR parts 1407 and 3017; 

5. Export programs administered by the Commodity Credit Corporation; 

6. Disputes between reinsured companies and the Federal Crop Insurance Corporation; 

7. Tenant grievances or appeals prosecutable under the provisions of 7 CFR part 1944, 

subpart L, under the multi-family housing program carried out by RHS; 

8. Personnel, equal employment opportunity, and other similar disputes with any agency or 

office of the Department which arise out of the employment relationship; 

9. The Federal Tort Claims Act, 28 U.S.C. 2671 et seq., or the Military Personnel and 

Civilian Employees Claims Act of 1964, 31 U.S.C. 3721; 

10. Discrimination complaints prosecutable under the nondiscrimination regulations at 7 

CFR parts 15, 15a, 15b, 15e, and 15f; or 

11. Section 361, et seq., of the Agricultural Adjustment Act of 1938, as amended (7 U.S.C. 

1361, et seq.) involving Tobacco Marketing Quota Review Committees. 

Record review means an appeal considered by the Hearing Officer in which the Hearing Officer's 

determination is based on the agency record and other information submitted by the appellant 

and the agency, including information submitted by affidavit or declaration. 

 

Secretary means the Secretary of Agriculture. 

§ 11.2 General statement. 

(a) This part sets forth procedures for proceedings before the National Appeals Division within 

the Department. The Division is an organization within the Department, subject to the general 

supervision of and policy direction by the Secretary, which is independent from all other 

agencies and offices of the Department, including Department officials at the state and local 

level. The Director of the Division reports directly to the Secretary of Agriculture. The authority 

of the Hearing Officers and the Director of the Division, and the administrative appeal 

procedures which must be followed by program participants who desire to appeal an adverse 

decision and by the agency which issued the adverse decision, are included in this part. 

 

(b) Pursuant to section 212(e) of the Federal Crop Insurance Reform and Department of 

Agriculture Reorganization Act of 1994, Pub. L. 103-354 (the Act), 7 U.S.C. 6912(e), program 

participants shall seek review of an adverse decision before a Hearing Officer of the Division, 

and may seek further review by the Director, under the provisions of this part prior to seeking 

judicial review. 
 

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§ 11.3 Applicability. 

(a) Subject matter. The regulations contained in this part are applicable to adverse decisions 

made by an agency, including, for example, those with respect to: 

1. Denial of participation in, or receipt of benefits under, any program of an agency; 

2. Compliance with program requirements; 

3. The making or amount of payments or other program benefits to a participant in any 

program of an agency; and 

4. A determination that a parcel of land is a wetland or highly erodible land. 

(b) Limitation. The procedures contained in this part may not be used to seek review of statutes 

or USDA regulations issued under Federal Law. 

§ 11.4 Inapplicability of other laws and regulations. 

(a) Reserved. 

(b) The Federal Rules of Evidence, 28 U.S.C. App., shall not apply to proceedings under this 

part. 

§ 11.5 Informal review of adverse decisions. 

(a) Required informal review of FSA adverse decisions. Except with respect to farm credit 

programs, a participant must seek an informal review of an adverse decision issued at the field 

service office level by an officer or employee of FSA, or by any employee of a county or area 

committee established under section 8(b)(5) of the Soil Conservation and Domestic Allotment 

Act, 16 U.S.C. 590h(b)(5), before NAD will accept an appeal of a FSA adverse decision. Such 

informal review shall be done by the county or area committee with responsibility for the 

adverse decision at issue. The procedures for requesting such an informal review before FSA are 

found in 7 CFR part 780. After receiving a decision upon review by a county or area committee, 

a participant may seek further informal review by the State FSA committee or may appeal 

directly to NAD under §11.6(b). 

(b) Optional informal review. With respect to adverse decisions issued at the State office level of 

FSA and adverse decisions of all other agencies, a participant may request an agency 

informal review of an adverse decision of that agency prior to appealing to NAD. Procedures 

for requesting such an informal review are found at 7 CFR part 780 (FSA), 7 CFR part 614 

(NRCS), 7 CFR part 1900, subpart B (RUS), 7 CFR part 1900, subpart B (RBS), and 7 CFR 

part 1900, subpart B (RHS). 

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(c) Mediation. A participant also shall have the right to utilize any available alternative dispute 

resolution (ADR) or mediation program, including any mediation program available under 

title V of the Agricultural Credit Act of 1987, 7 U.S.C. 5101 et seq., in order to attempt to 

seek resolution of an adverse decision of an agency prior to a NAD hearing. If a participant: 

1. Requests mediation or ADR prior to filing an appeal with NAD, the participant stops the 

running of the 30-day period during which a participant may appeal to NAD under 

§11.6(b)(1), and will have the balance of days remaining in that period to appeal to NAD 

once mediation or ADR has concluded. 

2. Requests mediation or ADR after having filed an appeal to NAD under §11.6(b), but 

before the hearing, the participant will be deemed to have waived his right to have a 

hearing within 45 days under §11.8(c)(1) but shall have a right to have a hearing within 

45 days after conclusion of mediation or ADR. 

 § 11.6 Director review of agency determination of appealability and right of participants to 

Division hearing. 

(a) Director review of agency determination of appealability. 

1. Not later than 30 days after the date on which a participant receives a determination from 

an agency that an agency decision is not appealable, the participant must submit a written 

request personally signed by the participant to the Director to review the determination in 

order to obtain such review by the Director. 

2. The Director shall determined whether the decision is adverse to the individual 

participant and thus appealable or is a matter of general applicability and thus not subject 

to appeal, and will issue a final determination notice that upholds or reverses the 

determination of the agency. This final determination is not appealable. If the Director 

reverses the determination of the agency, the Director will notify the participant and the 

agency of that decision and inform the participant of his or her right to proceed with an 

appeal. 

3. The Director may delegate his or her authority to conduct a review under this paragraph 

to any subordinate official of the Division other than a Hearing Officer. In any case in 

which such review is conducted by such a subordinate official, the subordinate official's 

determination shall be considered to be the determination of the Director and shall be 

final and not appealable. 

(b) Appeals of adverse decisions. 
 

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1. To obtain a hearing under §11.8, a participant personally must request such hearing not 

later than 30 days after the date on which the participant first received notice of the 

adverse decision or after the date on which the participant receives notice of the 

Director's determination that a decision is appealable. In the case of the failure of an 

agency to act on the request or right of a recipient, a participant personally must request 

such hearing not later than 30 days after the participant knew or reasonably should have 

known that the agency had not acted within the timeframes specified by agency program 

regulations, or, where such regulations specify no timeframes, not later than 30 days after 

the participant reasonably should have known of the agency's failure to act. 

2. A request for a hearing shall be in writing and personally signed by the participant, and 

shall include a copy of the adverse decision to be reviewed, if available, along with a 

brief statement of the participant's reasons for believing that the decision, or the agency's 

failure to act, was wrong. The participant also shall send a copy of the request for a 

hearing to the agency, and may send a copy of the adverse decision to be reviewed to the 

agency, but failure to do either will not constitute grounds for dismissal of the appeal. 

Instead of a hearing, the participant may request a record review. 

(c) If a participant is represented by an authorized representative, the authorized representative 

must file a declaration with NAD, executed in accordance with 28 U.S.C. 1746, stating that the 

participant has duly authorized the declarant in writing to represent the participant for purposes 

of a specified adverse decision or decisions, and attach a copy of the written authorization to the 

declaration. 

§ 11.7 Ex parte communications. 

(a) Ex parte communications. 

(1) At no time between the filing of an appeal and the issuance of a final determination under 

this part shall any officer or employee of the Division engage in ex parte communications 

regarding the merits of the appeal with any person having any interest in the appeal 

pending before the Division, including any person in an advocacy or investigative 

capacity. This prohibition does not apply to: 

1. Discussions of procedural matters related to an appeal; or 

2. Discussions of the merits of the appeal where all parties to the appeal have been 

given notice and an opportunity to participate. 

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(2) In the case of a communication described in paragraph (a)(1)(ii) of this section, a 

memorandum of any such discussion shall be included in the hearing record. 

(b) No interested person shall make or knowingly cause to be made to any officer or employee of 

the Division an ex parte communication relevant to the merits of the appeal. 

(c) If any officer or employee of the Division receives an ex parte communication in violation of 

this section, the one who receives the communication shall place in the hearing record: 

1. All such written communications; 

2. Memoranda stating the substance of all such oral communications; and 

3. All written responses to such communications, and memoranda stating the substance of 

any oral responses thereto. 

(d) Upon receipt of a communication knowingly made or knowingly caused to be made by a 

party in violation of this section the Hearing Officer or Director may, to the extent consistent 

with the interests of justice and the policy of the underlying program, require the party to 

show cause why such party's claim or interest in the appeal should not be dismissed, denied, 

disregarded, or otherwise adversely affected on account of such violation. 

§ 11.8 Division hearings. 

(a) General rules. 

1. The Director, the Hearing Officer, and the appellant shall have access to the agency 

record of any adverse decision appealed to the Division for a hearing. Upon request by 

the appellant, the agency shall provide the appellant a copy of the agency record. 

2. The Director and Hearing Officer shall have the authority to administer oaths and 

affirmations, and to require, by subpoena, the attendance of witnesses and the production 

of evidence. A Hearing Officer shall obtain the concurrence of the Director prior to 

issuing a subpoena. 

i. A subpoena requiring the production of evidence may be requested and issued at 

any time while the case is pending before the Division. 

ii. An appellant or an agency, acting through any appropriate official, may request 

the issuance of a subpoena requiring the attendance of a witness by submitting 

such a request in writing at least 14 days before the scheduled date of a hearing. 
 

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The Director or Hearing Officer shall issue a subpoena at least 7 days prior to the 

scheduled date of a hearing. 

iii. A subpoena shall be issued only if the Director or a Hearing Officer determined 

that: 

A. For a subpoena of documents, the appellant or the agency has established 

that production of documentary evidence is necessary and is reasonably 

calculated to lead to information which would affect the final 

determination or is necessary to fully present the case before the Division; 

or 

B. For a subpoena of a witness, the appellant or the agency has established 

that either a representative of the Department or a private individual 

possesses information that is pertinent and necessary for disclosure of all 

relevant facts which could impact the final determination, that the 

information cannot be obtained except through testimony of the person, 

and that the testimony cannot be obtained absent issuance of a subpoena. 

iv. The party requesting issuance of a subpoena shall arrange for service. Service of a 

subpoena upon a person named therein may be made by registered or certified 

mail, or in person. Personal service shall be made by personal delivery of a copy 

of the subpoena to the person named therein by any person who is not a party and 

who is not less than 18 years of age. Proof of service shall be made by filing with 

the Hearing Officer or Director who issued the subpoena a statement of the date 

and manner of service and of the names of the persons served, certified by the 

person who made the service in person or by return receipts for certified or 

registered mail. 

v. A party who requests that a subpoena be issued shall be responsible for the 

payment of any reasonable travel and subsistence costs incurred by the witness in 

connection with his or her appearance and any fees of a person who serves the 

subpoena in person. The Department shall pay the costs associated with the 

appearance of a Department employee whose role as a witness arises out of his or 

her performance of official duties, regardless of which party requested the 

subpoena. 

The failure to make payment of such charges on demand may be deemed by the 

Hearing Officer or Director as sufficient ground for striking the testimony of the 

witness and the evidence the witness has produced. 

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vi. If a person refuses to obey a subpoena, the Director, acting through the Office of 

the General Counsel of the Department and the Department of Justice, may apply 

to the United States District Court in the jurisdiction where that person resides to 

have the subpoena enforced as provided in the Federal Rules of Civil Procedure 

(28 U.S.C. App.). 

3. Testimony required by subpoena pursuant to paragraph (a)(2) of this section may, at the 

discretion of the Director or a Hearing Officer, be presented at the hearing either in 

person or telephonically. 

(b) Hearing procedures applicable to both record review and hearings. 

1. Upon the filing of an appeal under this part of an adverse decision by any agency, the 

agency promptly shall provide the Division with a copy of the agency record. If requested 

by the applicant prior to the hearing, a copy of such agency record shall be provided to 

the appellant by the agency within 10 days of receipt of the request by the agency. 

2. The Director shall assign the appeal to a Hearing Officer and shall notify the appellant 

and agency of such assignment. The notice also shall advise the appellant and the agency 

of the documents required to be submitted under paragraph (c)(2) of this section, and 

notify the appellant of the option of having a hearing by telephone. 

3. The Hearing Officer will receive evidence into the hearing record without regard to 

whether the evidence was known to the agency officer, employee, or committee making 

the adverse decision at the time the adverse decision was made. 

(c) Procedures applicable only to hearings. 

1. Upon a timely request for a hearing under §11.6(b), an appellant has the right to have a 

hearing by the Division on any adverse decision within 45 days after the date of receipt of 

the request for the hearing by the Division. 

2. The Hearing Officer shall set a reasonable deadline for submission of the following 

documents: 

i. By the appellant: 

A. A short statement of why the decision is wrong; 

B. A copy of any document not in the agency record that the appellant 

anticipates introducing at the hearing; and 
 

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C. A list of anticipated witnesses and brief descriptions of the evidence such 

witnesses will offer. 

ii. By the agency: 

A. A copy of the adverse decision challenged by the appellant; 

B. A written explanation of the agency's position, including the regulatory or 

statutory basis therefor; 

C. A copy of any document not in the agency record that the agency 

anticipates introducing at the hearing; and 

D. A list of anticipated witnesses and brief descriptions of the evidence such 

witnesses will offer. 

iii. Not less than 14 days prior to the hearing, the Division must provide the 

appellant, the authorized representative, and the agency a notice of hearing 

specifying the date, time, and place of the hearing. The hearing will be held in the 

State of residence of the appellant, as determined by the Hearing Officer, or at a 

location that is otherwise convenient to the appellant, the agency, and the 

Division. The notice also shall notify all parties of the right to obtain an official 

record of the hearing. 

iv. Pre-hearing conference. Whenever appropriate, the Hearing Officer shall hold a 

pre-hearing conference in order to attempt to resolve the dispute or to narrow the 

issues involved. Such pre-hearing conference shall be held by telephone unless 

the Hearing Officer and all parties agree to hold such conference in person. 

v. Conduct of the hearing. 

i. A hearing before a Hearing Officer will be in person unless the appellant 

agrees to a hearing by telephone. 

ii. The hearing will be conducted by the Hearing Officer in the manner 

determined by the Division most likely to obtain the facts relevant to the 

matter or matters at issue. The Hearing Officer will allow the presentation 

of evidence at the hearing by any party without regard to whether the 

evidence was known to the officer, employee, or committee of the agency 

making the adverse decision at the time the adverse decision was made. 

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The Hearing Officer may confine the presentation of facts and evidence to 

pertinent matters and exclude irrelevant, immaterial, or unduly repetitious 

evidence, information, or questions. Any party shall have the opportunity 

to present oral and documentary evidence, oral testimony of witnesses, 

and arguments in support of the party's position; controvert evidence 

relied on by any other party; and question all witnesses. When appropriate, 

agency witnesses requested by the appellant will be made available at the 

hearing. Any evidence may be received by the Hearing Officer without 

regard to whether that evidence could be admitted in judicial proceedings. 

iii. An official record shall be made of the proceedings of every hearing. This 

record will be made by an official tape recording by the Division. In 

addition, either party may request that a verbatim transcript be made of the 

hearing proceedings and that such transcript shall be made the official 

record of the hearing. The party requesting a verbatim transcript shall pay 

for the transcription service, shall provide a certified copy of the transcript 

to the Hearing Officer free of charge, and shall allow any other party 

desiring to purchase a copy of the transcript to order it from the 

transcription service. 

vi. Absence of parties. 

i. If at the time scheduled for the hearing either the appellant or the agency 

representative is absent, and no appearance is made on behalf of such 

absent party, or no arrangements have been made for rescheduling the 

hearing, the Hearing Officer has the option to cancel the hearing unless the 

absent party has good cause for the failure to appear. If the Hearing 

Officer elects to cancel the hearing, the Hearing Officer may: 

A. Treat the appeal as a record review and issue a determination based 

on the agency record as submitted by the agency and the hearing 

record developed prior to the hearing date; 

B. Accept evidence into the hearing record submitted by any party 

present at the hearing (subject to paragraph (c)(6)(ii) of this 

section), and then issue a determination; or 

C. Dismiss the appeal. 

ii. When a hearing is canceled due to the absence of a party, the Hearing 

Officer will add to the hearing record any additional evidence submitted 

by any party present, provide a copy of such evidence to the absent party 
 

HB-3-3560 

Appendix 2 

Page 13 of 18 

or parties, and allow the absent party or parties 10 days to provide a 

response to such additional evidence for inclusion in the hearing record. 

iii. Where an absent party has demonstrated good cause for the failure to 

appear, the Hearing Officer shall reschedule the hearing unless all parties 

agree to proceed without a hearing. 

vii. Post-hearing procedure. 

The Hearing Officer will leave the hearing record open after the hearing for 10 days, 

or for such other period of time as the Hearing Officer shall establish, to allow the 

submission of information by the appellant or the agency, to the extent necessary to 

respond to new facts, information, arguments, or evidence presented or raised at the 

hearing. Any such new information will be added by the Hearing Office to the 

hearing record and sent to the other party or parties by the submitter of the 

information. The Hearing Officer, in his or her discretion, may permit the other party 

or parties to respond to this post-hearing submission. 

(d) Interlocutory review. Interlocutory review by the Director of rulings of a Hearing Officer are 

not permitted under the procedures of this part. 

(e) Burden of proof. The appellant has the burden of proving that the adverse decision of the 

agency was erroneous by a preponderance of the evidence. 

(f) Timing of issuance of determination. The Hearing Officer will issue a notice of the 

determination on the appeal to the named appellant, the authorized representative, and the 

agency not later than 30 days after a hearing or the closing date of the hearing record in cases 

in which the Hearing Officer receives additional evidence from the agency or appellant after 

a hearing. In the case of a record review, the Hearing Officer will issue a notice of 

determination within 45 days of receipt of the appellant's request for a record review. Upon 

the Hearing Officer's request, the Director may establish an earlier or later deadline. A notice 

of determination shall be accompanied by a copy of the procedures for filing a request for 

Director review under §11.9. If the determination is not appealed to the Director for review 

under §11.9, the notice provided by the Hearing Officer shall be considered to be a notice of 

a final determination under this part. 

(02-24-05) SPECIAL PN 
 

HB-3-3560 

Appendix 2 

Page 14 of 18 

§ 11.9 Director review of determinations of Hearing Officers. 

(a) Requests for Director review. 

1. Not later than 30 days after the date on which an appellant receives the 

determination of a Hearing Officer under §11.8, the appellant must submit a 

written request, signed personally by the named appellant, to the Director to 

review the determination in order to be entitled to such review by the Director. 

Such request shall include specific reasons why the appellant believes the 

determination is wrong. 

2. Not later than 15 business days after the date on which an agency receives the 

determination of a Hearing Officer under §11.8, the head of the agency may make 

a written request that the Director review the determination. Such request shall 

include specific reasons why the agency believes the determination is wrong, 

including citations of statutes or regulations that the agency believes the 

determination violates. Any such request may be made by the head of an agency 

only, or by a person acting in such capacity, but not by any subordinate officer of 

such agency. 

3. A copy of a request for Director review submitted under this paragraph shall be 

provided simultaneously by the submitter to each party to the appeal. 

(b) Notification of Parties. The Director promptly shall notify all parties of receipt of a 

request for review. 

(c) Responses to request for Director review. Other parties to an appeal may submit 

written responses to a request for Director review within 5 business days from the date of 

receipt of a copy of the request for review. 

(d) Determination of Director. 

1. The Director will conduct a review of the determination of the Hearing Officer 

using the agency record, the hearing record, the request for review, any responses 

submitted under paragraph (c) of this section, and such other arguments or 

information as may be accepted by the Director, in order to determine whether the 

decision of the Hearing Officer is supported by substantial evidence. Based on 

such review, the Director will issue a final determination notice that upholds, 

reverses, or modifies the determination of the Hearing Officer. The Director's 

determination upon review of a Hearing Officer's decision shall be considered to 

be the final determination under this part and shall not be appealable. However, if 

the Director determines that the hearing record is inadequate or that new evidence 
 

HB-3-3560 

Appendix 2 

Page 15 of 18 

has been submitted, the Director may remand all or a portion of the determination 

to the Hearing Officer for further proceedings to complete the hearing record or, 

at the option of the Director, to hold a new hearing. 

2. The Director will complete the review and either issue a final determination or 

remand the determination not later than— 

(a) 10 business days after receipt of the request for review, in the case of 

a request by the head of an agency; or 

(b) 30 business days after receipt of the request for review, in the case of 

a request by an appellant. 

3. In any case or any category of cases, the Director may delegate his or her 

authority to conduct a review under this section to any Deputy or Assistant 

Directors of the Division. In any case in which such review is conducted by a 

Deputy or Assistant Director under authority delegated by the Director, the 

Deputy or Assistant Director's determination shall be considered to be the 

determination of the Director under this part and shall be final and not appealable. 

(e) Equitable relief. In reaching a decision on an appeal, the Director shall have the 

authority to grant equitable relief under this part in the same manner and to the same 

extent as such authority is provided an agency under applicable laws and regulations. 

§ 11.10 Basis for determinations. 

(a) In making a determination, the Hearing Officers and the Director are not bound by 

previous findings of facts on which the agency's adverse decision was based. 

(b) In making a determination on the appeal, Hearing Officers and the Director shall 

ensure that the decision is consistent with the laws and regulations of the agency, and 

with the generally applicable interpretations of such laws and regulations. 

(c) All determinations of the Hearing Officers and the Director must be based on 

information from the case record, laws applicable to the matter at issue, and 

applicable regulations published in the Federal Register and in effect on the date of 

the adverse decision or the date on which the acts that gave rise to the adverse 

decision occurred, whichever date is appropriate under the applicable agency program 

laws and regulations. 

(02-24-05) SPECIAL PN
 

HB-3-3560 

Appendix 2 

Page 16 of 18 

§ 11.11 Reconsideration of Director determinations. 

(a) Reconsideration of a determination of the Director may be requested by the appellant 

or the agency within 10 days of receipt of the determination. The Director will not 

consider any request for reconsideration that does not contain a detailed statement of 

a material error of fact made in the determination, or a detailed explanation of how 

the determination is contrary to statute or regulation, which would justify reversal or 

modification of the determination. 

(b) The Director shall issue a notice to all parties as to whether a request for 

reconsideration meets the criteria in paragraph (a) of this section. If the request for 

reconsideration meets such criteria, the Director shall include a copy of the request 

for reconsideration in the notice to the non-requesting parties to the appeal. The nonrequesting parties shall have 5 days from receipt of such notice from the Director to 

file a response to the request for reconsideration with the Director. 

(c) The Director shall issue a decision on the request for reconsideration within 5 days of 

receipt of responses from the non-requesting parties. If the Director's decision upon 

reconsideration reverses or modifies the final determination of the Director rendered 

under §11.9(d), the Director's decision on reconsideration will become the final 

determination of the Director under §11.9(d) for purposes of this part. 

§ 11.12 Effective date and implementation of final determinations of the Division. 

(a) On the return of a case to an agency pursuant to the final determination of the 

Division, the head of the agency shall implement the final determination not later than 

30 days after the effective date of the notice of the final determination. 

(b) A final determination will be effective as of the date of filing of an application, the 

date of the transaction or event in question, or the date of the original adverse 

decision, whichever is applicable under the applicable agency program statutes or 

regulations. 

§ 11.13 Judicial review. 

(a) A final determination of the Division shall be reviewable and enforceable by any 

United States District Court of competent jurisdiction in accordance with chapter 7 of 

title 5, United States Code. 

(b) An appellant may not seek judicial review of any agency adverse decision appealable 

under this part without receiving a final determination from the Division pursuant to 

the procedures of this part. 
 

HB-3-3560 

Appendix 2 

Page 17 of 18 

§ 11.14 Filing of appeals and computation of time. 

(a) An appeal, a request for Director Review, or any other document will be considered 

"filed" when delivered in writing to the Division, when postmarked, or when a 

complete facsimile copy is received by the Division. 

(b) Whenever the final date for any requirement of this part falls on a Saturday, Sunday, 

Federal holiday, or other day on which the Division is not open for the transaction of 

business during normal working hours, the time for filing will be extended to the 

close of business on the next working day. 

(c) The time for filing an appeal, a request for Director review, or any other document 

expires at 5:00 p.m. local time at the office of the Division to which the filing is 

submitted on the last day on which such filing may be made. 

§ 11.15 Participation of third parties and interested parties in Division proceedings. 

 

In two situations, parties other than the appellant or the agency may be interested in 

participating in Division proceedings. In the first situation, a Division proceeding may in 

fact result in the adjudication of the rights of a third party, e.g., an appeal of a tenant 

involving a payment shared with a landlord, an appeal by one recipient of a portion of a 

payment shared by multiple parties, an appeal by one heir of an estate. In the second 

situation, a party may desire to receive notice of and perhaps participate in an appeal 

because of the derivative impact the appeal determination will have on that party, e.g., 

guaranteed lenders and reinsurance companies. The provisions in this section set forth 

rules for the participation of such third and interested parties. 

(a) Third parties. When an appeal is filed, the Division shall notify any potential third 

party whose rights may be adjudicated of its right to participate as an appellant in the 

appeal. This includes the right to seek Director review of the Hearing Officer 

determination. Such third parties may be identified by the Division itself, by an 

agency, or by the original appellant. The Division shall issue one notice to the third 

party of its right to participate, and if such party declines to participate, the Division 

determination will be binding as to that third party as if it had participated. For 

purposes of this part, a third party includes any party for which a determination of the 

Division could lead to an agency action on implementation that would be adverse to 

the party thus giving such party a right to a Division appeal. 

(02-24-05) SPECIAL PN
 

HB-3-3560 

Appendix 2 

Page 18 of 18 

(b) Interested parties. With respect to a participant who is a borrower under a guaranteed 

loan or an insured under a crop insurance program, the respective guaranteed lender 

or reinsurance company having an interest in a participant's appeal under this part 

may participate in the appeal as an interested party, but such participation does not 

confer the status of an appellant upon the guaranteed lender or reinsurance company 

such that it may request Director review of a final determination of the Division. 
HB-3-3560

Appendix 3 

Page 1 of 2 

APPENDIX 3 

FORMS REFERENCED IN THIS HANDBOOK

Below is a list of forms that are mentioned in the text of this handbook. Since the Rural 

Development forms may change more frequently than the handbook, users are 

encouraged to obtain the most updated copy of these forms from the Rural Development 

Instructions home page (http://rdinit.usda.gov/regs) for their own reference.

Form AD 343, Cancellation of Administrative Offset 

Form AD 1047 Certification Regarding Debarment 

Form ASTM Standard E-1528 (TSQ), Transaction Screen Questionnaire 

Form FEMA 81-93, Standard Flood Hazard Determination 

Form HUD 935.2, Affirmative Fair Housing Marketing Plan

Form HUD 2530, Previous Participation Certification 

Form HUD 9832, Management Entity Profile 

Form RD 140-4, Transmittal of Documents 

Form RD 400-1, Equal Opportunity Agreement 

Form RD 400-4, Assurance Agreement 

Form RD 402-2, Statement of Deposits and Withdrawals 

Form RD 440-34, Option to Purchase Real Estate Property 

Form RD 1910-11, Applicant Certification Federal Collection Policies for Consumer or 

Commercial Debts 

Form RD 1924-13, Estimate and Certificate of Actual Cost 

Form RD 1944-37, Previous Participation Certification 

Form RD 1955-40, Notice of Real Property for Sale 

Form RD 1955-45, Standard Sales Contract, Sale of Real Property of the United States 

Form RD 1955-46, Invitation, Bid, and Acceptance, Sale of Real Property of the United 

States 

Form RD 1955-47, Bill of Sale ‘A’ 

Form RD 1955-49, Quitclaim Deed 

Form RD 1955-62, Request for Contract Services for Custodial/Inventory Property or 

Program Services 

Form RD 1962-20, Notice of Judgment 

Form RD 3560-1, Application for Partial Release, Subordination, or Consent 

Form RD 3560-7, Multiple Family Housing Budget/Utility Allowance 

Form RD 3560-8, Tenant Certification 

Form RD 3560-9, Interest Credit and Rental Assistance Agreement 

Form RD 3560-10, Borrower Balance Sheet 

Form RD 3560-15, Reamortization Request 

Form RD 3560-16, Reamortization Agreement 

Form RD 3560-17, MFH Note Consolidation 

Form RD 3560-17A, MFH Consolidation of Projects/Loan Agreements/Resolutions 

Form RD 3560-19, MFH Advice of Mortgaged Real Estate Sold 

Form RD 3560-20, Multi-Family Housing Transfer and Assumption Review and 

Recommendation 

Form RD 3560-21, Assumption Agreement 

 (02-24-05) SPECIAL PN
HB-3-3560

Appendix 3 

Page 2 of 2 

Form RD 3560-22, Offer to Convey Security 

Form RD 3560-27, Rental Assistance Agreement 

Form RD 3560-28, MFH Exception to Late Fees 

Form RD 3560-29, Notice of Payment Due Report 

Form RD 3560-29A, Multiple Family Housing Statement of Payment Due 

Form RD 3560-30, Certification of No Identity of Interest (IOI) 

Form RD 3560-31, Identity of Interest Disclosure/Qualification Certificate 

Form RD 3560-33, Loan Agreement 

Form RD 3560-33A, Consolidated Loan Agreement 

Form RD 3560-34, Loan Agreement 

Form RD 3560-34A, Consolidated RRH Loan Agreement 

Form RD 3560-35, Loan Resolution 

Form RD 3560-35A, Consolidated Loan Resolution 

Form RD 3560-50, Conversion Agreement 

Form RD 3560-51, Obligation – Fund Analysis 

Form RD 3560-52, Promissory Note 

Form RD 3560-55, MFH Transfer of RA 

Form RD 3560-56, Report on Real Estate Problem Case 

Form RD 3560-57, Application for Settlement of Indebtedness 

Form RD 3560-58, Satisfaction 

Form RD 3560-64, Online Payment Certification Monitoring Log 

Form SF 424, Application for Federal Assistance 

SF 424 C, Budget Information – Construction Programs

SF 424 D, Assurances – Construction Programs 

SF - LLL, Disclosure of Lobbying Activities 

IRS Form 990, Return of Organization Exempt from Income Tax 
HB-3-3560

Appendix 4

APPENDIX 4

HANDBOOK LETTERS REFERENCED IN THIS HANDBOOK

Handbook Letter 301 (3560), Servicing Letter #1

Handbook Letter 302 (3560), Servicing Letter #2

Handbook Letter 303 (3560), Servicing Letter #3

Handbook Letter 303-A (3560), Servicing Letter #3 for CMP

Handbook Letter 304 (3560), Preliminary Determination Notice 

Handbook Letter 304-A (3560), Borrower Preliminary Determination Notice

Handbook Letter 305 (3560), Final Determination Notice/Demand Letter 

Handbook Letter 305-A (3560), Borrower Sent Final Determination 

Notice/Demand Letter

(02-24-05) SPECIAL PN

Revised (02-15-19) PN 521
HB-3-3560

Appendix 4

Handbook Letter 301 (3560)

REFERENCE: HB-3-3560 Chapter 9

PURPOSE: Servicing Letter #1

ROUTINE NOTICE OF SERVICING RESULTS/CONCERNS

[insert date]

Dear [insert name of borrower]:

We are writing to inform you of the results of a recent review of certain selected aspects of your 

operations. A copy of the results of our review is attached [Attach copy of supervisory visit 

report, physical inspection report, compliance review, reserve records, notice of payment due, 

etc.].

Please review the attached material and note the areas of concern listed. [if necessary, insert “We 

want to especially bring to your attention the following items:”]

We are asking that you contact this office within 15 days of the date of this letter to inform us of 

the corrective actions you have taken, or plan to take, to correct the concerns listed. Our office 

address and telephone number are: [insert address and telephone number]

Sincerely,

[Signature and title of Official]

Attachment
HB-3-3560

Appendix 4

Handbook Letter 302 (3560)

REFERENCE: HB-3-3560 Chapter 9

PURPOSE: Servicing Letter #2

NOTIFICATION OF SERIOUS SERVICING CONCERNS

[insert date]

Dear [insert name of borrower]:

We are writing to inform you that certain aspects of your project operations are of serious 

concern to the Agency.

A brief description of the items of concern which warrant attention is [insert either: “provided 

below:” or “attached.”]

We would like to arrange a meeting to discuss these concerns. [insert either: “Please contact our 

office to confirm if you can make the tentatively scheduled meeting at the following time, date, 

and location:” or “Please contact our office within 15 days of the date of this letter to make the 

necessary arrangements”]. Our address and telephone number are [insert address and telephone 

number].

Please be prepared to discuss the matters of concern identified. [insert: “In particular, you may 

want to bring the following information to the meeting:”]

We look forward to hearing from you. 

Sincerely,

[Signature and title of Official] 

Attachment

(02-24-05) SPECIAL PN
HB-3-3560

Appendix 4

Handbook Letter 303-A (3560)

REFERENCE: HB-3-3560 Chapter 9

PURPOSE: Servicing Letter #3-A

_____________________________________________________________________________

NOTIFICATION OF INTENT TO PURSUE CIVIL MONETARY PENALTY ACTION 

[insert date]

Dear [insert name of borrower]:

We regret that earlier attempts to resolve [state the problems] have not been successful.

We are writing to inform you that Rural Development will be taking further action unless 

alternative arrangements are promptly made with this office. If you have not contacted us within 15 

days, we intend to forward a recommendation to the Administrator to pursue Civil Monetary 

Penalty action in an effort to bring about program compliance. The open violations resulting in this 

action as of the date of this letter are:

1. [list the violations]

2.

3.

The maximum civil money penalty that may be imposed per violation, in accordance with 7 CFR 

3.91(b)(8) and 543 (b)(3)(A) of the Housing Act, is $70,881.00.

Upon receipt of this letter, you should become familiar with the rules governing the Agency’s 

adjudicatory hearing proceedings set forth in 7 CFR part 1, subpart H. You will be given the 

opportunity to settle with the State Director prior to the hearing. Failure to respond adequately to 

the Agency within the 15-day period may result in issuance of a complaint under 7 CFR 3560.461 

without consideration of information that you may wish to provide.

We are hopeful we can avoid the necessity of taking the steps outlined above.

Please contact our office immediately if you wish to avoid the actions described above.

Sincerely,

_______________________

[Signature and title of Official]
HB-3-3560

Appendix 4

Handbook Letter 304 (3560)

REFERENCE: HB-3-3560, Chapter 9

PURPOSE: Preliminary Determination Notice for Initial Letter to Recipients of 

Unauthorized Assistance

PRELIMINARY DETERMINATION NOTICE

[insert date]

Dear [insert name of borrower or tenant]:

Rural Development has determined that (you)(name of tenant) (have, has) received 

unauthorized financial assistance in the form of a (loan, grant, subsidy) amounting to

$ which must be repaid.

(Insert a paragraph briefly describing the circumstances under which the 

unauthorized assistance was extended, including the reason(s) as provided in 7 CFR part 

3560 (Subpart O).

*If unauthorized assistance due from tenant:

You must notify the tenant in writing that a determination has been made that $ in 

unauthorized assistance was received. Please provide a copy of this notice to our office 

within seven (7) business days.

The unauthorized assistance determination notice is a preliminary notice, not a demand 

letter. The unauthorized assistance determination 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 parties 

responsible for repayment of the unauthorized assistance;

(3) Establish a place and time when the persons receiving the unauthorized 

assistance determination notice may meet with you to discuss issues related to the 

unauthorized assistance notice such as the establishment of a repayment 

schedule; and,

(4) Advise the tenants 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.

(02-24-05) SPECIAL PN

Added (07-29-11) PN 450

Revised (02-15-19) PN 521
HB-3-3560

Appendix 4

Upon request by the tenants, you will grant additional time for discussions related to 

an unauthorized assistance determination notice. You must notify this office of 

schedule revisions when additional time is granted to the tenants in this unauthorized 

assistance claim. 

After you have met with the tenants please provide a written explanation as to your 

findings and what, if any, corrective arrangements (e.g., recovery of improper benefit 

agreements, evictions, legal proceedings, etc.) you are making. Complete Form RD 

3560-65 and have the tenant sign the form as their agreement to repay. Please 

provide this office the explanation within 10 days of the date of the meeting with the 

tenant, along with the signed Form RD 3560-65. 

Should recovery of improper payments be required, Agency regulations require 

collection be made by lump sum cash payment, or payment over a reasonable period 

of time.

If the tenant fails to respond to the unauthorized assistance determination notice or 

fails to agree to a repayment schedule, please send Handbook Letter 305, Final 

Determination/Demand Letter to the tenant and a copy to this office. If you receive no 

response to this letter, please return the Form RD 3560-65 to this office, unsigned. 

*If unauthorized assistance due from borrower:

We have scheduled an appointment at (a.m.;p.m.) on date for 

you to come into this office to discuss the basis for the Agency’s claim. You may provide 

facts, figures, written records, or other information you have which might alter the 

Agency’s determination that the assistance you have received was unauthorized. 

Necessary servicing actions will also be discussed. 

If you are unable to keep this appointment, please telephone this office at 

(telephone number) to change the appointment. It is urgent that you respond to 

this request. 

Failure to do so within 15 days may result in the Agency initiating appropriate action 

to effect collection. If you agree with our claim of unauthorized assistance, Agency 

regulations require collection be made by lump sum cash payment, or payment over a 

reasonable period of time. 

If you have any questions concerning the subject matter, please contact this office.

Sincerely,

[Signature and title of Official] 

Attachment – Form RD 3560-65 (if needed) 

Handbook Letter 305, Final Determination/Demand Letter (if needed) 
HB-3-3560

Appendix 4

Handbook Letter 304-A (3560) 

REFERENCE: HB-3-3560, Chapter 9 

PURPOSE: Preliminary Determination Notice for Borrower or Management 

Agent Initial Letter to Recipients of Unauthorized Assistance

PRELIMINARY DETERMINATION NOTICE

[insert date] 

Dear [insert name of borrower or tenant]:

[Borrower and/or Management Agent name] has determined that (you)(name of 

tenant) (have, has) received unauthorized financial assistance in the form of a (loan, 

grant, subsidy) amounting to $ which must be repaid.

(Insert a paragraph briefly describing the circumstances under which the 

unauthorized assistance was extended, including the reason(s) as provided in 7 CFR part 

3560 (Subpart O). 

You must notify the tenant in writing that a determination has been made that $ in 

unauthorized assistance was received. Please provide a copy of this notice to the Rural 

Development office within seven (7) business days. 

The unauthorized assistance determination notice is a preliminary notice, not a demand 

letter. The unauthorized assistance determination 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 parties

responsible for repayment of the unauthorized assistance;

(3) Establish a place and time when the persons receiving the unauthorized

assistance determination notice may meet with you to discuss issues related to the

unauthorized assistance notice such as the establishment of a repayment

schedule; and,

(4) Advise the tenants 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.

(02-24-05) SPECIAL PN

Added (07-29-11) PN 450

 Revised (02-15-19) PN 521
HB-3-3560

Appendix 4

Upon request by the tenants, you will grant additional time for discussions related to 

an unauthorized assistance determination notice. You must notify the Rural 

Development office of schedule revisions when additional time is granted to the 

tenants in this unauthorized assistance claim.

After you have met with the tenants please provide a written explanation as to your 

findings and what, if any, corrective arrangements (e.g., recovery of improper benefit 

agreements, evictions, legal proceedings, etc.) you are making. Complete Form RD 

3560-65 and have the tenant sign the form as their agreement to repay. Please 

provide the Rural Development office the explanation within 10 days of the date of 

the meeting with the tenant, along with the signed Form RD 3560-65.

Should recovery of improper payments be required, Agency regulations require 

collection be made by lump sum cash payment, or payment over a reasonable period 

of time.

If the tenant fails to respond to the unauthorized assistance determination notice or 

fails to agree to a repayment schedule, please send Handbook Letter 305-A, Final 

Determination/Demand Letter to the tenant and a copy to the Rural Development 

Servicing office. If you receive no response to this letter, please return the Form RD 

3560-65 to the Rural Development office, unsigned.

If you disagree with the decision or facts used in making the decision, you may file a 

Tenant Grievance under the provisions of 7 CFR 356.160. To initiate the Tenant 

Grievance procedures, you will need to write to this office within 10 calendar days of 

the receipt of this letter and explain why the decision was wrong or to request a meeting 

with us. You can present any new information or evidence with the letter or at the 

meeting.

*See attachment Tenant Grievance Procedures, 7 CFR 3560.160.

If you have any questions concerning the subject matter, please contact [Borrower and/or 

Management Agent name].

Sincerely,

[Signature and title of Official]

Attachment – Form RD 3560-65 (if needed)

Handbook Letter 305-A, Final Determination/Demand Letter (if needed)
HB-3-3560

Appendix 4

Handbook Letter 305 (3560)

REFERENCE: HB-3-3560 Chapter 9

PURPOSE: Final Determination Notice/Demand Letter to recipient of 

unauthorized assistance to state final determination. Send if borrower 

or tenant fails to respond to an unauthorized assistance determination 

notice or fails to agree to a repayment schedule.

FINAL DETERMINATION NOTICE/DEMAND LETTER

[insert date]

Dear [insert name of borrower or tenant]:

After careful consideration of all information available, Rural Development has 

determined that you have received unauthorized financial assistance as outlined below.

[Insert a paragraph to:

(a) Describe the unauthorized assistance;

(b) State the amount of unauthorized assistance which must be repaid (same as the 

amount stated in Handbook Letter 304 unless subsequent information provided by 

the recipient caused this amount to be changed); and

(c) State what further action is to be taken by the Agency. (See 7 CFR 3560, 

3560.709, including termination of tenancy if applicable.)

(d) Attach Form RD 3560-65 to this letter which describes the amount owed and 

payment agreement. This form should be signed and returned to our office.]

If you disagree with the decision or facts used in making the decision, you may file a 

Tenant Grievance under the provisions of 7 CFR 356.160. To initiate the Tenant 

Grievance procedures, you will need to write to this office within 10 calendar days of 

the receipt of this letter and explain why the decision was wrong or to request a meeting 

with us. You can present any new information or evidence with the letter or at the 

meeting.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against 

credit recipients on the basis of race, color, religion, national origin, sex, marital status, 

handicap, or age (provided that the recipient has the capacity to enter into a binding 

contract), because all or part of the recipient’s income derives from any public assistance

(02-24-05) SPECIAL PN

Revised (02-15-19) PN 521
program. Department of Agriculture regulations provide that no agency, officer, or 

employee of the United States Department of Agriculture shall exclude from 

participation in, deny the benefits of, or subject to discrimination any person based on 

race, color, religion, sex, age, handicap, or national origin under any program or activity 

administered by such agency, officer, or employee. The Fair Housing Act prohibits 

discrimination in real estate-related transactions, or in the terms and conditions of such a 

transaction, because of race, color, religion, sex, handicap, familial status, or national 

origin. If an applicant or borrower believes he or she has been discriminated against for 

any of these reasons, that person can write the Secretary of Agriculture, Washington, 

D.C. 20250.

Applicants also cannot be denied a loan because the applicant has in good faith exercised 

his or her rights under the Consumer Credit Protection Act. If an applicant believes he or 

she was denied a loan for this reason, the applicant should contact the Federal Trade 

Commission, Washington, D.C. 20580.

*See attachment Tenant Grievance Procedures, 7 CFR 3560.160.

If you do not cooperate in effecting the necessary adjustments to your account, we will 

have no alternative but to initiate appropriate action to collect the unauthorized 

amount.

Sincerely,

[Signature and title of Official]

Attachment
HB-3-3560

Appendix 4

Handbook Letter 305-A (3560)

REFERENCE: HB-3-3560 Chapter 9

PURPOSE: Final Determination Notice/Demand Letter to recipient of 

unauthorized assistance to state final determination. Borrower or 

Management Agent to send if borrower identified unauthorized 

assistance, when tenant fails to respond to an unauthorized 

assistance determination notice or fails to agree to a repayment

schedule.

FINAL DETERMINATION NOTICE/DEMAND LETTER

[insert date]

Dear [insert name of tenant]:

After careful consideration of all information available, [Borrower and/or Management 

Agent name] has determined that you have received unauthorized financial assistance 

as outlined below. [Insert a paragraph to:

(a) Describe the unauthorized assistance;

(b) State the amount of unauthorized assistance which must be repaid (same as the 

amount stated in Handbook Letter 304 unless subsequent information provided 

by the recipient caused this amount to be changed); and

(c) Attach Form RD 3560-65 to this letter which describes the amount owed and 

payment agreement. This form should be signed by the Agency and returned 

to our Rural Development.]

If you disagree with the decision or facts used in making the decision, you may file a 

Tenant Grievance under the provisions of 7 CFR 356.160. To initiate the Tenant 

Grievance procedures, you will need to write to this office within 10 calendar days of 

the receipt of this letter and explain why the decision was wrong or to request a meeting 

with us. You can present any new information or evidence with the letter or at the 

meeting.

*See attachment Tenant Grievance Procedures, 7 CFR 3560.160.

If you do not cooperate in effecting the necessary adjustments to your account, we 

will have no alternative but to initiate appropriate action to collect the unauthorized 

amount.

Sincerely,

[Signature and title of Official]

Attachment