HB-1-3550

SECTION 1: UNDERSTANDING LEVERAGED LOANS

10.1 OVERVIEW

A leveraged loan is an Agency loan that is supplemented by an affordable housing loan 

or grant from another funding source that is provided at the same time the Agency loan is closed. 

Only eligible leveraged loans will be considered in the payment subsidy calculation. For the 

purpose of payment subsidy only, an eligible leveraged loan is defined as an affordable housing 

loan that is characterized by long term (not less than 30 years), amortized payments with a note 

interest rate equal to or less than 3 percent. Detailed guidance for calculating payment subsidy is 

provided in Paragraph 6.12. This does not preclude other types of participating leveraging.

Leveraging reduces the loan amount the Agency must provide to help an applicant obtain 

adequate housing. The additional funding source may be a private lender that provides home 

financing at market rates and terms, a State or local government, or a nonprofit organization that 

provides subsidized loans or grants. Leveraged loan payment, security, and processing 

requirements may vary from non-leveraged loans as provided in this chapter. This chapter 

provides basic information about leveraging and describes the modifications to regular loan 

processing procedures that are made when a loan is to be leveraged.

A. Advantages of Leveraged Loans

Leveraged loans offer advantages to both the Agency and applicants. By combining its 

resources with those of other lenders, the

Agency can assist more borrowers. For this 

reason, loan packages that receive an affordable 

housing loan from an Agency recognized source 

will receive a processing priority when the 

supplemental funding reduces the amount 

otherwise needed from the Agency by at least 

20 percent with loan funds or 15 percent if 

entirely grants, forgivable loans or deferred 

payment loans.

For some applicants, purchasing a home through a leveraged loan will be the first 

opportunity to establish a relationship with a private lender. For other applicants, combining the

10-1

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485

CHAPTER 10: LEVERAGED LOANS

Who Can Be a Participating Lender?

“Lender,” as it is used in this chapter, refers to an 

organization that provides long term, amortized loans 

for housing, including private lenders, State and local 

governments, and nonprofit organizations. The 

Agency encourages grant funding when it is 

available. However, a grant provider is not 

considered a “lender.”
HB-1-3550

10-2

Paragraph 10.1 Overview

Agency loan with a grant or low-interest loan from another subsidy program may be the only 

way to make homeownership possible. Leveraging is especially encouraged in the case of 

assumptions on new rates and terms, since the applicant may be able to obtain a non-Agency 

loan for purchase costs above the outstanding balance to be assumed.

B. Two Separate Financial Agreements

When a loan is leveraged, each lender enters into a separate financial agreement with the 

applicant. The combined resources that are provided enable the applicant to purchase a home.

Although each lender remains responsible for final underwriting decisions for its loan, the 

application and underwriting processes should be streamlined whenever possible to avoid 

duplication of effort and extra burden on the applicant.

10.2 SOURCE OF LEVERAGED FUNDS

Agency funds may be supplemented by funds from a variety of sources. One of the 

challenges for the Loan Originator will be to understand the implications for the applicant and 

the Agency of the requirements that may be imposed by these sources.

A. Market Rate Financing

Market rate financing may be appropriate under some circumstances. The applicant’s 

repayment ability must be considered in determining whether it is appropriate for referral to 

market rate sources. Market rate loans will not be considered in the payment assistance formula. 

Private lenders generally have a variety of loan products that are tailored to fit specific 

circumstances, for example, different products for new purchases, refinancing, and home 

improvement loans. The private lender loan must be a long-term, fixed rate mortgage of at least 

30 years or a term no shorter than 15 years with a balloon payment and installment based on at 

least a 30-year amortization schedule. The Agency will not accept an adjusted rate mortgage 

(ARM) or an interest only mortgage. The Agency will not participate in loan packages that 

involve interest rates that are more than 2% (200 basis points) above the Agency note rate. Loan 

Originators may need to work with the lender and applicant to identify an appropriate loan 

product that meets lender and Agency requirements.

B. Other Subsidized Financing

Although there are many variations in the specifics, the subsidized funds that can 

supplement Agency funds will generally come in one of the forms described below.

• Grants without long-term restrictions. Some grants are provided with no 

restrictions, as long as the applicant is eligible and the funds will be used for an 

eligible purpose.
HB-1-3550

Paragraph 10.2 Source of Leveraged Funds

• Forgivable loans. Some sources provide funds that require repayment only if the 

home buyer fails to comply with program requirements or restrictions. For example, 

a funding source may provide funds for a down payment or rehabilitation that need 

not be repaid if the home buyer remains in the property for a specified period oftime. 

The funds are generally provided as a loan to permit the funding agency to record the 

circumstances under which repayment is required.

• Deferred payment loans. Deferred payment loans may be used to provide funds that 

are repaid only upon transfer of the property or as a balloon payment at the end of a 

specified period. These funding arrangements often include a provision for the 

funding source to share any appreciation that occurs with the home buyer.

• Affordable Housing Loans. In many areas, low-interest loans are offered by State 

and local government agencies. These loans require repayment on a monthly basis 

and may include provisions for the funding source to share in any appreciation.

Grants, forgivable loans, deferred payment loans, and any other nonamortizing loans are not 

considered in calculating the monthly principal, interest, taxes, and insurance (PITI) or total debt 

(TD) ratios. The Agency’s ability to recapture subsidy funds may be affected by the provisions 

of these loans. Agency loans should be subordinated only in the case of an amortizing loan of 20 

to 30 percent of the total transaction. While an applicant may obtain a loan from another source 

of less than 20 percent of the total transaction, such a loan would not receive benefits such as 

lien priority, or processing priority. Further, USDA payment assistance is used to make the 

home affordable rather than to make the participating financing affordable.

10.3 KEY DIFFERENCES IN POLICIES ANDPROCEDURES

This paragraph highlights major policy and procedural differences between qualifying 

leveraged loans and other participation loans. Detailed processing guidance for originating 

leveraged loans is provided in Section 2 of this chapter.

A. Eligible Loans and Grants

Cash contributions by the applicant, gifts from individuals, and donations of land do not 

count as leveraged or participation amounts. These are applicant contributions. Likewise, seller 

contributions or assistance from organizations that require seller participation or seller 

contributions do not count towards leveraged or participation amounts. Subsequent loans cannot 

be leveraged unless they are used in conjunction with assumptions on new rates and terms.

10-3

(01-23-03) SPECIAL PN

Revised (03-19-20) PN 534
HB-1-3550

Paragraph 10.3 Key Differences in Policies and Procedures

10-4

The Agency will not consider leveraging arrangements with market-rate financing 

sources in which the lender’s loan amount is less than 20 percent or greater than 50 percent of 

the combined transaction amount. When all the leveraging consists of subsidized financing 

(affordable housing products, such as down payment assistance except funds that come directly 

or indirectly from seller contributions, forgivable loans, etc.), the minimum acceptable 

leveraging is 15 percent.

Other financing totaling less than 20 percent for lenders or 15 percent from other 

subsidized housing assistance is permissible. However, Rural Development will not subordinate 

its lien position to the lender if the loan is less than these required thresholds.

B. Lien Position

To encourage participation by other lenders, the Agency will subordinate its lien position 

to a leveraged lender providing at least 20 percent of the financing. However, liens related to 

other subsidized funds provided in the form of grants and nonamortizing loans, such as deferred 

payment or forgivable loan, must be subordinated to the Agency's loan. In those cases where 

there is a soft, silent or forgivable lien, the total debt may exceed the market value as prescribed 

in Paragraph 6.7 F.

C. Payment Subsidy Calculation

Regardless of the percentage of the 

loan that is financed by the leveraged lender, 

the monthly note installment of an eligible 

leveraged loan as described in paragraph 10.1, 

will be considered in the payment subsidy 

calculations. Detailed guidance for 

calculating payment subsidy is provided in 

Paragraph 6.12.

D. Availability of Mortgage Credit Certificates (MCC)

Under current tax law some State and local issuers of mortgage bonds may issue a MCC 

to provide a Federal income tax credit to assist low-income home buyers and home owners. The 

credit permits an eligible household to claim a specific percentage of the annual interest paid on 

a mortgage as a tax credit rather than a deduction. If an applicant will receive the credit, the 

benefit of the credit will be “grossed up” according to income calculation guidance described in 

Paragraph 4.4 H. MCCs are typically issued by Housing Finance Agencies through private 

lenders. The maximum annual MCC tax credit is limited by the IRS Tax Code (currently

$2,000).

Will the leveraged loan payment be considered 

when calculating payment subsidy?

Only when the eligible leveraged loan is amortized for 

at least 30 years with an interest rate that does not 

exceed 3 percent.

Exhibit 6-2 provides a sample payment subsidy 

calculation.
HB-1-3550

10-5

(01-23-03) SPECIAL PN

Revised (03-19-20) PN 534

Paragraph 10.3 Key Differences in Policies and Procedures

E. Section 8 Housing Choice Vouchers (HCV)

Housing Choice Vouchers may be used with or without a leveraged loan. The voucher 

itself is not considered leveraging.

F. Origination

Many processing steps can be conducted by the participating lender, rather than Agency 

staff. For example, the Agency may accept application and income information provided by the 

lender and permit the participating lender to conduct appraisals and inspections when the lender 

has a stake in the transaction. However, even when the Agency relies on the work of the 

participating lender, it retains internal control, final underwriting, and loan approval 

responsibility for the Agency loan. Responsibility for compliance with environmental 

requirements remains with the Agency, although the lender may be asked to assist in collecting 

needed environmental information. The Agency is also responsible for compliance with the 

disclosure requirements under the Truth in Lending Act and Real Estate Settlement Procedures 

Act Integrated Mortgage Disclosures (TRID) regulation for the Agency loan. Section 2 of this 

chapter provides detailed processing guidance for originating leveraged loans.

G. Servicing

Leveraged loans are eligible for the same servicing actions as any other Section 502 loan.

It is imperative that any leveraging arrangement be structured so that applicant rights are 

preserved. However, servicing strategies may be different because of the Agency's lien position 

and the need to coordinate servicing strategies with the participating lender.

1. Tax Service Fee (Tax and Insurance Escrow)

The Agency will collect a tax service fee on all leveraged loans. Either the 

participating lender with at least 20 percent of the total amortized loan amount or the 

Agency may maintain the escrow account. Lenders with less than 20 percent and all 

affordable housing product agencies may not maintain the escrow account. When 

necessary, the Agency may make advances to pay taxes or insurance premiums.

The Agency is customarily in a subordinate lien position with the largest portion of 

the loan amortized for the longer term and is at more risk than the other lender. An 

exception to this may be agreed to with the prior lien holder when the tax service vendor
HB-1-3550

Paragraph 10.3 Key Differences in Policies and Procedures

10-6

agrees in writing to cover both the Agency’s and the leveraged lender’s loans. The 

vendor must also agree to make annual real estate tax searches and report any 

delinquencies to the National Financial and Accounting Operations Center in St. Louis, 

Missouri.

2. Special Servicing

The Agency will aggressively pursue all available special servicing remedies to help 

solve applicant problems. If foreclosure is necessary, each lender has an independent 

responsibility to protect its interest. Form RD 1927-8, Agreement with Prior Lienholder, 

which must be executed and recorded in the appropriate Real Estate Mortgage Records, 

requires the participating lender to notify the Agency before accelerating any loan and 

permits, but does not require, the Agency to pay or reinstate the prior lien to protect the 

Agency's interest.

10.4 DEVELOPING STATE-BY-STATEAPPROACHESTO 

LEVERAGING

The way in which leveraging is most effectively handled will vary state-to-state and 

community-to-community, depending upon

market conditions, the availability of 

Government subsidy funds, and the interest of 

private lenders. For this reason, each State 

Director should develop an independent 

leveraging strategy that will encourage and 

facilitate the use of leveraged loans.

A. Lender Outreach

Each state should implement lender outreach activities that encourage participation by all 

prospective lenders. For example, Field Staff should:

• Collect and maintain sales information for each market area that will enable the Loan 

Originator to assess whether applicants are candidates for 100 percent private 

financing or for leveraging.

• Identify lenders who are active in the State and provide information about the 

Agency's loan programs and how leveraging arrangements mightwork.

Elements of an Effective Lending Strategy

• Lender Outreach and Marketing

• Effective Borrower Education

• Streamlined Processing Procedures
HB-1-3550

10-7

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Paragraph 10.4 Developing State-by-State Approaches to Leveraging

• Identify the sources of loan and grant funds that may be available from State and 

local governments, and nonprofit sources. Provide information on the Agency's loan 

programs to active and appropriate sources, and describe how leveraging 

arrangements might work.

• Consider maintaining lists of interested lenders, and information on their 

loan rates and terms. Care should be taken to provide information to

applicants in a manner that does not provide preferential treatment to specific lenders 

or borrowers.

B. Borrower Education

Each State should develop briefing materials that explain the leveraging concept and why 

leveraging funds may be advantageous. Some applicants may need guidance and assistance in 

identifying and contacting appropriate non-Agency funding sources.

C. Streamlined Processing Procedures

Lenders will be less interested in working with the Agency if the leveraging process 

greatly increases their processing time or their documentation requirements. However, 

streamlining procedures must be balanced with prudent lending and internal control practices. 

Each Field Office should develop streamlined procedures for coordinating with participating 

lenders and for reviewing underwriting determinations made by those lenders. Each State 

Director should consider the following approaches:

• Develop a separate application package specifically for applicants seeking leveraged 

loans.

• Inform participating lenders in advance of the Agency's requirements for the 

qualification of appraisers, inspectors, and closing agents and, if requested, provide 

advance approval of lender staff or contractors who routinely provide these services 

for lenders’ loans.

• Provide staff training to ensure expedited review of leveraged loans.

• Develop and enter into a Memorandum of Understanding (MOU) with active lenders 

covering basic policies and procedures, rather than operating on a loan-by-loan basis. 

See Attachment 10-A for a list of topics that should be considered in developing a 

Memorandum of Understanding.
HB-1-3550

10-8

Paragraph 10.4 Developing State-By-State Approaches to Leveraging

• The terms of the MOU, including requirements for leveraged loans outlined in this 

chapter, should be negotiated up front. A good MOU eliminates future 

misunderstandings, is a good public relations opportunity, and is strongly 

recommended for all partners. A copy of the MOU in each leveraged loan file is 

suggested.

• Over time, use information from LoanServ to generate information about the 

performance of leveraged loans to inform lenders, and to adjust processing 

procedures. To assure this information is accurate and useful, inconsistencies (such 

as First National Bank v. 1st Natl. Bank) should be avoided. The leveraged lender ID 

field in UniFi, including the lender’s Tax ID number, must be completed.
HB-1-3550

SECTION 2: ORIGINATING LEVERAGED LOANS

10.5 TAKING APPLICATIONS

If the applicant applies directly to the Agency, the application procedures described in 

Chapter 3 should be followed. When the applicant has already completed an application to 

another funding source, a copy of that loan or grant application may be accepted if the other 

funding source used a version of the Uniform Residential Loan Application (pages 1-5 of Form 

RD 410-4). However, the applicant also must complete Additional Information Required for 

RHS Assistance, pages 6 through 9 of Form RD 410-4, Uniform Residential Loan Application.

10.6 REFERRING APPLICANTS TO PARTICIPATINGLENDERS

Because both loan and grant funds may leverage Agency financing, any applicant for an 

Agency loan is a potential candidate for leveraging. The Loan Originator should provide 

information about other sources of subsidized loans or grants to applicants. Applicants should 

be referred to entities offering affordable housing products such as grants, forgivable loans, 

deferred interest loans, and below-market interest rate loans when such funding sources are

available in the local area for which they appear to qualify.

The applicant may be a candidate for a leveraged loan because they are working with or 

have already completed an application to another funding source prior to coming to the Agency 

for a loan.

10-9

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

10-10

10.7 DETERMINING APPLICANTELIGIBILITY

Applicants for Section 502 leveraged 

loans must meet the eligibility requirements 

described in Chapter 4. In addition, they may 

have to meet additional eligibility requirements 

imposed by participating lenders. Participating

lender credit requirements may be more stringent than the Agency’s, but the Loan Originatorcan 

encourage lenders to work with applicants who meet Agency requirements. In talking with the 

participating lender, the Loan Originator should stress that the Agency will be sharing risk with 

the participating lender and that the participating lender will hold the first lien position. Also, 

the lender may receive CRA credit for making loans in partnership with the Agency. Leveraged 

loans may be sold on the secondary market though the lender must notify Rural Development 

upon sale and assure the investor/buyer is aware of leveraging arrangements and all 

requirements.

10.8 ISSUING THE CERTIFICATE OFELIGIBILITY

To issue Form RD 1944-59, Certificate of Eligibility in conjunction with a leveraged 

loan, the Loan Originator should follow the procedures described in Paragraph 4.25, with the 

following exceptions. For leveraged loans, Form RD 1944-59 will contain:

• The total maximum loan for which the applicant qualifies -- not just the Agency’s 

portion of that loan; and 

• The expected Agency and lender shares of funds to be provided.

10.9 UNDERWRITING LEVERAGEDLOANS

A. Lender vs. Agency Underwriting

There are many underwriting processes 

that may be performed by either the Agency or 

the lender, such as income verification and title 

clearance. Lenders should be allowed to do the

primary legwork involved in collecting underwriting information, but only when all or a portion 

of their loan is at risk. Allowing lenders to collect underwriting

The Agency is responsible for making 

sound underwriting decisions regardless 

of another lender’s participation.

Community Reinvestment Act (CRA)

CRA requires lenders to help meet the credit needs 

of the communities in which they are chartered to do

business.
HB-1-3550

Paragraph 10.9 Underwriting Leveraged Loans

10-11

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

information does not imply that the Agency is relieved of its responsibility to make sound 

underwriting decisions, only that information collected by the lender is generally acceptable to 

use in making these decisions.

B. Property Requirements and Appraisal

The property must meet all of the requirements described in Chapter 5. The Loan 

Originator may accept property inspections and appraisals conducted by the participating lender, 

as long as evidence of the qualifications of the individuals performing these activities is provided 

and accepted. The Loan Originator must still inspect the property to determine eligibility. An 

administrative review of the appraisal must be completed before the appraisal is accepted. The 

environmental review remains the responsibility of the Agency; however, the participating 

lender may be requested to provide environmental information.

C. Loan-to-Value Ratio

When loans are funded solely by the Agency, the applicant’s total debt may exceed the 

market value of the property by the total of the Agency appraisal and tax monitoring fees, the 

required contribution to establish the escrow account, plus the fee for homeownership education. 

Down payments are required only if the nonelderly households cash value of non-retirement 

assets exceed $15,000 ($20,000 for elderly households). (See Paragraph 4.6.)

Some lenders may be willing to participate in a loan when the total debt exceeds the 

value of the property because their risk is limited by the Agency's participation in the loan. 

However, others will require that applicants have some equity in the property, because they 

believe an investment in the property improves the likelihood that the applicants will fulfill their 

commitments. This means that applicants with leveraged loans may need to contribute more 

cash than other applicants. The Loan Originator should explain to the applicant whether a cash 

contribution will be necessary and work with the lender to lower their usual equity requirements.

D. Loan Terms and Fees

Lenders are expected to charge reasonable and customary interest rates and fees. The 

Loan Originator may be able to help the applicant negotiate favorable terms.

The leverage loan interest rate must be the rate the lender typically charges to its best 

mortgage applicant customers – an extra amount may not be charged because of low income or 

other high risk factors. The interest rate may be no more than 2 percent (200 basis points) above
HB-1-3550

10-12

Paragraph 10.9 Underwriting Leveraged Loans

the Agency note rate in effect at loan closing. Also, the lender may not include “points” to buy 

down or pre-pay the interest. If funds are available from the applicant, they must be used to 

reduce the amount borrowed (reducing the cost to the government).

Non-Agency loans must be amortized over a 30-year period, but may contain provisions 

for a balloon payment at the end of the 15th year.

Loan fees must be kept as low as possible. All fees must be reasonable. “Underwriting 

fees” and similar add-ons are not permitted. The total fees paid to the lender may not exceed 3-

1/2 percent of the lender’s loan. (This limitation on the lender applies regardless of whether the 

buyer or the seller pays the fees.) However, an additional amount may be considered when the 

lender does most or all of the loan processing (including the Rural Development loan) and the 

additional amount is for reimbursements, such as fees for appraisals, inspections, etc.

In general, the loan originator must assure loan fees are minimized. The 3-1/2 percent is 

a maximum, not a baseline. The total Rural Development loan may not be considered when the 

lender is establishing fees. Lender fees must be commensurate with the amount of service 

provided by the lender.

E. Determining Loan Amount

The Agency loan may include costs for the initial contribution to the escrow account for 

taxes and insurance, even if the participating lender will manage the escrow account. The loan 

amount for leveraged loans is determined using the procedures described in Chapter 7, with the 

following exceptions.

• The note installment of an eligible leveraged loan (loan amortized for at least 30 

years and an interest rate that does not exceed 3%) will be considered in the payment 

subsidy calculation.

• Agency loans leveraged with private financing should always be at the standard 

terms. If the loan is not affordable at standard rates and terms, the Agency’s shareof 

the loan should be increased, rather than extending the loan term. Loans requiring 

38-year repayment terms should never be leverage with market rate financing.

• Use the Agency’s cost for an appraisal to determine total allowable debt, even when 

the appraisal is performed by the participating lender’s appraiser.
HB-1-3550

Paragraph 10.9 Underwriting Leveraged Loans

10-13

(01-23-03) SPECIAL PN

Revised (03-19-20) PN 534

• Packages involving affordable housing products or grants that primarily pay loan 

packaging fees or costs other than an eligible loan purpose, as defined in Chapter 6, 

do not count toward the 15/20 percent limitations for the loan to automatically 

receive leveraged loan benefits.

F. Agreements with the Participating Lender Regarding Construction

For loans that involve new construction or rehabilitation, the Agency and lender must 

agree on how construction inspections, payment draws, and final acceptance of the work will be 

handled. This may be accomplished by an agreement developed for the specific loan or through 

a general memorandum of understanding that covers multiple loans.

1. Inspections

Construction inspections completed by the participating lender may be accepted if 

the Field Office has approved the qualifications of the inspector. The participating 

lender may be asked to provide the Agency with a status report on implementation of any 

mitigation measures required by the Agency’s environmental assessment; however, the 

ultimate responsibility for compliance rests with the Agency.

2. Construction Draws

Typically, construction draws should be made by each lender in proportion to the 

amount of the loan each is contributing. For example, if the Agency provides 60 percent 

of the loan and the participating lender 40 percent, 60 and 40 percent of each draw would 

be paid by the Agency and the participating lender, respectively. However, there are 

circumstances in which another arrangement would be appropriate. For example, a 

participating lender might prefer to fully fund the acquisition of the site at the beginning 

of the construction period. If the participating lender is unwilling to provide construction 

funding until the Agency loan funds have been used, the Agency can provide the 

construction funding up to the maximum amount of the Agency’s loan.
HB-1-3550

10-14

10.10 LOAN CLOSING

The Agency’s Loan Approval Official must review the leveraged loan package and the 

lender’s Loan Estimate to determine if fees are reasonable and proposed use of loan funds is 

permissible. The Loan Approval Official will not approve a transaction where the fees are 

questionable or excessive.

A joint closing generally will be held for Agency and participating lender loans. If the 

leveraged loan will close after the Agency loan is closed, a written, firm loan commitment from 

the participating lender must be provided to the Agency by the time of the Agency’s loan 

closing. Closing procedures for the Agency’s loan are identical to those described in Chapter 8. 

When the Agency’s lien will be subordinated, the prior lien holder must execute Form RD 1927-

8, Agreement with Prior Lienholder.

Field offices should work closely with leveraged lenders to minimize loan closing costs.

It may be possible to use one title insurance policy to cover both the participating lender and 

Rural Development. The State Director should check with the Regional Attorney to assure this 

is an acceptable practice and obtain any special instructions to assure the government’s interests 

are protected.

Leveraged loan packages that include any type of broker referral fee are not acceptable. 

Some mortgage lenders pay these fees for loans closed at a higher than prevailing interest rate. 

These fees, along with the cost of credit, must be disclosed in accordance with the TRID 

regulation. They may be found in the “Origination Charges” section on the Loan Estimate and 

Closing Disclosure, as yield spread premiums, yield differentials, rate participation fees, par-plus 

pricing, or similar terms.

Mortgage insurance is not acceptable. This includes Private Mortgage Insurance (PMI), 

Mortgage Insurance Premium (MIP), and similar products.

Some lenders offer additional insurance products at loan closing, including mortgage 

payment insurance. Generally, the Agency will not approve a loan with such supplemental 

coverage unless the customer makes a written request for such coverage.

A. Required Documentation

In addition to the documentation required to support the Agency’s loan, a copy of the 

mortgage, promissory note, evidence of title and hazard insurance, and closing documents for the 

non-Agency loan or grant must be provided for the borrower's case file.
HB-1-3550

10-15

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485

Paragraph 10.10 Loan Closing

Ideally, there should be only one Closing Disclosure. It should include all details of the 

transaction including Agency and leveraged financing. If the leveraged lender requires a 

separate Closing Disclosure, a copy must be provided to Rural Development. The Loan 

Approval Official will review the Closing Disclosure to assure leveraged customers are charged 

fees as agreed prior to closing. The review will include fees that are not part of the leveraged 

loan amount and/or those paid by the seller.

B. Recording the Lien/Legal Documents

The closing agent should be informed of the lien position the Agency will take.

In addition to recording the real estate mortgage or deed of trust, the closing agent will 

record the executed Form RD 1927-8. Among other features, this agreement requires the lender 

to notify Rural Development prior to declaring the security instrument to be in default and 

accelerating the loan.
HB-1-3550

Attachment 10-A

Page 1 of 2

ATTACHMENT 10-A

SAMPLE TOPICS TO BE ADDRESSED IN A MEMORANDUM OF UNDERSTANDING

In general, the lender will recognize Rural Development requirements for leveraged loans, 

particularly in providing required notices. A good Memorandum of Understanding (MOU) 

avoids future problems and strengthens partnerships.

ORIGINATION

• Agency will subordinate to permit lender to obtain first lien position when at least 20 percent of the 

total financing is provided.

• Lender must use standard application form and obtain Agency approval of qualifications for the 

appraiser, inspector, and closing agent.

• Agency will be responsible for the appropriate level of environmental review; however, the lender 

may be asked to assist in the collection of needed environmental data.

• The lender rates and terms will be the same as those offered to best customers obtainingsimilar 

mortgage financing.

• Agency makes independent underwriting decisions based upon reviewing the participating lender’s 

origination package.

• A joint closing will be conducted and a single Closing Disclosure provided. Closing costs will be 

controlled.

• For construction loans:

◊ Describe how the lender will participate during the construction process (e.g., will the lender 

provide construction financing, will the lender defer amortization until the borrower occupies the 

dwelling, etc.);

◊ Describe how draws will be paid (a pro rata share from each lender is preferred);

◊ Describe how inspections will be completed (e.g., if the lender completes inspections, theAgency 

must receive a copy of the inspection and have the borrower’s acceptance before making draw 

payments); and

◊ Describe what will happen if the Agency loan will close before the participating loan. For 

example, the lender must provide a firm commitment at the time of Agency loan closing, 

contingent only upon successful completion of the construction.

SERVICING

• Describe who will establish and maintain the escrow account. If the lender maintains the account, the 

lender must report annually to the Agency on the state of tax and insurance payments.

(01-23-03) SPECIAL PN

Revised (03-19-20) PN 534
HB-1-3550

Attachment 10-A 

Page 2 of 2

• Describe what information will be shared between lenders (e.g., results of periodic inspections, 

delinquency or default information). Note: Information provided by the applicant cannot be released 

to another party without the applicant’s permission.

• Describe how each lender will:

◊ Pursue joint special servicing actions if a problem arises;

◊ Notify the lender in the case the loan is declared in default or accelerated;

◊ Provide a reasonable period for the other lender to cure the default (i.e., through a new 

loan or advance) with the borrower; and

◊ Pursue a joint foreclosure action if the borrower is in default on both accounts.

• Describe graduation review and the role of lender, customer, and Rural Development.

• Describe reporting requirements, if any.

• A copy of the MOU should be filed in each affected individual casefile.