Friday,

November 26, 2004

Part II

Department of 

Agriculture

Rural Housing Service 

Rural Business—Cooperative Service 

Rural Utilities Service 

Farm Service Agency 

7 CFR Parts 1806 et al. 

Reinvention of the Sections 514, 515, 

516, and 521 Multi-Family Housing 

Programs; Interim Rule

69032 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

DEPARTMENT OF AGRICULTURE

Rural Housing Service 

Rural Business—Cooperative Service 

Rural Utilities Service 

Farm Service Agency 

7 CFR Parts 1806, 1822, 1902, 

1925,1930, 1940, 1942, 1944, 1951, 

1955, 1956, 1965, 3560, and 3565 

RIN 0575–AC13 

Reinvention of the Sections 514, 515, 

516, and 521 Multi-Family Housing 

Programs

AGENCIES: Rural Housing Service, Rural 

Business—Cooperative Service, Rural 

Utilities Service, and Farm Service 

Agency, USDA.

ACTION: Interim final rule; request for 

comments. 

SUMMARY: The Rural Housing Service 

(RHS), formerly Rural Housing seand 

Community Development Service 

(RHCDS), a successor Agency to the 

Farmers Home Administration (FmHA), 

is streamlining and reengineering its 

regulations, as well as utilizing several 

private sector processes and techniques 

in the administration of the origination, 

management, servicing, and 

preservation of its Multi-Family 

Housing (MFH) programs. These 

programs include the section 515 Rural 

Rental Housing (RRH) loan program, the 

section 514/516 Farm Labor Housing 

loan and grant program, and the section 

521 Rental Assistance (RA) program. 

This interim final rule combines the 

provisions of the Streamlining and 

Consolidation of the sections 514, 515, 

516, and 521 Multi-Family Housing 

(MFH) Programs Proposed Rule 

published on June 2, 2003, and the 

Operating Assistance for Off-Farm 

Migrant Farmworker Projects Proposed 

Rule published on November 2, 2000.

EFFECTIVE DATE: February 24, 2005. 

Written or e-mail comments on this 

interim final rule must be received on 

or before December 27, 2004.

ADDRESSES: You may submit comments 

to this rule by any of the following 

methods: 

• Agency Web site: http://

rdinit.usda.gov/regs/. Follow the 

instructions for submitting comments 

on the Web Site. 

• E-Mail: comments@usda.gov.

Include the RIN number (0575–AC13) in 

the subject line of the message. 

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Submit written comments via 

Federal Express Mail or another mail 

courier service requiring a street address 

to the Branch Chief, Regulations and 

Paperwork Management Branch, U.S. 

Department of Agriculture, 300 7th 

Street, SW., 7th Floor, Suite 701, 

Washington, DC 20024. 

All written comments will be 

available for public inspection during 

regular work hours at the 300 7th Street, 

SW., address listed above.

FOR FURTHER INFORMATION CONTACT: Sue 

Harris-Green, Deputy Director, MultiFamily Housing Direct Loan Division, 

Rural Housing Service, U.S. Department 

of Agriculture, Room 1241, South 

Building, Stop 0781, 1400 

Independence Avenue, SW., 

Washington, DC 20250–0781, telephone 

(202) 720–1660.

SUPPLEMENTARY INFORMATION: 

Classification 

The interim final rule has been 

determined to be significant, but not 

economically significant, and was 

reviewed by the Office of Management 

and Budget (OMB) under Executive 

Order 12866.

Authority 

The existing statutory authority for 

the MFH programs was established in 

title V of the Housing Act of 1949, 

which gave authority to the RHS (then 

the Farmers Home Administration) to 

make housing loans to farmers. As a 

result of this Act, the Agency 

established single-family and multifamily housing programs. Over time, the 

sections of the Housing Act of 1949 

addressing MFH have been amended a 

number of times. Amendments have 

involved issues such as the provision of 

interest credit, broadening definitions of 

eligible areas and populations to be 

served, participation of limited-profit 

entities, establishment of a rental 

assistance program, and imposition of a 

number of restrictive-use provisions and 

prepayment restrictions. 

Environmental Impact Statement 

This document has been reviewed in 

accordance with 7 CFR part 1940, 

subpart G, ‘‘Environmental Program.’’ 

RHS has determined that this action 

does not constitute a major Federal 

action significantly affecting the quality 

of the environment. In accordance with 

the National Environmental Policy Act 

of 1969, Pub. L. 91–190, an 

Environmental Impact Statement is not 

required. 

Regulatory Flexibility Act 

This interim final rule has been 

reviewed with regard to the 

requirements of the Regulatory 

Flexibility Act (5 U.S.C. 601–612). The 

undersigned has determined and 

certified by signature on this document 

that this rule will not have a significant 

economic impact on a substantial 

number of small entities since this 

rulemaking action does not involve a 

new or expanded program nor does it 

require any more action on the part of 

a small business than required of a large 

entity. 

Federalism (Executive Order 13132) 

The policies contained in this rule do 

not have any substantial direct effect on 

States, on the relationship between the 

National Government and the States, or 

on the distribution of power and 

responsibilities among the various 

levels of Government. This rule does not 

impose substantial direct compliance 

costs on State and local Governments; 

therefore, consultation with the States is 

not required. 

Civil Justice Reform (Executive Order 

12988) 

This rule has been reviewed under 

Executive Order 12988. In accordance 

with this rule: (1) Unless otherwise 

specifically provided, all State and local 

laws that are in conflict with this rule 

will be preempted; (2) no retroactive 

effect will be given to this rule except 

as specifically prescribed in the rule; 

and (3) administrative proceedings of 

the National Appeals Division of the 

Department of Agriculture (7 CFR part 

11) must be exhausted before bringing 

suit in court that challenges action taken 

under this rule. 

Unfunded Mandate Reform Act 

(UMRA) 

Title II of the UMRA, Pub. L. 104–4, 

establishes requirements for Federal 

Agencies to assess the effects of their 

regulatory actions on State, local, and 

tribal Governments and on the private 

sector. Under section 202 of the UMRA, 

Federal Agencies generally must 

prepare a written statement, including 

cost-benefit analysis, for proposed and 

Final Rules with ‘‘Federal mandates’’ 

that may result in expenditures to State, 

local, or tribal Governments, in the 

aggregate, or to the private sector, of 

$100 million or more in any 1 year. 

When such a statement is needed for a 

rule, section 205 of the UMRA generally 

requires a Federal Agency to identify 

and consider a reasonable number of 

regulatory alternatives and adopt the 

least costly, more cost-effective, or least 

burdensome alternative that achieves 

the objectives of the rule. 

This rule contains no Federal 

mandates (under the regulatory 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69033

provisions of title II of the UMRA) for 

State, local, and tribal Governments or 

for the private sector. Therefore, this 

rule is not subject to the requirements 

of sections 202 and 205 of the UMRA. 

Paperwork Reduction Act of 1995 

The information collection 

requirements contained in this 

regulation have been approved by the 

OMB under the provisions of 44 U.S.C. 

chapter 35 and have been assigned OMB 

control number 0575–0189, in 

accordance with the Paperwork 

Reduction Act (PRA) of 1995. 

Collectively, 2,191,777 hours of 

paperwork burden will be made 

obsolete from 12 dockets. The new 3560 

regulation imposes 907,389 hours of 

paperwork burden on the public. This is 

a decrease of 1,284,388 hours. However, 

only 111,552 hours of that are due to 

program changes. 

Programs Affected 

The programs affected by this 

regulation are listed in the Catalog of 

Federal Domestic Assistance under 

number 10.405—Farm Labor Housing 

Loans and Grants; 10.415—Rural Rental 

Housing Loans; and 10.427—Rural 

Rental Assistance Payments. 

Intergovernmental Consultation 

These loans are subject to the 

provisions of Executive Order 12372 

that require intergovernmental 

consultation with State and local 

officials. RHS conducts 

intergovernmental consultations for 

each loan in a manner delineated in RD 

Instruction 1940-J (available in any 

Rural Development office and on the 

Internet at http://www.rdinit.usda.gov/

regs/). 

Background Information 

An Overview 

Most communities in the rural United 

States have a scarcity of decent rental 

housing that is affordable to very lowincome families. In addition, migrant 

farmworkers and farm laborers, whose 

incomes are extremely limited, face 

some of the worst housing conditions in 

the nation. Despite improvements in 

housing quality, especially in the 

number of rural units with complete 

plumbing facilities, there are about 2.7 

million families who live in 

substandard housing. In the Agency’s 

experience, rural renters were more than 

twice as likely to live in substandard 

housing as people who owned their own 

homes. With lower median incomes and 

higher poverty rates than homeowners, 

many renters are simply unable to find 

decent housing that is affordable. RHS’s 

rental housing programs are some of the 

few resources that enable the very lowincome renters in the rural United 

States to access decent, safe, sanitary, 

and affordable housing. In many rural 

communities, there are simply no other 

safe and sanitary alternatives for very 

low-income people.

Through public and private 

partnerships, RHS enables limited profit 

and nonprofit developers to build rental 

housing for low-income and very lowincome tenants across the rural United 

States. As of February 2004, the nearly 

$12 billion portfolio of 463,632 units 

and more than 17,100 projects often 

provides the only decent, affordable 

rental housing available in rural areas. 

The program provides affordable rental 

housing to very low- and low-income 

rural families, to disabled people, and to 

elderly residents. The average tenant 

has an adjusted income of $9,452. 

The Agency operates a multifamily 

rural rental housing direct loan program 

under section 515 and section 514 for 

farm labor housing. The Agency also 

provides grants under the section 516 

farm labor housing program. The direct 

loan program employs a public—private 

partnership by providing subsidized 

loans at an interest rate of 1 percent to 

developers to construct or renovate 

affordable rental complexes in rural 

areas. This 1 percent loan keeps the debt 

service on the property sufficiently low 

to support below-market rents 

affordable to low-income tenants. Many 

of these projects also utilize low-income 

housing tax credit (LIHTC) proceeds. 

This program is typically used in 

conjunction with the RHS section 521 

Rental Assistance (RA) program, which 

provides project-based rental assistance 

payments to property owners to 

subsidize tenants’ rents to an affordable 

level. With rental assistance, tenants 

pay 30 percent of income toward their 

rent (including utilities). Some section 

515 projects also utilize the U.S. 

Department of Housing and Urban 

Development’s (HUD’s) section 8 

project-based assistance, which enables 

additional very low-income families to 

be served. 

The direct loan and grant programs 

under sections 514 and 516 provide low 

interest loans and grants to provide 

housing for farmworkers. These workers 

may work either at the borrower’s farm 

(‘‘on-farm’’) or at the borrower’s or any 

other farm (‘‘off-farm’’) so long as the 

tenants meet program eligibility 

requirements. Section 521 rental 

assistance is available for off-farm labor 

housing, but not on-farm labor housing. 

The Agency has decided to not provide 

RA to on-farm labor housing units 

because of its limited availability. 

Goals of the Regulatory Streamlining 

Process 

This rule results from RHS’s pledge to 

make its programs more customer 

friendly, streamline the processes, 

reduce costs to the taxpayer, and 

increase the Agency’s level of customer 

service. These goals were accomplished 

through the input and commitment that 

resulted from numerous stakeholder 

meetings with recognized leaders in the 

multi-family industry, including 

borrowers, management agents 

identified by industry groups, and 

tenant representatives. Representatives 

of State housing finance agencies, 

accounting firms, and the USDA Office 

of Inspector General (OIG) also 

participated. Through these meetings, 

RHS was able to draw on a vast amount 

of expertise and knowledge to meet the 

following objectives of multi-family 

housing reinvention: 

• Assure affordable safe, decent, and 

sanitary housing for very low- and lowincome residents in rural communities. 

• Consolidate and simplify 14 

regulations into one regulation for rural 

rental housing, farm labor housing, and 

rental assistance. 

• Develop an efficient loan 

application process that supports the 

creation of partnerships and leveraging 

with local, State, and other Federal 

entities. 

• Clarify RHS’s existing policies and 

procedures to reflect the best practices 

within the Agency and within the multifamily field. 

• Improve efficiency and service to 

RHS’s customers, correcting past 

problems and addressing concerns 

raised by stakeholders so that 

particularly complex processes, such as 

preservation, work better. 

• Make much of the farm labor 

housing review and approval processes 

the same as those for rural rental 

housing processes. 

• Create a series of handbooks 

available to field staff and to applicants, 

borrowers, and partners that will give 

clear guidance on policies, such as 

developing project budget approvals, 

determining project feasibility, and 

servicing actions. 

Streamlining and Consolidation 

RHS is undertaking a major 

redevelopment and consolidation of 

Rural Development (RD) regulations 

affecting the sections 514, 515, 516, and 

521 Multi-Family Housing programs. 

Current customers of these programs are 

affected by 14 separate regulations, but 

as a result of reinvention, the interim 

final rule revises and consolidates 

Agency regulations affecting the 

69034 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

sections 514, 515, 516, and 521 MultiFamily Housing programs. This rule 

consolidates the policies outlined in 14 

separate regulations and a number of 

Administrative Notices into one 

regulation and moves the procedural 

guidance to program handbooks. A list 

of the regulations being consolidated 

follows: 

• 7 CFR part 1806, subpart A—Real 

Property Insurance 

• 7 CFR part 1930, subpart C—

Management and Supervision of MultiFamily Housing Borrowers and Grant 

Recipients 

• 7 CFR part 1944, subpart D—Farm 

Labor Housing Loan and Grant Policies, 

Procedures, and Authorizations 

• 7 CFR part 1944, subpart E—Rural 

Rental and Rural Cooperative Housing 

Loan Policies, Procedures, and 

Authorizations 

• 7 CFR part 1944, subpart L—Tenant 

Grievance and Appeals Procedure 

• 7 CFR part 1951, subpart D—Final 

Payment on Loans 

• 7 CFR part 1951, subpart K—

Predetermined Amortization Schedule 

System (PASS) Account Servicing 

• 7 CFR part 1951, subpart N—

Servicing Cases Where Unauthorized 

Loan or Other Financial Assistance Was 

Received—Multi-Family Housing

• 7 CFR part 1955, subpart A—

Liquidation of Loans Secured by Real 

Estate and Acquisition of Real and 

Chattel Property 

• 7 CFR part 1955, subpart B—

Management of Property 

• 7 CFR part 1955, subpart C—

Disposal of Inventory Property 

• 7 CFR part 1956, subpart B—Debt 

Settlement Farm Loan Programs and 

Multi-Family Housing 

• 7 CFR part 1965, subpart B—

Security Servicing for Multiple Housing 

Loans 

• 7 CFR part 1965, subpart E—

Prepayment and Displacement 

Prevention of Multi-Family Housing 

Loans 

These changes have two clear 

benefits. First, the consolidated, 

streamlined regulation makes 

information easier to access. Answers to 

policy questions are found in one 

document that has been shortened from 

over 1,500 pages to less than 200 pages. 

Similarly, answers to process and 

implementation questions are found in 

three handbooks. These handbooks 

provide ‘‘how-to’’ guidance on loan 

origination, asset management, and loan 

servicing. Agency staff, property 

owners, property managers, and 

residents can look for most answers to 

day-to-day questions in the handbooks’

plain English explanations and 

examples. If the regulatory basis for a 

procedure is in question, that 

information can be easily found in the 

streamlined regulation. The increased 

ease of finding information will help 

improve public understanding of the 

rules and eliminate inconsistencies in 

interpretation. 

Second, the division of policy and 

procedure gives the Agency more 

flexibility to update and revise program 

procedures. For example, as automation 

changes the way program reporting 

occurs, relevant procedures can be 

updated in the handbooks without going 

through the complex process of 

changing the regulation. This will make 

the Agency more responsive to changes 

in the business environment, an 

important initiative as the Federal 

Government strives to have more of its 

business conducted online and through 

electronic submissions. 

The paperwork burden reduction to 

the public resulting from this rule will 

be approximately 45 percent. This 

estimate is derived from the Paperwork 

Burden docket that RHS prepared. 

The Handbooks 

As stated above, the Agency is 

finalizing three separate handbooks that 

present the reader with administrative 

guidance on loan origination, asset 

management, and project servicing. The 

Loan Origination Handbook instructs 

the reader on application and 

processing procedures and provides 

information on matters such as what 

forms must be filed, where to submit 

loan requests, and the Agency’s internal 

processing procedures. It also provides 

Agency staff with the guidance needed 

to originate loans and grants efficiently 

and effectively. The Asset Management 

Handbook provides RHS Multi-Family 

Housing staff with guidance about the 

Agency’s procedures for overseeing 

borrowers’ performance in meeting their 

responsibilities under the program. The 

Project Servicing Handbook provides 

loan servicers with guidance about the 

Agency’s procedures for servicing 

actions involving borrowers that receive 

loans or grants for MFH projects. 

The handbooks are not published in 

the Federal Register but are available to 

the public at no cost. The public can 

access the handbooks through their 

local RHS servicing office. 

Exhibits 

Many of the exhibits that were part of 

the expired regulations may be found in 

the three companion handbooks to 7 

CFR part 3560: Loan Origination, Asset 

Management, and Project Servicing. As 

an example, exhibit B–1 of 7 CFR part 

1930, subpart C, is found in exhibit 3–

1 of chapter 3 of the Asset Management 

Handbook. 

Discussion of the Interim Final Rule 

This interim final rule combines the 

provisions of the Streamlining and 

Consolidation of the sections 514, 515, 

516, and 521 Multi-Family Housing 

(MFH) Programs Proposed Rule 

published on June 2, 2003, and the 

Operating Assistance for Off-Farm 

Migrant Farmworker Projects Proposed 

Rule published on November 2, 2000. 

RHS is issuing this regulation as an 

interim final rule, with an effective date 

30 days after publication in the Federal 

Register, given that these regulatory 

changes are very extensive, affect all 

aspects of the programs, and seek to 

achieve significant streamlining of the 

programs’ regulatory provisions. 

Delaying implementation of the rule to 

allow more time for further 

consideration would not be in the best 

interest of the direct MFH program or its 

recipients. All provisions of this 

regulation are adopted on an interim 

final basis, are subject to a 90-day 

comment period, and will remain in 

effect until the Agency adopts a final 

rule. 

Changes Presented in the 7 CFR Part 

3560 Proposed Rule That Remain 

Proposed, but Not Implemented in the 

Interim Final Rule 

Reserve Requirements for Project 

Improvements 

Current regulations include standards 

for physical condition, maintenance, 

and reserve levels to address the 

physical condition of the property. 

These regulations require that borrowers 

initially contribute 1 percent annually 

of total development costs toward a 

reserve for project improvements until a 

total of 10 percent is reached. While 

borrowers are permitted to request 

adjustments to their reserve 

contributions, there is no systematic 

provision for reevaluating reserves over 

the life of the project. 

The proposed rule included language 

requiring a life-cycle cost analysis be 

used to establish the initial reserve 

amount needed to meet the capital 

needs of new projects. For existing 

projects, the proposed rule would have 

required that any servicing action that 

involves additional Agency funds must 

take into account physical needs of the 

project, based on a capital needs 

assessment. The regulatory impact 

analysis for the proposed rule indicated 

that these provisions would increase 

rents and result in additional demand 

for rental assistance payments. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69035

Since the proposed rule was 

published, RHS has undertaken a 

comprehensive property assessment of 

the properties in the section 515 

portfolio. The preliminary results 

provided useful information for 

reconsidering the extent of capital 

reserves that may be necessary to meet 

the capital needs of projects and to 

explore policy options for addressing 

these needs to be reflected in any 

necessary budgetary and legislative 

changes. More time is needed to 

properly address these matters. 

Accordingly, RHS has decided to 

publish an interim final rule that does 

not include these provisions—

specifically § 3560.103(c)(3) and 

§ 3560.306(k)(1) of the proposed rule—

until their impacts can be assessed and 

policy decisions can be made for a longterm strategy. 

For the interim final rule, the Agency 

is continuing the policy from the 

existing regulation 7 CFR part 1930, 

subpart C. Because 7 CFR part 1930, 

subpart C is being replaced by 7 CFR 

part 3560 in this rulemaking, the 

relevant language from the previous 

regulation is being carried forward and 

included in § 3560.306(j)(1) (Changes to 

Reserve Requirements), while the 

language from § 3560.103(c)(3) is 

removed and the paragraph marked as 

reserved. 

Changes to the Rule With Significant 

Impact 

Investment Earnings on Reserve 

Account Funds 

RHS has found that most project 

owners are putting their reserve funds 

in accounts that earn no or minimal 

income. The average reserve account 

has been earning only 2 percent interest 

annually. Project owners indicate that, 

under current regulations and tax rules, 

they have few options for investing 

these funds and face a strong 

disincentive for investing them in a 

manner that maximizes their return. The 

disincentive is due to Internal Revenue 

Service (IRS) rules that treat income 

earned on reserve accounts as 

investment income for the owner and 

thus is taxable, rather than project, 

income.

This rule makes two changes to 

address these limitations. First, it allows 

a greater number of investment options, 

including relatively conservative 

investment vehicles that are used by 

public agencies and are not expected to 

pose a significant increased risk to the 

funds. This change would give owners 

more flexibility for investing their 

reserve account funds and is expected to 

result in greater returns on these funds 

and thus more income to be put toward 

better project operations and capital 

improvements. The increase in interest 

income would lower the amount needed 

from tenant rents and rental assistance 

to meet project needs. 

Second, the rule addresses the issue 

of ‘‘phantom income’’—the interest 

income earned on reserve accounts. 

This income is committed to the project 

but not accessible to the owner. To ease 

the burden of paying taxes on this 

phantom income by for profit and 

limited profit entities, the rule allows 

owners, with RHS’s approval, to 

withdraw up to 25 percent of the annual 

interest income earned on the reserve 

funds to cover the tax expense. The 25 

percent allowance was determined to be 

a reasonable estimate of the tax rate for 

the average investor. It was decided to 

use a single rate for all owners to 

simplify the administration of this 

feature. RHS also consulted with the 

USDA OIG and the American Institute 

of Certified Public Accountants (AICPA) 

to arrive at the 25 percent figure. 

Transferring Surplus Funds 

Prior regulations required that if a 

property had a surplus in its general 

operating account at the end of the 

project’s fiscal year in excess of 10 

percent, the amount over 10 percent had 

to be transferred into the property’s 

reserve for replacement account. This 

policy has been changed so that if a 

project has surplus cash in excess of 20 

percent at the end of the project’s fiscal 

year, the amount over 20 percent must 

be transferred to the reserve account. 

Numerous comments to the proposed 

rule said that the prior policy allows for 

no contingency should the project have 

an unplanned, extraordinary expense. 

The policy also results in project cash 

flows that are extremely tight. The new 

policy in the interim final rule should 

help to mitigate these cash flow 

problems. 

Treatment of Surplus Operating Funds 

Transferred to the Reserve Account 

As stated above, the Agency requires 

surplus funds in a project’s operating 

account to be transferred into the 

project’s reserve account. However, 

there was confusion about whether the 

amount transferred could be deducted 

from the scheduled contributions to the 

reserve account. This issue is clarified 

in the interim final rule, which states 

that transfers of surplus funds into the 

reserve account may not be deducted 

from the scheduled contribution. The 

surplus funds are to be used for 

addressing a project’s capital needs. 

Prepayment Policies and Procedures 

The Agency, borrowers, and tenant 

advocates agreed that the prepayment 

request process is difficult and 

confusing. Agency staff in the National 

Office recognized that they were 

spending a great deal of time providing 

technical assistance to Field Offices in 

responding to prepayment requests. 

Borrowers commented that the process 

was unduly burdensome to borrowers 

who were within their rights to request 

prepayment. Tenant advocates pointed 

out that tenants are virtually excluded 

from the process because the process 

complexity makes it difficult for tenants 

to take action. Discussion of these 

concerns at the stakeholder meetings 

indicated that RHS needed to clarify 

many of the policies toward prepayment 

and, where possible, make policy 

changes that would help simplify the 

process. Consequently, this rule 

includes changes to Agency policy 

regarding tenant notification and 

projects on the waiting list for 

incentives. 

Tenant Notifications 

Stakeholders suggested changes to the 

content and timing of tenant 

notifications to provide tenants with the 

information they need to participate in 

the prepayment process. This rule 

replaces the requirement for one early 

tenant notification with a series of 

notifications aimed at keeping the 

tenants informed of the Agency’s and 

the borrower’s decisions throughout the 

process. 

Alternatives to Acceleration When 

Needed To Preserve Affordable Units 

The Agency received numerous 

comments on the proposed rule on the 

preservation process. One issue that was 

raised repeatedly is that the Agency 

should have alternative means to 

sanction a borrower for monetary or 

nonmonetary default without 

accelerating the borrower’s account. 

Commenters expressed concern that a 

borrower could force the Agency to 

accelerate the loan to be able to prepay 

the loan. The Agency cannot prevent 

such an occurrence in all cases, but has 

added language to the interim final rule 

to acknowledge this problem and to 

demonstrate its intention to prevent it 

from occurring. 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 

69036 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

management documents. Subpart J of 

the interim final rule provides several 

alternatives to acceleration. 

Waiting List 

One of the most common complaints 

heard about the prepayment process is 

its open-ended nature. Borrowers who 

are approved for incentives and agree to 

stay in the program in exchange for 

incentives may have to wait years before 

the funds for the incentives become 

available. The interim final rule 

establishes a maximum time on the 

waiting list of 15 months and allows 

borrowers three choices at the end of 

that time: (1) Stay on the waiting list 

and continue waiting for the incentives; 

(2) withdraw from the list and continue 

operating the property for program 

purposes; or (3) offer to sell the property 

to a nonprofit organization. This last 

option may allow some properties to 

eventually prepay if they complete the 

process involved in offering the project 

for sale and fail to receive a bona fide 

offer. This option responds to the reality 

that the Agency may not always have 

the resources to keep borrowers in the 

program indefinitely and that costly 

legal battles are likely if it does not 

allow other options to the borrowers. 

Further, it is believed that many 

borrowers have not applied for 

prepayment incentives and joined the 

waiting list because of the extended 

time period they must currently remain 

on the list. If the 15-month maximum 

time period is implemented, a greater 

number of these borrowers may seek 

prepayment with the expectation that 

they will be allowed to exercise one of 

the three options at the end of the 15-

month time period. If borrowers do 

prepay and convert their apartment 

complexes to market rate units, RHS 

will take measures to protect the tenants 

at these properties by providing them 

with a letter of priority entitlement 

(LOPE) that gives them priority in 

Agency-financed housing elsewhere. 

However, if alternative vacant RHSfinanced rental housing is not available 

in the market, the impacted tenants face 

displacement or rent overburden if they 

remain in place.

Incentives 

The interim final rule clarifies the 

Agency’s policy on incentives and adds 

several requirements to help ensure that 

the limited amount of funding available 

for incentives, as discussed in the 

overview section of this analysis, is 

used efficiently to benefit the program. 

For example, this rule outlines the 

process a borrower must follow when 

requesting permission to prepay and be 

eligible to receive incentives. 

In addition, the proposed rule 

clarifies that third-party equity loans are 

an option for borrowers who are seeking 

equity loans through the prepayment 

process. The use of third-party equity 

funding stretches RHS’s incentive funds 

by providing resources from alternative 

funding sources. However, it should be 

noted that debt costs from other sources 

might be higher than financing received 

under the section 515 program. For 

example, section 515 funding is lent at 

an effective 1 percent interest rate and 

amortized for 50 years, whereas thirdparty funds may be lent at rates ranging 

from interest free to market rate 

depending upon the source of the funds, 

with amortization periods ranging from 

fully deferred to 30 years. All proposed 

third-party equity loans must be 

underwritten and reviewed to the same 

standard as section 515 loans to ensure 

that no project is made financially 

unfeasible as a result of a third-party 

loan. 

Initial Operating Capital 

Under previous regulations, 

borrowers were required to pay the 

equivalent of 2 percent of the cost of 

developing a project into an account for 

initial operating costs. They earned no 

interest on this account, which also 

received funds from other sources, 

including rental income. If within 2 

years the project was operating 

successfully and there was sufficient 

capital in the operating account to 

maintain the financial soundness of the 

account, borrowers might take out up to 

the full amount of their contribution. 

While on deposit in the operating 

account, borrowers received no return 

on investment for the funds. After 2 

years, any portion of the contribution 

that remained in the account must 

remain in the account to meet ongoing 

operating capital needs. During the 

stakeholder meetings, borrowers 

expressed concern that the previous 

regulation did not allow them sufficient 

time to recover their contribution, even 

when a project is functioning well and 

no longer needs the additional capital. 

RHS determined that the 2-year limit 

was originally set due to difficulties in 

tracking the funds within the project’s 

overall budget, and that its new 

management information system, has 

the capability to provide better tracking 

and disclosure of these funds. 

Therefore, RHS is extending the time 

limit for the recovery of initial operating 

capital from 2 to 7 years. In selecting 7 

years for the new limit, RHS received 

input from field staff and industry 

groups indicating that the prospects for 

recovery after 7 years were minimal, 

either because financial soundness 

could not be established or owners were 

willing to leave their contribution in the 

account. 

This change allows more borrowers to 

fully recover the payments they make to 

initial operating capital accounts. It is 

uncertain how many borrowers would 

benefit from the change and how many 

dollars these borrowers would be 

allowed to recover from these accounts. 

Because of the limitation on recovery 

from only financially sound accounts, it 

is unlikely that there would be 

immediate, negative impacts on the 

performance of the MFH programs. 

However, it should be noted that by 

allowing borrowers to recover funds 

from initial operating capital accounts, 

these funds would not be available for 

ongoing capital needs. The potential 

withdrawal of initial operating capital is 

not considered to have significant 

impacts on rents and thus on costs to 

the Government and tenants. 

Other Changes to the Rule 

Conventional Rents for Comparable 

Units 

RHS has incorporated the concept of 

‘‘conventional rents for comparable 

units’’ (CRCU), which is one of the most 

important policies established by the 

interim final rule. The concept is 

applicable to loan origination, loan 

servicing, replacement reserve set 

asides, and preservation. In essence, 

rents are to be capped at conventional 

rents for comparable units in the area 

where the housing is located. 

Comparable units would be those 

equivalent to RHS-financed units in 

terms of quality and amenities. If no 

such units are located in the same 

community, units from a similar 

community could be used for 

comparison. Comparable units also 

means that the units the Agency 

finances would meet a standard of 

economical development—modest in 

size, facilities, and design, yet 

compatible with the community. 

RHS will continue to require that 

rents be based on the project’s operating 

costs. However, the interim final rule 

requires that RHS not approve project 

proposals, servicing actions, or 

prepayment incentives that involve 

rents above the CRCU, except in limited 

circumstances, where such rents are 

determined to be in the best interest of 

the Government and the tenants of the 

project. The Agency wants to emphasize 

that the comparison to CRCUs is not 

used during annual budget reviews and 

requests for rent changes.

By placing an upper limit on rents, 

RHS expects to protect the Government 

from investing in projects that may be 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69037

wasteful or fraudulent, and to ensure 

that projects are competitive so that 

vacancy and other market-driven 

problems can be avoided. In this way, 

the CRCU should improve the long-term 

viability of MFH projects, limit the costs 

of rental assistance, and reduce the risk 

of defaults. 

The interim final rule maintains 

flexibility for serving areas where MFH 

projects provide the only decent, safe, 

and sanitary affordable rental housing in 

a local housing market, or where a 

significant amount of the substandard 

housing rents for less than the cost of 

operating a MFH project. In such cases, 

RHS may base the CRCU on rents 

outside the local community. It may 

also grant an exemption for exceptional 

circumstances. 

The CRCU will create a definitive 

underwriting standard. It will apply to 

leveraging other low-interest loan funds 

or paying for additional owner 

contributions (up to 3 percent return on 

investment over required contribution), 

improving project design and amenities 

(within the definition of economical 

development), and adjusting reserves or 

other serving actions. In areas where 

rents are below the CRCU, rental 

assistance costs and loan levels may 

increase. However, it will also ensure 

‘‘marketable units’’ if the Agency should 

lose rental assistance units. 

Cost Reasonableness Basis for the 

Evaluation of Project Proposals 

The interim final rule also includes 

changes related to evaluating the cost 

reasonableness of project proposals. 

Under current regulations, the Agency 

has applied a policy of cost containment 

when evaluating whether the costs of 

the proposed design for new projects are 

reasonable. While this policy has 

effectively held down construction costs 

for new projects, Agency field staff and 

borrowers report that lower-cost project 

design features are not always cost 

effective over the long term. They report 

that while certain design features reduce 

initial construction costs, they actually 

cost more over the life of the project 

because the components used require 

higher levels of maintenance and more 

frequent replacement. 

Projects with these design features 

experience higher routine maintenance 

costs, higher expenditures of project 

reserves, and a greater need for 

subsequent financing for rehabilitation. 

The result is an upward pressure on 

project rents and increased use of rental 

assistance funding. To the extent a 

project cannot support the rent 

increases needed to cover these costs, 

the project faces an increased risk of 

financial failure or compliance 

violations due to physical deficiencies. 

Previously, RHS had no process for 

conducting life-cycle analyses. The 

requirement for a life-cycle cost analysis 

is to be used for new projects. The 

requirement is intended to assure 

quality construction, as well as the longterm viability of complexes. Under the 

interim final rule, the Agency will 

change its policy for evaluating project 

proposals to consider the life-cycle costs 

of proposed project designs. Under this 

policy, the Agency may approve a 

proposed project design that is not the 

lowest cost if the life-cycle cost analysis 

that is prepared by the project architect 

reveals that the design achieves the 

lowest overall cost over the life of the 

project. Industry standards will be used 

for the analysis. To assure that new 

projects are affordable and appropriate 

to the local housing market, this rule 

restricts the Agency from approving 

project designs that would cause rents 

to exceed the market standard (except in 

exceptional circumstances where such 

costs are determined to be in the best 

interest of the Government and the 

tenants). Examples of two design 

features that may cost more initially but 

decrease operating expenses over the 

life of the project are brick exteriors and 

increased thermal standards. In the past, 

many projects were built using a 

popular exterior plywood siding. These 

buildings require replacement of the 

original siding. Similar buildings that 

utilized brick as an exterior finish or 

partial finish are not having similar 

expenses, thereby decreasing demands 

on the reserve accounts. Thermal 

standards in RHS-financed projects 

often exceed local codes. By building 

RHS projects with more energy 

efficiency, tenant and owner utility 

expenses are kept lower, thereby 

decreasing the need for rent increases or 

tenant utility allowance increases. By 

avoiding the additional rent and utility 

allowance increases, tenant rent 

overburden is avoided, as is the 

additional drain on scarce rental 

assistance resources. 

Because this change will allow for 

more costly designs, the Agency expects 

the size of initial loans and initial rents 

to grow slightly. However, higher 

upfront costs would be offset by lower 

long-term costs. The Agency expects 

that new projects receiving funding 

under this policy will have lower 

maintenance and rehabilitation needs, 

thereby lowering project rents and use 

of Agency rental assistance over the life 

of the project. Lower maintenance 

expenses, resulting in rents essentially 

the same as projects built under cost 

containment guidelines, would offset 

the increased debt service due to higher 

construction costs. This change will also 

lower demand for subsequent loans 

from the Agency in a time when 

additional loan funds are increasingly 

scarce. 

Management Certification 

Under previous regulations, RHS 

needed to approve the management 

agreement between the borrower and 

the management entity for a project. 

This requirement for Agency approval 

was designed to ensure that the 

management agent was also accountable 

for meeting program requirements. 

However, the Agency has found that 

this policy resulted in a time-consuming 

approval process because these 

agreements varied considerably from 

borrower to borrower, and lacked the 

consistency necessary to implement a 

national program. Further, the USDA 

OIG has found that many management 

agreements and plans lack the 

specificity to accurately describe how 

project and management costs are 

prorated between expenses paid by the 

project fee and those paid by the 

management fee. 

The interim final rule eliminates 

Agency approval of management 

agreements and instead requires 

borrowers to submit a management 

certification in an Agency-approved 

format. In submitting this document, 

borrowers certify that their agreement 

with the project management entity 

obligates that entity to comply with 

program requirements; establishes 

sanctions for failure to comply with 

these requirements, including 

termination of the agent; and specifies 

penalties for false certifications. This 

change eliminates the administrative 

burden on RHS for approving 

management agreements, while 

strengthening the Agency’s ability to 

hold borrowers and their agents 

accountable for their management 

responsibilities. In addition, revisions to 

the management fee policy, discussed 

below, allow for a more definitive 

method to differentiate between project 

and management agent expenses. 

Management Plan 

Under previous regulations, 

borrowers were also required to obtain 

RHS’s approval of the management 

plans for their projects. The purpose of 

this policy was to assure the Agency 

that the borrower and management 

entities would have adequate systems in 

place to comply with program 

requirements. The requirement to obtain 

Agency approval for updates only added 

to the burden for both the Agency staff 

and the borrowers. This policy also left 

69038 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

the Agency in an awkward position 

when borrowers with sound projects 

changed their operations but did not 

update their management plan. The 

USDA OIG has reported audit findings 

where borrowers and management 

agents have not been operating the 

properties in conformity with the 

executed management plan. While this 

is true, RHS has found that the agent 

and owner have not engaged in an 

improper practice; instead, the practice 

is just not documented correctly in the 

management plan. The OIG has agreed 

that if the practice had been correctly 

disclosed in the management plan, the 

practice would not have been listed as 

an audit finding. The OIG has worked 

with RHS during the stakeholder 

process to identify changes in policy 

and procedures and has addressed this 

particular area of confusion. The result 

of the change will establish clearer 

borrower and management agent 

accountability combined with 

procedures that discourage RHS 

micromanagement of borrower and 

management agent business practices. 

Additionally, fewer OIG findings will 

result, requiring less OIG and RHS staff 

time to resolve. 

The interim final rule eliminates 

Agency approval of project management 

plans and instead requires that 

borrowers submit a management plan 

that addresses a specified list of 

operational areas. RHS staff will review 

the plan to see if the required areas have 

been covered in the plan but will not 

approve the plan. The plan will be used 

to monitor project performance, but 

discrepancies between project 

operations and the plan will not 

constitute a violation of program 

requirements, unless the discrepancies 

affect program performance. This 

change reduces the administrative 

burden on RHS staff and borrowers. It 

also provides borrowers with greater 

flexibility to make sound changes in 

project operations without creating a 

performance concern.

Management Fees 

Previously, program regulations 

required that management fees for 

projects be reasonable and competitive. 

However, the USDA OIG staff found that 

the management fees approved for 

projects varied significantly, ranging 

from as low as $25 per unit per month 

to $55 per unit per month across States. 

This led the OIG to question whether 

the higher fees found in some instances 

were reasonable. As with management 

plans, the OIG expressed concern that 

the current regulations were neither 

clear nor consistent concerning what 

services were to be included in the 

management fee. In some States many of 

the maintenance services provided by 

management company staff were 

included in the management fees, and 

in other States the charges were not. In 

some States insurance and tax costs for 

project employees were included in 

management fees, while in other States 

the costs were billed directly to the 

project. Comments by Agency staff at 

stakeholder meetings revealed that the 

variations were often due to differences 

in Field Office interpretations about the 

services to be covered by the 

management fee. They noted that 

services not covered by the fee were 

paid for as a line item on the budget. 

When management fees plus other fees 

for services were accounted for, 

management compensation was 

consistent. Together with 

representatives of the property 

management industry and the OIG, RHS 

developed the bundle of management 

services that is a part of this regulatory 

change. By moving to a standardized 

grouping of services that is to be 

included in the management fee, RHS 

and the OIG believe that the change will 

greatly improve consistency among 

different areas of the country and RHS 

offices. As stated in the previous 

paragraph, as these services were all 

being provided previously but charged 

to the project on different lines of the 

operating budget. The grouping of these 

expenses in a different manner would 

neither increase nor decrease the overall 

cost to the project or the rents being 

charged. 

The interim final rule and 

accompanying handbooks address the 

inconsistencies in fees by establishing a 

standard bundle of services covered by 

the management fee and a framework 

for setting standard adjustments for 

project characteristics that warrant 

slightly higher fees, such as for a new 

management agent taking over a 

troubled property. However, this rule 

should improve RHS’s ability to 

document that the management fees for 

projects are reasonable. It should also 

ensure consistency among RHS Field 

Offices in interpreting the services 

included in fees. Additionally, the 

number of OIG findings should be 

reduced, requiring less OIG and RHS 

staff time to resolve. 

Standards for Physical Conditions at 

Projects 

Previous regulations established 

borrowers’ responsibility to maintain 

their projects in decent, safe, and 

sanitary condition. However, the USDA 

OIG raised concerns about a lack of 

consistency in how this standard has 

been implemented. 

The interim final rule establishes 

specific standards for physical 

conditions that clarify the conditions 

that constitute decent, safe, and sanitary 

housing. These standards do not 

represent a change in Agency policy. 

Rather, they make Agency expectations 

explicit and thus improve the Agency’s 

ability to enforce physical standards, 

thereby improving the quality of living 

conditions for tenants and better 

preserving the security of Agency loans. 

Recertifications of Tenant Eligibility 

Recertifications are used to document 

tenants’ income for the purpose of 

determining eligibility to live in a multifamily housing unit and qualify for 

rental assistance payments. Previous 

regulations required both an annual 

recertification and an interim 

recertification whenever tenants’

income changes. Stakeholders indicated 

that the recertification process was time 

consuming for tenants, borrowers, and 

the Agency. 

The interim final rule simplifies the 

process by eliminating the requirements 

for an interim recertification for tenants’

monthly income changes of less than 

$100. RHS arrived at the $100 threshold 

by comparing the cost of recertifying 

tenants with the benefit either the 

Government or the tenants would 

receive as a result of increased or 

decreased rent. Based on consultation 

with industry groups and the OIG, RHS 

determined that the cost to recertify a 

tenant was about $150. Assuming that 

any change would apply for only 6 

months of the year, the $150 figure was 

converted to a monthly figure of $25, 

which became the threshold. However, 

after receiving numerous comments that 

this threshold amount was too low, that 

the amount of increase in tenants’

contribution toward rent would be 

minimal, and in consideration of the 

tenant income profile of RHS properties, 

the Agency decided to increase the 

threshold to $100 per month of income 

change rather than tenant contribution. 

The regulation also allows tenants to 

request an interim recertification any 

time between annual recertifications if 

their income changes by $50 or more 

per month. This provision was included 

to avoid adverse impacts on tenants 

with the lowest income for whom the 

$50 per month figure may constitute a 

significant share of their income.

While a detailed analysis of how the 

impact of the $100 and $50 thresholds 

might be distributed between the 

Government and tenants was not 

completed, recent OIG audits have 

indicated that the current recertification 

process produces approximately the 

same amount of rent increases as rent 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69039

decreases, thus resulting in little or no 

overall change in rental assistance 

payments. 

Lease Protection 

The interim final rule would require 

that leases for rental units that receive 

rental assistance include a clause that 

specifies that tenants’ contribution to 

rent will not increase if rental assistance 

is terminated due to actions by the 

borrower/owner. RHS estimates that 

there have been two to four incidents 

per year in which borrowers/owners 

have attempted to make up for the loss 

of rental assistance payments due to a 

default on their part by raising tenants’

rents. Such action usually occurs in a 

contentious situation, with the 

borrowers/owners already in default 

and uncooperative. Consequently, 

requiring leases to include a clause 

specifically prohibiting such action may 

not resolve all cases. However, it would 

provide tenants with a regulatory and 

lease citation that could be used in 

bringing court proceedings against 

abusive borrowers/owners. Further, it 

would provide RHS with an additional 

instance of noncompliance with 

regulations that could be used against 

owners in a liquidation action or in a 

criminal or civil court case. However, it 

is uncertain whether cases could be 

resolved more quickly at less cost to the 

Government. 

While the interim final rule offers 

some additional protection to tenants 

and imposes some additional 

responsibility on borrower/owners, it is 

difficult to place a monetary value on 

these impacts. Each case is likely to be 

different, and the resolutions are 

uncertain. The low incidence, however, 

suggests that the impacts would not be 

significant in value. 

Limited English Proficiency (LEP) 

The Agency has issued guidance to 

clarify the responsibilities of recipients 

and subrecipients of Federal funds from 

the Agency to assist them in fulfilling 

their responsibilities to LEP persons 

under title VI of the Civil Rights Act, as 

amended, and implementing 

regulations. The Agency has 

incorporated language in subparts A and 

D of the interim final rule stating that 

borrowers and grantees must take steps 

to ensure the meaningful participation 

in Agency programs and activities by 

LEP persons free of charge. 

Application Process for Rental 

Subsidies 

Rental subsidies provide critical 

funds for housing very low-income 

tenants. Projects that receive RHS’s 

rental assistance, including interest 

subsidy and rental assistance payments, 

depend on the continued availability of 

these subsidies to maintain in-place 

tenants in their units. Under previous 

regulations, borrowers were required to 

complete full rental assistance requests 

to renew expiring subsidies. 

Stakeholders noted that the Agency 

gathers sufficient information through 

the budget approval process to assess 

project needs for rental assistance. 

The interim final rule states that 

expiring subsidies will be renewed at 

the existing number of units and to the 

extent that sufficient funds are 

available. To indicate that rental 

assistance units are needed, borrowers 

must fill in a single check box on the 

project budget form (which must be 

filed annually) instead of completing a 

separate form as currently required. 

These changes relieve borrowers of the 

burden of applying, and the Agency of 

the burden of reviewing the requests. 

Instead, the review can be accomplished 

as part of the budget approval process. 

The change has no effect on project or 

program budgets. It does not change the 

Agency’s determination about rental 

subsidies; it simply streamlines the 

process. 

Transferring Rental Assistance 

The Agency has revised the interim 

final rule to state that the Agency will 

transfer rental assistance from one 

property to another after it has been 

unused for 6 months. Prior to 

transferring the RA, the Agency must 

conduct an analysis to determine 

whether any of the current tenants or 

applicants at the top of the waiting list 

need RA, so that the subsidy is not 

transferred prematurely. This provision 

should help to ensure that rental 

assistance stays in or is transferred to 

properties where it is needed the most. 

Budget Approval 

RHS requires its borrowers to submit 

an annual budget, which is used in 

setting rents. Approximately 92 percent 

of these budgets arrive for approval at 

the same time because most owners 

operate on a calendar-year basis and 

their schedules for developing budgets 

is about the same. Budget approval is a 

time-consuming process that taxes RHS 

staff resources in times of high volume 

and forces borrowers to operate for 

extended periods of time with 

unapproved budgets while the review 

process is underway. Previous 

regulations required that all budgets be 

reviewed in the same way, regardless of 

whether they represented no real change 

from the previous year or contained 

significant and potentially controversial 

changes. 

The interim final rule establishes an 

expedited review for those budgets that 

are within a certain threshold requiring 

little or no increase in rents. The 

threshold is based on data to be 

obtained from the MFIS III ADP system 

on area-wide norms for projects within 

RHS’s MFH portfolio, as well as 

commercially available multifamily 

income and expense surveys. Details on 

how the threshold will be computed 

will be contained in the program 

handbooks rather than in the interim 

final rule, which will facilitate making 

any necessary adjustments in the 

threshold to meet changing conditions. 

The new process could improve 

program performance by allowing RHS 

to focus its review on those budgets that 

contain significant changes, while 

expediting approval of those budgets 

with little or no change. However, it is 

unlikely that the new process would 

have measurable budget impacts, such 

as reduced rental assistance costs or 

fewer defaults, because the decisions 

RHS makes on whether to approve a 

budget will most likely be the same 

under the new process as under the 

existing system. Those decisions will, 

however, be reached in a more efficient 

manner. 

Summary of Tenant Comments 

There was a requirement in the 

proposed rule stating that when a 

borrower requests a rent increase for a 

particular Agency-financed MFH 

project, the borrower must provide a 

summary of all written comments from 

the tenants to the Agency. The Agency 

determined that this was a cumbersome 

and unnecessary requirement as most 

tenants provide their comments on rent 

increase proposals directly to the 

Agency anyway. The Agency removed 

this requirement, resulting in a decrease 

in the borrower’s burden.

Project Operating Accounts 

The interim final rule states that 

rather than maintaining separate bank 

accounts for every property, a borrower 

or manager of Agency-financed MFH 

projects may have one operating 

account for all properties in their 

portfolio, as long as the borrower, 

manager, and bank track each property’s 

funds separately. With today’s enhanced 

reporting technology, banks can divide 

accounts into subaccounts, to ensure 

accurate reporting of all transactions for 

each property. In addition, this policy is 

economical, because it helps the 

borrower and/or manager save on bank 

fees and charges for separate accounts.

69040 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Priorities for Budgeted Expenses 

The priorities for budgeting a 

property’s operating expenses have been 

revised in the interim final rule. In the 

proposed rule, the first priority for 

budgeted expenditures was critical 

maintenance and operating expenses. 

Due to comments received by the 

Agency, the interim final rule now lists 

amounts owed to a prior lienholder as 

the first priority for budgeted 

expenditures. This new policy reflects 

the current reality that the Agency is not 

always the primary lienholder on 

Agency-financed projects. The policy 

also acknowledges the Agency’s focus 

on participating with other funding 

sources. 

Annual Financial Reporting 

Under previous regulations, the 

Agency required that for all projects of 

25 units or more the owners contracted 

with a Certified Public Accountant 

(CPA) to perform an audit in accordance 

with Government Auditing Standards 

(GAS). Because a large percentage of the 

Agency’s portfolio consists of projects 

with between 16 and 24 units, annual 

financial statements have not been 

prepared for a substantial number of 

projects financed by the Agency. 

Moreover, certain components of GASaudited financial statements did not 

address the Agency’s need for certain 

information related to specific aspects of 

project performance, and these financial 

statements are prohibitively expensive 

for a substantial portion of the Agency’s 

portfolio. Finally, the previous audit 

guide did not require the auditor to 

provide information that remains of 

specific importance to the Agency, such 

as information on identity-of-interest 

(IOI) transactions. 

Under the interim final rule, owners 

of MFH projects with 16 or more units 

must base their annual financial reports 

on an engagement report completed 

according to ‘‘agreed upon procedures’’

established by the Agency, which will 

be included in detail in the new MultiFamily Housing Engagement Guidelines 

to be delivered by the Agency. 

Borrowers must include the engagement 

report with their annual financial 

reports submitted to the Agency. These 

borrowers will not be required to submit 

a GAS audit prepared by an 

independent CPA. The new MultiFamily Housing Engagement Guidelines 

will provide specific instructions on 

how the individual preparing the 

annual financial statements should 

handle compliance issues. The annual 

financial statements must be completed 

using agreed upon procedures that help 

meet certain performance standards. 

The engagement must be initiated by 

borrowers using an engagement letter, 

which will either: 

• Reference the Multi-Family 

Housing Engagement Guidelines, which 

will specify the program compliance 

issues that the Agency wants the 

preparer to address and the guidelines 

for testing compliance; or 

• State the list of compliance issues 

that the Agency wants the preparer to 

address. 

Owners of small projects, which are 

defined as projects with fewer than 16 

units, must submit annual financial 

statements that are prepared in a 

manner consistent with the Agency’s 

Engagement Guide using a limited scope 

engagement based on Agency-approved 

procedures and must certify that the 

housing meets the performance 

standards established in the interim 

final rule. The annual financial 

statements may be prepared by a CPA or 

other individual with the training and 

experience to prepare the report. The 

information presented in the annual 

financial statements must be prepared 

in a manner consistent with the 

requirements of the Engagement Guide. 

In response to USDA OIG concerns, 

the Agency is implementing these 

changes to the annual financial 

reporting system to ensure that a higher 

percentage of projects submit annual 

financial statements to the Agency, and 

that the preparers of these statements 

are made aware of the Agency’s specific 

concerns so that project funds are spent 

appropriately. 

Loans From Third Parties 

In its continuing efforts to streamline 

and facilitate transfers, the Agency has 

included a new provision in the interim 

final rule that specifically allows for 

loans from a third-party source in 

conjunction with an ownership transfer 

or sale of a housing project. The loan 

may be in the form of a first mortgage 

or deed of trust, junior or parity lien, or 

soft second mortgage. This provision 

should make it easier for purchasers to 

put together more than one source of 

financing and allow for greater 

leveraging of Agency funds. 

Transfers at New Rates and Terms 

Previously, Agency regulations 

implied that project transfers typically 

occur at the same rates and terms as the 

original loan. In acknowledging the 

need to streamline and facilitate the 

transfer process, the Agency will allow 

transfers to occur at new rates and terms 

if the transfer would result in lower 

rents to the tenants than at the original 

rates and terms. Again, this will help 

preserve the Agency’s affordable 

housing resources without increasing 

the drain on the Agency’s budget, and 

without resulting in higher rents. 

Equity Loan at the Time of Transfer 

Previously, the regulation prohibited 

debt to be added to pay for equity to the 

seller. In an effort to facilitate transfers 

and provide incentives to sellers to 

assure the project remains as affordable 

rental housing, the new regulations will 

allow for equity loans from the Agency 

or from third parties at the time of 

transfer. 

Special Servicing, Enforcement, 

Liquidation, and Other Actions 

In response to stakeholder, USDA 

OIG, and Agency staff comments, the 

Agency made a number of changes to 

strengthen Agency servicing. None of 

the changes to the regulations on 

servicing constitute changes in policy; 

rather, they address a lack of clarity in 

existing rules and incorporate policies 

that previously existed only in 

Administrative Notices. As such, the 

changes are not anticipated to have 

either a negative or a positive budget 

impact.

For example, the interim final rule 

clarifies the definition of ‘‘default’’ by 

spelling out specific actions that owners 

may take or fail to take that would cause 

the Agency to determine that the loan is 

at risk. The rule also simplifies the 

submission requirements for transfers of 

project ownership. Other changes serve 

to simplify servicing actions in an effort 

to enhance the Agency’s flexibility in 

addressing servicing issues. These 

changes allow for swifter and more 

consistent action to address troubled 

projects—for example, focusing action 

for the Agency and borrowers. This 

would help to avert more serious 

problems in the long term and allow 

Agency staff to concentrate their efforts 

on other portfolio management issues. 

Additional Enforcement Tools 

As a result of the Debt Collection 

Improvement Act and other statutes, the 

Agency has added some important 

enforcement provisions to the interim 

final rule. These include provisions 

allowing the Agency to have the U.S. 

Attorney bring an action in U.S. court to 

recover project assets or income, seek 

civil monetary penalties and other 

sanctions against borrowers for ‘‘equity 

skimming,’’ and seek legal remedies for 

money laundering and obstruction of 

Federal audits. These are important 

provisions that shift some of the burden 

of recovering lost resources from the 

Agency to the rest of the Federal 

Government and also give the Agency 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69041

more effective tools in enforcing its 

requirements. 

Management and Disposition of Real 

Estate Owned Properties 

The interim final rule consolidates 

current regulations regarding real estate 

owned (REO) property and clarifies the 

specific requirements that apply to MFH 

properties. Previous regulations 

addressed many different types of REO 

properties acquired by USDA, including 

MFH properties. Often, the guidance 

provided was generic or related to nonMFH properties. The interim final rule 

provides specific guidance to MFH 

properties, taking into consideration the 

physical condition of the property, 

occupancy status of the property by 

eligible program tenants, and 

determinations of whether the property 

is still needed under the program. This 

rule also adds flexibility to the Agency’s 

requirements for selling the property; 

the change allows the sale to be 

conducted while taking into account 

local market conditions. It also provides 

Field Offices with several options in 

selling REO properties, giving them 

authority that previously rested with the 

National Office. With more options and 

flexibility, processing and sales times 

will be reduced. 

Farm Labor Housing 

The interim final rule consolidates 

separate program regulations for the 

Farm Labor Housing loan and grant 

program along with separate regulations 

for other MFH programs. It does, 

however, maintain separate subparts for 

off-farm labor housing and on-farm 

labor housing. This was necessary to 

preserve the distinction between offfarm labor housing, which consists of 

multi-unit housing operated by 

nonprofit corporations or public bodies 

that receive either loans or loans and 

grants under the sections 514 and 516 

programs, and on-farm labor housing, 

which consists of single or small multifamily housing operated by farmers who 

receive only loans. Several statutory 

changes to the Farm Labor Housing loan 

and grant program have been made over 

the past 5 years. Previous regulations 

have been modified to incorporate these 

changes prior to drafting this proposed 

rule. Since the changes are currently in 

place, they are not addressed again in 

this analysis. No further program 

changes other than regulation 

consolidation are included. 

Technical Assistance Grants to 

Developers of Off-Farm Labor Housing 

The Agency received numerous 

comments on the proposed rule with 

regard to technical assistance grants to 

developers of off-farm labor housing. 

The Farm Labor Housing Technical 

Assistance Final Rule published on 

October 31, 2002, in the Federal 

Register (67 FR 66308), gives the 

Agency the authority to 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 off-farm labor 

housing. This information was 

inadvertently not incorporated into the 

proposed rule. However, the 

requirements for technical assistance 

grants have been incorporated into the 

interim final rule. 

Operating Assistance for Off-Farm 

Labor Housing 

The Agency published a proposed 

rule entitled ‘‘Operating Assistance for 

Off-Farm Migrant Farmworker Projects’’

on November 2, 2000, in the Federal 

Register (65 FR 65790). The 

requirements for operating assistance 

were not included in the 7 CFR part 

3560 proposed rule, but have been 

added to the interim final rule. 

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 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. 

Priorities for Admitting Applicants to 

Off-Farm Labor Housing 

The previous regulations contained an 

elaborate and complicated priority 

system for admitting applicants into offfarm labor housing projects. The Agency 

received numerous comments on the 

proposed rule stating that the priority 

system was cumbersome and confusing. 

The previous regulations had four 

priorities, two of which had two 

subpriorities. These priorities have been 

streamlined into three simple categories 

in the interim final rule. This change 

will result in waiting lists that are 

simpler to create and maintain and 

should promote greater adherence to the 

Agency’s admission criteria. 

Income Limits for Off-Farm Labor 

Housing 

Off-farm labor housing applicants and 

tenants must demonstrate that they earn 

a certain portion of their annual 

household income from farm labor. The 

prior regulation, 7 CFR part 1944, 

subpart D, exhibit J, provided income 

thresholds for applicants of off-farm 

labor housing projects. Borrowers 

applied these percentages to the income 

threshold for their particular region of 

the country. The income thresholds 

established de facto income floors for 

farm labor housing projects. Exhibit J, 

however, had not been updated since 

1986 and reflected average income 

figures for farmworkers from 1983. 

Therefore, the Agency conducted 

research on average farmworker 

earnings based on the 2000 U.S. Census 

and will include an updated version of 

exhibit J in the Asset Management 

Handbook. The interim final rule has 

been revised to state: ‘‘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.’’

While imposing these new income 

limits may result in an increased 

number of applicants to be ineligible for 

occupancy in off-farm labor housing, the 

Agency anticipates that this increase 

will be extremely small, given the 

concomitant increase in average 

farmworker wages during the past 20 

years. 

Office of Rental Housing Preservation 

Changes to the Housing Act of 1949 

required the establishment of an Office 

of Rental Housing Preservation within 

RHS for handling matters related the 

preservation of affordable rental housing 

in the Agency’s MFH portfolio. RHS 

established this office within its MultiFamily Housing Portfolio Management 

Division. 

The Office of Rental Housing 

Preservation has already taken steps to 

enhance the Agency’s consistency in 

reviewing prepayment requests and 

offering incentives by making a single 

entity responsible for coordinating all 

preservation actions. The interim final 

rule recognizes the establishment of this 

office and defines its responsibility to 

69042 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

coordinate, direct, and monitor the 

RHS’s MFH preservation activities. This 

addition to the rule complies with the 

statute and clarifies the role of the 

National Office in the preservation 

process. 

Unauthorized Assistance

When tenants receive unauthorized 

assistance through their own error, the 

Agency has a duty to try to recapture the 

assistance. Under previous regulations, 

much of this responsibility was put on 

project owners. The process was both 

time consuming and burdensome. 

Furthermore, project owners, as well as 

RHS, have only limited ability to collect 

unauthorized assistance, and in many 

cases the cost of pursuing unauthorized 

assistance outweighed the funds 

collected. 

Recognizing these circumstances, the 

interim final rule relieves project 

owners of the responsibility of 

recovering unauthorized assistance due 

to tenant error once tenants have 

moved. It also provides for RHS to 

determine whether unauthorized 

assistance should be pursued. These 

changes give the Agency greater 

flexibility to apply resources cost 

effectively toward cases that most 

deserve to be pursued, and to relieve 

project owners of the burden of 

pursuing tenants who no longer live in 

their projects. This rule also brings RHS 

into compliance with the Debt 

Collection Improvement Act by 

allowing the use of collection agencies 

and offsets to collect unauthorized 

assistance from project owners and 

tenants. 

Market Value, Subject to Restricted 

Rents 

In the past, the process for 

determining the security value of 

Agency-financed MFH projects has been 

overly complicated and a source of 

confusion because of the various 

methods of valuation that the Agency 

used, some of which were not those 

typically used and understood by the 

appraisal industry. Therefore, the 

interim final rule now clarifies that 

appraisals must include the ‘‘market 

value’’ of the property, or the ‘‘market 

value, subject to restricted rents.’’ The 

term ‘‘market value’’ is defined in 

§ 3560.752. ‘‘Market value, subject to 

restricted rents’’ means that 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 funding source. ‘‘Market value, 

subject to restricted rents’’ refers only to 

the value of the subject real property, as 

restricted, and excludes the value of any 

favorable financing. When this value 

type is part of an appraisal assignment, 

all favorable financing in place at the 

time of the appraisal must also be 

valued, but separately from the real 

property. The specification and 

definition of value types will help to 

ensure that applicants, borrowers, and 

the Agency receive appraisals that are 

more accurate and complete. 

Conformance With the Appraisal 

Industry 

Subpart P of the interim final rule has 

been revised substantially so that the 

Agency’s requirements for multi-family 

housing appraisals conform to appraisal 

industry standards. In addition to the 

specification and definition of value 

types described above, subpart P 

establishes new guidelines for appraisal 

scope, procurement, review, and 

release. These new requirements should 

facilitate the appraisal process, as 

certified general appraisers will be 

familiar with the terminology and 

procedures of the revised subpart. 

Changes in Definitions 

Disability 

Agency regulations currently have 

separate definitions for the terms 

‘‘individual with disability’’ and 

‘‘individual with handicap.’’ The 

definition of the term ‘‘individual with 

disability’’ is, in large part, taken from 

section 501(b) of the Housing Act of 

1949. The definition of the term 

‘‘individual with handicap’’ is taken 

from the Fair Housing Act. Other civil 

rights laws, such as the Americans with 

Disabilities Act (ADA) and section 504 

of the Rehabilitation Act of 1973, use 

the term ‘‘disability’’ rather than 

‘‘handicap’’; however, they define it in 

the same manner as the Fair Housing 

Act defines handicap. 

Rather than having two separate 

terms, the Agency will only use the term 

‘‘disability’’ and it will be considered 

equivalent to the term ‘‘handicap.’’ If 

people meet either the Housing Act of 

1949’s definition of handicap or the Fair 

Housing Act’s definition of handicap, 

they will be considered disabled. 

Nonprofit Organization 

The Agency has streamlined its 

definition of ‘‘nonprofit’’ and has made 

it less prescriptive so that more 

nonprofit organizations are eligible for 

participation in the Agency’s multifamily direct loan programs. Most 

notably, the aspects of the definition 

that describe local and regional 

nonprofit organizations have been 

broadened. This will result in increased 

participation by a wider pool of 

nonprofit organizations in the 

construction, transfer, and preservation 

of Agency-financed multi-family 

projects. There are additional 

requirements for what constitutes a 

nonprofit organization for purposes of 

farm labor housing and preservation, 

and these are described in subparts A, 

L, M, and N. 

Additional Definitions 

As a result of comments received on 

the proposed rule from the public, the 

Agency has added several definitions to 

the interim final rule. The addition of 

these definitions should help to clarify 

the Agency’s policies on a variety of 

issues. The new definitions and their 

significance are as follows: 

• Applicant: Clarifies the distinction 

between the applicant and the borrower. 

• Appraisal: Provides the industry 

definition that the Agency uses. 

• Capital needs assessment: Explains 

how the Agency uses this term. 

• Disabled domestic farm laborer:

Explains this category of tenant, so that 

the farm labor housing priorities for 

admission are more easily understood. 

• Farm: Clarifies what the Agency 

considers an eligible farm, which is 

particularly helpful in the discussion of 

farm labor housing. 

• Manufactured housing: Clarifies 

what constitutes this type of housing for 

purposes of interpreting the regulation 

and handbooks. 

• Market rent: Provides the industry 

definition of the term that the Agency 

uses. 

• Off-farm labor housing:

Distinguishes this type of farm labor 

housing from on-farm labor housing. 

• On-farm labor housing:

Distinguishes this type of farm labor 

housing from off-farm labor housing.

Participation With Other Funding or 

Financing Sources 

The provisions of 7 CFR 3560.66 were 

revised to encourage participation from 

public and private sources. The Agency 

made a number of changes in the 

proposed rule to provide greater 

flexibility in the program to allow 

program financing to be more readily 

combined with other sources. However, 

the existing section 515 policy of 

restricting rental assistance to basic 

rents that do not exceed what they 

would have been had the Agency 

provided full financing is retained. The 

Agency recognizes that because it is 

delivering financing at 1 percent, this 

provision will be difficult for an 

applicant to meet under the most 

aggressive leveraging or other lowinterest loan funds financing package. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69043

However, the Agency is also responsible 

for ensuring the efficient, prudent use of 

rental assistance funding. Without this 

standard, RHS would face even greater 

growth in the demand for rental 

assistance funding over and above the 

already significant funding levels. For 

this reason, RHS made the decision to 

continue this policy. 

30-Year Term and 50-Year Amortization 

Period 

Though not a new issue or policy, this 

rule requires that new loans have a 30-

year term with a 50-year amortization 

schedule. This rule will clarify that, at 

the end of 30 years, borrowers have the 

option to pay off the residual balloon 

with no restrictive-use on the property, 

and the Agency has the option to 

refinance (or not) for the facility’s 

remaining economic life. In effect, loans 

will have a 30-year use restriction, 

versus the previous 50-year use 

restriction, with additional use 

restrictions only should the Agency 

refinance. 

Conforming Household Income 

Calculation to Industry Standards 

By changing the calculation of tenant 

household income and assets to be 

consistent with other funding sources in 

the MFH industry, RHS has made a 

significant contribution to reducing 

paperwork burden to the public. No 

longer will a separate calculation have 

to be made for a MFH loan when a 

separate calculation was already 

executed for LIHTCs or another 

affordable housing program. Tenants’

income and assets will be calculated in 

accordance with 24 CFR 813.106 and 

102, which are regulations published by 

HUD. 

Discussion of Comments—Streamlining 

and Consolidation of the Sections 514, 

515, 516, and 521 Multi-Family 

Housing (MFH) Programs—Proposed 

Rule 

This proposed rule was published in 

the Federal Register on June 2, 2003 (68 

FR 32872), with a 60-day comment 

period that ended August 1, 2003. 

Comments were received from 146 

commenters yielding nearly 3,000 

individual comments about the 

language in the proposed rule. 

Commenters included Rural 

Development personnel, housing 

advocacy groups, developers, builders, 

property managers, attorneys, housing 

organizations, and others with an 

interest in these housing programs. 

Many of the comments focused on 

areas currently published in the CFR, 

which were not a part of the proposed 

rule. As discussed, part of the intent 

behind the reengineering and 

reinvention of these regulations was to 

remove much of the administrative 

guidance from the CFR and incorporate 

this guidance into the program 

handbooks, which would not be 

published in the CFR. As discussed 

above, the handbooks provide the 

Agency with flexibility in the Agency’s 

administration of program procedures in 

response to changing circumstances 

without entering into a rule-making 

process. 

The responses to many comments 

have indicated that the guidance 

requested by a commenter is 

administrative and contained in the 

applicable handbooks. RHS sincerely 

appreciates the time and effort of all 

commenters. Comments, by subpart, 

from the proposed rule are discussed 

below. 

Subpart A—General Provisions and 

Definitions 

Topic: Regarding civil rights (e.g., 

limited English proficiency, fair housing 

compliance, reasonable 

accommodations, domestic violence), 

several commenters stated that the 

Agency did not fully address the 

requirements of section 504 of the 

Rehabilitation Act of 1973. 

Response: The Agency appreciates 

these comments and has specific 

references to section 504 requirements 

in § 3560.2 and § 3560.11 of the interim 

final rule. 

Topic: Other commenters were 

concerned with the sufficiency of the 

Agency’s proposed language with 

respect to the civil rights 

responsibilities of borrowers and the 

protections the language in the 

proposed rule would offer the 

applicants to and residents of RHS 

housing. 

Response: The Agency has ensured 

that the civil rights requirements of 

borrowers are clearly described in the 

interim rule and internal Agency 

procedures. 

Topic: Several commenters addressed 

the protected classes included in the 

proposed rule. One commenter believed 

that age and marital status classes are 

added under the proposed language and 

disagreed with this amendment to the 

regulation. Another commenter believed 

that sexual orientation should be added. 

Yet another commenter thought that age 

and disability are important to take into 

account. 

Response: The Agency appreciates 

these comments and has removed 

marital status from § 3560.2 because it is 

not a status specifically protected by 

civil rights statutes. Age was retained 

because it is protected by statute. 

However, the Agency wants to clarify 

that when age is established by statute 

as a program eligibility factor, then it 

needs to be considered when 

determining eligibility for occupancy, 

but only for that determination. Sexual 

orientation is not a status specifically 

protected by civil rights statutes, and 

therefore was not added. 

Topic: Several commenters identified 

an occurrence of ‘‘accommodation’’ in 

the civil rights section, which is not 

preceded by ‘‘reasonable.’’ The 

commenters urged the Agency to revise 

this error. 

Response: The Agency thanks the 

commenters and has revised the interim 

final rule at § 3560.2(a)(1). 

Topic: One commenter suggested that 

a single point of contact at USDA be 

established to receive complaints.

Response: The Agency acknowledges 

the comment and has revised § 3560.2(c) 

in response to this suggestion. 

Topic: One commenter urged the 

Agency to remove requirements that 

owners and agents collect ethnicity and 

racial information from applicants. 

Response: The Agency thanks the 

commenter for highlighting this 

important issue. The Agency has 

modified § 3560.2 to include a 

disclosure statement about the use of 

race and ethnicity information that must 

appear on all applications for housing 

under sections 514, 515, and 516. 

Topic: One commenter suggested 

revising proposed § 3560.2(a)(1) to read: 

‘‘To refuse to make reasonable 

accommodations * * *.’’

Response: The Agency appreciates the 

commenters’ suggestion and has revised 

the interim final rule accordingly. 

Topic: Commenters also addressed 

CRCU. Several commenters expressed 

confusion about the implementation of 

CRCU. 

Response: The Agency has added 

additional information on the 

circumstances under which CRCU 

applies. Specific references to the CRCU 

applicability can be found at 

§§ 3560.60(c), 3560.69(g), 3560.406(d), 

3560.409(b)(3), and 3560.656(e)(1) in the 

final interim rule. 

Topic: Several commenters were 

concerned that capping rents at CRCU 

will keep rents artificially low in some 

cases and not address cases in which 

the costs of operating assisted housing 

are higher than those for conventional 

housing. 

Response: The Agency has addressed 

this concern by allowing exceptions to 

the CRCU cap to allow for certain 

market conditions—extraordinary 

circumstances when it is in the best 

interest of the Government as a means 

to preserve affordable housing 

69044 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

resources. See the references noted 

above for discussions concerning CRCU. 

Topic: The Agency received many 

comments regarding the definition of 

CRCU. Several commenters believed 

that the definition in proposed 

§ 3560.11 should refer to the market 

area, not to the geographic area. 

Response: The Agency thanks the 

commenters for this suggestion, but has 

made no change to the interim final 

rule. There are regions in the country 

where the market is small and where 

Agency-financed multi-family 

properties comprise the market. By 

expanding the definition to include the 

geographic area, this increases the 

likelihood that there will be compatible 

rents by which to measure these 

Agency-financed properties. 

Topic: One commenter suggested that 

CRCU should not be used in any county 

where the median income is lower than 

the statewide median income. 

Response: The Agency thanks the 

commenter for this suggestion but has 

made no change to the interim final 

rule. CRCU is designed to work within 

‘‘market areas’’ which may cross county 

lines and is not designed to work within 

the strictures of a county basis. 

Topic: One commenter believed that 

the Annual Financial Report 

requirement places an additional 

burden on small projects that is further 

exacerbated by the CRCU restrictions. 

Response: The Agency thanks the 

commenter for this suggestion but has 

made no change to the interim final 

rule. Based on the findings of the OIG, 

the Agency is adding this requirement 

for smaller projects to address the 

potential misuse of funds. 

Topic: Concern was expressed with 

respect to authority measures, 

specifically the delegation of authority, 

as well as exception authority. 

Response: The Agency understands 

that commenters are concerned that its 

requirements be implemented 

consistently and that the chain of 

command remain clear when authority 

is delegated. The interim final rule was 

designed to maximize consistency in 

implementing Agency requirements 

nationwide. 

Topic: Commenters were concerned 

that the interim final rule imposes too 

many restrictions on granting 

exceptions. Several commenters stated 

that the proposed rule allows exceptions 

only when the action is in the best 

financial interest of the Government. 

Response: The Agency appreciates 

these comments and has revised 

§ 3560.8 to read ‘‘The RHS 

Administrator may make an exception 

to any provision of this part or address 

any omissions provided that the 

exception (1) is consistent with the 

applicable statute, (2) does not 

adversely affect the interest of the 

Federal Government, and (3) does not 

adversely affect the accomplishment of 

the purposes of the Multi-Family 

Housing programs, or application of the 

requirement would result in undue 

hardship on the tenants.’’

Topic: One commenter recommended 

that the USDA hire a national firm to 

evaluate preservation projects to ensure 

they are economically beneficial to the 

Government and, therefore, to tenants. 

Response: The Agency acknowledges 

this suggestion but has made no change 

to the interim final rule. The Agency has 

an established process and internal 

procedures and staffing to evaluate the 

economic benefits of preservation 

transactions. 

Topic: One commenter believed that 

Rural Development employees find it 

easier to disallow exceptions than to 

perform the necessary steps to execute 

an exception. 

Response: The Agency respectfully 

disagrees with the commenter’s 

interpretation. Exceptions are evaluated 

thoroughly on a case-by-case basis and 

only granted rarely.

Topic: One commenter believed that 

Agency regulations should acknowledge 

that other financing programs (e.g., taxexempt bonds, State financing 

programs, HOME Investment 

Partnership Funds) may dictate rent 

levels in addition to the rents dictated 

by LIHTCs. 

Response: The Agency appreciates the 

comment. The Agency has 

acknowledged these other programs in 

its descriptions of financial leveraging, 

third-party financing, and subordination 

of Agency debt. Numerous commenters 

raised concerns about some of the 

definitions provided in § 3560.11, 

which are described below: 

Administrative appeals 

Topic: Several commenters stated that 

the rule does not contain enough 

information on when appeals are 

allowable, to whom appeals should be 

made, and what are the tenant grievance 

procedures. 

Response: The Agency wishes to 

clarify that the requirements for appeals 

for all actions, unless otherwise noted in 

the interim final rule, are found at 7 

CFR part 11. The tenant grievance 

process is described in detail in subpart 

D and in internal Agency procedures. 

Topic: One commenter objected to the 

use of handbooks, notices, or other 

issuances being a program requirement. 

The commenter believed that practice 

subverts the public comment and 

appeals period otherwise required for 

regulatory changes. 

Response: The Agency appreciates the 

commenter’s interest in ensuring a free 

and open public discussion of public 

policy but disagrees with the assertion. 

The regulatory and burden issues are 

discussed in the interim final rule. 

Handbooks are useful for providing 

guidance and establishing internal 

Agency procedure. 

Topic: One commenter addressed the 

issue of environmental reviews. First, 

with respect to ‘‘practicable 

alternatives,’’ the commenter suggested 

that the location of a site in relation to 

flooding, along with the additional cost 

for insurance and potential 

development costs, must be addressed 

in the appraisal. Second, the commenter 

addressed § 3560.4(e) and noted that 

lead-based paint requirements are no 

longer located in 7 CFR part 1924, 

subpart A; the correct reference is 24 

CFR part 35, subparts A–D, J, and R, 

which are regulations published by 

HUD. 

Response: The Agency thanks the 

commenter for the updated regulatory 

citations and has updated these 

references in the interim final rule. 

However, the Agency has made no 

change to § 3560.3 of the interim final 

rule. The suggestion was not adopted 

because of the existing environmental 

regulations at 7 CFR part 1940, subpart 

G. 

Numerous commenters raised 

concerns about some of the definitions 

provided in § 3560.11, which are 

described below: 

Applicant 

Topic: One commenter suggested that 

proposed § 3560.55(b) refers to the 

‘‘applicant,’’ but that ‘‘applicant’’ is not 

defined. 

Response: The Agency thanks the 

commenter for the suggestion and has 

added a definition for ‘‘applicant’’ to the 

interim final rule. 

Asset Management Fee 

Topic: A commenter believed that the 

Agency should add a definition for 

‘‘asset management fee,’’ asking it be 

defined as a fee allowed to nonprofit 

organizations or public bodies for the 

effective ownership of RHS-assisted 

multi-family housing properties. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. This issue is covered 

under § 3560.303(b)(1)(ii) and includes a 

list of expenses that would commonly 

be charged as an asset management fee. 

Basic Rent 

Topic: Several commenters agreed 

with the change in definition of ‘‘basic 

rent’’ but were concerned that CRCU 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69045

would impose a restriction on the 

amount of basic rent that borrowers can 

charge that could adversely affect some 

properties. Several commenters 

recommended additional components to 

be included in the calculation of basic 

rent. 

Response: As stated previously, CRCU 

only applies in certain instances, and 

the Agency may make CRCU exceptions 

on a case-by-case basis. CRCU is a 

concept that the Agency uses to evaluate 

rent levels. It is not considered the 

established ‘‘rent’’ or basic rent. 

Topic: A commenter suggested that in 

the definition of ‘‘basic rent,’’ the 

Agency should change the last word 

‘‘agreement’’ to ‘‘subsidy.’’

Response: The Agency appreciates 

this suggestion; however, the interest 

credit agreement is the instrument by 

which any reduction is made. 

Caretaker 

Topic: One commenter believed that 

the definition of ‘‘caretaker’’ should be 

expanded to state that caretakers may 

also serve as a site manager, with either 

an onsite or offsite work location. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. Borrowers may use 

caretakers or site manager as they see fit, 

as long as staffing duties and 

responsibilities are clearly spelled out 

in the Management Plan. 

Congregate Housing 

Topic: One commenter thought that 

the definition for ‘‘congregate housing’’

should state that such a facility could 

not be a licensed healthcare facility. 

Response: The Agency appreciates the 

comment and has adopted that change 

in the interim final rule.

Current Appraisal 

Topic: A commenter believed that the 

definition for ‘‘current appraisal’’ be 

revised because an appraisal report 

could be 14 months old and still be a 

current appraisal report. 

Response: The Agency thanks the 

commenter for the suggestion and has 

revised the interim final rule to state 

that the appraisal report date should be 

no more than 1 year old. 

Default 

Topic: Several commenters thought 

that the definition of ‘‘default’’ raised a 

concern that the Agency could consider 

a borrower to be in default for minor, 

insignificant items. 

Response: The Agency appreciates 

these comments and has revised the 

definition to state that default is the 

failure ‘‘by a borrower to meet 

significant monetary or non-monetary 

obligations.’’

Disability 

Topic: One commenter believed that 

the definition of ‘‘disability’’ is a helpful 

change, while another commenter 

believed that the definition is 

inappropriate. 

Response: The Agency thanks the 

commenter for their concurrence on this 

issue and has clarified the definition in 

the interim final rule by providing the 

specific regulatory citations. 

Topic: One commenter recommended 

changes to the definition of ‘‘disability.’’

The commenter believed that the 

Agency should either delete the list of 

examples of a disability, or at least make 

it clearer that the lists of examples are 

in no way intended to be exclusive. 

Response: The Agency appreciates the 

comment but made no change to the 

interim final rule because the definition 

is statutory. 

Topic: One commenter suggested that 

the term ‘‘handicapped’’ be replaced by 

‘‘disabled’’ or ‘‘accessible’’ whenever 

appropriate. In limited instances, the 

use of ‘‘handicapped’’ is acceptable, but 

the term should be limited. 

Response: The Agency thanks the 

commenter for the suggestion and has 

revised the text as appropriate in the 

interim final rule. 

Domestic Farm Laborer 

Topic: Five comments were received 

concerning the definition of domestic 

farm laborer and the proposed rule’s 

elimination of the requirement that 

aliens be admitted for permanent 

residence. The majority were in support 

of the change. One of the commenters 

contended that Congress has expressed 

its intent for broader eligibility 

standards. 

Response: The requirement that aliens 

be admitted for permanent residence 

has been reinserted in the definition. 

This is required by the authorizing 

statute, 42 U.S.C. 1484(f)(3)(A). The 

language concerning the eligibility of a 

family member was also rewritten to be 

more consistent with statutory language 

in 42 U.S.C. 1484(f)(3). 

Elderly Person 

Topic: Numerous commenters were 

concerned that the definition of an 

‘‘elderly person’’ includes persons with 

a disability, and that these persons 

could be any age. They thought that 

allowing non-elderly persons to reside 

in properties designed for the elderly 

causes social and project management 

problems. 

Response: The Agency appreciates 

these comments but has made no 

change to the definition because it is 

statutory. 

Engagement 

Topic: One commenter suggested that 

because the costs of CPA audits are 

based on the scope of work, the 

requirements for such engagements 

must be provided to owners in enough 

time for the owner to obtain cost 

estimates from the CPAs and to include 

the costs in proposed budgets. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. The Agency will 

provide guidance for borrowers in the 

MFH Engagement Guidelines to be 

issued separately. 

Familial Status 

Topic: Regarding the definition of 

‘‘familial status,’’ the commenter 

recommended that RHS adopt the same 

definition used in the Fair Housing Act. 

Response: The Agency thanks the 

commenter for raising this issue. The 

Agency is adopting the same definition 

of ‘‘familial status’’ as used under the 

Fair Housing Act. 

Family Farm Corporation or Partnership 

Topic: One commenter questioned the 

definition for ‘‘family farm corporation 

or partnership.’’ The commenter asked 

whether this definition is consistent 

with other rural development 

definitions of family farm, particularly 

the Rural Business-Cooperative Service 

Business and Industry Cooperative 

Stock Purchase Program. 

Response: The Agency thanks the 

commenter for the suggestion but has 

made no change to the interim final rule 

because the definitions are consistent 

within Rural Development. 

Farm Labor

Topic: The Agency received several 

comments concerning the definition of 

‘‘farm labor.’’ Each commenter raised 

questions about the term ‘‘unprocessed 

stage.’’

Response: The Agency has used this 

term in the proposed rule instead of the 

term ‘‘manufactured state’’ in the 

previous regulation to make the term 

more consistent with statutory language. 

Topic: One commenter asked the 

Agency to include the statutory phase 

‘‘without respect to the source of 

employment’’ in the definition and to 

provide examples of what is considered 

to be farm labor in the handbooks. 

Response: The Agency has added the 

statutory phase to the definition, and 

the Agency intends to include examples 

of farm labor in the program handbooks. 

Farmer and Farm Owner 

Topic: For the definitions of ‘‘farmer’’

and ‘‘farm owner,’’ one commenter 

found the added reference to 7 CFR 

69046 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

1941.4, which brings in the concept that 

a farmer must be a ‘‘family-size farm,’’

to be a very limiting and improper 

restriction. This commenter believed 

that farm laborers should be able to 

occupy farm labor housing regardless of 

whether the farm they work for is 

‘‘family size.’’

Response: The Agency thanks the 

commenter and has deleted the 

reference to 7 CFR 1941.4 from the 

interim final rule. 

General Overhead 

Topic: Two commenters asked 

whether RHS imposes maximum limits 

for general overhead. 

Response: There is a maximum limit 

on general overhead. This maximum 

limit is 4 percent of the construction 

cost. RHS establishes a maximum limit 

that is similar to the standards used by 

other government lenders. This upper 

limit can vary with the types of 

financing used for a project or due to 

changes in market conditions. The 

ceiling only serves as an upper limit to 

help ensure cost reasonableness and can 

vary across circumstances and over 

time. 

Topic: The Agency received a 

comment stating that the proposed rule 

should require documentation to ensure 

that the resident assistant is truly 

needed for the well-being and care of 

the tenant. 

Response: The Agency appreciates the 

comment but has made no change to its 

interim final rule. Section 

3560.104(c)(4) of the interim final rule 

provides guidance for borrowers to 

permit resident assistants. This is a 

reasonable accommodation issue and 

should be treated like other reasonable 

accommodation issues. 

Topic: One commenter asked why 

Plainview, Texas, and Altus, Oklahoma, 

are singled out for consideration in 

terms of 2000 U.S. Census data. 

Response: These communities are 

authorized by statutory language in 

section 520 of the Housing Act. 

General Requirements 

Topic: The commenter thought that 

performance and payment bonds, cost 

certifications, and building permits are 

not considered ‘‘general requirements’’

by the industry and need to be left out 

of the definition. 

Response: The professional architect 

on the Agency’s staff disagrees with the 

commenter and feels the items 

mentioned are part of ‘‘general 

requirements’’ by the industry and no 

change is needed in the definition. 

Household Furnishings 

Topic: A commenter questioned the 

definition of ‘‘household furnishings,’’

believing household furnishings should 

not include tables, chairs, dressers, and 

beds. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. The commenter needs 

to consider that these items are 

necessary for tenants of Farm Labor 

Housing occupied primarily by migrant 

farmworkers. 

Household Member 

Topic: The commenter thought that 

the proposed rule and the handbooks 

should be reconciled and should clarify 

their definitions of ‘‘household 

member.’’

Response: The Agency appreciates the 

comment and will revise Agency 

guidance about program procedures to 

be consistent with the regulation. No 

change to the interim final rule was 

needed. 

Identity-of-Interest 

Topic: Numerous commenters stated 

that the definition of ‘‘identity-ofinterest’’ is too broad.

Response: The definition of IOI has 

been moved from the existing 

regulations to 3560 without change and 

it is consistent with the one used by 

other Government lenders. 

Topic: Some commenters stated that 

the trigger for an identity-of-interest to 

occur of 10 percent or more interest in 

the supplying entity was a reasonable 

threshold. Other commenters thought 

that the threshold was either too high or 

too low. 

Response: The Agency appreciates 

these comments. However, the Agency 

has decided to retain the definition as 

presented in the proposed rule. The 

concept of identity-of-interest, as it 

relates to specific issues, is discussed in 

more detail in subpart C. Therefore, the 

Agency has determined that retaining a 

general description in § 3560.11 is 

appropriate. 

Legal or Qualified Alien 

Topic: One commenter requested that 

the Agency use the Single-Family 

Housing definition for ‘‘legal or 

qualified alien,’’ which the commenter 

finds clearer. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. The definition used 

in the proposed rule was the same as the 

definition that is used by the SingleFamily Housing Program (see 7 CFR 

3550.10) and is consistent with the 

Housing Act of 1949, section 501(h). 

The Agency has exercised its authority 

under sections 501(h) and 510(k) of the 

Housing Act of 1949 [42 U.S.C. 1471(h) 

and 1480 (k)] to restrict eligibility for 

occupancy in all section 515 projects to 

citizens and qualified aliens. In 

addition, eligibility for the migrant farm 

workers programs under sections 514 

and 516 is specifically restricted to such 

individuals by section 514(f)(3)(A) of 

the Housing Act of 1949 [42 U.S.C. 

1484(f)(3)(A)]. 

Life-Cycle Cost Analysis 

Topic: Several commenters expressed 

approval of the Agency’s decision to 

require life-cycle cost analyses under 

certain circumstances. Others, however, 

expressed concern about the definition’s 

lack of specificity. 

Response: The Agency appreciates 

these comments and has clarified the 

life cycle cost analysis in§ 3560.11. 

Topic: One commenter addressed the 

wording in the definition for ‘‘life-cycle 

cost analysis.’’ The commenter believed 

that the Agency should say Licensed 

Engineer or Architect rather than Design 

Professional. 

Response: The Agency thanks the 

commenter for this suggestion but has 

made no change to the interim final 

rule. The Agency does not want to limit 

the borrower’s option regarding 

preparation of the analysis. 

Limited Partnership 

Topic: Two commenters suggested 

that ‘‘capitol’’ be revised to ‘‘capital’’ in 

the definition for ‘‘limited partnership.’’

Response: The Agency thanks the 

commenters for the suggestion and has 

revised the interim final rule. 

Management Fee 

Topic: Regarding the definition of 

‘‘management fees,’’ one commenter 

asserted that the proposed rule will use 

occupied units as the basis for all fees—

an approach that is not in keeping with 

normal industry practices * * * and 

fails to recognize that vacant units are 

typically the ones that require the 

greatest amount of management 

attention and effort. 

Response: The Agency acknowledges 

the commenters’ concerns. However, the 

Agency believes the rule as written 

takes into account partial occupancy at 

§ 3560.102(i)(2). If additional staff time 

is needed to perform leasing activities to 

address vacancies, these costs are 

payable directly from the project. For 

this reason, the Agency believes that a 

fee system based on occupied units will 

not adversely affect projects 

experiencing vacancies or higher 

turnover. Further, if a property is 

located in a difficult market, the Agency 

can authorize add-on fees as a means to 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69047

address issues associated with 

individual markets in an area. The 

Agency has made no changes to the 

rule, but will continue to consider 

options and refinements during the 

interim final rule. 

Maximum Debt Limit 

Topic: The commenter supported the 

inclusion of the reduction of funding 

available to the borrower from sources 

other than the Agency in the definition 

of the ‘‘maximum debt limit.’’

Response: The Agency appreciates the 

commenter’s support. 

Migrants or Migrant Agricultural 

Laborers 

Topic: Several commenters stated that 

the definition for ‘‘migrants’’ and 

‘‘migrant agricultural laborers’’ should 

be clarified to provide a definition of 

‘‘temporary residence.’’ Others stated 

that the definition should exclude the 

requirement that to be migrant, the 

farmworker would have to travel out of 

state, and that in large states such as 

California, this requirement is not 

practicable. 

Response: The Agency acknowledges 

these comments but notes that the 

definition states that farmworkers may 

still be considered ‘‘migrant’’ if they are 

‘‘day-haul agricultural workers whose 

travels are limited to work areas within 

one day of their residence.’’ In addition, 

the term ‘‘temporary residence’’ is 

discussed more fully in § 3560.553 of 

the interim final rule. 

Moderate-Income Households 

Topic: Several commenters stated that 

the Agency’s definition of ‘‘moderate 

income’’ is not used by any other 

affordable housing program and that the 

Agency should adopt HUD’s definition.

Response: The Agency appreciates the 

commenters’ concerns but has chosen to 

use the definition from the SingleFamily Housing program for consistency 

within Agency programs. 

Mortgages 

Topic: One commenter suggested that 

a definition for ‘‘deed of trust’’ should 

be added. The term ‘‘mortgage’’ is 

defined, but because many of our multifamily housing loans are secured by a 

deed of trust rather than a mortgage, 

deed of trust should also be defined. 

Response: The Agency appreciates the 

comment and has clarified its definition 

of ‘‘mortgage’’ to include deed of trust 

in the interim final rule. 

Topic: One commenter recommended 

that the definition of ‘‘mortgage’’ be 

modified by adding the phrase ‘‘that 

requires judicial foreclosure for 

enforcement’’ to the end of the 

definition. 

Response: The Agency appreciates the 

comment but has made no change to the 

definition because not all states require 

judicial foreclosure for enforcement. 

Native American 

Topic: Several comments addressed 

the definition of ‘‘Native American.’’

The commenters believed that the 

reference to the Indian SelfDetermination & Education Assistance 

Act as the trigger for eligible status is 

confusing and results in a burdensome 

search to find this information. 

Response: The Agency thanks the 

commenters for the suggestion. The 

Agency has revised the interim final 

rule to define the term ‘‘Indian tribe’’

and provides appropriate reference to 

the Indian Self-Determination & 

Education Assistance Act. In addition 

the definition of ‘‘Native American’’ is 

statutory under section 501(b)(6) of title 

V of the Housing Act of 1949 (42 U.S.C. 

1471(b)(6)). 

Net Recovery Value 

Topic: A commenter wrote in support 

of the definition for ‘‘net recovery 

value.’’

Response: The Agency appreciates the 

commenter’s concurrence. 

Nonprofit Organization 

Topic: Numerous commenters 

expressed concern that the definition of 

‘‘nonprofit organization’’ is too 

prescriptive and will cause too many 

organizations to be considered ineligible 

for the priority purchaser category in 

preservation transfers. For instance, in 

large states such as California, nonprofit 

organizations that have the capacity to 

develop and operate affordable MFH 

properties are often not local in nature. 

Commenters were concerned that such 

restrictions would limit the 

participation of capable nonprofit 

organizations in the development and 

operation of sections 514, 515, and 516 

properties. 

Response: The Agency appreciates 

these comments and has simplified the 

definition of nonprofit organization to 

be less prescriptive and to allow for 

more widespread participation by 

nonprofit groups, but the definition 

remains consistent with the applicable 

statute. Similarly, the interim final rule 

provides a separate definition for 

‘‘nonprofit organization for section 515 

program for prepayment or purchase’’

that is substantially simplified to allow 

for greater participation in these 

activities. 

Note Rent 

Topic: Several commenters expressed 

concern that the definition of ‘‘note,’’ for 

note rent, should acknowledge that it 

stands for the term ‘‘note rate rent.’’

Response: The Agency has included 

the definition for ‘‘note rent’’ in 

§ 3560.11 of the interim final rule, and 

the correct term for this rent is ‘‘note 

rent.’’

Permanent 

Topic: A commenter questioned why 

the term ‘‘permanent’’ was eliminated. 

The commenter wondered whether the 

intent is that tenants who are here with 

temporary legal status papers be housed. 

Response: The Agency thanks the 

commenter for the suggestion and notes 

that there was an error in the proposed 

rule. The text has been revised as 

appropriate in the interim final rule. 

Plan I 

Topic: One commenter stated that the 

definition for ‘‘Plan I’’ can be more 

specific by saying interest credit became 

effective in 1968. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule because the Agency 

does not believe the additional 

specificity provides any more clarity to 

the definition. 

Prepayment 

Topic: One commenter recommended 

providing further clarification for the 

definition for ‘‘prepayment’’ by adding 

‘‘as authorized by the Agency in 

response to an offer from the borrower.’’

Response: The Agency appreciates the 

comment but has not incorporated the 

suggested language in the interim final 

rule. The Agency does not believe that 

the suggested revision adds anything to 

the definition because full payment of 

the debt may occur in situations other 

than the Agency’s response to an offer 

from the borrower.

Renovation 

Topic: One commenter stated that 

‘‘renovation’’ is a new term for the 

program that is barely used in the 

proposed regulation, so this definition 

should be deleted. 

Response: The Agency thanks the 

commenter for the suggestion and has 

deleted the definition from the interim 

final rule. 

Rent 

Topic: Several commenters were 

pleased that the Agency acknowledges 

that there are many different rent levels 

in affordable housing finance. One 

commenter asked the Agency to address 

the issue of multi-tiered rents. 

69048 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Response: The Agency thanks these 

commenters for their comments on this 

issue. The Agency did not address 

multi-tiered rents in the Definitions 

because such rents are not permitted in 

the interim final rule. 

Topic: One commenter found the 

definition of ‘‘rent’’ to be redundant 

with the definition of ‘‘basic rent.’’ The 

commenter suggested that the definition 

of ‘‘rent’’ include vacancy and 

contingent factors, reserve transfers, and 

owner’s return as defined expenses. 

Response: The Agency appreciates the 

comment and has clarified the 

definition of each type of rent in the 

interim final rule in § 3560.11 by 

removing the language in § 3560. 202(c). 

The Agency did this because it believes 

the language from the Housing Project 

Budget Form provided clearer wording 

for a definition of this term. 

Rental Assistance 

Topic: One commenter suggested that 

the definition for ‘‘rental assistance’’ be 

revised to read: ‘‘The portion of 

approved shelter cost paid by the 

Agency to compensate a borrower for 

the difference between the approved 

shelter cost (basic rent) and the tenant 

contribution when such contribution is 

less than the basic rent.’’

Response: The Agency has accepted 

the comment and has revised the 

definition for ‘‘rental assistance’’ in 

§ 3560.11 of the interim final rule. 

Topic: One commenter suggested 

revisions to ‘‘rental assistance units,’’

specifically, expanding the definition of 

servicing units to include RA units 

provided to an operational project for 

any reason. 

Response: The Agency thanks the 

commenter for the suggestion and has 

revised the interim final rule at 

§ 3560.11. 

Topic: The Agency received one 

comment that asks for explanatory 

guidance as to what a season is. For 

example, in Oregon seasonal farm labor 

housing is occupied typically up to 10 

months. In other states or regions it may 

be only as long as 6 or 7 months. 

Response: The Agency appreciates the 

comment but has decided not to add 

this term to the interim final rule. As 

stated by the commenter, seasons vary 

by region and therefore, the Agency is 

allowing the borrower to have the 

flexibility to deal with this issue. 

Section 3560.568 of the interim final 

rule requires the borrower, in their 

management plan, to establish specific 

opening and closing dates for off-farm 

labor housing operating on a seasonal 

basis. 

Resident or Site Manager 

Topic: Regarding the definition for 

‘‘resident or site manager,’’ the 

commenter recommended replacing the 

portion of the definition that currently 

reads: ‘‘who lives at or near the project 

site.’’ The commenter believed that 

maintaining a local presence is a critical 

element in providing an acceptable level 

of customer service. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule because a site manager 

is a manager who works at the property 

but is not required to live at or near the 

property. The Agency does not believe 

there is a connection between local 

presence and good customer service. 

Rural Area 

Topic: A few commenters expressed 

concern that basing the definition of 

‘‘rural area’’ on decennial census 

population data is inappropriate 

because the data are now several years 

old. Another commenter suggested that 

the definition was too complicated. 

Response: The Agency appreciates 

these comments but has made no 

change to the definition of rural area 

because it is statutory, from section 520 

of title V of the Housing Act of 1949. 

Topic: One commenter asked the 

Agency to add a provision that allows 

for the automatic revision of the 

definition of ‘‘rural area’’ as statutes 

change. This commenter was also 

concerned with the definitions of 

sections 515, 514, and 516 programs. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. The definition is 

statutory and will be changed when the 

statute is amended. 

Tenant Contribution 

Topic: One commenter suggests that 

in the definition for ‘‘tenant 

contribution,’’ the word ‘‘rent’’ be 

replaced with the words ‘‘shelter cost.’’

Response: The Agency thanks the 

commenter for the suggestion and has 

revised the interim final rule.

Topic: The commenter believed that 

the definition of ‘‘tenant contribution’’

implies that all tenants pay something 

for occupancy at a rental unit; however, 

some tenants do not pay anything. 

Response: The Agency appreciates the 

comment and has reworded the 

definition of ‘‘tenant contribution’’ to 

use the same definition that was used 

previously. Under the statutory 

definition (42 U.S.C. 1471(a)(5)(A)) of 

income, some items are excluded from 

the calculation of income; therefore, the 

commenter is correct that some tenants 

do not pay any rent. 

Tenants’ Rights 

Topic: One commenter suggested that 

the regulation should include an 

explicit statement that state or local 

laws that give tenants greater rights than 

this regulation are not preempted by the 

regulation or handbooks, as long as 

those laws do not interfere with the 

fundamental purposes of the RHS 

programs. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. Throughout subpart D 

of the interim final rule, the Agency 

states that borrower policies regarding 

occupancy and tenant rights must be 

consistent with state and local laws. 

Topic: One commenter acknowledged 

that no per-unit square footages was 

proscribed. The commenter stated that 

this will help in dealing with 

multifunding sources; however, 

developing modest housing should still 

be a priority with the Agency. 

Response: The Agency thanks the 

commenter for the support. 

Topic: Regarding design 

requirements, one commenter agreed 

with the change in philosophy from cost 

containment to economical 

construction. 

Response: The Agency thanks the 

commenter for the support. 

Topic: The Agency received a 

comment regarding owner responsibility 

and requirements. The commenter 

believed that this provision is confusing 

and may be interpreted too broadly. 

Implicitly this rule provides that parties 

cannot delegate responsibility, which is 

not accurate. 

Response: The Agency appreciates the 

comment but has made no change to the 

interim final rule. The borrower is 

contractually bound to meet the 

Agency’s requirements by the 

promissory note, loan agreement/

resolution, and mortgage. The borrower 

is permitted to hire a management 

company to perform day-to-day 

oversight of the property, but the 

borrower is ultimately responsible for 

the property. 

Topic: One commenter addressed 

§ 3560.60(d)(2) and the definition of ‘‘to 

the extent possible’’ as it relates to 

accessibility upgrades when a single 

damaged unit is being extensively 

repaired. The commenter suggested that 

if accessibility requirements would add 

more than 5 percent to the repair costs, 

the accessibility requirement should not 

be required. Further, the Agency should 

note that borrowers could use reserve 

funds for additional accessibility 

requirements.

Response: The Agency appreciates the 

comment but has made no change to the 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69049

interim final rule. See the reference at 

§ 3560.2(a)(2) that the Uniform Federal 

Accessibility Standards are required (49 

CFR part 1190). 

Total Development Costs 

Topic: Numerous commenters were 

concerned that the components of total 

development costs do not include 

developer fees. One commenter 

suggested that household furnishings be 

removed from the total development 

cost. 

Response: For Agency-financed 

projects with LIHTC financing, the 

developer will continue to earn 

developer fees. Developers of projects 

without LIHTC financing will not be 

permitted developer fees. The Agency 

believes that the borrower’s permitted 

return as currently calculated should 

provide sufficient remuneration on a 

well-managed property. Furnishings, as 

noted in the Definition, are only part of 

the total development cost for section 

514 and 516 (Farm Labor) Housing. 

Subpart B—Direct Loan and Grant 

Origination 

Topic: Numerous commenters 

expressed concern that the definition of 

and restrictions on nonprofit 

organizations are too restrictive. Several 

commenters said that the requirement 

for a nonprofit to have 25 members from 

the community to show community 

support for the project is excessive 

because finding 25 people in any 

community to actively serve is difficult. 

Some commenters stated that the 

requirements were unclear. For 

instance, several commenters asked for 

a definition of public sector, when used 

to describe restrictions on the number of 

board members from the public sector. 

Response: As stated in the description 

of the comments received for subpart A, 

General Provisions and Definitions, the 

Agency has revised the definition of 

‘‘nonprofit organization’’ to be simpler, 

less prescriptive, and less restrictive to 

maximize participation of nonprofit 

organizations in the sections 514, 515, 

and 516 programs. 

Topic: Similar to the comments 

received on the definition of ‘‘total 

development costs,’’ numerous 

commenters stated that developer fees 

should be an allowable expenditure of 

loan funds. Several commenters noted 

their belief that developer fees should 

be capped. 

Response: Again, the Agency’s 

position is that for Agency-financed 

projects with LIHTC financing, 

developers will continue to receive 

developer fees. Developers of projects 

without LIHTC financing will not be 

permitted developer fees. (This is 

described in § 3560.63(d)(2) of the 

interim final rule.) The Agency believes 

that a borrower’s permitted return as 

currently calculated should provide 

sufficient remuneration on a wellmanaged property. 

Topic: The Agency received multiple 

comments on the requirements for 

initial operating capital and the initial 

equity contribution required of 

borrowers, as well as the time period 

during which the initial operating 

capital may be repaid to the owner. One 

commenter asked the Agency to revise 

the proposed language in § 3560.64(b) to 

state that any additional initial 

operating expenses paid by owners 

above this amount would be repaid, as 

a priority, from available cash flow. A 

second commenter asked the Agency to 

clarify in § 3560.64(c) why it would 

require the initial contribution of 

operating to be made prior to the start 

of construction. The commenter asked 

the Agency to revise these requirements 

so that the initial operating contribution 

could be provided at the end of the 

construction period, or at least after 

construction is 50 percent completed. 

Response: As outlined in § 3560.304, 

the purpose of initial operating capital 

(IOC) is to provide a source of capital for 

start-up costs. IOC may only be used to 

pay for approved budget expenses. The 

applicant’s ability to fund the IOC, if 

required, is part of the applicant 

eligibility requirements and therefore, 

cannot be contributed after loan 

approval, e.g., at the end of construction 

or at 50 percent completion. The 2 

percent IOC requirement is a minimum. 

If excess funds are contributed to the 

IOC, they may be withdrawn by 

borrower in accordance with 

§ 3560.304(c). 

Topic: Several commenters said that 

the amount of the initial operating 

capital—2 percent of total development 

costs—is unrealistically high. 

Response: The Agency has 

determined that 2 percent of total 

development costs is reasonable in light 

of the amount required to operate an 

Agency-assisted property, especially 

during the initial rent-up period, during 

which the amount is used to help cover 

startup costs. 

Topic: Some commenters said that the 

2- to 7-year time period during which 

the initial operating capital may be 

repaid to the owner is too long, while 

others said it was too short. 

Response: The Agency appreciates 

these comments but has decided that 

the 2- to 7-year repayment period is 

acceptable because it allows adequate 

flexibility to borrowers. Therefore, the 

Agency has made no change to the 

regulation. 

Topic: Regarding the requirements for 

general partners in a limited partnership 

with LIHTCs, 12 commenters stated that 

the requirement for general partners to 

have a 5 percent financial interest in a 

limited partnership, as stated in 

§ 3560.55(d)(2), is unworkable. They 

stated that in the majority of LIHTC 

deals, the general partners only have a 

financial interest of 1 percent or less. 

Response: The Agency believes that 

the commenters are confusing the 

expression ‘‘financial interest in the 

residuals or refinancing proceeds’’ with 

‘‘financial ownership interest.’’ The two 

expressions are distinct, whereby 

having a 5 percent interest in the former 

does not preclude having a 1 percent 

interest in the latter. Therefore, the 

Agency has made no change to this 

section. 

Topic: Numerous commenters stated 

that the pre-application and initial 

application submission requirements 

were too onerous and asked the Agency 

to clarify its position since they could 

not clearly understand the proposal. For 

example, one commenter recommended 

two annual Notices of Funding 

Availability (NOFAs) rather than one to 

promote accelerated use of USDA funds 

and to allow for more units to be 

produced on a 6-month versus 12-

month cycle. Some commenters were 

concerned that the Agency considered 

additional technical assistance as an 

ineligible use of funds. 

Response: In developing the NOFA 

process with the three application 

stages, the Agency has endeavored to 

streamline the process by minimizing 

the application requirements during the 

pre-application phase when project 

approval is unknown to reduce the 

applicants’ burden. Likewise, the 

Agency is requiring the minimum 

amount of information to be submitted 

during the initial application phase to 

reduce the applicants’ burden. However, 

the Agency has a responsibility to 

collect enough information about 

proposed projects at each stage to allow 

for reasonable decisionmaking and 

effective underwriting. Therefore, the 

Agency has made no further changes to 

this section. 

Topic: Some commenters said that 

requiring the Agency to conduct an 

environmental review during the preapplication phase, when it is still 

uncertain whether the project will 

receive funds, is unrealistic. 

Response: The Agency believes that 

the commenters misunderstood 

§ 3560.56. This paragraph states that 

environmental reviews are required 

during the initial phase of loan 

processing to aid in determining project 

eligibility and feasibility. 

69050 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Topic: Several commenters asked the 

Agency to define ‘‘State Consolidated 

Plan.’’

Response: The Agency agrees with the 

commenters and has added this 

definition to § 3560.11 of the interim 

final rule. 

Topic: Some commenters said that the 

Affirmative Fair Housing Marketing 

Plan should not be required for 

submission during the initial 

application stage but should be part of 

the final application submission. 

Response: The Agency believes the 

commenters misunderstood the 

procedures in the handbook. The form 

used for this plan is given to the 

applicant during the initial application 

stage, but the applicant does not need to 

submit the plan until the final 

application stage. The Agency has 

clarified this point in § 3560.56(h) of the 

interim final rule. 

Topic: Several commenters stated that 

the Agency should allow flexibility in 

requiring applicants to be in full 

compliance with any existing loan and 

grant programs, particularly in the case 

of property transfers and preservation, 

wherein the new owner entity should 

not be punished for taking on a property 

with physical, financial, or managerial 

issues, or under a preexisting workout 

plan of less than 6 months. 

Response: The Agency realizes that 

achieving and maintaining compliance 

are challenges under these 

circumstances. The Agency recognizes 

these challenges, and program 

procedures allow RHS to accept a 

revised workout plan from the new 

owner that it deems acceptable under 

the standards in § 3560.453 of the 

interim final rule and in the Project 

Servicing Handbook. Also, an exception 

may be requested by the State Director 

and considered by the Agency on a caseby-case basis.

Topic: The Agency received several 

comments regarding its position on 

purchasing excess land, such as when a 

seller owns 5 acres and will only sell all 

of the acres, regardless of how much the 

applicant wants to develop. 

Commenters stated that there should be 

flexibility in the Agency’s policy so that 

excess land can be purchased if the 

applicant cannot find a smaller parcel to 

purchase and develop. 

Response: The Agency recognizes the 

need for flexibility on this issue and is 

willing to work with applicants in 

determining the suitability of sites for 

development. Funds may be used to 

purchase and improve the site on which 

multi-family housing 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. 

The regulations at § 3560.54(a)(11) allow 

borrowers to purchase land for a site in 

excess of what is needed, except when 

the applicant cannot acquire an 

alternate site or cannot acquire the 

needed land as a separate parcel. The 

applicant agrees to sell the excess land 

as soon as practical and to apply the 

proceeds to the loan. Program site 

density requirements must be met in 

accordance with the site requirements 

established under § 3560.58. 

Topic: Several commenters expressed 

concern about the difficulty in locating 

appropriate sites for development and 

the need for flexibility in the Agency’s 

criteria. One commenter asked the 

Agency to clarify its language by 

changing ‘‘will’’ to ‘‘should’’ in 

§ 3560.58(a)(4). Commenters also said 

that clarification is needed regarding 

what constitutes an established rural 

community/eligible site. Many 

acceptable sites are located outside city 

limits but have water, sewer systems, 

and fire protection. Several commenters 

said that the regulation requires sites to 

have reasonable access to water and 

sewage removal, but this statement 

appears to negate the use of onsite 

septic systems as outlined in the Loan 

Origination Handbook, which describes 

when alternatives to ‘‘community’’

systems may be used. 

Response: The Agency appreciates 

these comments; however, RHS has not 

made the suggested change from ‘‘will’’

to ‘‘should’’ in § 3560.58(a)(4). The 

Agency wants to emphasize that it will 

not approve sites that are not an integral 

part of a residential community and do 

not have reasonable access, either by 

location or terrain, to essential services 

such as water, sewage removal, schools, 

shopping, employment opportunities, 

and medical facilities. Environmental 

studies and civil rights assessments 

must be conducted before a site is 

approved. The Agency wants to 

emphasize that it remains flexible 

pending the outcome of such site 

assessments and the review of final 

development costs and plans. 

Topic: Several commenters felt that 

more consideration should be afforded 

for development within 100-year flood 

plains, provided adequate flood 

insurance is maintained, and for 

development near or adjacent to 

industrial sites and processing plants, 

provided there are no threats of health 

hazards. 

Response: The Agency appreciates 

these comments. However, the Agency 

will not approve sites subject to 100-

year floods when non-floodplain sites 

exist. Where there are no non-floodplain 

sites available, sites located within a 

100-year floodplain are not eligible for 

Federal financial assistance unless flood 

insurance is available through the 

National Flood Insurance Program. 

Once all necessary information is 

collected, analyses are performed, and 

the appropriate reviews completed for 

these sites, the Agency will make its 

decision based on whether the proposed 

project furthers the program’s objectives 

and the government’s interests are 

adequately protected. 

Topic: Numerous commenters 

expressed concern that the Agency does 

not consider standards imposed by 

other financing sources, such as tenant 

income restrictions and tiered rents. 

Some commenters appeared to be 

confused about tax credits as a funding 

source. 

Response: The Agency appreciates 

these comments and is committed to 

working to reduce interprogram 

differences to the extent practicable, 

thereby making it easier to satisfy the 

requirements of other funding sources. 

Moreover, as noted in § 3560.66(a)(3) of 

the interim final rule, the Agency will 

allow the strictest interpretation of the 

policy to prevail in most instances when 

requirements conflict. 

Topic: Several comments focused on 

the Agency’s preference for loan 

applications with leveraging. 

Commenters stated that the Agency 

should not award points, or should 

award fewer points, to applicants with 

‘‘token’’ financing that makes up a very 

small percentage of total development 

costs. 

Response: The Agency understands 

the commenters’ position and notes that 

how points are awarded is discussed in 

the Agency’s annual NOFA. It is not 

changing how it scores and ranks 

applications at this time. Moreover, it 

already awards fewer points to 

applications wherein there is a lower 

percentage of leveraging in comparison 

to the total development costs.

Topic: The Agency received 

numerous comments on equity 

requirements for subsequent loans. One 

commenter stated that the Agency 

should change its language in proposed 

§ 3560.55(d)(1) to read ‘‘borrower,’’ not 

‘‘equity.’’ Several other commenters 

stated that requiring a borrower to make 

an equity contribution for a subsequent 

loan is a disincentive for applying for 

the loan. Others said that the equity 

contribution should come from the 

property’s resources. 

Response: The Agency appreciates 

these comments and has changed its 

language in § 3560.55(d)(1) of the 

interim final rule to read ‘‘borrower,’’

but it will not change its position. RHS 

does not consider it an onerous 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69051

requirement for applicants for 

subsequent loans to make an equity 

contribution of 3 or 5 percent, 

depending on whether the project is 

being financed with LIHTCs. 

Topic: A substantial number of 

commenters focused on the required 

funding level of a property’s reserve 

account and felt that the minimum 

deposit requirement was too high. These 

commenters were concerned that this 

requirement would be unduly costly 

and result in budget-based rents 

exceeding conventional rents for 

comparable units. 

Response: The Agency appreciates 

these concerns. Since the proposed rule 

was published, RHS has undertaken a 

comprehensive property assessment of 

the properties in the section 515 

portfolio. The preliminary results 

provided useful information for 

reconsidering the extent of capital 

reserves that may be necessary to meet 

the capital needs of projects and to 

explore policy options for addressing 

these needs to be reflected in any 

necessary budgetary and legislative 

changes. More time is needed to 

properly address these matters. 

Accordingly, RHS has decided to 

publish an interim final rule that does 

not include these provisions—

specifically § 3560.103(c)(3) and 

§ 3560.306(k)(1) of the proposed rule—

until their impacts can be assessed and 

policy decisions can be made for a longterm strategy. 

Topic: Several commenters believed 

that there were loopholes in the 

proposed rule that would have enabled 

a borrower to commit deliberate actions 

to force the Agency to accelerate the 

borrower’s loan to circumvent the 

preservation/prepayment requirements. 

Response: The Agency notes that 

similar comments were addressed in 

subpart N and recommends referring to 

this part of the interim final rule for 

more information. However, it does note 

that in the interim final rule, the Agency 

modified § 3560.456(a) to read as 

follows: ‘‘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.’’

Topic: The Agency received 

numerous comments on the restrictiveuse provisions described in this subpart. 

Several of these comments focused on 

how the proposed rule was unclear 

about whether use restrictions remain in 

effect or terminate on properties whose 

borrowers make their balloon payment 

and pay off their Agency debt when the 

30-year term expires. Some commenters 

expressed concern that if the use 

restrictions do not remain in effect for 

the entire 50-year loan amortization 

period, the supply of affordable housing 

will decrease. Other commenters said 

that the restrictive-use provisions 

should expire when the borrower pays 

off the Agency debt. 

Response: As explained in the 

preamble to the proposed rule, use 

restrictions are tied to the 30-year term 

of the mortgage. This requirement was 

established in 7 CFR part 1944, subpart 

E and the proposed rule simply 

continued this policy. However, the 

Agency notes that its interim final rule 

would allow properties to remain in the 

program if the borrower sought and 

obtained additional financing from the 

Agency upon expiration of the term. 

Topic: Several commenters expressed 

dissatisfaction with the Agency’s policy 

for calculating returns on investment. 

Some commenters recommend that the 

full 8 percent return should be allowed 

on all equity funds up to 10 percent of 

the amount of the initial investment 

instead of just on the 3 or 5 percent 

initial contribution. These commenters 

also felt that consideration should be 

given for older projects. 

Other commenters noted that the 

Agency should allow a return based on 

the current value of the original 

investment adjusted for inflation, if 

owners are expected to maintain a 

business commitment to MFH projects. 

Response: The Agency has considered 

the commenters’ reasons for suggesting 

higher returns but has retained the 

policy described in the proposed rule, 

which is consistent with the Agency’s 

existing policy in 7 CFR part 1944, 

subpart E on this topic.

Topic: Additional commenters noted 

that the Agency does not account for 

inflation when estimating return on 

investment in § 3560.68. (One noted that 

the reference to § 3560.67 was wrong 

and should be § 3560.68.) They also felt 

that there needed to be provisions for 

the payment of general partner fees for 

MFH projects with LIHTCs consistent 

with the LIHTC industry standard. 

Response: The Agency has corrected 

the cross reference in the interim final 

rule. As is the case with the payment of 

developer’s fees on combined MFH/

LIHTC-financed projects, general 

partner fees, while not an eligible use of 

Agency loan funds, may be included in 

the total development costs when such 

fee is paid from other financing sources, 

in accordance with § 3560.63(d)(2). 

Topic: Several commenters noted that 

the definition of security value of the 

property is critical to the calculation of 

return on investment. If security value 

equals ‘‘value-in-use,’’ the return on 

investment will be greater than if the 

security value of the property equals the 

market value. 

Response: The Agency acknowledges 

these comments and has made revisions 

to the language in § 3560.68 to address 

this concern. The Agency also has noted 

that clarifications were made in 

§ 3560.752 of the interim final rule to 

reduce confusion about the types of 

value determinations. 

Topic: The Agency received 

comments regarding its cost certification 

requirements, which state: ‘‘Whenever 

the State Director determines it 

appropriate, and in all situations where 

there is an IOI 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.’’ Several 

commenters stated that these 

requirements were not strict enough and 

suggested requiring further cost 

certifications. Another commenter 

recommended that the regulation 

should specify an audit by a CPA, who 

is independent from the borrower. 

Another commenter asked for 

clarification about some of the related 

procedures, and who pays for the audit. 

Response: The Agency appreciates 

these comments and has included a 

clarification in § 3560.72(b) of the 

interim final rule that cost certifications 

must be prepared in accordance with 7 

CFR part 1924, subpart A. The Agency 

believes this clarification provides the 

necessary protection. Further, the 

Agency, rather than the borrower, has 

the authority to contract with a CPA to 

perform the audit. RHS believes that the 

language in the rule is clear—the 

expenses related to the cost certification 

and the accompanying audit are paid by 

the borrower out of loan proceeds. If the 

Agency contracts for the audit, it pays 

for the cost, and the loan funds for this 

cost are returned. This process is 

described in Agency guidance about 

program procedures. 

Topic: Several commenters supported 

the elimination of the designated places 

requirement. The commenters said that 

the designated places list frequently 

excludes areas where the need for 

affordable housing is the greatest. 

Commenters said that if a market study 

indicates a need for affordable housing 

in a given area, the Agency should 

consider the project for funding, even if 

the location is not on the designated 

places list. 

69052 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Response: The Agency is committed 

to using its funds to benefit households 

with the greatest need for housing in 

areas where the supply of affordable 

housing is limited. Further, it believes 

this commitment is reflected in the 

designated places list, where designated 

places is a requirement in accordance 

with § 532(c) of title V of the Housing 

Act of 1949, as well as other Agency or 

Administration priorities. 

Topic: The Agency received several 

comments on the regulation’s references 

to accessibility standards. Several 

commenters suggested that the reference 

to the ADA be removed because the 

ADA is not applicable to residential 

properties. Some commenters expressed 

confusion about accessibility 

requirements. 

Response: The Agency has noted 

these comments and has removed the 

references to the ADA, except where it 

is applicable. The interim final rule 

continues to reference 7 CFR part 1924, 

subpart A, which addresses accessibility 

requirements. Further, Agency staff can 

help provide clarification about 

accessibility requirements during the 

project planning stage. 

Topic: Other commenters said that the 

accessibility requirements for on-farm 

labor housing should be less stringent. 

Response: The Agency appreciates 

these comments. However, the Agency 

has made no change to § 3560.60(d), as 

its policy on accessible units needs to 

comply with the applicable civil rights 

statutes and regulations. 

Topic: The Agency received several 

comments on § 3560.56(e), which states 

that the Agency will process the next 

initial loan application, in rank order, 

when an application is delayed for a 

period of time that will not permit 

funding of the project during the current 

funding cycle. The commenters stated 

that it is very difficult to complete 

projects within a particular funding 

cycle given all the development 

challenges and the need to obtain funds 

from other sources. 

Response: The Agency believes that 

the commenters misunderstood this 

paragraph. The Agency must be able to 

obligate the funds for a particular 

project, not complete the construction 

process, during the current funding 

cycle. The Agency recognizes the 

challenges in preparing an application 

involving multiple funding sources but 

has retained the language as written 

because it must obligate the available 

program funds within the established 

period. 

Topic: Several commenters focused 

on § 3560.60 (Design requirements), 

with comments ranging from the 

specific to the relatively general. For 

example, commenters stated that the 

Agency’s requirements for (1) 

economical construction, operation, and 

maintenance and (2) life-cycle cost 

analyses are contradictory, as life-cycle 

cost analyses can lead to greater 

maintenance costs. By comparison, a 

commenter asked the Agency to work 

with other Agencies to ensure that 

current threshold requirements are 

improved to prevent air and water 

infiltration. 

Response: While the Agency 

appreciates these comments, it has 

made no change to this section because 

it feels that conducting life-cycle cost 

analyses will help ensure a balance 

between economical construction and a 

property’s long-term viability.

Topic: Several commenters also 

focused the on the life-cycle cost 

analysis requirement in § 3560.60 

(Design requirements). Some 

commenters were concerned that 

requiring a life-cycle cost analysis 

would not be cost-effective for 

properties with minor capital needs. 

Others said that the term ‘‘life-cycle cost 

analysis’’ should be clarified so that 

borrowers are fully aware of their 

responsibilities for obtaining and 

implementing the results of the analysis. 

Response: The Agency appreciates 

these comments, but the life-cycle cost 

analysis requirements in 

§ 3560.60(c)(3)(iii) of the interim final 

rule are used in an effort to balance 

upfront construction costs and longterm operating costs. The Agency has 

made no change. The Agency provides 

further information on obtaining and 

using a life-cycle cost analysis in its 

guidance about program procedures. 

Topic: A number of commenters 

stated that a property’s rents should be 

based on its operating and development 

costs, which might be higher than 

conventional rents for comparable units. 

Several of these commenters stated that 

it is difficult to find comparable rents in 

certain communities. Other commenters 

said that it was difficult to comment on 

the implementation of conventional 

rents for comparable units without 

knowing what the impact will be. 

Response: The Agency appreciates 

these comments, but RHS views 

conventional rents for comparable units 

as an important underwriting 

consideration in assessing project 

viability. As stated previously, the 

Agency may make an exception to the 

requirement that rents do not exceed 

conventional rents for comparable units 

if doing so is in the Government’s best 

interest. 

Topic: With regard to the Agency’s 

requirement that its loans be at least 25 

percent of a project’s total development 

costs, some commenters thought that 

this 25 percent threshold is reasonable, 

but others said that the threshold should 

be increased because of the difficulty in 

servicing small loans. 

Response: The Agency has considered 

the commenters’ suggestions but has 

decided to retain the 25 percent 

threshold. The Agency believes this 

threshold is reasonable and has not been 

a problem for the majority of applicants. 

Topic: Several commenters asked 

what security value should be used to 

determine maximum loan limits. 

Response: The Agency has clarified 

these terms in the interim final rule so 

that the terms ‘‘current value’’ and 

‘‘value-in-use’’ were replaced by 

‘‘market value’’ in § 3560.63(e). Also, a 

description of market value is provided 

in § 3560.752 of the interim final rule. 

Topic: The Agency received several 

comments regarding the cap of 2 percent 

of total development costs for section 

515 projects and 4 percent for off-farm 

labor housing projects to cover 

development/loan packaging. Several 

commenters said that the 2 percent for 

section 515 projects and 4 percent for 

off-farm labor housing projects are not 

adequate to cover costs, especially in 

those cases where the developer does 

not serve as the general contractor. 

Other commenters contended that 

development costs for section 515 and 

off-farm labor projects are roughly 

equivalent. 

Response: The Agency acknowledges 

the commenters’ concerns but has 

determined that there is no compelling 

reason to increase the cap. Furthermore, 

in the Agency’s experience, 

development of Farm Labor Housing 

projects is more difficult than 

development of section 515 properties. 

Therefore, the Agency has made no 

change in the cap for section 515 

properties. 

Topic: Regarding the eligible uses of 

loan and grant funds as described in 

§ 3560.53, several commenters 

supported the Agency’s more detailed 

description of allowable costs. Others 

said that the percentages for allowable 

builder’s profit, general overhead, and 

general requirements are improved over 

prior allowances, while others thought 

that the percentages should be increased 

to compensate for increased costs. 

Several commenters said that the 

section should be more inclusive, while 

others thought some costs should be 

prohibited. 

Response: The Agency appreciates 

these comments but has made no 

change to its position in the interim 

final rule. The comments were very 

general, and RHS believes the language 

in the proposed rule is reasonable. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69053

Moreover, the allowable cost 

percentages were derived as a result of 

an Agency review of Agency, State, and 

industry cost information and best 

management practices. The provisions 

in the Agency’s interim final rule are 

consistent with the results of this 

review. 

Topic: Regarding the language in 

§ 3560.53 on the use of funds to develop 

and install necessary systems, some 

commenters felt that certain elements of 

this requirement were too prescriptive 

and bureaucratic, ultimately leading to 

increased development costs. Other 

commenters said that the installation of 

necessary systems offsite should require 

permanent easements. 

Response: The Agency has considered 

the commenters’ concerns and revised 

§ 3560.53(e)(1) in the interim final rule 

to read: ‘‘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.’’

Topic: Other comments regarding 

§ 3560.53 included praise for the 

clearer, improved statement of 

authorized purposes. Another 

commenter stated that the language in 

§ 3560.53(b)(2) was too restrictive and 

could result in properties without the 

amenities to effectively compete with 

other affordable properties in their 

market area. 

Response: The Agency thanks the 

commenters for positively recognizing 

the improved language. RHS 

acknowledges the concern about 

ensuring that properties are competitive. 

The Agency believes that other 

provisions throughout subpart B 

provide sufficient flexibility to enable 

applicants to develop properties with 

competitive features and amenities for 

the area, while at the same time 

ensuring affordability and reasonable 

development costs. 

Subpart C—Borrower Management and 

Operations Responsibilities

Topic: The Agency received 

numerous comments on the property 

maintenance requirements. These 

comments covered three broad topics, as 

discussed below. 

Topic: A number of commenters 

expressed approval of the Agency’s 

effort to codify property standards. They 

indicated that the increased clarity will 

help ensure a consistently higher level 

of compliance with the standards and 

provide safer, healthier environments 

for tenants, especially children. 

However, other commenters argued that 

such specificity should not be included 

in the regulation, as it can create a lack 

of flexibility for property owners who 

must follow the rules over their own 

judgment about cost-effective 

maintenance. Some suggested putting 

the detailed property standards in the 

program handbooks. One person 

suggested referencing an industry code. 

Response: The Agency appreciates 

these comments and understands the 

commenters’ concerns. The Agency has 

considered the advantages and tradeoffs 

of including specific standards in the 

rule and has decided to keep the 

specific standards in the rule. By 

establishing the standards in the 

regulation, the Agency has a stronger 

regulatory basis for enforcing property 

maintenance standards. 

Topic: Similarly, commenters were 

concerned that for many properties it 

would not be practical to achieve and 

maintain compliance with all items in 

the list of requirements. They indicated 

that any single deficiency should not be 

interpreted as an indication of a poorly 

maintained project and questioned 

whether a single or limited number of 

deficiencies would put them out of 

compliance. One commenter asked for a 

specific statement of what would 

constitute compliance. Commenters also 

added that ongoing compliance with a 

long list of requirements would be even 

more difficult given the limits on 

operating budgets and stressed the need 

for adequate resources to meet these 

property maintenance standards. They 

suggested that they be allowed to 

consider the severity of a problem to 

prioritize their maintenance needs and 

not be required to address all 

deficiencies at once. 

Response: The Agency appreciates all 

these comments and has modified 

§ 3560.103(a) to indicate that it will not 

penalize the borrower for not meeting 

all standards if there is clear evidence 

that the borrower is working toward 

meeting 100 percent of the standards. 

Further, properties in the process of 

addressing deficiencies will not be 

deemed out of compliance unless the 

number of deficiencies constitutes 

substantial noncompliance and calls 

into question the viability of the 

property and the effectiveness of the 

borrower’s maintenance program. The 

Agency has added language to the 

interim final rule at § 3560.103(a)(4) 

indicating that upon discovery of 

conditions that do not meet the 

standards, it expects that the borrower 

will remedy the conditions in a 

reasonable period of time. The Agency 

has listed in the interim final rule at 

§ 3560.103 (a)(3)(i) through (xvii) the 

standards by which compliance will be 

measured. 

Topic: Commenters also had a 

number of suggestions, proposed 

language changes, and questions on how 

to interpret these standards. They had 

questions on issues ranging from rain 

diverters and gutters to van parking 

spots to the caulking of water closet 

floors and accessible laundry facilities. 

They suggested edits to the language on 

water leaks, cracks, moisture and mold, 

and common area accessibility. They 

also raised the issue of work order 

systems and the difficulty of 

implementing them in small properties. 

Response: The Agency acknowledges 

these comments and has made 

appropriate edits for clarity in the 

interim final rule at § 3560.103(a)(3)(i) 

through (xvii). The work order system 

required is not intended to be any more 

elaborate than necessary for the size of 

the property. 

Topic: Regarding the new approach to 

management plans, management 

agreements, and management 

certifications, many commenters 

applauded these changes for reducing 

the administrative burden on both the 

borrower and the Agency, though a 

number of commenters were also 

concerned that the changes might 

hinder the effectiveness of Agency 

oversight. Other commenters suggested 

further streamlining these requirements, 

and a number of comments asked to see 

the management certification form. 

Finally, several commenters noted that 

subpart C of the proposed rule 

contradicts itself by stating that 

management plans are not subject to 

Agency approval and then stating 

conversely that Agency approval is 

required (see § 3560.102(c)). 

Response: The Agency acknowledges 

these comments. The Agency has 

remedied the conflict identified at 

§ 3560.102(c) to clarify that Agency 

approval of management plans is no 

longer required. The Agency believes 

that the concerns about the changes 

hindering Agency oversight reflect 

commenters’ confusion about the some 

of the specifics of the new policy. While 

the Agency is no longer approving 

either the management plan or the 

management agreement, the 

management certification is signed by 

both the management agent and the 

borrower, and is approved by RHS . The 

certification commits the management 

agent and the borrower to operate the 

property in compliance with program 

requirements and provides specific 

financial and other penalties for failure 

to comply, including termination of the 

management agreement. This 

certification is similar to the document 

69054 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

used successfully in HUD multi-family 

programs. The Agency believes that this 

document eliminates unnecessary 

Agency reviews, while still retaining 

clear authority for compliance oversight 

and enforcement. 

Topic: Commenters made a number of 

suggestions on how and when to submit 

management plans and certifications. 

They asked if current management plans 

would need to be reviewed and updated 

for approval, and also, what types of 

changes in approved plans would 

require reapproval of the documents; 

they strongly suggested that only 

significant changes require reapproval 

within the 3-year timeframe. One 

commenter suggested that a borrower 

with multiple properties should be able 

to submit a ‘‘master file’’ with a plan for 

all the borrower’s properties. Another 

asked if the management certification 

could be done as part of the budget 

document. Commenters also asked 

about using a management agreement 

acceptable to both the Agency and the 

State finance Agency to help eliminate 

paperwork. 

Response: The Agency agrees with the 

commenters that only significant 

changes will require resubmission of 

documents. As noted in § 3560.102(c) of 

the interim final rule, the Agency will 

no longer approve management plans. 

Borrowers will need to prepare and 

submit updated management plans 

initially after publication of this rule. 

Subsequent updates are required when 

project operations substantially change 

with regard to the mandatory items in 

the plan, or if the borrower needs to 

submit a workout plan and the 

management plan needs to be updated 

to be consistent with the workout plan 

(see subpart J).

Topic: Numerous commenters 

questioned the requirement in 

§ 3560.102(d) that the management plan 

be updated if the project is found to be 

out of compliance. The commenters 

questioned the need to update the 

management plan in cases where the 

problem is not due to items covered in 

the plan and noted that this poses an 

unnecessary burden. 

Response: The Agency agrees with the 

commenters’ concern but notes that the 

paragraph allows borrowers to submit a 

statement that the management plan is 

adequate to assure compliance if 

changes to the plan are not needed to 

address the violation. Further, the 

Agency believes that requiring the 

management plan to be updated to 

describe how compliance violations are 

to be addressed is reasonable when such 

changes would support compliance. 

Therefore, the Agency has made no 

changes to the management plan 

requirements. 

Topic: Management fees and the 

policy for determining allowable fees to 

be paid out of project income received 

numerous comments. A number of 

commenters supported the new method. 

Some commenters suggested that a base 

fee using a National average, with addons for geographic factors, would help 

with consistency. However, others 

expressed strong opinions that the 

determination of reasonable fee 

standards could only be done effectively 

at the State level. Numerous 

commenters were disappointed that the 

Agency chose to institute a ‘‘per unit, 

per month’’ management fee rather than 

a fee based on a percentage of revenue 

or gross collections. They were also 

concerned that much of the clarity 

gained through the development of 

Administrative Notices on this topic did 

not appear in the rule. Many 

commenters were concerned that any 

method used to determine a range of 

base fees for a given area would be 

seriously flawed. Their concerns 

included the following: 

• Management fees should be 

determined at the State level because 

only the state has specific market 

knowledge to set fees correctly. 

• Management fees should be 

published periodically at specified 

times. Some commenters worried that 

the process of publication will delay the 

release of the fees. They asked that State 

lists be made available immediately. 

• RHS should consider Consumer 

Price Index when establishing 

management fees. 

• The management fee system should 

ensure that the appropriate fee ranges 

are allowed. Some suggested looking at 

successful State models for per-unit 

fees. 

Commenters also had a number of 

questions and clarifications regarding 

the eligibility for fees of Public Housing 

Authorities, the fees for sections 514 

and 516 projects, the bundle of services, 

and add-on fees and the relationship of 

these fees to fees in market rate 

properties. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

revised § 3560.102(i) to address 

clarification issues raised by the 

commenters. Management fees will be 

paid based on a ‘‘per occupied unit’’

basis. The Agency feels that this is the 

fairest methodology at this time. The 

base fee will be valued on a specific 

‘‘bundle of services’’ that has been 

added to this section. The ‘‘bundle of 

services’’ has previously been issued in 

Administrative Notices. Periodically, 

the Agency through the State Offices 

will publish the base fee. The States will 

determine the base fee using housing 

industry data for their state. The 

frequency for updating the fee ranges 

will be established in Agency program 

procedures. 

Topic: The Agency received 

numerous comments with respect to 

management agents being allowed to 

earn a management fee for any unit 

occupied for at least one day during the 

month. Several commenters said that 

allowing for a management fee for a 

partial month is a welcomed 

improvement; however, there was 

disagreement about whether the 

Agency’s information management 

capabilities would allow it to effectively 

track monthly occupancy rates, 

including units that are vacant on the 

first of the month but occupied later in 

the month. Some commenters suggested 

that management agents should only be 

eligible to receive a fee for a unit that 

was occupied on the first of a month; in 

contrast, other commenters argued that 

occupancy should not even be a factor 

in calculating management fees. They 

stressed this method is not the industry 

standard because vacant units often 

require more attention than occupied 

units. In addition, the tracking of 

occupied units places an additional 

burden on the management agent. One 

compromise approach offered was to 

allow management fees on the total 

units as long as the property stays 90 

percent occupied, and per-unit fees if 

the property falls below the 90 percent 

threshold. 

Response: The Agency acknowledges 

the commenters’ concerns. However, the 

Agency believes the rule as written 

takes into account partial occupancy at 

§ 3560.102(i)(2). If additional staff time 

is needed to perform leasing activities to 

address vacancies, these costs are 

payable directly from the project. For 

this reason, the Agency believes that a 

fee system based on occupied units will 

not adversely affect projects 

experiencing vacancies or higher 

turnover. Further, if a property is 

located in a difficult market, the Agency 

can authorize add-on fees as a means to 

address issues associated with 

individual markets in an area. The 

Agency has made no changes to the rule 

but will continue to consider options 

and refinements during the comment 

period of the interim final rule. 

Topic: The bundle of services concept 

established in § 3560.102(i) received 

many comments and questions. Several 

commenters asked for more detail on 

the included list of services. Some 

expressed concern that this arrangement 

will add new costs and complexity to 

the compensation of management 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69055

agents, while others strongly endorsed 

the concept stating that it will help 

bring clarity and consistency to the 

process. Commenters stressed that, 

given the diversity of business practices 

among agents, the defined bundle of 

services must be complete, necessary, 

and consistent among projects, counties, 

and states. Some commenters asked that 

a list of charges for each state (for the 

bundle of services) should be made 

available for comment before the 

interim final rule is published. 

Response: The Agency appreciates 

these comments and has endeavored to 

establish a clear, appropriate, and 

practical delineation of project-related 

costs and services to be covered out of 

the management fee, and those costs 

and services to be paid directly from 

project income. RHS has developed this 

definition of the bundle of services for 

the management fee based on extensive 

input from stakeholders prior to the 

rulemaking. The bundle of services can 

be found at § 3560.102(i)(3) of the 

interim final rule.

Topic: Commenters raised several 

points about the benefits and potential 

costs of the prohibition on IOI 

relationships in the program. Several 

commenters recommended that IOI 

relationships between any parties 

connected to a particular Agencyfinanced project be prohibited, while 

other commenters stated that such a 

prohibition would increase the cost of 

goods and services for many projects. In 

addition, several commenters suggested 

that § 3560.102(g)(2) be revised to state 

that failure to disclose IOI relationships 

will subject the borrower, management 

agent, and any other firms or employees 

found to have an IOI relationship to 

suspension and debarment. Still others 

asked for more guidance on what 

constitutes an IOI relationship and how 

to document it. 

Response: While the Agency 

acknowledges the commenters’

concerns, requirements regarding the 

disclosure of IOI relationships and 

documentation that the use of such 

providers and suppliers is in the best 

interest of the project are essential 

program controls to ensure program 

integrity and reduce the risk of abuse. 

Further, the Agency’s ability to suspend 

or debar borrowers who fail to disclose 

IOI relationships is important to 

enforcing this requirement; however, 

the Agency reserves the right to use this 

provision within its discretion. For 

these reasons, the Agency has made no 

change to § 3560.102(g) in the interim 

final rule. 

Topic: The prohibition of IOI 

insurance carriers drew many 

comments. Commenters explained that 

with rising insurance premiums, they 

have fewer and fewer choices for 

insurance providers. They noted that it 

is especially difficult to find insurance 

in rural and tribal areas; many have 

found that their only cost-effective 

option has been with carriers that would 

be considered to have an IOI 

relationship with the borrower. 

Commenters emphasized that memberowned risk pools have been a successful 

strategy for holding down insurance 

costs, but these, too, are adversely 

affected by the prohibition on IOIs. 

Commenters urged the Agency to 

remove the IOI prohibition with respect 

to insurance. 

Response: The Agency has considered 

these comments and has deleted the 

requirement under § 3560.105(e) that 

prohibited borrowers from using IOI 

insurance carriers. The Agency expects 

that this change will improve borrowers’

ability to obtain Agency-required 

coverage at a lower cost. 

Topic: Regarding the Agency’s general 

insurance requirements, several 

commenters stated that the Agency 

should not have to deem insurance 

carriers as ‘‘reputable and financially 

sound.’’ Other commenters 

recommended that the minimum 

property insurance coverage should be 

the replacement value, not the 

depreciated replacement value. They 

offered that the alternative of existing 

debt is acceptable. Commenters also 

proposed adding language to the 

regulation on tenant responsibility for 

‘‘contents’’ insurance, the use of project 

revenue for nonprofit organizations’

director’s liability insurance, and the 

deposit of checks. Commenters also 

requested certain changes to language in 

the rule for clarity regarding insurance 

minimums and limited insurance. 

Finally, one commenter expressed 

satisfaction with the addition of the 

guidance on policies for several 

buildings. 

Response: The Agency appreciates the 

comments and suggestions, and has 

made several of the suggested editorial 

changes to the rule for clarity at 

§ 3560.105(b),(c), and (d). The Agency 

acknowledges the concerns raised, and 

while the Agency has decided not to 

make substantive modifications to its 

insurance requirements in the interim 

final rule, the Agency will continue to 

accept comments and consider them in 

subsequent policy discussions prior to 

publishing the final rule. 

Topic: Commenters also asked RHS to 

allow greater flexibility with respect to 

insurance requirements to allow the 

Agency and borrowers to appropriately 

respond to changing market conditions. 

Several commenters expressed strong 

concern about rising insurance 

premiums and identified possible costeffective alternatives to current 

insurance policies. They stressed the 

need for exception authority and 

suggested that one approach—at the 

state level grant exceptions to the 

deductible requirement, while allowing 

borrowers to put aside funds to selfinsure for the difference. 

Response: The Agency recognizes the 

cost issues associated with insurance 

and changes in the insurance industry. 

Since September 11, 2001, the Agency 

has been processing deductible 

exceptions and meeting with industry 

groups in order to develop a response to 

higher costs. Therefore, the Agency has 

increased the maximum allowable 

deductible to $10,000 (for property 

insurance). The Agency has retained the 

flexibility for increased deductible 

amounts. 

Topic: Regarding requirements for 

insurance deductibles, several 

commenters stated that the required 

deductibles were too low and could 

result in dramatic premium increases. 

Other commenters said that the 

deductible limits (of 0.5 percent or 

$5,000) were set many years ago and 

should be adjusted to reflect current 

industry standards. Finally, several 

commenters asked for clarification with 

regard to the language in § 3560.105(f) 

about how insurance deductible 

‘‘amounts must be accounted for in the 

reserve account.’’

Response: The Agency recognizes the 

commenters’ concerns. It has adjusted 

the deductible amounts to reflect 

current industry practice and they 

appear at § 3560.105(f)(8) in the interim 

final rule. 

Topic: The Agency received several 

comments on the requirements for 

hazard insurance coverage. These 

commenters asked the Agency to clarify 

its definition of hazard insurance. For 

instance, some commenters were 

uncertain if terrorism or earthquake 

coverage is required. Several 

commenters stated that earthquake 

insurance should not be required as it 

is prohibitively expensive. 

Response: The Agency appreciates 

these comments and has revised the 

interim final rule to clarify the 

insurance types required at 

§ 3560.105(f)(1) and (2). 

Topic: Regarding requirements for 

liability and fidelity coverage, some 

commenters said that while the 

proposed rule provides for minimum 

liability coverage of $1,000,000 per 

occurrence, no deductible is provided in 

the proposed rule. Similarly, 

commenters expressed concern that the 

proposed rule did not provide minimum 

69056 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

coverage amounts and deductibles for 

fidelity coverage. Commenters also 

asked that language regarding the 

breadth of liability coverage be changed 

to specify the coverage of buildings; 

grounds; and common, commercial, and 

other public space. They suggested that 

language on options for liability 

coverage, such as errors and omissions 

and environmental damage, be moved to 

the Asset Management Handbook. For 

fidelity coverage, commenters indicated 

that the provision for reflecting the 

portion covering the employee in the 

management plan was not practical. 

Response: The Agency acknowledges 

the commenters’ concerns. The 

deductible amounts for fidelity coverage 

have been included in the interim final 

rule at § 3560.105(h)(2)(i). The Agency 

has retained the language from the 

proposed rule regarding coverage of 

areas beyond the buildings in the 

interim final rule and has replaced the 

language regarding the fidelity premium 

to state that the premium could be 

prorated among the housing projects 

covered. The Agency has not removed 

the language on suggested coverage as it 

reflects current industry standards and, 

as a minimum amount, is not likely to 

require regular updating. 

Topic: Several commenters objected 

to the Agency’s requirement that the 

Agency must be named as co-payee on 

all loss drafts. These commenters felt 

that this is a viable requirement only 

when the Agency is in first lien 

position. Several commenters said that 

if the Agency is in the junior lien 

position, the Agency can be named as 

an additional insured. 

Response: The Agency has considered 

these comments and made appropriate 

revisions at § 3560.105(b)(4) of the 

interim final rule. 

Topic: Regarding the affirmative 

marketing and accessibility 

requirements discussed in § 3560.104, 

one commenter expressed appreciation 

for the level of specificity provided in 

the rule, while another stated that 

further guidance was still needed. 

Several commenters proposed edits to 

the language to strengthen and clarify 

requirements regarding community 

contacts, the frequency of advertising 

and the publication of advertisements, 

the costs associated with fair housing 

training for staff, and requirements 

regarding limited English proficiency. 

Another commenter asked for additional 

detail regarding accessibility and 

reasonable accommodations. Finally, 

several commenters asked for 

clarification regarding the requirements 

for updates to the Affirmative Fair 

Housing Marketing Plan, suggesting that 

updates be made only for significant 

changes. 

Response: The Agency appreciates the 

comments and has made the change to 

clarify organizations for the disabled at 

§ 3560.104(b)(4)(ii)(B) of the interim 

final rule. The Agency has not made 

changes to the language on reasonable 

accommodations and financial burden 

because it is based on fair housing and 

accessibility statutes and their 

implementing regulations. Additional 

clarification about procedures and 

determinations regarding reasonable 

accommodations and Affirmative Fair 

Housing Marketing Plans are included 

in internal Agency procedures. Limited 

English proficiency requirements are 

addressed in subpart A. 

Topic: The Agency received a number 

of additional comments regarding the 

fair housing and accessibility 

requirements in subpart C. Commenters 

noted the importance of these 

requirements. Several commenters 

stated that reasonable accommodations 

should be made at the project’s expense, 

not at the borrower’s expense as stated 

in the proposed rule. Other commenters 

asked for clarification as to who makes 

the decision about whether a request for 

an accommodation causes undue 

financial or administrative burden, and 

one asked for a definition of undue 

burden. Multiple commenters requested 

a change in the language about persons 

with disabilities and companion 

animals to help clarify which tenants 

can request this accommodation. Other 

commenters said that the discussion of 

accessible laundry facilities does not 

allow for alternate arrangements, as 

allowed by section 504. Other 

commenters stated that in the interim 

final rule, any discussion of common 

area accessibility must refer to the 

Uniform Federal Accessibility 

Standards (UFAS). Still other 

commenters said that the proposed 

rule’s language defining responsibility 

for paying for reasonable 

accommodations is unclear. 

Response: The Agency appreciates the 

comments and has changed the 

language at § 3560.104(c)(4) of the 

interim final rule to place the financial 

burden on the property, instead of on 

the borrower, and further clarifies this 

responsibility. 

Topic: The discussion of required 

signage drew many comments. Some 

suggested language changes to clarify 

the requirements. Others questioned the 

need for such extensive guidance on 

these topics. Still others questioned 

about the applicability of the 

requirement and whether existing signs 

had to be changed to meet the 

requirements or local requirements. 

Response: The Agency acknowledges 

that the ten requirements listed under 

§ 3560.104(d) are very specific but does 

not consider these requirements to be 

onerous. Further, the Agency believes 

that this detail is appropriate to help 

ensure compliance with applicable 

Federal fair housing and accessibility 

requirements. Therefore, the Agency has 

retained these requirements in the 

interim final rule.

Topic: Several commenters disagreed 

with the language in certain paragraphs 

in subpart C that referred to the ADA. 

The commenters correctly noted that 

these paragraphs should refer to section 

504 of the Rehabilitation Act of 1973 

because most areas in residential 

properties are not regulated under the 

ADA. 

Response: The Agency thanks the 

commenters for highlighting this issue 

and has removed the identified 

references to the ADA from the interim 

final rule. 

Topic: Regarding policies related to 

payment of property taxes, some 

commenters stated that the Agency 

should not require the borrower to 

certify that the property’s taxes were 

paid because some states have services 

that notify USDA of property tax 

delinquencies. Several other 

commenters suggested that instead of 

requiring the Agency to pay property 

taxes when the borrower fails to do so, 

the Agency should determine whether it 

is in the best interest of the Government 

to pay the delinquent taxes. 

Response: The Agency appreciates 

these comments and removed the 

requirement at § 3560.105(i) for 

borrowers to certify the payment of 

property taxes from the interim final 

rule. However, this certification will 

remain as a requirement for the annual 

financial statements. The Agency has 

considered the suggestion regarding 

property taxes but believes that it is not 

prudent as a general policy to relax the 

requirement for keeping the property tax 

payment current. More guidance on the 

annual financial statements will be 

provided by the MFH Engagement 

Guidelines to be issued separately. 

Topic: The Agency received a number 

of comments on the qualifications for 

acceptable management agents. Some 

commenters approved of the 

requirements, while others suggested 

that it may be difficult to find 

management entities with the required 2 

years of experience in many rural areas. 

Other commenters questioned whether 

this requirement is unnecessary for 

small properties. One commenter 

suggested broadening the requirement to 

allow experience managing LIHTC 

properties to satisfy the experience 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69057

requirement. One commenter suggested 

requiring the prospective management 

agent to disclose all past RRH properties 

managed as evidence of past 

performance. 

Response: The Agency understands 

the commenters’ concerns but has 

retained the experience requirement. 

RHS believes that successful experience 

with some type of federally assisted 

affordable housing is important for 

effective project management because 

the program rules require specialized 

knowledge beyond conventional 

property management. The Agency 

notes that experience managing LIHTC 

projects would be acceptable 

experience. 

Topic: There were also comments on 

the 45-day approval timeframe for 

management agents. Some commenters 

agreed with it or suggested lengthening 

it to 90 days to allow the Agency more 

time for review. Others stated that the 

approval timeframe, with 30-day 

interim authorizations, for new agents is 

too long for a project without a 

management agent and suggested that 

the Agency should simply accept the 

agent and provide approval after the 

change has taken effect. 

Response: The Agency understands 

the commenters’ concerns about getting 

new management agents in place 

quickly but also needs to allow adequate 

time for Agency review of a prospective 

agent’s experience and acceptability. In 

balancing these two considerations, the 

Agency has decided to retain the 

proposed timeframes in the interim final 

rule. 

Topic: The Agency received several 

comments on the requirement for 

resident participation in property 

management. The commenters were 

concerned that the wording implies that 

residents have a role in decisions 

regarding property operation beyond 

input and suggestions. They stated that 

while resident input is helpful, 

borrowers’ financial responsibilities also 

give them full responsibility for 

operations. 

Response: The Agency emphasizes 

that the borrower has ultimate 

responsibility and, therefore, 

decisionmaking authority in the 

property. The intent of the tenant 

participation requirement is only to 

provide an opportunity for tenant input 

into the management process, not a role 

in making decisions. 

Topic: One commenter suggested 

adding a requirement to the rule 

requiring language in the management 

agreement that clearly establishes a 

management agent’s responsibility and 

liability for any equity skimming it 

causes or allows to happen. 

Response: The Agency does not have 

a direct relationship with the borrower’s 

management agent and cannot hold 

such agents directly responsible for 

these activities. The Agency 

relationship is with the borrower and, as 

such holds the borrower responsible for 

all activities at Agency-financed 

properties. 

Subpart D—Multi-Family Housing 

Occupancy 

Topic: The Agency received a 

substantial number of comments on 

lease and occupancy terminations. 

Several commenters said that the 

regulation should acknowledge that 

some tenants are displaced through no 

fault of their own and describe the 

tenants’ rights in these situations. 

Response: The Agency thanks the 

commenters for this suggestion and has 

modified the interim final rule. 

Specifically, the Agency has modified 

§ 3560.159(c) to state that tenants whose 

leases are terminated through no fault of 

their own are entitled to benefits under 

the Uniform Relocation Act. 

Topic: Several commenters said that 

once a termination notice is given to the 

tenant to vacate, the tenant’s recourse 

should be through the court system. To 

allow a tenant to provide a corrective 

action plan will only increase the 

termination time of problem tenants. 

Other commenters said that the 

proposed regulation still excludes 

evictions from the grievance process but 

also eliminates the written warning 

requirement and the right to meet with 

the borrower to discuss the alleged lease 

violation and possibly the termination 

notice itself.

Response: The Agency has modified 

§ 3560.159(a) to state that the borrower 

must give the tenant written notice of 

the violation and give the tenant the 

opportunity to correct the violation 

prior to terminating a lease. 

Topic: The Agency received several 

comments that recommend revised 

language regarding the termination of 

occupancy in § 3560.159(a)(1). One 

commenter suggests that 

§ 3560.159(a)(1)(i) be revised to read: 

‘‘Violations of lease provisions or 

occupancy rules which are substantial 

and/or repeated.’’ The commenter also 

suggested revisions to 

§ 3560.159(a)(1)(ii), specifically, 

removing ‘‘beyond the grace period.’’

Response: The Agency thanks the 

commenter for the suggestions and has 

changed the above referenced sentences 

as recommended at § 3560.159(a)(1)(i) 

and (ii) in the interim final rule. 

Topic: Several commenters wanted 

the current regulation to better specify 

residents’ rights and borrowers’

obligations. Specifically, the 

commenters identified the following: 

• The proposed regulation eliminates 

the requirement that the borrower notify 

the tenant of the right to review the 

borrower’s file and copy information 

from it. 

• RHS streamlining efforts have gone 

too far in the eviction or termination 

section of the proposed rule. RHS 

should revise the termination section by 

adding back the language about tenants’

rights and obligations from the current 

regulation and stating these rights in a 

precise and clear manner that residents 

can understand. 

• RHS should make it clear to its 

borrowers that the rejection or eviction 

of otherwise eligible applicants or 

tenants may cause borrowers to violate 

the Fair Housing Act, title VI of the Civil 

Rights Act of 1964, and other civil rights 

laws. 

Response: The Agency acknowledges 

the commenters’ concerns. The issue 

regarding the tenant’s right to review the 

borrower’s file is described in the 

interim final rule at § 3560.160(g)(4). 

The Agency has amended 7 CFR 

3560.159 to include additional tenant 

protections with respect to termination. 

The civil rights laws to which 

borrowers, tenants, and the Agency are 

bound are described in 7 CFR 3560.2. 

Topic: Multiple commenters praised 

the Agency for drafting the proposed 

rule to give new latitude to USDA to 

issue Letters of Priority Entitlement 

when required repair or rehabilitation 

causes displacement. The commenters 

believed that this added authority is 

helpful. 

Response: The Agency appreciates the 

commenters’ support. 

Topic: One commenter advised the 

Agency to include ‘‘major loss or 

destruction by fire’’ as another example 

of conditions that could lead to 

termination, even if temporary until the 

housing can be restored for occupancy. 

Response: The Agency acknowledges 

the commenter’s concern. The situation 

described is referenced in 7 CFR 

3560.159(c), which states that a tenant’s 

occupancy may be terminated in the 

event of a building rehabilitation or a 

natural disaster. This paragraph further 

explains the tenant’s rights under these 

circumstances. 

Topic: Commenters stated that 

material lease violations should not be 

attributed to innocent members of the 

household, particularly in cases of 

domestic violence. 

Response: The Agency notes the 

commenters’ concerns. However, 

termination of tenancy terminates the 

lease of the unit and not specific 

household members. 

69058 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Topic: Comments were received 

regarding the Agency’s prohibitions 

against noncitizens. Several commenters 

contended that if enacted, the regulation 

would have a negative impact on many 

existing tenants who are not eligible 

noncitizens. This, in turn, will have a 

negative impact on the projects 

themselves. One commenter asked 

whether noncitizens could live in 

section 515 properties. 

Response: While the Agency 

acknowledges the commenters’

concerns, restricting occupancy in 

sections 514, 515, and 516 properties to 

U.S. citizens and legal immigrants is a 

statutory requirement. 

Topic: The Agency received one 

comment recommending that RHS 

expand its proposed definition of legal 

or qualified alien to include three 

classes of immigrants that Congress 

recently determined should be eligible 

for public benefits, including ‘‘public 

and assisted housing’’ under the 

Personal Responsibility and Work 

Opportunity Reconciliation Act of 1996 

and the Illegal Immigration Reform and 

Immigrant Responsibility Act of 1996. 

Response: While the Agency 

appreciates the commenter’s suggestion, 

it has made no change because the 

definition of a legal alien is statutory per 

42 U.S.C. 1436(a). The Agency has 

exercised its authority under sections 

501(h) and 510(k) of the Housing Act of 

1949 [42 U.S.C. 1471(h) and 1480(k)] to 

restrict eligibility for occupancy in all 

section 515 projects to citizens and 

qualified aliens. In addition, eligibility 

for the migrant farm worker programs 

under sections 514 and 516 is 

specifically restricted to such 

individuals by section 514(f)(3)(A) of 

the Housing Act of 1949 [42 U.S.C. 

1484(f)(3)(A)]. 

Topic: Several comments were 

received regarding the proposed rule’s 

citizen requirement for the head of 

household. First, the commenter 

indicated that RHS’s proposal to require 

the head of household be a citizen or a 

permanent resident violates section 

501(h) of the Housing Act of 1949. In 

addition, the commenter asserted that 

HUD has not conditioned eligibility to 

reside in its housing upon an adult 

member being a citizen or a person 

legally admitted for permanent 

residency. Finally, the commenter urged 

RHS to clarify language in § 3560.152 to 

indicate that only one member of a 

household need be a citizen or legal or 

qualified alien. 

Response: The Agency acknowledges 

the commenters’ concerns, but it has 

made no change because the 

requirement for occupants of sections 

514, 515, and 516 housing to be citizens 

or legal immigrants is statutory.

Topic: With regard to § 3560.152(a)(1) 

and § 3560.154(a)(7), a comment was 

received suggesting that USDA 

incorporate appendix 2 to the HUD 

Handbook 4350.3. Further, the 

commenter urged USDA to coordinate 

with the Department of Homeland 

Security in much the same manner as 

HUD. 

Response: The Agency thanks the 

commenter for this suggestion. 

Appendix 2 to the HUD Handbook 

4350.3 is incorporated into internal 

Agency procedures. 

Topic: Several comments were 

received regarding the acceptance of 

income-ineligible tenants into section 

515 properties. Several commenters 

noted that if enacted, the Agency would 

require the borrower to publish local 

notices when waivers are granted to 

allow a project to rent to ineligible 

tenants. They thought that § 3560.152(d) 

was an unnecessary, excessive, and 

costly requirement to impose on what 

are presumably vacancy-troubled 

projects. 

Response: The Agency notes the 

commenters’ concerns and has removed 

this requirement from the interim final 

rule. In the proposed rule, it was located 

at § 3560.152(d)(3). 

Topic: Regarding § 3560.152(d)(4), 

commenters believed that borrowers 

should not be required to submit 

monthly reports to the Agency regarding 

marketing efforts to locate eligible 

tenants. Instead, records should be kept 

onsite for review during Agency 

inspections. 

Response: The Agency thanks the 

commenters for raising this issue and 

has modified the interim final rule so 

that the monthly report submission is 

not required. In the proposed rule, this 

was located at § 3560.152(d)(4). 

Topic: Regarding § 3560.152(e), 

commenters generally argued that the 

move-in date should be the effective 

date for tenant certification, which is 

the first of the month. 

Response: The Agency provides rental 

assistance, if available, to eligible 

tenants as of the first day of the tenant’s 

first full month of occupancy. Therefore, 

the recertification date is the first day of 

the month for which the tenant is 

eligible to receive the subsidy. The 

Agency has made no change to the 

interim final rule. 

Topic: One commenter asked what 

‘‘prevailing market rent rate’’ means as 

referenced in § 3560.152(d)(8). 

Response: The Agency appreciates the 

commenter’s question. The Agency has 

removed this reference from 

§ 3560.152(d) of the interim final rule. 

Topic: Several commenters addressed 

ineligible tenant waivers with regard to 

the lease term, as well as the Farm Labor 

Housing rent. First, with regard to lease 

terms, commenters acknowledged that 

the proposed rule calls for one-year 

leases to ineligible tenants followed by 

a month-to-month lease thereafter. The 

commenters recommended that the 

lease to ineligible tenants should simply 

be month-to-month. In terms of Farm 

Labor Housing rent, the commenters 

believed that income-ineligible tenants 

should be expected to pay the greater of 

the one percent note rent or prevailing 

market rent, not the lease rate of one 

percent in the proposed rule. The 

Agency received one comment 

suggesting that over income residents 

should be required to move after the 

expiration of the current calendar year 

or 90 days, whichever is later. 

Response: The Agency acknowledges 

the commenters’ concerns. The Agency 

allows a 1 year lease for ineligible 

tenants because not allowing an 

ineligible tenant to remain in the unit 

for at least 1 year could result in an 

undue financial burden to that tenant, 

and in many localities, contravenes 

State or local law. The Agency believes, 

however, that once the year elapses, it 

is fair to require the ineligible tenant to 

move within 30 days if this is stated in 

the lease and does not contravene State 

or local law. The Agency has removed 

the reference to prevailing market rate 

rent. 

Topic: Regarding § 3560.152(d)(7), 

one commenter suggested that this 

paragraph be deleted. Other commenters 

indicated that requiring a 25 percent 

surcharge for a Plan I projects, which 

operate at market rents, would require 

the borrower to charge rents higher than 

the market and consequently hurt 

project occupancy. 

Response: The Agency appreciates the 

commenters’ concerns but has made no 

change to § 3560.152(d)(7) because the 

requirement is not a change from 

existing policy, which merely requires 

that ineligible tenants pay a higher rent 

than eligible tenants. 

Topic: One commenter addressed 

§ 3560.152(e)(1)(iv) and asked for 

clarification regarding the ineligibility 

consequences faced by tenants who fail 

to comply with tenant certification. 

Response: The Agency appreciates the 

commenter’s concern. The interim final 

rule states that tenants who fail to 

recertify are no longer eligible for 

occupancy and subject to termination of 

tenancy in Agency MFH programs 

covered by the interim final rule. The 

interim final rule (at § 3560.152(d)) also 

explains how ineligible tenants may 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69059

continue to be housed and the 

regulations concerning their occupancy. 

Topic: Multiple comments were 

received asking that any change in 

tenant eligibility should grandfather in 

existing tenants. 

Response: The Agency notes the 

commenter’s concern; however, any 

changes in tenant eligibility 

requirements will not grandfather in 

existing tenants. Existing tenants should 

not be affected by changes in eligibility 

requirements, until their upcoming 

recertifications. Further, the Agency’s 

internal procedures provide guidance 

for existing tenants. 

Topic: One commenter said that 

allowing borrowers to ‘‘temporarily rent 

apartments to all persons without regard 

to age or income restrictions’’ appears to 

violate the exemption from the 

prohibitions against discrimination 

because of familial status that was 

granted to RHS.

Response: The Agency does not agree 

with this commenter’s assessment. 

Ineligible tenants are permitted for 

temporary periods to protect the 

financial interest of the Government. No 

change was made to the interim final 

rule. 

Topic: Several comments were 

received on tenant grievance 

procedures. These commenters said that 

the Notice of Adverse Action is 

specifically listed as a category of action 

a tenant or prospective tenant may 

grieve. The commenters went on to say 

that new language defines a Notice of 

Adverse Action as a proposed action 

that may have adverse consequence for 

tenants or prospective tenants, whereas 

in the prior regulation it was not clearly 

defined, and that notice delivery 

requirements were excluded from the 

proposed rule. 

Response: The Agency appreciates the 

commenters’ recommendations and has 

included delivery requirements at 

§ 3560.160(e) of the interim final rule. 

Topic: Several commenters asked the 

Agency to include a provision that 

when the tenant and the borrower 

disagree as to whether something is 

grievable, the dispute should be viewed 

as a threshold question to be decided 

before the Hearings Officer or panel. 

Response: The Agency has made no 

change to the interim final rule. The 

actions that are grievable are identified 

at § 3560.160(d) of the interim final rule. 

Topic: One commenter suggested that 

the proposed regulation indicate that 

the tenant has a right to grieve the 

borrower’s action or inaction when it 

involves the borrower’s failure to 

comply with lease terms or rules. 

Response: The Agency acknowledges 

the commenter’s concern. Section 

3560.160(b)(2) lists the circumstances 

under which a borrower’s action or 

inaction is not grievable. Borrower’s 

failure to comply with lease provisions 

or rules would fall under 

§ 3560.160(b)(1) of the interim final rule. 

Topic: The Agency received a few 

comments regarding compliance with 

§ 3560.103 and a tenant’s right to grieve. 

One commenter believes the standards 

contained in the proposed rule are too 

broad. For example, the commenter 

cited § 3560.103, which indicates that 

failure to maintain the premises in such 

a manner that provides decent, safe, 

sanitary, and affordable housing is 

grounds for a grievance. The commenter 

interpreted this to mean that residents 

would have a right to a grievance 

hearing if they thought the landscaping 

was not attractive. Another commenter 

believed that these standards should be 

posted or handed out to tenants at the 

time a lease agreement is executed. 

Response: The Agency acknowledges 

the commenters’ concerns. The Agency 

cannot prevent nuisance or frivolous 

grievance filings but has attempted to 

outline realistic standards of property 

maintenance that are expected of 

borrowers. Additionally, the Agency 

does not believe it is necessary to 

require borrowers to provide these 

standards to tenants as part of the lease. 

The standards are contained in 

§ 3560.103 of the interim final rule. 

Topic: One commenter addressed the 

issue of grievances based on 

discrimination against protected classes 

(§ 3560.160(a)(2)). According to the 

commenter, this paragraph includes 

marital status and sexual preference as 

protected classes, which is unlike any 

other Federal law. The commenter 

believes there is no apparent need to 

have greater fair housing provisions 

than in other Government programs. 

Response: The Agency thanks the 

commenter for raising this issue. The 

Agency has revised the language in this 

section to include only the protected 

classes as specified under Federal law. 

Marital status and sexual preference 

have been removed from 

§ 3560.160(a)(2) in the interim final rule. 

Topic: Several comments addressed 

grievances that may involve 

discrimination. One commenter 

suggested that language should be 

added to § 3560.160(a)(2) to clarify that 

discrimination complaints should be 

filed with the Regional Fair Housing 

and Equal Opportunity Office of HUD. 

Another commenter suggested that 

discrimination grievances could be 

handled under § 3560.160, if the 

grievant so desires. 

Response: The Agency thanks the 

commenters’ for these suggestions and 

has modified the language in 

§ 3560.160(a)(2) to state that any tenants 

or potential tenants who feel that they 

are being discriminated against may 

present a complaint to the U.S. 

Department of Agriculture’s Office of 

Civil Rights.

Topic: One commenter suggested that 

the process outlined in § 3560.160 may 

be abused and used merely for delay. 

The commenter recommended allowing 

an exception where the owner 

determines that a resident poses a risk 

to health and safety to other residents 

and property staff. 

Response: While the Agency 

recognizes the commenter’s concerns, 

the Agency has a responsibility to 

ensure that all tenants have equal 

protection under civil rights and fair 

housing laws. Tenants have the right to 

participate in a grievance process when 

they feel that they have been treated 

unfairly by a borrower or agent of the 

borrower in an Agency-assisted MFH 

property. Section 3560.160(b)(2) makes 

it clear that tenants who engage in 

unlawful behavior that threatens the 

health and safety of other tenants may 

not take advantage of the grievance 

process once the termination action has 

been initiated. The Agency has made no 

change to the interim final rule. 

Topic: One comment addressing 

§ 3560.160(h)(2)(iii) recommended that 

the right of a tenant to confront and 

cross-examine witnesses during the 

hearing be specifically included in 

§ 3560.160(h)(2)(iii) because both the 

current and the proposed regulations 

include such a right for the borrower. 

Response: The Agency thanks the 

commenter for this suggestion and has 

made the change to § 3560.160(h)(2)(iii). 

Topic: The Agency received a 

comment regarding § 3560.160(g)(4) 

expressing concern that this section 

limits a tenant’s inspection of the 

documents, records, and policies a 

borrower intends to use at a hearing to 

a ‘‘reasonable time before the hearing.’’

The commenter believed that the 

regulation must include a timeframe in 

which the borrower is required to 

disclose their evidence before the 

hearing so that the tenant has adequate 

time to prepare for the hearing. 

Response: The Agency acknowledges 

the commenter’s concern, but believes 

that, ‘‘reasonable time before the 

hearing’’ is clear. In this instance, a 

reasonable time is that which allows the 

tenant adequate time to use the 

information to the benefit of his or her 

case against the borrower. The Agency 

has made no change to § 3560.160(g)(4) 

of the interim final rule. 

Topic: Several comments were 

received regarding fair and impartial 

69060 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

hearing procedures. Specifically, the 

commenters recommended that the 

regulation: 

• Require Hearing Officers to be 

‘‘impartial and disinterested.’’

• Include the prohibition against the 

Agency’s appointing a Hearing Officer 

who was earlier considered by either 

party to ensure the integrity of the 

process. 

• Include the language of the current 

regulation, which prohibits a Hearing 

Officer from being paid, unless done so 

by the Agency. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

incorporated the suggestions into 

§ 3560.160(g)(2) of the interim final rule. 

Topic: The Agency received several 

comments urging time limits for certain 

actions. Specifically, the commenters 

recommended that the new regulation: 

• Impose a time limit on a borrower 

to submit the summary of the informal 

meeting to the tenant. This would be 

similar to the proposed regulation, 

which imposes a 10-day time limit on 

the tenant to request a hearing after 

receipt of the summary 

(§ 3560.160(g)(1)). 

• Include a specific timeframe in 

which the borrower is required to 

submit a summary of the meeting to 

both the tenant and the Agency. 

• Impose a requirement on the 

borrower to prove receipt of the 

Response to a Notice of Adverse Action. 

• Change the 10-day Response time 

for grievances regarding lease 

modifications. 

Response: The Agency acknowledges 

the commenters’ concerns. Section 

3560.160(f) of the interim final rule has 

been revised to provide for a 10-

calendar day time frame for the 

borrower to provide a summary of the 

informal meeting. The Agency has also 

imposed a requirement on the borrower 

to prove receipt of the Response to a 

Notice of Adverse Action. The Agency 

did not change the 10-day Response 

time for lease modifications. No 

justification was provided by the 

commenter for the change. 

Topic: One comment addressed 

§ 3560.160(f)(3) and noted that language 

contained in the current regulation 

required the borrower to include certain 

information in the summary submitted 

to the tenant, but this language was left 

out of the proposed rule. The 

commenter recommended that this 

language be retained in the new 

regulation. 

Response: The Agency acknowledges 

the commenter’s concerns and has 

incorporated this requirement at 

§ 3560.160(f)(3) of the interim final rule. 

Topic: The Agency received multiple 

comments on how borrower/tenant 

communications, such as Notices of 

Adverse Action, waiting list decisions, 

and eligibility decisions should occur. 

One commenter urged that 

communications be sent via certified 

mail. Another commenter suggested that 

communications be sent by regular mail 

to the last known address. Other 

commenters urged that phone contact be 

made. 

Response: The Agency acknowledges 

the commenters’ concerns. Section 

3560.160 of the interim final rule 

provides direction for borrower/tenant 

communications in those areas where 

tenant rights are concerned. The Agency 

would prefer that borrowers establish 

the most efficient communication 

system for their property. 

Topic: Several commenters urged that 

any notice from the resident to the 

owner or management must be in 

writing.

Response: The Agency appreciates the 

commenters’ concerns. The Agency has 

added language in § 3560.160(f) of the 

interim final rule that tenants or 

prospective tenants must file grievances 

in writing. 

Topic: One comment recommended 

that the rule state that any tenant or 

prospective tenant seeking occupancy in 

a housing project may complain to the 

Secretary of Agriculture. 

Response: The Agency thanks the 

commenter for this suggestion and has 

modified the interim final rule’s 

language in § 3560.160(a) to state that 

any tenants or potential tenants may 

present a complaint to the U.S. 

Department of Agriculture’s Office of 

Civil Rights, which Agency is the 

receiver of all complaints. 

Topic: One commenter suggested that 

§ 3560.160 should be deleted. According 

to the commenter, residents already 

have leases and lease rights, landlord/

resident law, the legal right to form 

associations, and access to the 

regulatory Agency, so the additional 

processes outlined in § 3560.160 are 

duplicative and burdensome. 

Response: While the Agency 

recognizes the commenter’s concerns, it 

has a responsibility to ensure that all 

tenants have equal protection under 

civil rights and fair housing laws. 

Tenants have the right to participate in 

a grievance process when they feel that 

they have been treated unfairly by a 

borrower or agent of the borrower in an 

Agency-assisted multi-family housing 

property. 

Topic: The Agency received a 

comment regarding § 3560.160(f)(2) 

stating that the 5-calendar-day 

timeframe for the meeting requirement 

by the borrower is rather short. The 

commenter believed that this time limit 

should be extended to 10 days. 

Response: The Agency thanks the 

commenter for this suggestion and has 

incorporated it into § 3560.160(f)(2) of 

the interim final rule. 

Topic: One commenter cited 

§ 3560.160(i)(2), which indicates that 

the notice must state that the decision 

is not effective for 10 days to allow time 

for an Agency review as specified in 

paragraph (i)(3) of this section. The 

commenter recommended that this 

section clarify that the 10 days are 

calendar days. Second, the commenter 

believed that the reference to (i)(3) 

appears to be wrong and should be 

(i)(4). 

Response: The Agency thanks the 

commenter for this suggestion and has 

changed the interim final rule to clarify 

that the 10 days are 10 calendar days. 

The Agency has made the other editorial 

changes as well. 

Topic: The Agency received a 

comment regarding § 3560.160(g)(5) 

recommending that 15 calendar days are 

used, rather than 15 days. Also, in terms 

of escrow deposits, the commenter 

suggested a new section be added that 

requires that the grievant notify the 

borrower of his intention to escrow 

funds and the name of where the funds 

are being held. 

Response: The Agency acknowledges 

the commenters’ concern and has added 

‘‘calendar’’ to clarify the time period. 

The Agency believes § 3560.160(g)(6)(iv) 

of the interim final rule provides the 

guidance for the tenant providing proof 

of escrow deposit information. 

Topic: A commenter addressed the 

failure of either party to appear at a 

scheduled hearing (§ 3560.160(h)(5)). 

The commenter believed that 

postponement of the hearing should not 

be an option when either party has 

failed to appear at a scheduled hearing. 

Response: The Agency appreciates the 

commenter’s concern but has made no 

change to this provision so that both the 

borrower and the tenant have ample 

opportunity to defend their respective 

positions. 

Topic: The Agency received multiple 

comments regarding the importance of 

resolving disputes without litigation. 

The commenters believed that the 

regulation leaves tenants without 

adequate protection and leaves 

borrowers without a clear process to 

resolve lease compliance issues without 

litigation. One commenter suggested 

that without a dispute resolution 

process, borrowers and tenants will be 

forced into litigation and resident 

evictions will increase. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69061

Response: The Agency acknowledges 

the commenters’ concerns. However, the 

Agency believes that adequate 

protections are afforded to the tenant in 

the interim final rule, including a 

grievance process, and that borrowers 

have appeal rights in certain situations. 

The Agency believes that its policy and 

accompanying procedural guidance 

provide ample protection for borrowers 

and tenants. 

Topic: One commenter recommended 

involving tenants and advocates in the 

rulemaking process. 

Response: The Agency recognizes that 

the position of tenants and advocates is 

very important to the proper 

implementation of the regulation. 

Tenants’ representatives were included 

in stakeholder meetings prior to the 

development of the rule and their input 

was considered by the Agency as it 

developed the proposed rule. 

Topic: Several commenters stated that 

the proposed requirement that adverse 

decisions be issued in English as well as 

other languages when the area contains 

a concentration of non-English speakers 

is overly burdensome. 

Response: The Agency acknowledges 

the commenters’ concerns but has made 

no change to the language in the interim 

final rule because requirements 

concerning limited English proficiency 

of applicants and tenants are civil rights 

issues and are covered under 

§ 3560.2(b). 

Topic: Several commenters stated that 

applicants with incomplete applications 

should not be entered on the waiting 

list. 

Response: The Agency appreciates 

these comments and has modified 

§ 3560.154(f)(4) of the interim final rule 

to state that tenant selection will be 

made from the applicants on the waiting 

list with completed applications.

Topic: Several commenters addressed 

requirements about specifying both a 

time and a location when applications 

can be taken, as well as office hours in 

key documents. Specifically, multiple 

commenters believed that the 

requirement to list the office times on 

the management plan and Affirmative 

Fair Housing Marketing Plan should be 

removed because it is burdensome to 

the borrower and managing agent to 

update these documents often as office 

hours change. Other commenters 

expressed concern about having to 

maintain regular office hours in small 

projects to take applications, especially 

since many are submitted by mail; 

maintaining office hours in small 

projects can be costly. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

revised § 3560.154(c) of the interim final 

rule to eliminate the requirement to 

maintain a place for accepting 

applications to provide more flexibility 

to smaller projects. However, borrowers 

still need to announce when and where 

applications will be taken (in rental 

advertisements) and document this 

information in the management plan 

and the Affirmative Fair Housing 

Marketing Plan because this information 

needs to be formally documented to 

establish compliance with key fair 

housing requirements. This is required 

in § 3560.154(c) of the interim final rule. 

Topic: One commenter addressed 

§ 3560.154(g)(2)(ii), believing that the 

definition of ‘‘displaced’’ is not clear. 

The commenter suggested creating a 

definition of displaced in § 3560.11. 

Response: The Agency acknowledges 

the commenter’s concern but has not 

added a definition of ‘‘displaced’’

because the definition is contained in 

the Uniform Relocation Act, which is 

applicable to all Agency MFH 

properties. 

Topic: The Agency received several 

comments regarding the automation of 

forms and waiting lists. The 

commenters believed that the 

continuation of this practice should be 

permitted. Another commenter 

advocated a waiting list cap. 

Response: The Agency appreciates the 

commenters’ concerns and has 

undertaken substantial automation 

initiatives recently. The commenter did 

not provide a justification for 

establishing a waiting list cap, therefore 

no change was made to the regulation. 

Topic: One commenter suggested 

revising § 3560.152(e)(1)(iii) to read: 

‘‘Tenants must report to borrowers all 

changes in their household status that 

may affect the tenant’s eligibility.’’

Response: The Agency thanks the 

commenter for this suggestion and has 

made the suggested change to 

§ 3560.152(e)(1)(iii) of the interim final 

rule. 

Topic: One commenter recommended 

that in § 3560.152(e)(2) the Agency 

should require borrowers to use wagematching techniques to confirm tenants’

income. The commenter believed that 

this practice should be done at initial 

certification and at each annual 

recertification. 

Response: The Agency notes the 

commenter’s suggestion. Wage matching 

is an internal Agency procedure and not 

available to borrowers. 

Topic: One commenter addressing the 

10-day standard in § 3560.152(e)(2)(iii) 

recommended that in certain 

circumstances this standard should be 

waived. 

Response: The Agency acknowledges 

the commenter’s suggestion, but no 

change has been made because § 3560.8 

of the interim final rule describes the 

requirements for administrator 

exceptions. 

Topic: Several comments were 

received on the Agency’s policy of 

collecting race and ethnicity data on 

applications for occupancy. Several 

commenters said that the proposed rule 

requires applicants to provide this 

information on the application form and 

if they elect not to do so, the owner is 

required to note applicants’ race/

ethnicity and sex on basis of visual 

observation or surname. In addition, 

several commenters noted that 

applicants’ race and/or ethnicity should 

not appear on the waiting list. Further, 

some commenters urged that if race 

and/or ethnicity appear on the waiting 

list, then gender should be included as 

well. One commenter said that listing 

the race categories in alphabetical order 

is problematic. This text is based on 7 

CFR part 1900, subpart A, and the 

Federal Register Notice entitled 

‘‘Revisions to the Standards for the 

Classification of Federal Data on Race 

and Ethnicity’’ published October 30, 

1997. 

Response: The Agency thanks the 

commenters for highlighting this 

important issue and has modified 

§ 3560.154(a)(9) of the interim final rule 

to include a disclosure statement about 

the use of race and ethnicity 

information that must appear on all 

applications for housing under sections 

514, 515, and 516. Applicants are not 

required to provide this information. 

The Agency requires the waiting list to 

include race and ethnicity information 

for statistical purposes only. 

Topic: One commenter addressed 

§ 3560.154(f) and recommended that 

computer-generated waiting lists should 

only be allowed if the program does not 

allow names to be deleted or inserted. 

The commenter believes that otherwise 

computer-generated waiting lists are 

open to manipulation and civil rights 

data are not accumulated. 

Response: The Agency appreciates the 

commenter’s concern but it notes that in 

§ 3560.154(i) of the interim final rule 

and irrespective of the form (i.e., 

electronic or nonelectronic), the Agency 

requires borrowers to document their 

purging procedures in the project’s 

management plan. To further address 

the commenter’s concern, the Agency 

added language to this same paragraph 

establishing minimum standards 

regarding these procedures that will 

allow Agency review of borrower 

management of the waiting list to check 

for such concerns. 

Topic: One commenter disagreed with 

the requirement that applicants must 

69062 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

certify that the unit will be their 

permanent residence as stated in 

§ 3560.154(a)(7). The commenter argues 

that this rule will not work for migrant 

families and urges the Agency to revise 

the language. 

Response: The Agency wishes to 

clarify its position. Section 

3560.154(a)(7) states that the applicant 

must certify that the unit will be the 

household’s primary residence, not its 

permanent residence.

Topic: One commenter suggested a 

revision to § 3560.154(a)(2) regarding 

‘‘the number of household members and 

their ages.’’ The commenter suggested 

that this be changed to ‘‘number of 

household members and their dates of 

birth.’’

Response: The Agency appreciates the 

commenter’s suggestion and has 

incorporated this change into 

§ 3560.154(a)(2). 

Topic: One commenter addressed 

§ 3560.154(a)(10) and did not believe 

that individuals have a ‘‘taxpayer 

identification number.’’

Response: The Agency appreciates the 

comment and has changed this item to 

refer to the individual’s social security 

number. 

Topic: Several commenters voiced 

their approval of § 3560.152(a)(3), which 

makes a household eligible if it qualifies 

for and is receiving housing benefits 

through another program, such as 

section 8 or the Low-Income Housing 

Tax Credit (LIHTC) program. 

Response: The Agency thanks the 

commenters for their support of this 

provision. 

Topic: Regarding § 3560.154(g), 

commenters expressed concern that 

there is no mention of the right of 

borrowers to give priority to LIHTCeligible tenants if the project is operated 

under the LIHTC program, or any 

mention of the right to leave a unit 

vacant if no LIHTC-eligible applicant is 

available. 

Response: The Agency recognizes the 

commenters’ concerns and has included 

language regarding selection of 

applicants in LIHTC projects at 

§ 3560.154(d) of the interim final rule. 

Topic: Comments were received that 

addressed the Agency’s requirements to 

establish occupancy policies related to 

unit sizes. Numerous commenters stated 

that the proposed rule was not clear 

about the borrower’s responsibilities 

toward residents who are over-or 

underhoused. Some commenters asked 

whether these families would be 

required to move from the project. 

Others suggested that basing eligibility 

on unit size could potentially be 

construed as a violation of applicable 

civil rights laws. Another commenter 

recommended that any decision on unit 

size should be given in writing and 

should contain specific references to the 

grievance process. 

Response: The Agency appreciates 

these comments and has deleted the 

requirement for borrowers to establish a 

minimum threshold of one person per 

bedroom for each rental unit from 

§ 3560.155 (e). Families who are over-or 

underhoused will be required to move 

into the first appropriate size unit 

available at the property, not to vacate 

the property altogether. 

Topic: One commenter questioned the 

proposed regulation regarding 

occupancy policies in § 3560.155 

because it deletes references to ‘‘fair 

housing concepts’’ such as reasonable 

accommodation. The commenter 

recommended that these concepts 

remain in the regulation. 

Response: The Agency thanks the 

commenter for raising this issue and has 

added references to reasonable 

accommodation to § 3560.155(e)(3) of 

the interim final rule. 

Topic: The Agency received multiple 

comments on § 3560.156(c)(1)(iii) and 

§ 3560.156(c)(15)(xiii) expressing 

concern about increasing the extended 

tenant absences from two weeks to four 

weeks. One commenter recommended 

that the definition of extended tenant 

absences remain at two weeks and not 

be increased to four weeks. 

Response: The Agency thanks the 

commenters for highlighting this issue. 

The reference to the time period for 

extended absences has been deleted 

from the interim final rule. The Agency 

believes this is an occupancy rule that 

is best determined by each property. It 

is not a regulatory definition. The 

borrower has the right to decide what 

constitutes an extended absence as long 

as the definition is consistently applied 

to all tenants. 

Topic: Several comments specifically 

focused on § 3560.156(c)(15)(xx) of the 

proposed rule. One commenter 

suggested that the Agency delete 

examples of good cause and note that 

good cause varies based on local 

practices. In addition, two commenters 

addressed the lease requirements 

contained in § 3560.156(c)(15)(xx). The 

commenters recommended that the 

Agency specify a distance that 

represents a good cause move to another 

location, such as 100 miles. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

deleted the examples of good cause from 

the interim final rule. 

Topic: The Agency received several 

comments regarding 

§ 3560.156(c)(15)(iii) of the proposed 

rule, which requires the owner to accept 

a tenant’s net contribution. One 

commenter urged greater flexibility in 

how borrowers are allowed to apply 

these funds to amounts owed by the 

tenant. Other commenters 

recommended that this section be 

revised so that the owner must first 

apply funds to back rent and any 

damages, then current rent. A 

commenter believed that this would 

limit property abuse. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

revised the interim final regulation at 

§ 3560.152(c)(8) to clarify that the tenant 

contribution should first be used for 

rental charges. 

Topic: One commenter addressing 

§ 3560.156(c)(15)(iii) of the proposed 

rule argued that the proposed regulation 

and handbook sections pertaining to 

leases and occupancy rules do not 

adequately cover security deposits. The 

commenter thought that the new 

regulation should place limits on 

security deposits, allow residents to 

contribute to the deposit over a period 

of time, require the owner to place the 

deposits in segregated escrow accounts, 

and require that leases contain 

information consistent with provisions 

of State law regarding the use, 

collection, and disposition of security 

deposits. 

Response: The Agency appreciates the 

commenter’s concern, but this 

information is contained in § 3560.204 

of the interim final rule.

Topic: Multiple comments were 

received regarding displaced tenants in 

cases where a unit is uninhabitable in 

§ 3560.156(c)(15)(xviii) of the proposed 

rule. One commenter urged that RHS 

modify the regulation to make clear that 

tenants who are displaced from units 

when they become uninhabitable have a 

first right to return to the unit after it is 

rehabilitated unless the owner has 

terminated the residency for good cause. 

The second commenter acknowledged 

that both the current and proposed 

regulations require that the lease 

contain a provision about disposition of 

a lease when a unit becomes 

uninhabitable. Further, commenters 

suggested that the proposed regulation 

clarify that termination of the tenancy 

and the subsidy are two different issues, 

and that both require written notice and 

a hearing. 

Response: The Agency appreciates the 

commenters’ concerns. While the 

Agency has made no change to this 

section in the interim final rule, it has 

modified § 3560.159(c) to state that any 

tenant displaced due to a unit being 

uninhabitable is eligible for benefits 

under the Uniform Relocation Act. 

Section 3560.159 refers to termination 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69063

of tenancy only; termination of subsidy 

is discussed at § 3560.259(c) of the 

interim final rule. 

Topic: The Agency received one 

comment about § 3560.156(c)(15)(ix) of 

the proposed rule suggesting that the 

Agency clarify the proposed rule to 

indicate that the tenant may not be 

evicted for failure to pay charges other 

than rent or utilities. Instead, the 

commenter suggested that the borrower 

should be limited to other legal action 

to collect those charges. 

Response: The Agency acknowledges 

the commenter’s concern. However, the 

Agency believes it is appropriate for 

termination of occupancy based on 

material noncompliance with lease 

requirements and has retained this 

language at § 3560.159(a)(1)(ii) of the 

interim final rule. 

Topic: Several comments addressing 

the 30-day move out requirement in 

§ 3560.156 (c)(1)(i) of the proposed rule 

recommended that this paragraph allow 

tenants to move out either within 30 

days or at the end of the term of the 

lease, whichever is greater, which 

would agree with language in 

§ 3560.158(b). 

Response: The Agency acknowledges 

the issue raised by the commenters and 

has revised the interim final rule so that 

the requirement is consistent with the 

language in § 3560.158(b). 

Topic: The Agency received a 

comment about § 3560.156(c)(1)(iv) of 

the proposed rule, acknowledging the 

requirement that tenants make 

restitution when unauthorized 

assistance is received but expressing 

concern that the proposed rule does not 

differentiate between the unauthorized 

assistance being the fault of the tenant 

or the borrower. 

Response: The Agency appreciates the 

commenter’s concern. The Agency has 

moved references to unauthorized 

assistance due from the borrower or 

from the tenant to subpart O of the 

interim final rule. 

Topic: One commenter addressing 

§ 3560.156(c)(15) of the proposed rule 

recommended that the lease include a 

statement that tenants agree that they 

will be held financially responsible if 

they receive any excessive Government 

subsidies because of their failure to 

report their accurate income, income 

changes, true members of the household 

and their incomes, or any other 

improper actions. 

Response: The Agency acknowledges 

the commenter’s concern. The 

certification form that tenants are 

required to sign includes the penalties 

for fraudulent reporting of income. This 

issue is further addressed in subpart O 

of the interim final rule. 

Topic: One commenter suggested 

month-to-month leases rather than yearlong leases. 

Response: The Agency has made no 

change to this provision because it has 

always required a minimum one-year 

initial lease term for all its MFH 

projects, as is the case with other 

Federal housing programs. 

Topic: Several comments addressed 

Agency concurrence with lease 

agreements. One commenter suggested 

the use of standard lease agreements by 

State to reduce the attorney certification 

process that is required under the 

proposed regulation. Other commenters 

questioned the process of approval of 

lease modifications. One commenter 

believed that the Agency’s role should 

be expanded from just a ‘‘concurrence’’

role. One commenter urged that the 

Office of General Counsel or other 

qualified Agency staff be involved in 

lease reviews. 

Response: The Agency has amended 

§ 3560.156(a) of the interim final rule to 

state that the Agency must approve all 

leases. The borrower’s attorney is 

responsible for ensuring that the lease 

complies with all applicable State and 

local laws. This should not be unduly 

burdensome, as most standard leases are 

in compliance with these laws. 

Topic: One commenter expressed 

opposition to the provision in the 

proposed regulation that allows 

borrowers with projects receiving 

section 8 project-based assistance to use 

the HUD model lease, because tenant 

rights and regulations are significantly 

different between the two programs. 

Response: The Agency appreciates 

this comment and has revised the 

language in § 3560.156(e) to clarify that 

the HUD lease provisions will prevail 

unless they conflict with the 

requirements of § 3560.156. The 

revision also specifies that in the event 

of an overlap or conflict between the 

requirements, the provisions most 

favorable to the tenant will apply. 

Topic: One commenter expressed 

concerned about the way that the 

requirements in § 3560.156(d)(5) have 

been revised. The commenter believed 

that the new wording could lead to 

borrowers having to notify a tenant of 

their intent to bring suit as opposed to 

notifying them that a suit has been filed. 

Response: The Agency thanks the 

commenter for raising this issue. The 

Agency has revised this section to 

specify lease clauses stating that the 

borrower may institute a lawsuit 

without providing advance notification 

to the tenant are prohibited.

Topic: Commenters stated that the 

Agency’s requirement to provide leases, 

Notices of Adverse Action, and other 

important documents in English as well 

as other languages when the area 

contains a concentration of non-English 

speakers is burdensome from both an 

administrative and financial standpoint. 

Response: The Agency acknowledges 

the commenters’ concerns, but has made 

no changes to the applicable sections of 

subpart D. The requirements concerning 

limited English proficiency of 

applicants and tenants are civil rights 

issues and are covered under § 3560.2(b) 

of the interim final rule. 

Topic: One commenter acknowledged 

that the proposed regulation includes 

language not found in the current rule 

that ‘‘borrowers must execute their 

Agency approved lease with each tenant 

household * * *’’ The commenter 

believed that borrowers should be 

required to offer the same lease to all 

households in a project or a locality. 

Response: The Agency acknowledges 

the comment. Each household is 

required in § 3560.156 of the interim 

final rule to have an executed lease on 

file and borrowers are required to offer 

an Agency approved lease to tenants. 

Topic: Multiple comments addressed 

that the proposed regulation adds the 

requirement that leases contain the 

street address of the management agent 

to which tenants may direct complaints. 

Commenters thought that this meant a 

management agent with authority to 

address the complaint. 

Response: The Agency acknowledges 

the above comment but considers the 

sentence as written to be sufficiently 

clear. Therefore, the Agency has made 

no change to this language. 

Topic: One commenter did not 

understand § 3560.156(c)(4) of the 

proposed rule. The commenter 

supported the new requirement that 

leases for rental units that receive rental 

assistance include a clause that specifies 

that the tenant’s contribution to rent 

will not increase if rental assistance is 

terminated due to actions by the 

borrower. The commenter did not 

understand the use of the term ‘‘other 

than Federal assistance.’’

Response: The Agency appreciates the 

commenter’s support for the addition of 

this clause. The term ‘‘other than 

Federal assistance’’ has been deleted 

from 3560.156(c)(3) of the interim final 

rule. (The reference to § 3560.156(c)(4) 

of the proposed rule was changed and 

is now § 3560.156(c)(3) of the interim 

final rule.) 

Topic: One commenter asserted that 

leases must state that the housing 

project is subject to title VI of the Civil 

Rights Act of 1964, section 504 of the 

Rehabilitation Act of 1973, the Age 

Discrimination Act of 1975, and the 

ADA. While the current regulation (7 

69064 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

CFR part 1930, subpart C), in addition 

to identifying the Federal 

antidiscrimination laws that apply to 

the housing project, describes the 

appropriate complaint procedure under 

those laws, the commenter believed that 

the complaint information is omitted 

from the proposed regulation and 

should be included. 

Response: The Agency appreciates the 

commenter’s suggestion. The 

information on applicable civil rights 

related laws is included in 

§ 3560.156(c)(6). The complaint 

procedure is described in § 3560.160. 

Topic: One commenter believed that 

both the proposed regulation and 

handbooks should explicitly prohibit 

lease clauses that would limit 

occupancy by persons with disabilities. 

Response: The Agency acknowledges 

the commenter’s concern; however, it is 

against all applicable Federal civil rights 

laws to prohibit occupancy by persons 

with disabilities. The Agency feels that 

this information does not need to be 

restated in § 3560.156(d). 

Topic: One commenter suggested that 

the Agency provide something similar 

to the Form RD 1910–11, Applicant 

Certification Federal Collection Policies 

for Consumer or Commercial Debts, to 

tenants at the time that they apply for 

assistance, because such a form 

describes actions that may occur to 

protect the interests of the government. 

Response: The Agency has not 

imposed this additional requirement, as 

the certifications on the forms that 

tenants complete when they apply for 

assistance provide the government with 

authority to collect unauthorized rental 

assistance. 

Topic: Several comments were 

received regarding the Agency’s policies 

on calculating applicant/tenant income 

and assets. The majority of commenters 

on this subpart supported the Agency 

and stated that by using the HUD 

definitions of annual income, adjusted 

income, and net assets found in 24 CFR 

part 5, the Agency will reduce burden 

on owners and managers who might 

otherwise be required to use different 

criteria for calculating income and 

assets for various Federal programs. 

Other commenters asked for a 

comparison between the current 

practice and the proposed practice to 

illustrate how the change would affect 

individuals. 

Response: The Agency appreciates the 

commenters’ support. The Agency will 

consider providing some comparison 

examples for internal Agency 

procedures. 

Topic: A commenter suggested that 

chapter 5 of the HUD Handbook 4350.3, 

sections 1 and 2, provide considerable 

guidance on determining annual 

income, adjusted income, and net 

assets. The commenter thought that RHS 

should include similar provisions in its 

handbooks or, at the very least, refer 

borrowers and tenants to this HUD 

Handbook when questions arise 

concerning these matters. 

Response: The Agency appreciates the 

commenter’s suggestion. Because the 

information from this HUD Handbook is 

procedural, the Agency will be using 

similar information on determining 

annual income, adjusted income, and 

net assets in Agency internal guidance 

about program procedures. 

Topic: Comments were also received 

on the Agency’s policy toward criminal 

activity and drug use. Several 

commenters asked that § 3560.154(j) 

reference 24 CFR part 5. 

Response: The Agency has modified 

this section to include this reference.

Topic: Other commenters stated that 

the Agency’s policy to not allow the 

lessee or other adult members 

occupying the unit who commit a drug 

violation to enter the premises unless 

the individual agrees not to commit a 

drug violation in the future, participates 

in a counseling or recovery program, or 

has completed such a program is too 

lax. These commenters recommended 

that the Agency employ HUD’s onestrike policy. 

Response: The Agency thanks the 

commenters for their recommendations; 

however, the Agency disagrees with the 

commenter’s view that the above-stated 

policy established in § 3560.156(c) of 

the interim final rule is too lax. It 

provides the borrower with the 

authority to take specific actions to limit 

the access of such persons and 

ultimately terminate tenancy if further 

drug-related violations are committed. 

Topic: One commenter suggested that 

§ 3560.159(a)(1) should include 

evidence of minor infractions such as 

drug paraphernalia. 

Response: The Agency appreciates the 

commenter’s suggestion. The Agency 

believes the borrower can include this 

in occupancy rules or lease provisions 

without Agency direction. 

Topic: With regard to § 3560.159(a)(1) 

and (a)(2), one commenter believed that 

the regulation should include an 

innocent tenant defense for material 

noncompliance cases. 

Response: The Agency appreciates the 

commenter’s concern. However, the 

lease termination is based on the terms 

of the lease, and any member of the 

household who signs the lease becomes 

subject to the terms of the lease. 

Topic: Several commenters stated that 

the Agency’s requirements for 

occupancy rules described in § 3560.157 

should include guidance on how to 

determine who will remain in the unit 

and/or receive the rental assistance in 

the event of a family breakup, 

particularly in the event of domestic 

abuse. 

Response: The Agency appreciates 

this comment. Households that add or 

lose any member are required to 

recertify their income in order to 

establish eligibility and/or rental 

assistance levels. This can be found in 

the interim final regulation at 

§ 3560.158(d). 

Topic: With regard to § 3560.154(d) 

and (h), a commenter indicated that the 

proposed regulation requires the 

borrower to base decisions related to the 

approval or rejection of the application 

on selection criteria contained in the 

Agency-approved management plan. 

The commenter believed, however, that 

the regulation gives insufficient 

guidance on the development of those 

selection criteria. The commenter 

recommended that language be included 

in this section providing that the 

borrower give ‘‘due consideration to 

mitigating factors’’ that might have led 

to a history of poor credit, and/or 

employment or housing problems. 

Response: The Agency appreciates the 

commenter’s concerns. The interim final 

rule at § 3560.102 (b) requires that the 

borrower describe his applicant 

eligibility and selection criteria in the 

property’s management plan, which is 

reviewed by the Agency. 

Topic: Several comments focused on 

the threshold for interim 

recertifications. These commenters 

stated that the proposed rule requires a 

tenant income recertification ‘‘whenever 

a change in household status results in 

a net tenant contribution change that is 

greater than $25 per month.’’ These 

commenters felt that tenants cannot be 

expected to understand how a change in 

their household income will result in a 

$25 change in their rent. 

Response: The Agency reviewed this 

threshold and has modified 

§ 3560.152(e) to state that an interim 

recertification is required when a 

household’s monthly income changes 

by $100 or more per month. In an effort 

to achieve a more realistic threshold, the 

Agency evaluated HUD’s requirement 

for recertification and took into further 

consideration the generally lower 

incomes of tenants in Agency-financed 

properties. The overwhelming majority 

of tenants have annual incomes under 

$10,000 (or about $800 a month) and 

turnover at Agency-financed properties 

does not result in a substantive change 

in the tenant income profile. The 

Agency determined that a $100 per 

month change (half of HUD’s $200 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69065

amount) is substantial enough to trigger 

a recertification but not common 

enough to create an undue burden on 

either the tenant or borrower in terms of 

documentation and follow-up. The 

Agency further established that a tenant 

may request a recertification when 

household income changes by at least 

$50 per month. 

Topic: One commenter recommended 

that recertification take place every 2 

years rather than every year. 

Response: The Agency has made no 

change because the requirement to 

recertify tenant incomes annually is 

statutory (see 42 U.S.C. 1490a section

521(a)(2)(B)). 

Topic: Several commenters addressed 

§ 3560.156(c)(1)(ii) of the proposed rule. 

One commenter recommended that the 

proposed rule require residents to 

obtain advance approval of any increase 

in household members. Another 

commenter suggests that, in general, the 

Agency should consider eliminating 

recertification when the only change in 

a household is the addition of a minor 

child (without any increase in income). 

Response: The Agency acknowledges 

the commenters’ concerns but has made 

no change. The Agency does not have 

the authority to require tenants to obtain 

preapproval of increases in household 

members, only to require reporting of 

these changes. The Agency does not 

mandate that an interim recertification 

be completed when a minor child is 

added to the household unless the 

household’s income will increase as a 

result. 

Topic: With regard to tenant 

certification and verification, a 

commenter cited that the proposed 

regulation, unlike the rule that it 

replaces, fails to set forth any timeframe 

or deadline for a borrower to process an 

updated or interim tenant certification.

Response: The Agency appreciates the 

commenter’s concern. The timeframe 

requirement can be found at 

§ 3560.152(e)(2)(iii) of the interim final 

rule. 

Topic: Several comments were 

received regarding policies on the 

occupancy of accessible units. Several 

commenters said that 

§ 3560.158(d)(3)(ii) should be modified 

to say that if an applicant with a need 

for a unit with accessibility features 

applies for housing at a project and the 

unit is occupied by an ineligible family, 

the family should only be required to 

move when another suitable unit is 

available in the project. Some 

commenters said that the 30-day 

notification to move needs to be 

clarified, specifically, those moving can 

only be given the notification when 

another nonaccessible unit becomes 

available, since it is not the intent to 

displace a tenant totally. The 

commenter believed that it would be 

difficult to rent such units if tenants 

could be forced to move from the 

complex on 30 days notice at any time. 

Response: The Agency thanks the 

commenters for these recommendations 

and has modified this section to address 

the commenters’ concerns. Tenants in 

units with accessibility features will not 

be required to vacate these units until 

another appropriate size unit without 

accessibility features becomes available 

in the project. The Agency does not 

intend to displace in-place tenants, but 

to move them to accommodate the 

needs of persons with disabilities. 

Topic: One commenter asked whether 

a tenant would be considered 

overhoused if they were disabled and 

needed an extra room for apparatus 

related to their disability. 

Response: A tenant who is disabled 

will not be considered overhoused if the 

tenant needs an additional room for an 

apparatus related to the tenant’s 

disability or a live-in aide. 

Topic: The Agency heard from several 

commenters on its policies for allowing 

surviving family members to remain in 

units for which they are ineligible after 

the eligible household member dies. 

Several commenters recommended that 

§ 3560.158(d) allow a surviving member 

in this instance to remain in the unit, 

even if an eligible applicant or tenant is 

available to occupy that unit, unless 

another suitable unit becomes available 

in the project. 

Response: The Agency has modified 

§ 3560.158(d) of the interim final rule, 

which deals with surviving family 

members and establishes timeframes in 

which surviving members must move to 

a suitably sized unit when one becomes 

available. 

Topic: Several commenters stated that 

mixed housing projects should not be 

allowed because designating certain 

units for occupancy by families and 

others for occupancy by elderly 

households constitutes segregation and 

is in violation of title VIII of the Civil 

Rights Act of 1968. 

Response: The Agency thanks the 

commenters for their recommendation. 

The interim final rule at § 3560.151 has 

been revised to clarify that mixed 

projects are no longer eligible for 

Agency financing under the multifamily housing program. 

Topic: The Agency received several 

comments regarding pets and service 

animals. The most frequent comment 

was that the definition of reasonable pet 

rules must be clarified. One commenter 

noted that the proposed regulation 

should contain a further discussion of 

factors to consider in the development 

of pet rules and a list of prohibited 

clauses, and that borrowers of 

operational projects consult with 

tenants when revising pet rules and 

document how that consultation process 

was conducted. 

Response: The Agency appreciates the 

commenters’ concerns. Internal Agency 

procedures will provide further 

guidance on the development of pet 

rules. 

Topic: Several comments addressed 

the issue of guests. One commenter 

suggested that the trespass provision of 

§ 3560.156(c)(12) of the proposed rule 

may violate State laws and 

Constitutional rights to association. 

Other commenters suggested that the 

proposed rule should specify exactly 

when a guest will be considered a 

member of the household so that these 

criteria are applied equally, fairly, and 

consistently at all RRH projects. 

Response: The Agency acknowledges 

the commenters’ concerns, but has made 

no change because the lease 

requirements established in 

§ 3560.156(c)(12) of the proposed rule 

are statutory. Further, § 3560.157(b)(10) 

establishes the borrower’s responsibility 

to establish the terms under which a 

person staying in the unit is no longer 

considered a guest and becomes a 

member of the household as part of the 

property’s occupancy rules. The Agency 

has not provided further detail because 

the appropriate definition will vary 

depending on local circumstances and 

in some cases local law. The Agency 

believes that this policy is most 

appropriately set by the borrower and 

then applied consistently within a 

property. The interim final rule 

provides guidance on situations in 

which there is a conflict between 

Federal and State or local laws. 

Specifically, 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. 

Topic: Multiple commenters 

addressed § 3560.156(c)(6) and the 

requirement that leases will state that 

the housing will be subject to the ADA. 

However, the commenters pointed out 

that if there is no public space, this law 

would not be applicable. 

Response: The Agency thanks the 

commenters for raising this issue and 

has removed the reference to the ADA 

from § 3560.156(c)(6) of the interim final 

rule. 

Topic: One commenter expressed 

concern about the requirement in 

§ 3560.156(c)(4) of the proposed rule 

that leases must specify that no change 

in the resident contribution will occur 

due to loan prepayment. The 

69066 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

commenter believed this has the effect 

of extending use restrictions for 

undefined periods, which is 

inappropriate and inconsistent where 

the Agency has determined that 

prepayment is acceptable or where it 

has been judged the owner’s contract 

right. 

Response: Tenant contributions as a 

result of prepayment are covered under 

subpart N—Housing Preservation in the 

interim final rule. Reference to subpart 

N is made at § 3560.154(c) of the interim 

final rule.

Topic: Several comments were 

received on including office hours in 

the occupancy rules and leases. 

Commenters believe the office hours 

should be removed from the occupancy 

rules; including this in the occupancy 

rules would require unnecessary 

changes. 

Response: The Agency has made no 

change because § 3560.157(b)(7) states 

that the office hours must be posted at 

the property and included in the 

project’s occupancy policies. While the 

occupancy policies are to be attached to 

each tenant’s lease, the Agency believes 

that it is not too cumbersome to provide 

a blanket amendment to each tenant’s 

lease in which the new office hours are 

listed. 

Topic: One commenter addressed 

§ 3560.157(c), which requires that 30 

days notice be given to residents upon 

a change in the occupancy rules, despite 

the fact that the preceding paragraph 

requires the ongoing and permanent 

posting of the current occupancy rules. 

The commenter believed that this 

paragraph serves no useful purpose 

since the occupancy provisions that 

exist at the time of signing the lease are 

the only rules that apply to any given 

tenant. 

Response: The Agency wishes to 

clarify this matter. The occupancy rules 

are an attachment to the lease, not the 

lease itself. The borrower may not 

change the lease, but may change the 

occupancy rules, upon written 

notification to all tenants. 

Topic: One commenter noted that the 

current regulation provides examples of 

unreasonable restrictions on the use of 

community rooms by tenants and tenant 

organizations, but the proposed 

regulations omit these examples. The 

commenter thought that they should be 

included. 

Response: In § 3560.157(b)(6), the 

interim final rule states that the 

occupancy rules must address housing 

services and facilities available to 

tenants and members. The Agency will 

incorporate this information into its 

internal Agency procedures. Some 

examples of unreasonable restrictions 

may include occupancy rules requiring 

management representatives to be 

present in order to use community 

rooms, barring tenant or cooperative 

organizational meetings from using the 

rooms, or requiring management 

representatives to be present at any 

resident organizational meeting held in 

community rooms. 

Topic: One commenter suggested that 

the Agency remove the words ‘‘beyond 

agreed to grace period’’ from 

§ 3560.159(a)(1)(ii). 

Response: The Agency has made this 

change to § 3560.159(a)(1)(ii) of the 

interim final rule. 

Subpart E—Rents 

Topic: The Agency received 

numerous comments addressed to this 

subpart about the CRCU limitation. 

While these comments are discussed 

here, the Agency notes that CRCU is 

covered in a number of subparts 

throughout the rule, including subparts 

A, B, G, I, and N. Some supported the 

concept, while many expressed 

significant reservations. Those that did 

not support the concept argued either 

that market forces already achieve the 

objective sought by the Agency, or that 

the concept places the properties in 

jeopardy by limiting the resources 

available to them. In particular, they 

noted the potential danger to troubled 

housing, new construction, and Farm 

Labor Housing. They asked that the 

concept be piloted before being used 

broadly. Others asked that the Agency 

specifically cite its exception authority. 

Commenters cited the critical 

importance of clearly defining terms 

such as ‘‘conventional,’’ ‘‘comparable,’’

and ‘‘reasonable costs.’’ Many 

commenters noted the difficulty of 

establishing comparable rents in rural 

areas. They noted that comparable units 

must be similar in terms of size and age, 

within the same market (not geographic) 

area. Several commenters stressed that 

the cost of developing new units may 

not be reflected in local market rate 

units. Commenters also noted that 

section 515 projects have operational 

costs that make them difficult to 

compare to conventional units such as 

tenant grievance procedures and reserve 

requirements. Commenters also fear that 

the CRCU may serve as a disincentive 

for new owners to take on troubled 

properties and may make it difficult to 

work with other funding sources. They 

asked that there be sufficient flexibility 

in the definition to facilitate transfers, 

rehabilitation, and new units and to 

work with other leveraging sources. 

Finally, one commenter stated that the 

CRCU limitation should not apply to 

public housing authorities. 

Response: The Agency recognizes and 

acknowledges the commenters’

concerns. CRCU applies to loan 

applications, servicing actions, and 

preservation actions, not to annual 

budget reviews and requests for rent 

changes. As noted in the preamble to 

the proposed rule, the Agency has 

incorporated this policy into the multifamily regulations to improve the longterm viability of the multi-family 

properties in the program, limit future 

costs of rental assistance, and reduce the 

risk of defaults. The Agency emphasizes 

that the interim final rule provides RHS 

with explicit authority to grant 

exceptions that allow rents that exceed 

CRCU under certain circumstances, 

such as when allowing these rents 

would preserve a valuable affordable 

housing resource. This flexibility 

addresses a number of the commenters’

concerns. Section 3560.205(f)(4) was 

deleted in the interim final rule in order 

to address any confusion. 

Topic: Numerous comments were 

received on the Agency’s policies on 

rent payment grace periods and late 

fees. Commenters stated that rent 

should be due by the fifth day of the 

month and that late fees should be 

increased. They stated that the grace 

periods and fees in the proposed rule 

are not industry standard and do not 

provide sufficient incentive to tenants to 

pay on time. They also noted that they 

are not consistent with HUD rules and 

asked for guidance about what to do in 

projects with HUD funding. 

Response: While the Agency 

understands that conventional 

properties have a stricter definition of 

late rent payments and charge higher 

late fees, it has made no change to 

§ 3560.209. Many tenants of sections 

514, 515, and 516 properties receive 

their income from Government agencies 

by mail. Allowing a 10-day grace period 

helps to ensure that tenants are not 

penalized when their checks are not 

received on time and mirrors the 

borrower’s grace period for submitting 

mortgage payments to the Agency. 

Likewise, increasing late fees would be 

prohibitive to many tenants living in 

Agency-financed properties. For 

properties with multiple sources of 

financing, the strictest rules always 

apply. 

Topic: Some commenters addressed 

the use and refunding of security 

deposits. Several of these commenters 

remarked that the proposed rule allows 

for payment plans for security deposits 

but offers no parameters for these plans. 

Other commenters said that ‘‘routine 

turnover expenses’’ and other items that 

may not be covered by a tenant’s 

security deposit should be more clearly 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69067

defined or that the Agency defer to State 

laws on this issue. They also asked for 

language to clarify the policy on pets 

versus companion animals. 

Response: The Agency acknowledges 

these concerns and notes that the 

parameters for security deposit payment 

plans are described in internal Agency 

procedures. The Agency has revised 

§ 3560.204(d)(1) in the interim final rule 

to substitute ‘‘routine turnover 

expenses’’ with ‘‘expenses due for 

addressing normal wear and tear.’’

‘‘Normal wear and tear’’ is a term that 

is commonly used and understood by 

the property management industry. The 

Agency has also revised the interim 

final rule to distinguish between pets 

and companion animals. 

Topic: Several comments were 

received on the budget-based rent 

approach described in the proposed 

regulation. Several commenters said 

that there should be standard rent 

increase allowances, such as occupancy 

cost adjustment factor (OCAF) or costof-living increases that are reviewed 

every three years but are automatic 

during the interim years. They also 

noted that project rents must work with 

rent standards established by other 

funding sources (typically the 30 

percent of Area Median Income (AMI)). 

Several other commenters were 

concerned that the budget-based rent 

approach would be undermined by 

CRCU, which would impose an arbitrary 

cap. Still others asked for clarification 

on the four definitions provided in 

§ 3650.202(c), specifically the mention 

of LIHTC rents. Finally, commenters 

asked how rents would be tested once 

established.

Response: Regarding the budget-based 

rent approach, see the Agency’s 

response in the description of comments 

received on subpart G (Financial 

Management). The Agency has clarified 

in the preamble to the interim final rule 

that the comparison to CRCU will not be 

applied during reviews of project 

budgets, only to new projects, projects 

requesting servicing actions, and 

preservation activities. The Agency has 

listed CRCU as a standard in the rule in 

the circumstances when the Agency will 

use it as a standard. The Agency wants 

to clarify that CRCU is not listed as a 

standard in § 3650.303 of the interim 

final rule because it will not be used 

during Agency reviews of annual project 

budgets. With regard to the comments 

on the four definitions provided in 

§ 3650.202(c), the rents listed in 

§ 3650.202(c) are now defined in 

subpart A of the interim final rule. The 

Agency also deleted § 3560.205(f)(4) in 

the interim final rule. 

Topic: Several commenters said that 

the annual review of utility allowances 

is too time-consuming and should not 

be required. 

Response: Because utility costs can 

change notably from year to year, the 

Agency, and its interim final rule, 

requires annual review of utility 

allowances as a necessary part of the 

budgeting process. Just like the annual 

tenant income recertification, this 

annual review helps to ensure that the 

amount that tenants pay for shelter cost 

is not greater than specified by the 

program, and helps ensure that rental 

assistance usage reflects the utility costs 

that tenants actually face. 

Topic: Several commenters requested 

that rather than having all rent changes 

for all projects go into effect at the 

beginning of the project’s fiscal year, 

these should be permitted at any other 

time. They noted that by allowing new 

rents to take effect over several months, 

borrowers could submit rent changes 

and tenant certifications 

simultaneously, saving time for the 

Agency, the borrower, and the tenant. 

Response: The Agency appreciates 

these comments, but no change has been 

made because the rent changes are 

requested as part of the annual budget 

that must be submitted for the fiscal 

year. However, it should be noted that 

§ 3560.205(c) of the interim final rule 

states that the Agency will accept 

borrower requests for rent changes 

anytime during the year if the property 

is financially distressed due to 

circumstances beyond the borrower’s 

control. 

Topic: Several commenters asked that 

the Agency allow projects to keep 

section 8 overage as project revenue to 

address necessary project repairs. They 

noted that the Agency is willing to offer 

interest credit of 1 percent rents 

regardless of tenant subsidy and 

therefore should be willing to consider 

letting the project keep the section 8 

overage. Commenters also asked that 

overage paid by the tenant be kept by 

the project. 

Response: In such instances of 

overage, the borrower’s interest credit 

will be reduced. Further, if a borrower 

is collecting significant overage from 

tenants, project rents should be 

reevaluated. 

Topic: One commenter asked that the 

proposed rule be revised to address the 

circumstance of a security officer 

occupying a unit for the good of the 

property. 

Response: The Agency’s interim final 

rule does not address this issue as it is 

currently dealt with on a case-by-case 

basis. 

Topic: One commenter asked that the 

paragraph on funds contributed to 

reduce rents clarify that this does not 

mean borrower contributions or 

rehabilitation loans. 

Response: The Agency appreciates the 

comment and notes that the language in 

the proposed rule was not intended to 

mean borrower contributions or 

rehabilitation loans. The Agency added 

a sentence to § 3560.202(e) of the 

interim final rule to clarify that funds 

from borrower contributions or 

rehabilitation loans will not be counted 

towards reducing rents. 

Topic: One commenter welcomed the 

move toward conversion to Plan II, as 

this will reduce the cost of operating 

section 515 projects. 

Response: The Agency appreciates the 

commenter for this support. 

Topic: Several commenters remarked 

that the Agency’s approach to reviewing 

HUD section 8 subsidized budgets is 

only appropriate when HUD is 

providing less than 100 percent of the 

tenant subsidy. They suggested that 

when HUD is providing 100 percent of 

the tenant subsidy, the Agency should 

allow the project to charge the rents 

HUD is willing to subsidize. 

Response: The Agency acknowledges 

the comment but no change has been 

made to the interim final rule because 

the Agency seeks to ensure that 

properties in the program do not receive 

excessive subsidy. HUD has issued 

guidance regarding reviewing HUD 

section 8/515 subsidized budgets. The 

information is included in chapter 14, 

‘‘RHS section 515/8,’’ of HUD 

document, ‘‘Section 8 Renewal Policy—

Guidance for the Renewal of ProjectBased Section 8 Contracts.’’ This 

document is available on the HUD Web 

site at: http://www.hud.gov/offices/hsg/

mfh/exp/guide/s8renew.pdf.

Topic: Commenters had issues with 

the provisions for rent payment during 

eviction proceedings. They noted that 

rent cannot be accepted when eviction 

proceedings are underway. Further, they 

questioned why rental assistance and 

interest credits are suspended, as this 

can be detrimental to the property. One 

commenter added that while tenants 

under eviction proceedings are charged 

the note rent, they do not always pay it 

and that borrowers should only be 

responsible for the note rent if they 

actually receive it. Finally, one 

commenter stressed the need to protect 

tenants by ensuring that a failure to 

recertify was truly a willful act on the 

part of the tenant and that the tenant 

received adequate notice about 

recertification. 

Response: The Agency acknowledges 

these comments and has revised its 

69068 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

language in § 3560.208(a) of the interim 

final rule to require borrowers to put 

any rent received during eviction 

proceedings into escrow and has 

removed language suspending rental 

assistance and interest credits. The 

Agency believes that the current 

language adequately protects tenants as 

it requires sufficient notice. 

Topic: Comments varied regarding the 

extension of time to submit the 

recertification. One commenter said the 

extension would be helpful because 

obtaining signatures from agricultural 

workers and immigrants on extended 

family trips can be difficult. Another 

commenter agreed that the additional 10 

days for certifications and 

recertifications would be helpful. 

However, one commenter disagreed 

with the extension.

Response: The Agency appreciates 

these comments. The majority of the 

comments agreed with the proposed 

rule, therefore, no changes were made 

for the interim final rule. 

Topic: One commenter suggested that 

utility allowances be calculated only 

once every three years, with 

adjustments to the rate only once a year. 

Response: The Agency appreciates the 

comment but did not make this change. 

In § 3560.202(d) of the interim final 

rule, the Agency notes that borrowers 

must review utility allowances 

annually, adjust for accuracy, and 

submit any utility allowance changes to 

the Agency for approval. Even if there 

are no changes, the borrower must 

notify the Agency that no changes were 

made. This annual review is necessary 

because utility allowances are integral 

to a project’s budget and budgets must 

be submitted annually in accordance 

with statute 42 U.S.C. 1490(a)(2)(B). 

Subpart F—Rental Subsidies 

Topic: Several commenters addressed 

the Agency’s requirement to submit 

information to the Agency 

electronically. Some commenters 

expressed concern about submitting 

certification and recertification 

information, stating that this 

requirement is unfair to ‘‘mom and pop’’

ownership entities that will resist 

submitting the information 

electronically. Others stated that older 

properties in the portfolio should be 

exempt from this requirement. 

Conversely, several commenters urged 

that the Agency encourage or require the 

use of Industry Interface, for example, 

when borrowers submit their monthly 

requests for rental assistance payments, 

as under § 3560.256, and for the purpose 

of assigning rental assistance, as under 

§ 3560.257. 

Response: The Agency is requiring 

electronic submission in order to 

expedite the gathering of requisite data. 

Section 3560.102(i) establishes the 

submission requirements for properties 

with eight or more units. The Agency 

has been upgrading their automation 

processes to provide better flexibility for 

borrowers to submit data electronically 

to the Agency. The upgraded system, 

Management Interactive Network 

Connection (MINC), allows for 

borrowers to use software purchased 

from vendors or input data directly into 

the MINC Web site. For more 

information, access the MINC Web site 

at https://usdaminc.sc.egov.usda.gov.

Topic: One commenter asked if a 

tenant that receives a subsidy under a 

HUD program is prevented from giving 

up the subsidy to qualify for rental 

assistance under RHS. 

Response: The Agency notes that a 

tenant receiving a HUD subsidy is only 

required to give up the subsidy when a 

rental assistance unit is available. 

Topic: Several comments were 

received in which the commenter stated 

that the priorities for assigning rental 

assistance shown in § 3560.253(b) 

should be changed or removed. 

Response: The Agency acknowledges 

that these priorities were confusing and 

has deleted this paragraph in its interim 

final rule. 

Topic: Several commenters addressed 

eligibility issues under § 3560.254. One 

commenter addressed the requirements 

for eligible units, stating that the current 

requirements to meet § 3560.103 were 

impossible to achieve and that 

alternative language could include 

‘‘Borrowers may not request rental 

assistance for rental units that are not 

habitable.’’ Another commenter 

suggested that the Agency add language 

to this section that would terminate 

rental assistance for borrowers found in 

noncompliance with Agency 

requirements, ‘‘as a means for 

expediting repairs and corrective 

actions.’’

Response: The Agency has addressed 

this topic in the revisions to subpart C. 

The Agency has modified the 

requirements in § 3560.103 to recognize 

borrower progress in correcting physical 

deficiencies. If a borrower is correcting 

physical deficiencies within a 

reasonable period of time, the borrower 

will not be found out of compliance. 

Topic: One commenter wrote that 

‘‘the change to require interim tenant 

recertifications only when the change in 

rent would be $25 or more is an 

improvement.’’

Response: The Agency appreciates the 

commenter’s support for the change and 

has made a change in this policy in the 

interim final rule to follow the structure 

used by HUD for recertifications. In the 

interim final rule, interim 

recertifications are required only when 

a household’s monthly income increases 

by $100 or more per month.

Topic: Other comments addressing 

§ 3560.254 discussed household 

eligibility. One commenter suggested 

that compliance with occupancy rules 

be clarified so that households that are 

under-or overhoused due to a lack of 

appropriately sized units do not lose 

their eligibility; they should retain their 

rental assistance but be required to 

move when an appropriately-sized unit 

becomes available. Another commenter 

suggested that the requirement for 

having a signed, unexpired tenant 

certification form on file be clarified so 

that households retain their eligibility if 

the lack of such a form is not the 

household’s fault. 

Response: The Agency notes that 

subpart D clarifies that under- and overhoused tenants will retain their rental 

assistance and be required to move 

when a unit becomes available. For 

situations in which a tenant does not 

have a signed, unexpired certification 

form on file, the Agency has not 

modified this rule, but recognizes that 

individual circumstances should be 

considered and that no tenant should be 

unfairly penalized. 

Topic: Several commenters expressed 

dismay at the Agency’s citizenship 

requirements. Commenters said that the 

Agency should not be in the business of 

immigration status. More specifically, 

one commenter questioned whether 

RHS had an adequate basis to consider 

an entire household to be eligible based 

on the citizenship or immigration status 

of its head of household, and therefore 

be eligible for assistance only if the head 

of household is eligible. The 

commenters believed that one solution 

would be to follow HUD’s approach of 

prorating assistance to the household 

based on the eligibility of each 

individual. If the Agency retains this 

requirement, another commenter stated 

that many otherwise eligible farmworker 

families would no longer be eligible for 

occupancy in Agency-assisted housing. 

Response: The Agency acknowledges 

the commenters’ concerns, but no 

change has been made because the 

requirement for occupants of sections 

514, 515, and 516 housing to be citizens 

or qualified aliens is statutory. 

Topic: Another commenter was 

confused by the head of household 

citizenship requirement because it 

implied that non-rental assistance units 

could be rented to noncitizens/illegal 

aliens. This person stated that the 

implication would contradict the 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69069

requirement ‘‘in § 3560.152 that all 

household [sic], regardless of rental 

assistance status, qualify under the 

citizen/alien definition in § 3560.11.’’

Response: The Agency notes that the 

head of household citizenship 

requirement does not imply that nonrental assistance units could be rented 

to noncitizens/illegal aliens. The 

requirement that all households, 

regardless of rental assistance status, 

must qualify under the citizen/alien 

definition is statutory. 

Topic: One commenter suggested that 

the Agency coordinate with the 

Department of Homeland Security 

(DHS) as HUD has, incorporating 

appendix 2 to the HUD Handbook 

4350.3, which is a copy of the User 

Manual created by U.S Citizenship and 

Immigration Service (USCIS) in 2000 for 

the Systematic Alien Verification 

Entitlements (SAVE) Program. 

References to USCIS should also be 

replaced with references to DHS. 

Response: The Agency recognizes that 

the correct reference is DHS. However, 

the Agency does not feel this comment 

lends itself to being incorporated in this 

rule. Nevertheless, the commenter’s 

suggestion is incorporated into the 

Agency’s guidance about program 

procedures. 

Topic: Several commenters expressed 

their approval of the new requirement 

that allows borrowers to request rental 

assistance by checking a box on the 

budget form. 

Response: The Agency thanks the 

commenters for their support. 

Topic: One commenter questioned the 

Agency’s automatic renewal of rental 

assistance agreements at the existing 

unit number because the policy does not 

account for changes in the number of 

units or the amount of rental assistance 

being received. 

Response: The Agency recognizes that 

changes occur. When borrowers need 

rental assistance for more units, they 

can apply for additional units. When 

borrowers require rental assistance for 

fewer units, the Agency will transfer the 

rental assistance to properties with 

greater need. Consequently, the Agency 

does not feel a change to this rule is 

necessary. 

Topic: Two commenters disagreed 

with the Agency’s requirement that the 

borrower notify tenants of a subsidy loss 

when the Agency does not have funding 

available to renew the borrower’s rental 

assistance contract. 

Response: The Agency has decided to 

retain the requirement that the borrower 

notify the tenant because the borrower 

is in a landlord-tenant relationship with 

the tenant, and the loss of rental 

assistance may affect the terms of the 

lease. 

Topic: Several commenters said that 

the borrower should have the option of 

paying utility allowances to the utility 

companies in individually metered 

projects. Another suggested that the 

Agency allow the issuance of a joint 

check made payable to the tenant and 

the utility company to prevent fraud 

and abuse and to allow the payment to 

be applied directly to the tenant’s utility 

bill. 

Response: While the Agency 

acknowledges the commenters’

concerns, it does not have the capacity 

at present to pay some utility 

allowances directly to the utility 

companies. Implementing this 

suggestion would cause an undue 

administrative burden to the Agency. 

Currently, management companies may 

issue a joint check payable to the tenant 

and the utility company. 

Topic: One commenter suggested that 

the Agency clarify § 3560.256 to prevent 

borrowers from holding households 

financially responsible when the 

Agency adjusts rental assistance 

payments. 

Response: The Agency notes that this 

issue is clarified in the public comments 

and Agency responses addressing 

subpart O.

Topic: The Agency received several 

comments urging RHS to prorate rental 

assistance based on the tenant’s movein date. 

Response: The Agency acknowledges 

that for units where a tenant moves in 

during the middle of the month and the 

tenant is eligible for rental assistance, 

either the property or the tenant covers 

the difference. However, the Agency has 

made no change to the interim final rule 

because it does not currently have the 

information system capability to allow 

rental assistance to be prorated. 

Topic: Other commenters questioned 

the idea that residents must be in good 

standing to receive rental assistance. 

The commenters’ believed that tenants 

should be able to be somewhat 

delinquent and able to pay back rent 

through a payment plan; if tenants 

could afford to pay their rents without 

hardship, they would not be eligible for 

rental assistance in the first place. 

Response: The Agency appreciates the 

comment; however, no changes have 

been made to this subpart. The Agency 

allows borrowers to establish policies 

on rent charges under § 3560.157(b)(2) 

and encourages borrowers to structure 

these policies to permit workout or 

payment plans for tenants who 

encounter payment difficulties due to 

circumstances beyond their control. 

Tenants who are following a payment 

plan that is consistent with such a 

policy and acceptable to the borrower 

would be in adequate standing to 

receive rental assistance. However, the 

Agency wants to emphasize that such 

policies do not relieve tenants of their 

responsibility for timely rental 

payments. 

Topic: Several commenters addressed 

the requirements for assigning rental 

assistance in § 3560.257. Commenters 

indicated that requirements generally 

needed to be more flexible and that, in 

particular, documenting the percentages 

occupied by low-income households 

was burdensome. 

Response: The Agency appreciates the 

commenters’ desire to have more 

flexibility, but its first responsibility is 

to the tenants. By assigning priorities 

and targets, the Agency has tried to use 

its available rental assistance to best 

serve the tenants with the greatest need. 

Information about the percentage of 

low-income households is necessary to 

help the Agency manage its rental 

assistance resources most effectively. 

Consequently, neither of these 

suggestions are being adopted in this 

rule. 

Topic: Two commenters agreed that 

identifying the term of rental assistance 

agreements or having no term was 

problematic. One person nevertheless 

suggested that the term could be ‘‘when 

the funds obligated for the units are 

expended or 5 years, whichever comes 

first.’’

Response: The Agency appreciates the 

comment; however, the term of the 

agreements have traditionally been 

established in the appropriation 

language each fiscal year, and can 

change. Therefore, the Agency has not 

specified the term of the agreements in 

the interim final rule. 

Topic: One commenter stated his 

support of the ‘‘change to allow a lease 

clause stating that a tenant’s rent will 

not increase when rental assistance is 

terminated by actions of the borrower/

owner.’’

Response: The Agency thanks the 

commenter for supporting this 

provision; this lease clause is addressed 

in subpart D. 

Topic: Several commenters addressed 

§ 3560.259 on the transfer of rental 

assistance, with most concerns 

addressing the effect of the transfer on 

the property. For example, two 

commenters recommended that unused 

rental assistance remains equal to 5 

percent of the total units to avoid 

financial problems that occur if the 

property ends up with less than 95 

percent occupancy the following year. 

Other commenters addressed the 

conditions under which rental 

69070 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

assistance might be lost and thought 

clarification in the regulation is needed 

for conditions such as transfer of rental 

assistance due to unit damage during a 

disaster, the inability to get an ineligible 

tenant evicted, turnover in separate 

units over 4 months, or units for which 

tenant-based section 8 has been 

accepted and no rental assistance would 

be used. 

Response: The Agency appreciates the 

comments addressing the various 

conditions that could effect and be 

affected by the transfer of rental 

assistance. The Agency believes that 

most issues should be resolved by the 6-

month timeframe that occurs before the 

Agency assesses whether to transfer 

rental assistance. For all situations, 

particularly those brought about by 

disasters or by eviction, the Agency has 

exception authority under § 3560.8 of 

the interim final rule. For clarification, 

the timeframe for transferring rental 

assistance refers to one unit, not to 

multiple units several months in a row.

Topic: Other comments on the 

transfer of rental assistance focused on 

the borrower’s role in transferring rental 

assistance. Regarding the borrower, 

commenters urged that the regulation 

expressly allows borrowers to transfer 

rental assistance from one project to 

another or to accommodate the transfer 

of rental assistance among projects 

under a common general partner. 

Response: The Agency acknowledges 

the commenters’ suggestion; however, 

RHS must consider the needs of the 

larger portfolio and tenant population in 

making decisions about the allocation or 

transfer of rental assistance. For this 

reason, the Agency has made no change, 

and it remains the Agency’s decision 

regarding where to transfer rental 

assistance. 

Topic: Other comments on the 

transfer of rental assistance focused on 

the effect on the household. One 

commenter recommended that 

households in a project who did not 

receive rental assistance be notified of 

the transfer of the rental assistance prior 

to its approval. Another commenter 

pointed out that households that were 

over-income are allowed to pay the 

‘‘overage,’’ and suggested ‘‘leases be 

allowed to ‘‘non-renew’’ at the annual 

recertification date for any ‘‘overage 

tenant’’ whose continued occupancy 

prevents reassignment of rental 

assistance.’’

Response: The Agency notes that the 

regulation already protects the interests 

of non-rental assistance tenants in the 

property and has made no changes to 

the interim final rule. Prior to 

transferring rental assistance, the 

Agency conducts a review to determine 

if the property has other eligible 

households that qualify for rental 

assistance. Also, borrowers who lose 

rental assistance through transfers can 

apply for new rental assistance units 

when their property reflects a need. The 

Agency considered the comment 

regarding ‘‘overage.’’ Tenants paying 

overage are eligible to reside in Agency 

financed housing properties and should 

not be forced out of their units when 

they are still income eligible. The 

Agency’s housing is available to very 

low-, low- and moderate-income tenants 

in rural areas. 

Topic: The Agency received 

numerous comments on § 3560.259 

regarding the Agency’s timeframe for 

transferring rental assistance. Several 

commenters contended that requiring 

the transfer of unused rental assistance 

after 4 months is not sufficient for 

several reasons, including the seasonal 

nature of farm work and the recreational 

industry and the time it takes to repair 

units after disasters. Several 

commenters stated that the Agency 

should continue to transfer unused 

rental assistance after 12 months. 

However, one commenter agreed that 

rental assistance should be transferred if 

it is unused for 4 months or more to 

ensure that the assistance goes to those 

with the greatest need. 

Response: The Agency appreciates 

these comments and acknowledges that 

four months does not give the Agency 

sufficient time to analyze assistance 

needs of current tenants. Therefore, the 

Agency has increased the time period to 

six months in the interim final rule. 

Topic: Several comments were 

received in connection with the 

Agency’s requirement that non-RHS 

subsidy contracts cannot be for less than 

five years. Some commenters said that 

non-Agency rental assistance should be 

allowed for any period of time because 

‘‘some rental assistance is better than 

none,’’ as one commenter noted. Other 

commenters said that this requirement 

is inconsistent with those of other 

funding sources. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

revised § 3560.260(d)(2) in the interim 

final rule to allow for subsidy 

agreements with non-Agency sources 

‘‘similar to existing or current Agency 

rental assistance funding levels.’’ This 

should make it easier for projects with 

Agency financing to obtain rental 

assistance from other sources. 

Topic: Two commenters provided the 

following comment: ‘‘Projects with HUD 

certificates (project based) have often 

received a minimal or no mortgage rate 

interest credit reduction from the 

Agency, which often realizes a basic 

rent equal to HUD established rent. This 

regulation should allow for use of the 

HUD established rental rate.’’

Response: The Agency notes that 

§ 3560.207 of the interim final rule 

addresses this issue. 

Topic: Two commenters addressed 

the topic of minimum rents. One 

commenter expressed disappointment 

that the regulation did not address 

zero’income tenants and require a 

minimum rent level. One commenter 

wrote that zero rents should be 

prevented (especially in labor housing) 

and suggested that there be a minimal 

payment of $50 or $100, with exception 

granted by the Agency. 

Response: The Agency has considered 

the suggestion but has decided to retain 

the language from the proposed rule at 

this time until it has time to further 

evaluate this issue. 

Topic: One commenter suggested that 

the regulation allow rental assistance to 

go to higher rent units in LIHTC and 

tax-exempt bond projects. 

Response: The Agency has decided 

not to adopt the comment; because 

rental assistance is not assigned to a 

particular unit or rental rate, it is 

prioritized by the tenant’s need. The 

Agency details its priorities in 

§ 3560.257(a) of the interim final rule. 

Topic: Two commenters suggested 

that the Agency allow borrowers 

flexibility in how they make use of 

rental assistance to maximize its 

benefits, particularly when the tenant 

household income rises and its relative 

use of rental assistance declines to a 

nominal amount. In this situation, one 

commenter stated: ‘‘The rental 

assistance unit is tied up and cannot be 

reassigned to a more needy very lowincome tenant/applicant. This 

predicament could be alleviated by 

creating latitude for borrowers to 

intervene and assume responsibility of 

the cost of rental assistance to tenants or 

for the project to offer marketing 

incentives to near-moderate income 

tenant (e.g., those using rental assistance 

at a rate of <$10 per month).’’

Response: The Agency believes this 

comment is permitted under this rule. 

However, the Agency will need to draft 

implementing procedures. 

Topic: One commenter asked for 

clarification regarding § 3560.257 

because that commenter did not 

understand the issue. 

Response: In § 3560.257 of the interim 

final rule, the Agency gives priority to 

the tenants who most need rental 

assistance. The issue is further 

discussed in the Agency’s internal 

guidance about program 

implementation. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69071

Topic: One commenter stated that the 

changes in the calculation for electronic 

submission of certifications/

recertifications were unclear. 

Response: The Agency believes that 

the commenter misunderstood the 

changes; the timeline was changed, but 

the calculation was not changed. The 

timeline changes are addressed earlier 

in this subpart. 

Subpart G—Financial Management 

Topic: Numerous comments were 

received on § 3560.308 regarding the 

requirements for submitting annual 

financial statements. Several 

commenters stated that lowering the 

threshold for requiring a Government 

Auditing Standards (GAS) audit for 

projects from 25 units to 16 units would 

be cost-prohibitive, particularly by 

raising the costs for projects least 

prepared to absorb the additional costs. 

Several commenters attempted to 

estimate the increase in cost, including 

the cost to tenants or to taxpayers of 

subsidizing this increased expense. 

Additionally, because the number of 

projects requiring an audit will go up, 

a commenter stated that this 

requirement will create an additional 

burden on Area Offices to review these 

audits. Other commenters disagreed, 

stating that the submission requirements 

for small properties currently do not 

contain sufficient information to 

adequately analyze the financial status 

of the project, and that the additional 

requirements in the proposed rule are 

appropriate. Several commenters 

suggested an agreed upon procedures 

report for smaller properties that is 

consistent with generally accepted 

accounting principles (GAAP) under 42 

U.S.C. 1485(z)(1) be required as an 

alternative to a standard audit. Another 

commenter suggested using a 

‘‘verification of review’’ to achieve the 

same goals as the audit at lower costs. 

Another suggested requiring audits 

every second or third year or forgoing 

audits on projects that have a good track 

record of financial integrity as a way of 

reducing the burden. Another 

commenter said that audits are only as 

good as the accountant providing them; 

since the owner is the one providing the 

information and paying for the audit, it 

is doubtful that requiring audits on 

smaller complexes will bring to light 

additional fraudulent activities. The 

commenter went on to say that MFH 

specialists do not have accounting 

degrees and are not equipped to quickly 

recognize fraudulent activities, and that 

an audit of the project should provide 

all pertinent information that RHS is 

interested in that affects Agencyfinanced projects. 

Response: As discussed in the 

preamble to the proposed rule, the 

Agency implemented the change to 

address concerns raised by the USDA 

OIG. The Agency has modified 

§ 3560.308 of the interim final rule in 

response to the commenters’ concerns, 

while staying consistent with the 

actions agreed upon with OIG. OIG 

requires that annual financial reports 

are prepared in a way that allows the 

Agency to get a realistic picture of the 

property’s financial status and 

operations. By requiring an Agency 

approved engagement, the Agency 

should be able to address OIG concerns 

and obtain the information necessary to 

get an accurate picture of the property’s 

health. In addition, the Agency has 

substantially modified § 3560.308 in the 

interim final rule to allow properties 

with 16 or more units to obtain an 

Agency approved engagement report. 

This section also states that properties 

with fewer than 16 units may obtain a 

limited-scope engagement. These 

engagements may be conducted by a 

CPA or other accounting professional 

and will cost considerably less than 

GAS audits, thereby minimizing the 

financial impact on the properties. The 

Agency has not adopted the suggestion 

for procedures reports or verification of 

reviews because the Agency needs the 

information that would be provided in 

an acceptable engagement letter so that 

it can meet OIG needs. The Agency’s 

new policy shifts away from standard 

GAS audits to year-end reports that 

provide a more detailed picture of each 

property being managed. To address the 

issue of additional burden on Area 

Offices, RHS intends to automate most 

of the review process, enabling Area 

Office staff to concentrate on problem 

cases. One of the major considerations 

of the Agency in developing this new 

policy was the financial impact on 

properties. The limited scope 

engagement required in § 3560.308 

provides the Agency with adequate 

financial information while not 

imposing a full audit requirement on 

smaller properties. The Agency has the 

option to obtain full audits on 

randomly-selected properties every two 

or three years. The Agency notes the 

concerns about the accountants being 

selected by the borrowers, but feels that 

the current rule strikes the best balance 

between risk, cost, and reliability. 

Topic: Two commenters suggested 

raising the number of units triggering 

the audit threshold from 25 to 33 or 36, 

rather than lowering it to16. Another 

commenter suggested that the cost to 

projects that had not been subject to the 

auditing process would be high, 

especially to prepare the first audit, as 

this auditor would want to review data 

from the beginning of the project, which 

will increase operating expenses for the 

most difficult properties to manage. 

These properties will have to impose 

rent increases to accommodate the 

additional expense. Another commenter 

said that one reason stated for this new 

requirement is to further monitor IOI 

transactions, and that the new proposed 

management certification should 

provide the Agency with a certain 

amount of comfort that it is putting 

borrowers on notice that IOI 

relationships will be closely monitored. 

Another commenter said that the list of 

borrower accounting responsibilities 

should include a requirement to 

maintain documentation of the financial 

benefits where IOI work is used. The 

dollar amount of fraud at smaller 

properties would be less than the added 

expense of trying to catch it. Another 

commenter said that the proposed rule 

basically allows projects with less than 

16 units to self-certify that their 

financial reports are accurate; the 

proposed rule is unclear in that it says 

the borrower must certify that the 

‘‘* * * housing meets the performance 

standards * * *’’ The commenter went 

on to say that the rule should be more 

specific, saying that the borrower must 

certify that the financial statement 

report is accurate and that project funds 

have only been used for authorized 

purposes and for expenses that are 

actual, necessary, and reasonable. A 

commenter said that Agency personnel 

are currently awaiting the publication of 

an Agency guide about preparing annual 

financial statements being developed 

with the assistance of OIG.

Response: The Agency acknowledges 

the commenters’ concerns. The policy 

set forth in the proposed rule and the 

interim final rule—the 16-unit 

threshold—responds to OIG’s concern 

that the Agency is not receiving a 

complete and accurate picture of the 

financial and operational status of the 

properties in the Agency’s portfolio. 

While the Agency’s goal is to receive 

more targeted information, it recognizes 

that GAS audits performed by 

independent CPAs are costly, which is 

why the Agency has opted to allow 

annual reports that are tailored to 

Agency specifications for larger projects 

and limited scope engagements for 

smaller projects. The Agency has 

researched the costs of obtaining these 

types of financial reports, which are 

substantially lower than the cost of a 

GAS audit. The Agency does not think 

that the cost of such audits will pose an 

undue financial burden, such as 

69072 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

increased rents, on the properties in its 

portfolio. With respect to identity-ofinterest relationships and their impact 

on the financial activity at properties, 

the new management certification will 

reveal such relationships but the new 

financial statement requirements 

outlined in § 3560.308 will provide 

more financial information regarding 

these relationships. The new regulation 

also outlines the performance standards 

each engagement and limited 

engagement is required to cover. Agency 

review of this information will verify 

the owner’s certification. The Agency 

did not adopt the suggestion regarding 

maintaining documentation because 

that documentation must already be 

retained for audits provided under this 

rule. 

Topic: Two commenters said that the 

Agency should not require an Agency 

engagement letter, as this would create 

additional burden on Agency staff and 

could cause delays in completing the 

audit if the Agency does not approve the 

engagement letter in a timely manner. 

The commenters went on to say that it 

would be beneficial for the Agency to 

provide suggested wording in 

accordance with AICPA. Another 

commenter said that if the Agency’s 

intention is to distribute the exact 

verbiage entailed in an engagement 

letter, it may be beneficial for the 

Agency to ensure the wording is in 

accordance with GAS and AICPA 

standards. The commenter noted that if 

the prescribed letter was not written in 

accordance with the above mentioned 

standards, accounting firms would still 

need to issue a separate engagement 

letter to discuss their procedures to be 

performed in accordance with GAS and 

AICPA standards. The commenter went 

on to say that such firms are required to 

issue an engagement letter detailing the 

procedures to remain licensed in their 

profession by peer review standards. 

Response: The Agency thanks the 

commenters for raising this issue; 

however, the commenters seem to have 

misinterpreted § 3560.308(b). The 

Agency does not feel that audits in 

accordance with GAS are sufficient 

because they would not sufficiently 

cover IOI compliance issues and do not 

provide a sufficient sampling for this 

program. This section states that the 

borrower must use an Agency approved 

engagement letter, not that the Agency 

must approve the engagement. The 

engagement letter must be approved by 

the Agency. The Agency will consult 

with the OIG which regularly consults 

with AICPA on engagement and audit 

compliance standards. Therefore the 

engagement letter should be in 

alignment with AICPA requirements. 

Topic: One commenter suggested that 

§ 3560.308(a)(1) should be limited to 

requiring that engagement letters be 

compliant with GAS. Another stated 

that the regulation should specifically 

state that the audit should be in 

accordance with GAS. Another 

commenter said that for projects with 

less than 16 units where a compilation 

is required, the MFH Balance Sheet 

should be submitted. For project with 

16 or more units, in lieu of the MFH 

Balance Sheet, a balance sheet in 

accordance with GAS should be 

accepted. Another commenter pointed 

to chapter 1, section 1.01 of the GAO 

Government Auditing Standards 2003 

Revision issued by the Comptroller 

General of the United States which 

states that audits and engagements 

compiled according to GAS are 

considered reliable. This commenter 

also highlighted chapter 1, section 1.02, 

regarding auditors who use GAS can 

support Government accountability. 

Another commenter stated that the idea 

of not getting audits on all projects 

creates more opportunity for problems; 

while this might save a project some 

money, most owners must have audits 

prepared for their partners anyway. 

Response: The Agency acknowledges 

the commenters’ concerns. The Agency 

does not feel that audits in accordance 

with GAS are sufficient because they 

would not sufficiently cover IOI 

compliance issues and do not provide a 

sufficient sampling for this program. 

The Agency has established the 

engagement standards. A balance sheet 

is not sufficient to meet OIG 

requirements. The regulation does not 

prevent borrowers from obtaining GAS 

audits, but rather seeks to ensure that 

the Agency receives detailed financial 

information tailored to its needs to 

assist in the Agency’s portfolio analysis. 

Topic: One commenter said that in 

the past, it has been difficult to 

reconcile an accrual-based audit to a 

cash-based Form RD 1930–7, ‘‘Multiple 

Family Housing Project Budget,’’ and 

that while the proposed rule indicates 

that an engagement letter will control 

the annual report process for projects 

with 16 or more units, one of the 

proposed program handbooks indicates 

that this is still an audit. The 

commenter noted that as such, the same 

situation may result—the Form RD 

1930–7 is prepared on a cash basis, 

while the annual reports are prepared 

on an accrual basis. The commenter 

recommended that the bookkeeping 

system and reporting be consistent. 

Response: The Agency thanks the 

commenter for introducing these issues 

and has modified § 3560.302(b)(1) of the 

interim final rule to say that the borrow 

must conduct accounting, bookkeeping, 

and budget preparation in a manner 

consistent with the engagement. 

Topic: One commenter said that 

§ 3560.302 could be confusing to the 

independent accounting community 

because it states ‘‘borrowers must 

maintain records in a manner suitable 

for an audit or an engagement.’’ The 

commenter said that an engagement can 

be several things: An audit, an audit 

performed to agreed upon procedures, a 

review, or a compilation, all of which 

are typically performed by CPAs. The 

commenter continued, saying that 

review and compilation engagements do 

not include procedures/tests to verify 

the accuracy of the amounts disclosed 

in financial statements, whereas audits 

are designed to do just that.

Response: The Agency thanks the 

commenter for this observation and has 

made changes to § 3560.302(a) to refer to 

maintaining ‘‘records in a manner 

suitable for an engagement,’’ rather than 

to an audit or engagement. 

Topic: One commenter contacted the 

AICPA and spoke with the Director of 

Professional Standards and Services, Ian 

A. MacKay, on July 11, 2003, more than 

halfway through the comment period on 

the proposed rule. The commenter 

found that the Director was not even 

aware of any changes being proposed by 

the Agency that would affect the 

accounting profession and auditing and 

urged that any planned changes to audit 

guidance must include and involve 

CPAs. The commenter believed that the 

Agency needs to engage and work with 

industry partners who are the experts in 

accounting before issuing the final rule. 

Another commenter echoed the idea 

that CPAs should be involved in writing 

the Agency policy and guidance on this 

topic. 

Response: The Agency would like to 

reassure the commenters that CPAs and 

the HUD were consulted during the 

development of these policies. 

Topic: Another commenter 

questioned whether the intent of 

§ 3560.308(b) was for projects owned by 

the same owner and managed by the 

same manager to not be required to have 

separate audits for each property. The 

commenter stated a preference for 

having annual financial statements on 

all properties. One commenter 

suggested that in § 3560.308(b), the term 

‘‘managing’’ general partner be defined 

as the partner responsible for operation 

under the partnership agreement. One 

commenter recommended removing 

§ 3560.308(c) because if only a sample 

of housing projects were audited in a 

specific time period, audits conducted 

in later years would lack the necessary 

data inputs. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69073

Response: The Agency appreciates the 

commenters’ suggestions and has 

deleted in the interim final rule what 

was § 3560.308(b) in the proposed rule. 

All properties will be required to 

prepare annual financial statements, not 

just a sample number of properties. 

Topic: One commenter stated that 

§ 3560.308(d)(7) was too subjective. 

Response: The Agency appreciates the 

commenter’s concern. However, the 

Agency believes the standards are 

sufficiently objective to meet the needs 

of the Agency and borrowers. 

Topic: Several commenters 

questioned the 2-year limit in 

§ 3560.308(f), indicating that (1) most 

audit requests for proposals are for more 

than two years, and (2) required audit 

costs should always be an authorized 

project expense. Another commenter 

requested clarification on the 

procedures required by § 3560.308 after 

the initial 2-year period. Another 

commenter said that the proposed rule 

states that the Agency will approve a 

‘‘full audit expense’’ for two years after 

the effective date of this regulation and 

questioned whether this is an attempt to 

get borrowers going with these audits 

and not worrying about the additional 

costs that they would incur doing these 

‘‘full audits.’’

Response: The Agency thanks the 

commenters for highlighting this issue 

and has deleted § 3560.308(f) from the 

interim final rule. Annual financial 

statements are an allowable financial 

expense through the term of the 

property’s Agency loan. 

Topic: Regarding the proposed 

language for § 3560.305, several 

commenters stated that borrowers 

should be able to take their returns 

without prior authorization from the 

Agency. Other commenters said that 

§ 3560.305 appears to allow an owner be 

paid a return that was earned several 

years prior but still not paid, provided 

sufficient funds are available to pay it. 

Some commenters thought that it was 

prudent to allow the borrower to accrue 

unpaid returns on investments, while 

others thought that the period for 

capturing the return should be limited. 

One commenter said that the proposed 

rule should limit how many years the 

borrower can go back and be paid 

earned but unpaid return on investment, 

which would possibly prevent large 

withdrawals on project accounts where 

borrowers have not collected their 

return on investment because of 

negative cash flow or their own 

discretion. One commenter said that if 

the audit confirms sufficient cash flow, 

which would allow for a return on 

investment, then the return on 

investment should be taken the next 

year. The commenter went on to say 

that the Agency should allow for this 

return to not be taken ‘‘immediately 

after,’’ but rather any time during the 

next year. 

Response: The Agency notes these 

concerns and has modified 

§ 3560.305(b) of the interim final rule to 

state that a borrower may only take a 

return that is accrued but unpaid for the 

previous year only. The interim final 

rule does not require the borrower to 

receive Agency approval before taking a 

return unless the project had a negative 

cash flow. The Agency believes that the 

period of time to recapture earned 

returns should be limited and believes 

this policy is in the best interest of the 

property. The borrower is permitted in 

§ 3560.305 to take his return after the 

fiscal year. The Agency has removed the 

word ‘‘immediately’’ from the section 

discussed by the commenter. 

Topic: Other commenters said that an 

owner’s return should be treated like 

any other property operating expense 

and that the Agency should encourage 

owners to stay in the program instead of 

discouraging their involvement by 

establishing regulations and 

administrative processes that result in 

denying payment of an owner’s return. 

Another commenter said that the timing 

for payment of accrued but unpaid 

return on investment is unclear and that 

owners should be allowed to accrue 

such returns indefinitely or until sale or 

other disposition of the owner’s interest, 

since returns are paid from surplus 

cash, and do not affect the underlying 

real estate. One commenter said that 

rent increases should be allowed for a 

return on investment, which is part of 

the budget, and that the Agency’s 

denying such a request constitutes a 

clear violation of the loan agreements. 

The commenter felt that if RHS cannot 

guarantee a return, it at least must 

permit the owner to seek that return. 

Response: The Agency acknowledges 

the commenters’ concerns; however, the 

return to owner is to be paid only when 

the project has surplus cash while being 

properly operated and maintained. If the 

property has adequate occupancy and is 

operating properly, then the net 

operating cash available at the end of 

the year would enable the borrower’s 

return to be paid. The Agency does not 

believe the policies concerning returns 

on investment discourage participation 

in the program. However, a policy that 

permits unlimited accrual of such return 

could financially harm the property and 

the Agency’s security. The return on 

investment is a budgeted line item and, 

combined with other operating costs, 

could be the basis for a rent increase. 

However, a rent increase based solely on 

guaranteeing the return on investment is 

not permitted. Therefore the Agency has 

not adopted these suggestions. 

Topic: One commenter said that 

consideration should be given to returns 

on investment for older projects and 

allow a return based on the current 

value of the original investment, which 

would help preserve existing projects 

because the return allowed is 

insignificant when compared to the 

property’s current value. 

Response: The Agency acknowledges 

the commenter’s concern but has not 

modified the regulation at this time. 

However, the Agency will consider 

methods to implement such a change. 

Topic: One commenter said that it 

appears from the language in the 

proposed rule that an owner may be 

paid for a return on investment that was 

earned several years prior but still not 

yet paid, provided sufficient funds are 

now available to pay it. The commenter 

asked if a project experiences a negative 

cash flow for the year and lacks 

sufficient surplus cash to pay the return, 

is it assumed that a return was not 

earned for that year and therefore could 

not be paid in subsequent years. If not, 

the commenter wanted to know if there 

is ever a situation where the return on 

investment is not earned.

Response: The Agency thanks the 

commenter for these suggestions. The 

borrower may carry accrued, unpaid 

distributions on the project balance 

sheet but only will be eligible to receive 

a distribution from the prior year. This 

can be found at § 3560.305(b) of the 

interim final rule. 

Topic: Several commenters said that if 

the Agency approves a negative cash 

flow budget, then the return on 

investment should be paid because it is 

outside the borrower’s control. They 

thought that payment of return should 

depend on whether there are sufficient 

funds to address the project’s capital or 

operational needs. If reserves are funded 

as required, the commenter felt that the 

return on investment should be allowed 

and paid. 

Response: The Agency acknowledges 

the commenters’ concern. The Agency 

will only approve a negative cash flow 

budget at the beginning of the project’s 

fiscal year if the property has sufficient 

cash on hand from the previous fiscal 

year. Under these circumstances, the 

borrower could be eligible to receive a 

return, but only with the Agency’s prior 

approval. This can be found at 

§ 3560.305(a)(2) of the interim final rule. 

The Agency does not believe the return 

is outside of the borrower’s control 

because the borrower controls the 

budget. Further, the Agency has not 

adopted the suggestion to pay a return 

69074 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

if there are sufficient funds to address 

the project’s capital or operational needs 

because the Agency needs to evaluate 

the performance of the property. 

Topic: One commenter asked under 

what conditions, or with what 

justification, would the Agency 

authorize borrowers to be paid their 

return on investment, while at the same 

time their project is experiencing a 

negative cash flow. The commenter 

asked if these criteria are published to 

ensure their consistent use. Several 

commenters suggested that the borrower 

be prohibited from taking a return on 

investment from the project’s reserve 

account. 

Response: The Agency wishes to 

clarify this issue. The Agency may 

authorize that a return be paid to an 

owner when the property has a negative 

cash flow under very limited 

circumstances, as described in 

§ 3560.305(a)(2) of the interim final 

rule—when surplus cash exists in the 

reserve account and the property has 

sufficient funds to address its capital 

needs. The Agency policy remains the 

same and the borrower is permitted, 

with Agency approval, to withdraw ROI 

from surplus cash in the reserve 

account. The Agency did not adopt the 

suggestion that the borrower be 

prohibited from taking a return on 

investment from the reserve account 

because taking this return has no 

adverse effect on the project. 

Topic: One commenter said that the 

reference in § 3560.305(a)(2)(i) to 

§ 3560.306(d)(2) should read 

§ 3560.306(d)(1). 

Response: The Agency thanks the 

commenter and has revised the 

reference in the interim final rule. 

Topic: Regarding budget reviews and 

approvals, a substantial number of 

commenters decried the Agency’s 

decision to have the budget submission 

date for borrowers requesting rent 

increases be 105 days before the end of 

the project’s fiscal year. Commenters 

explained that this timeframe would 

require borrowers to prepare budget 

information so early in the project’s 

fiscal year that they would have 

inadequate data—such as projected 

property taxes—to estimate the 

upcoming year’s cost. Another 

commenter expressed approval of the 

proposed timeline. Another commenter 

said that the Agency should allow for 

rent increases on days other than the 

first day of the fiscal year because many 

management companies recertify all 

residents on a specific annual day. If 

that day is February 1, having a rent 

increase January 1 will require 

managing agents to implement a rent 

increase January 1 and then revise the 

rent on February 1, doubling the 

workload. In addition, the commenter 

said that this will require Agency staff 

to update their records twice, increasing 

their workload. The commenter 

believed that allowing rent increases on 

days other than the first day of the fiscal 

year will decrease workloads and allow 

rent increase reviews to occur over a 

period of months. However, several 

Agency commenters said that the 

timeframe proposed for reviewing 

budgets with and without rent increases 

was a welcome addition. 

Response: The Agency appreciates 

these comments and has revised 

§ 3560.303(d) of the interim final rule to 

reflect the previous deadline for budget 

submissions of 90 days before the end 

of the project’s fiscal year for a project 

for which a rent increase is being 

requested and of 60 days before the end 

of the project’s fiscal year for a project 

for which a rent increase is not being 

requested. The Agency’s streamlined 

budget processing also makes it possible 

for budgets to be reviewed on a more 

timely basis. The Agency wishes to note 

that there is nothing in the regulation 

that prohibits a borrower from 

submitting a rent increase request that 

will go into effect on a date other than 

on the first of the year. Further, 

§ 3560.205 of the interim final rule 

allows requests for rent or utility 

allowance changes any time during the 

year if necessary to preserve the 

financial integrity of the housing 

complex and the circumstances are due 

to factors beyond the borrower’s control. 

Topic: Another commenter said that 

the Agency’s new expedited review will 

free up Agency resources, which are 

stressed when all budgets come in at the 

same time, and will eliminate owners’

having to operate their projects without 

approved budgets because of long waits 

for Agency approval. However, another 

commenter stated that the Agency has 

too many budgets to review at one time. 

Response: The Agency thanks the 

commenter for this concurrence. The 

Agency is working to improve its 

management information systems to 

help expedite budget reviews, thereby 

enabling it to complete this task on 

time. 

Topic: One commenter said that the 

proposed rule does not specify any 

thresholds and refers to budgets with 

‘‘no rent increase.’’

Response: The Agency wishes to 

clarify this issue. ‘‘No rent increase’’

means that the borrower did not request 

a rent increase with the submitted 

budget package. Thresholds are 

addressed in § 3560.303(d) of the 

interim final rule, which describes 

budgets and rent increases for which 

Agency approval is required. 

Topic: One commenter said that the 

proposal to use thresholds when 

reviewing annual budgets seems good; 

however, there needs to be a way for the 

public to comment on the thresholds 

used.

Response: The Agency appreciates the 

comment; however, the thresholds are 

an internal program standard used to 

determine the level of Agency review. 

The thresholds are not part of the 

criteria used to determine whether the 

budget can be approved. Because the 

thresholds are part of internal program 

procedures, there is no obligation to 

allow public comment. The Agency 

does want to note that the public can 

easily find out the thresholds being used 

by obtaining the relevant Agency 

guidance about program procedures, 

which is readily available via the 

Internet or Agency Offices. Further, the 

Agency wants to emphasize that the 

criteria that borrowers must meet are 

provided in § 3560.303(a) of the interim 

final rule. 

Topic: Several commenters said that 

the proposed rule should include the 

information contained in the current 7 

CFR part 1930, subpart C, exhibit C 

whereby a budget is considered 

approved if the Agency approval official 

does not act on the request within 30 

days. The commenters believed that this 

should include any budget, regardless if 

a rent change is requested. 

Response: The Agency acknowledges 

the commenters’ concern. Language was 

added to § 3560.303(d)(3)(ii) of the 

interim final rule to address budgets and 

automatic rent change procedures. 

Topic: The Agency also received 

comments on the disposition of interest 

earned on the project’s reserve account. 

Several commenters stated that letting 

the borrower retain 25 percent of the 

interest earned on reserve accounts 

helps offset taxes paid on phantom 

income. A few commenters felt that 

borrowers were not entitled to this 

benefit. Another commenter said that 

the criteria for Agency approval under 

§ 3560.306(i) should be (1) A statement 

from a CPA in an audit or compilation 

regarding the amount of interest on 

reserves, and (2) a request to release 25 

percent of that interest amount. The 

commenter said that this should not be 

calculated as return to owner; instead, 

this will mostly compensate owners for 

the tax burden from interest income as 

a return to owner. Someone commented 

that borrowers or management 

companies do not put the reserve 

account on higher yielding interest rate 

accounts because they do not get to keep 

the interest; there is no business 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69075

incentive. Further, to obtain higher 

interest yields, this commenter said that 

long-term commitments are required, 

and borrowers and agents may be afraid 

to have funds locked at a time when 

they may need the money for an 

emergency. Another commenter said 

that the proposed rule needs to limit the 

withdrawal of 25 percent of interest 

earned on reserve accounts to borrowers 

that deposit project funds in high 

interest-bearing accounts; at best, this is 

a break-even deal for the borrower, 

which is not a good incentive. Another 

commenter said that the annual return 

should equal 35 percent of the interest 

earned on reserve accounts, because 25 

percent is not sufficient to compensate 

borrowers. Still, another said that the 

borrower should receive 100 percent of 

the interest earned on this account. One 

of the commenters concurs with the 

basic principle of the rule change to 

allow borrower’s to keep up to 25 

percent of the interest earned on reserve 

accounts, provided that the use of 

reserve fund interest to pay borrowers a 

return on investment 

(§ 3560.306(i)(2)(ii)) is conditioned on 

the deposits to the maintenance reserve 

account being on schedule. However, 

the commenter is opposed to any 

concession to limited profit owners that 

might result in underfunding the 

maintenance reserve. 

Response: The Agency appreciates the 

commenters’ concerns. The Agency will 

not consider the 25 percent of interest 

income as part of the return to owner. 

The Agency believes the 25 percent 

figure, as opposed to 35 percent or 100 

percent, is a reasonable amount. The 

Agency will monitor this new policy 

and determine if any change is 

necessary. The Agency has attempted to 

provide borrowers with investment 

options so they are less limited by the 

size of the reserve account that may be 

invested. This policy allows borrowers 

to receive an amount to offset the effect 

of phantom income taxes. Borrowers are 

entitled to this amount if interest is 

earned on the reserve account. It is not 

dependent upon compliance with the 

reserve account funding schedule. 

Borrowers are encouraged to maximize 

their interest return as long as they 

remain in alignment with this rule. 

Topic: One commenter said that 

§ 3560.306(d)(2) of the proposed rule 

states that the borrower may need to 

deposit surplus general operating 

account funds into the reserve account 

‘‘if the reserve account is not fully 

funded,’’ but could not find a definition 

for ‘‘fully funded.’’ Another commenter 

stated that borrowers should make 

required deposits until the reserve is 

fully funded. 

Response: The Agency appreciates the 

commenters’ questions and has revised 

§ 3560.306(d)(2) of the interim final rule 

to state that the borrower will be 

required to deposit surplus general 

operating funds into the reserve 

account. This does not change the 

borrower’s required contribution to the 

reserve account. This is because 

scheduled contributions are required 

until the account is fully funded as 

stated in the loan agreement. 

Topic: With respect to 

§ 3560.306(h)(3), one commenter said 

that the paragraph should read that 

borrowers 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, rather than on 

amounts earned. The commenter 

believed that this paragraph should state 

that interest income earned does not 

include any increased equity in the 

value of any reserve securities. Another 

commenter praised the new rule 

because it requires borrowers to record 

the price actually paid for securities 

when reserves are involved. The 

commenter said that this will help the 

Agency determine whether accounts 

have lost money and will also help 

determine that 25 percent of earnings to 

be released to the owner for taxes. 

Response: The Agency acknowledges 

the first commenter’s concern and has 

revised § 3560.306(h)(3) to read that 

borrowers may withdraw 25 percent of 

the interest earned on a reserve account 

during the prior year. The Agency 

believes this clarifies its position 

sufficiently. The Agency appreciates the 

second commenter’s support of its 

position. 

Topic: One commenter said that 

borrowers should not be able to take 25 

percent of the earned interest out of the 

reserve account because interest earned 

is not phantom income; the interest is 

income earned on an asset, thus 

increasing the asset. The commenter 

continued that the value of the asset is 

higher because the interest is left with 

the property, and that there is already a 

problem with the reserve accounts not 

being adequate to cover needed capital 

improvements. Another commenter said 

that 25 percent of the interest earned 

only be given to the owner if the actual 

annual deposit to the account exceeds 

this amount. 

Response: The Agency appreciates the 

commenters’ position but does not agree 

that the disposition of the interest 

earned on the reserve account should be 

limited per the commenters’

suggestions. The Agency understands 

that paying taxes on phantom income is 

a disincentive for staying in the program 

and that allowing borrowers to receive 

a portion of the interest income earned 

on the reserve accounts helps to 

mitigate this disincentive. The Agency 

expects that 100 percent of the interest 

earned on the account will be deposited 

to the account. Twenty-five percent of 

that amount is available for withdrawal. 

The Agency will monitor this new 

policy and determine if any change is 

necessary. 

Topic: Regarding allowable project 

expenses, several commenters stated 

that costs incurred in connection with 

alleged civil rights abuses by the 

borrower should be allowable project 

expenses if the borrower is not guilty. 

Other commenters said that the 

language in § 3560.303(b)(2)(v) is overly 

restrictive because if a judge overturned 

a management agent’s eviction action, it 

would be for a violation of some portion 

of landlord—tenant law. The 

commenter said that regardless of how 

minor or insignificant the violation is, 

this would prevent the owner from 

billing the legitimate legal fees to the 

project; if owners end up paying for 

such legal fees, they will be less likely 

to pursue such actions, which might 

have a detrimental effect on other 

tenants. 

Response: While the Agency takes 

civil rights abuses very seriously, it 

acknowledges that the borrower should 

not be required to pay for costs 

associated with frivolous lawsuits. 

Section 3560.303(b)(2)(v) has been 

revised to remove the term evictions 

and now states only that borrowers must 

pay for fines, penalties, and legal fees 

when they are found guilty of civil 

rights or other violations. 

Topic: One commenter said that the 

proposed rule states that authorized 

purposes for project funds are described 

in the rule, but felt that § 3560.303(b) is 

not specific enough. 

Response: The Agency acknowledges 

the commenter’s concern. Allowable 

and unallowable project expenses are 

discussed in greater detail at 

§ 3560.303(b) of the interim final rule. 

Topic: Several comments were 

received on project payment for tenant 

services. One commenter said that the 

proposed rule should spell out the 

limits on how much project funds can 

be budgeted for tenant services. Another 

commenter suggested adding a section 

to the rule that allows a project 

controlled by a nonprofit corporation or 

public body to utilize operating 

revenues to pay for tenant services that 

enhance the tenant’s quality of life. An 

additional commenter said that the 

value of tenant services in creating a 

healthy community is recognized by the 

MFH industry and that the Agency 

69076 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

encourages these services but does not 

allow them to be paid for from operating 

costs. A commenter said that HUD’s 

project reengineering program allows 

tenant services to be paid for by project 

operating funds and that nonprofit 

organizations should be allowed to 

expense tenant services that enhance 

the tenant’s quality of life (e.g., 

computer rooms, afterschool programs, 

etc.). 

Response: The Agency has considered 

the comments but has decided to retain 

the language from the proposed rule at 

this time until it has time to further 

evaluate this issue. 

Topic: One commenter noted that 

§ 3560.302(c)(5)(iii) should state that 

uses of funds for nonprogram purposes 

does constitute a non-monetary default, 

not that it ‘‘may’’ constitute a nonmonetary default. 

Response: The Agency thanks the 

commenter for highlighting this issue 

and has made this change in the interim 

final rule. 

Topic: The Agency received several 

comments on asset management fees. 

One commenter said that the proposed 

rule does not provide a definition for 

asset management fee. The commenter 

suggested that to facilitate the 

acquisition of Rural Development 

housing by nonprofit organizations, a 

reasonable and customary asset 

management fee be established; 

additionally, payment of asset 

management fees is inconsistent 

throughout the country. Another 

commenter asked the Agency to clarify 

that nonprofit organizations can obtain 

asset management fees consistent with 

current practice. However, one 

commenter strongly disagreed with 

allowing an asset management fee for 

nonprofit organizations. Another 

commenter said that the Agency should 

allow asset management fees as an 

allowable project expense as required by 

third-party entities, in conjunction with 

grants, loans, or equity. 

Response: The Agency acknowledges 

the commenters’ concerns. The Agency 

is not adopting a definition of ‘‘asset 

management fees’’ nor setting a 

‘‘reasonable and customary management 

fee’’ because it feels this concept is 

sufficiently delineated in the provisions 

of this rule. The Agency allows 

nonprofit organizations to use housing 

project funds as asset management 

expenses directly attributable to 

ownership responsibilities. Section 

3560.303(b)(1)(ii) of the interim final 

rule delineates the purposes of the asset 

management fee, which are reasonable 

and customary costs incurred by 

nonprofit organizations. While the 

Agency acknowledges commenter’s 

disagreement, it also recognizes that 

small nonprofit organizations often 

cannot afford to cover the time to 

perform property oversight functions or 

errors and omission insurance, and this 

oversight and coverage is important to 

ensuring the viability of the property. 

Topic: Several commenters stated that 

supervised bank accounts are too 

cumbersome. Some of these commenters 

also stated that certain banks would no 

longer accept responsibility for dual 

signature accounts. Several individuals 

thought that the Agency micromanages 

reserve accounts because the borrower 

must submit a request for withdrawal of 

reserves to the local USDA office for 

review and approval with supporting 

documentation for eligible replacement 

items or residual receipts. Another 

commenter said that HUD and other 

affordable housing funders allow 

borrowers to operate their reserve 

accounts as legitimate needs dictate. 

Another commenter recommended that 

borrowers should be given more control 

over management of the reserve 

accounts, with USDA reviewing and 

verifying the accounts on a semiannual 

or annual basis. 

Response: The Agency acknowledges 

the commenters’ concerns. The Agency 

has determined that these requirements 

are necessary to enable RHS to meet its 

fiduciary responsibility to ensure that 

these funds are used for the purposes for 

which they were intended. The Agency 

does recognize, however, that 

technological and other changes may 

require different techniques to ensure 

the Agency’s security. The Agency will 

review possible acceptable alternatives 

for the dual signature requirement. The 

Agency does not believe that (1) it 

micromanages reserve or operating 

accounts, (2) the requirements it 

imposes are unreasonable or 

cumbersome, and (3) that it can give 

borrowers more control over the 

management of the reserve accounts 

***

Topic: One commenter noted that the 

postapproval requirement contained in 

§ 3560.306(h)(5) should be discretionary 

with the Agency, but ‘‘extraordinary 

circumstances’’ should be revised to 

accommodate emergencies where prior 

approval is not practical and where 

there are delays in Servicing Office 

approvals. 

Response: The Agency has revised the 

regulation at § 3560.306(g) to respond to 

emergency situations and will include 

further direction in internal Agency 

procedures. The Agency wants to 

emphasize that it has a fiduciary 

responsibility to ensure that these funds 

are used for the purpose for which they 

were intended. 

Topic: Several comments were 

received on pre- and postapprovals of 

project reserve funds. One commenter 

said that to require preapproval of all 

expenditures from reserve accounts in 

unnecessarily burdensome; current 

practices at both HUD and many State 

housing agencies allow for postreporting 

in many instances—for instance, below 

a certain threshold dollar amount. The 

commenter recommended that the 

Agency modify this requirement to 

allow for postreporting of expenditures 

when the dollar amount is budgeted or 

when the amount is less than $10,000. 

Conversely, another commenter said 

that a bad precedent will be set if the 

Agency begins to post-approve 

withdrawals from the reserve account 

based on the funds’ being used for 

authorized purposes and having been 

approved by the Agency anyway, even 

if the proposed rule says that these will 

be approved only under ‘‘extraordinary 

circumstances.’’

Response: The Agency has revised 

§ 3560.306(g) of the interim final rule to 

state that borrowers must inform the 

Agency of planned withdrawals when 

the project’s budget is prepared. The 

Agency has not adopted a threshold 

requirement because the Agency feels it 

needs to evaluate program use and 

categorization of reserve accounts and 

due to the extensive problems the 

Agency has had with reserve accounts. 

In addition, the Agency has deleted 

from the interim final rule the statement 

in § 3560.306(g)(5) that it may 

postapprove the use of reserve funds 

only under extraordinary circumstances. 

Topic: Numerous comments were 

received on § 3560.306 regarding the 

required deposits to the project’s reserve 

accounts. The comments were similar to 

those described in the comments to 

subpart B. 

Response: For the Agency’s response, 

please refer to the discussion in the 

comments to subpart B. 

Topic: Several commenters said that 

the proposed rule states that the 

required deposit amount will be an 

amount needed to maintain the 

property. They said that the methods of 

determining the amount need to be 

described in the program handbooks, or 

everyone will deposit the current 10 

percent of the loan amount. The Office 

of Rural and Farmworker Housing 

agrees that maintenance reserve 

requirements should be revised 

(§§ 3560.65 and 3560.306). They said 

that history seems to indicate that the 

current one percent per year required 

contribution is insufficient; for the 

Agency to continue using one percent as 

a base would seem to invite the 

problems of the past, as some say this 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69077

amount is too high and some say it is 

too low. One commenter believed that 

the correct approach would be flexible 

and tied to the new requirement for 

including life-cycle cost analysis in the 

design and specifications of the 

proposed project (§ 3560.60(c)) and 

suggested that there should be two bases 

for funding the reserve accounts:

• One percent per year for 15 years 

for projects using materials with longer 

lives, such as brick siding and long-life 

heating equipment. During year 15, 

future maintenance needs would be 

calculated and the reserve conditions 

changed up or down as appropriate. In 

some cases, excess reserves should be 

returned to the owner as appropriate. 

• One-and-a-half percent per year for 

10 years for projects using average 

designs and specifications, with 

reevaluation performed during or after 

year 10. 

Response: RHS has decided to publish 

an interim final rule that does not 

include § 3560.103(c)(3) and 

§ 3560.306(k)(1) of the proposed rule, 

until their impacts can be assessed and 

policy decisions can be made for a longterm strategy. For the interim final rule, 

the Agency incorporated the relevant 

language from the existing regulation (7 

CFR part 1930, subpart C). 

Topic: Several commenters said that 

while increasing maintenance reserves 

will increase rents and therefore rental 

assistance costs in the short term, these 

increases should be balanced by smaller 

increases in the long run. They thought 

that the potential for deferred 

maintenance is more critical than the 

need for additional rental assistance 

with respect to the program’s long-term 

success and its ability to serve the 

lowest-income rural residents. 

Response: The Agency is in the 

process of evaluating the capital needs 

of the properties in the portfolio. 

However, over half of the residents in 

Agency-financed properties receive 

rental assistance; more than 93 percent 

of our residents are very low income 

and earn less than $10,000 a year. 

Rental assistance will continue to be a 

very important component in the longterm success of the RHS MFH programs. 

Topic: One commenter said that the 

proposed rule reads as if future reserve 

requirements would be imposed on 

existing projects, which may require an 

agreed upon change to the loan 

agreement by the owners. Regardless, 

this commenter thought that this is only 

possible if the Agency increased rental 

assistance and allows liberal rent 

increases. While the commenter wanted 

to see well-capitalized properties, 

additional reserves simply cannot be 

expected without more income being 

provided to the projects. 

Response: The Agency refers the 

commenter to the response for the two 

preceding topics. 

Topic: One commenter asked the 

Agency to allow borrowers the 

flexibility to deposit funds irregularly 

over the course of the year, as long as 

they achieve the required annual 

deposit. 

Response: The Agency agrees with the 

commenter’s suggestion and has revised 

§ 3560.306(c) of the interim final rule to 

address this comment and it is based on 

the language in the loan agreement as to 

the timing of deposits into the reserve 

account. 

Topic: The Agency received a number 

of comments on the requirements for 

disposition of surplus operating funds 

and excess reserve account funds. 

Several commenters stated that excess 

reserve funds should be transferred to 

the property’s operating account. Other 

commenters contended that borrowers 

should be allowed maximum flexibility 

in using surplus funds for the benefit of 

the project and that the borrower should 

be able to use excess reserves to make 

repairs and capital improvements and 

cover unexpected costs or unanticipated 

cost increases—in other words, for any 

project purpose when needed or to pay 

the return on investment. They thought 

that this language makes use of the 

excess reserves more restrictive than the 

use of reserves. Several commenters 

said that when a determination of 

surplus funds is made, it should take 

into account the upcoming year’s budget 

of the project. One commenter said with 

regard to § 3560.306(d)(2) that rather 

than saying that if the housing project’s 

general operating account has surplus 

funds at the end of the project’s fiscal 

year, the Agency may require the 

borrower to use the funds to address the 

project’s capital needs, with the word 

‘‘may’’ being replaced with the word 

‘‘will.’’

Response: The Agency appreciates 

these comments and has made several 

modifications to § 3560.306(d) in the 

interim final rule. These modifications 

should add flexibility to the 

requirements for transferring excess 

operating funds to the reserve account 

and determining whether the borrower 

is entitled to take a return on 

investment. The Agency has also 

revised § 3560.306(d)(2) in the interim 

final rule to read that the Agency will 

require the use of surplus operating 

funds to address the project’s capital 

needs. Excess funds should be 

deposited to the reserve account 

because so doing: (1) Maintains Agency 

control and oversight; and (2) ensures 

these funds are readily available for 

capital expenses and emergency needs. 

Use of surplus reserves is outlined in 

§ 3560.306(k), all for the benefit of the 

project. Internal Agency procedures 

require evaluation of the upcoming 

project budget with reviewing surplus 

reserves.

Topic: A commenter asked if the 

priorities for using excess reserve funds 

shown in § 3560.306(l) are in order of 

importance. 

Response: The Agency wishes to 

clarify this issue and has modified 

§ 3560.306(k) of the interim final rule to 

read: ‘‘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.’’

Topic: Several commenters stated that 

under § 3560.306(d)(1), the Agency 

seeks to keep excess funds to a 

maximum of 10 percent of the budget, 

which causes many properties to 

operate more thinly than is 

recommended and puts a property at 

financial risk to the normal vagaries of 

operations. They thought that prudent 

industry servicing should permit several 

months of funds to accumulate. 

Response: The Agency thanks the 

commenters for their suggestions and 

has revised the interim final rule to state 

that the general operating account will 

be considered to contain surplus funds 

when the balance at the end of the 

project’s fiscal year exceeds 20 percent 

of the budget. This can be found at 

§ 3560.306(d)(1) of the interim final 

rule. 

Topic: With regard to the 

requirements of initial operating capital, 

the Agency received a substantial 

number of comments. Comments 

received were similar to those described 

in the comments to subpart B. Several 

commenters said that the rule allows the 

developer to take the initial operating 

capital in more than one withdrawal 

within the 2- to 13-year period after a 

property is built, which decreases the 

developer’s incentive to have a 

successful project as soon as possible. 

To these commenters, it appeared that 

there may be conflicting information as 

the summary indicates 2 to 7 years, 

while § 3560.304(c)(2) allows the 

developer 2 to 13 years to take the 

initial operating capital. Some 

commenters approved of this timeframe; 

some thought it was too short, and some 

thought it was too long. 

Response: There was an error in the 

proposed rule and it should have stated 

that the developer may take the initial 

operating capital in more than one 

withdrawal in years 2 through 7, with 

69078 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Agency approval. This can be found at 

§ 3560.304 of the interim final rule. 

Topic: Some commenters expressed 

skepticism regarding the benefits of this 

proposed rule change. One commenter 

questioned if there is an element of the 

borrower’s desire to max out profit. The 

commenter went on to say that in 

today’s market, owners are receiving an 

eight percent rate of return on their 

investment in their property, while the 

best any bank will do is a two or three 

percent. 

Response: The Agency acknowledges 

the commenters’ concerns but believes 

that the proposed rule change is more 

equitable to borrowers. Therefore, the 

Agency has not revised its regulatory 

language in the interim final rule. 

Topic: Several comments were 

received on the Agency’s requirements 

for project bank accounts. Most of these 

comments contended that the regulation 

should be permissive enough to allow 

for establishing accounts required by 

other funding sources, over and above 

the four that RHS requires. Another 

commenter said that § 3560.302(c)(5)(v) 

should be reworded to clarify whether 

commingling of accounts is acceptable 

between projects owned by the same 

borrower, or project owned by different 

borrowers but operated by the same 

entity. Another commenter said that the 

proposed rule states in § 3560.302(d)(1) 

and (d)(2) that the borrower may 

combine two or more housing project 

accounts, and in (d)(3) it says that they 

cannot if they are managed by the same 

management company. One commenter 

asked whether nonprofit organizations 

could have all program funds through 

one account as long as they are tracked 

separately for each program; if this is 

the case, the commenter wanted to see 

separate operating and maintenance 

accounts for the housing program, along 

with separate reserve accounts for each 

project. 

Response: The Agency acknowledges 

the commenters’ concerns. Section 

3560.302(c)(3) in the interim final rule 

identifies permitted accounts, including 

account required by third-party lenders. 

The Agency has also revised 

§ 3560.302(c)(5)(v) in the interim final 

rule to state that borrowers, including 

nonprofits, may operate one account for 

multiple projects as long the funds for 

each project are accounted for 

separately. Management companies may 

not commingle funds for multiple 

properties. This can be found at 

§ 3560.302(d)(3). 

Topic: Several commenters believed 

that the collateral requirements for 

project accounts are too restrictive. One 

commenter said that the Agency’s 

proposal to use the cash in reserve 

accounts as security for the Agency’s 

loan does not address the issue of 

multiple lenders on projects. The 

individual thought that this requirement 

should be amended to address the 

mechanism to be used when multiple 

lenders, including the Agency, require 

this type of security. Some additional 

commenters expressed concern that the 

proposed rule does not address 

circumstances when borrowers have not 

adequately collateralized accounts that 

exceed the Federal Deposit Insurance 

Corporation (FDIC) insurance limit of 

$100,000. Other commenters noted that 

the proposed rule continues and 

expands 7 CFR 1902.4(a)(5) to require 

collateral pledges for not just reserve 

accounts, but for all project accounts. 

They stated that this is a cumbersome, 

time-consuming, and an unnecessary 

requirement. They favored simply 

continuing 7 CFR 1902.4(a)(5), which 

allows more flexibility because a 

collateral pledge only applies to reserve 

accounts, and even then a collateral 

pledge is not required if the financial 

institution has its accounts insured 

against theft and dishonesty. The 

commenter believed that the 

requirement for collateral pledges 

should be removed. 

Response: The Agency notes the 

commenters’ concerns. The Agency 

feels that security issues involving 

multiple lenders should be handled on 

a case by case basis. Regarding the 

comment concerning inadequate 

collateralization, the Agency makes an 

independent assessment of 

collateralization. If the Agency were to 

determine that the accounts were 

inadequately collateralized, then it 

would treat this as a non-monetary 

default. The Agency does not believe 

the collateral requirements are too 

restrictive. An alternative to collateral 

pledges are multiple accounts under 

$100,000. Regarding the comment that 

collateral pledges now apply to all 

project accounts: that has always been 

the case. No change was made in this 

rule and the Agency continues to 

believe it is necessary to have these 

accounts pledged to support the loan. 

The identified collateral requirements 

establish a minimum threshold for 

protecting the Government’s financial 

interest. 

Topic: The Agency received several 

comments on this subpart related to lifecycle cost analyses. Comments received 

were similar to those described in the 

comments to subpart B.

Response: For the Agency’s response, 

please refer to this discussion in the 

comments for subpart B. 

Topic: One commenter expressed 

concern that little is stated in the 

proposed rule concerning vacancies 

when preparing project budgets. 

Another commenter said, however, that 

the vacancy rate should be capped at 10 

percent for properties with 15 or fewer 

units. Vacancies for properties with 

more than 15 units should have a 

maximum vacancy rate of 15 percent. 

Another commenter said that vacancies 

should be realistic given the project’s 

history, but history is not defined. 

Response: The Agency thanks the 

commenters for their observations. The 

methods for budgeting vacancy rates 

vary depending on each project’s 

occupancy history and cannot be 

capped or based on number of units in 

the property. The Agency will provide 

additional details in its program 

procedures. 

Topic: One commenter said that, as an 

alternative to management fees, the 

regulation should allow an 

administrative fee, possibly as a state’s 

option. For example, in Mississippi, the 

management company is paid an all 

encompassing administrative fee that is 

intended to cover salary, paperwork, 

postage, etc., with the exception of 

training and auditing. The commenter 

noted that other states also use this 

system, and in all cases the reduction in 

micromanagement results in a much 

smoother cooperation between 

management companies and Agency 

personnel. 

Response: The Agency thanks the 

commenter for this observation. The 

Agency understands the utility of 

having the property pay for a specific 

bundle of services for management and/

or administrative services. The Agency 

describes this bundle of services in 

§ 3560.102 (i)(3) of the interim final 

rule. However, the Agency cannot adopt 

this comment because it wants a 

nationwide, consistent fee structure 

through the management fee process 

rather than individual ‘‘state options’’ of 

administrative fees. 

Topic: One commenter said that there 

must be ways for management 

companies to do a better job at being 

more frugal with their project budgets. 

Another commenter said that audits are 

reviewed on a first-come, first-served 

basis; there are so many to review in a 

short period of time in addition to other 

work demands. The commenter felt that 

there are opportunities for management 

companies to improve on their financial 

management during the year to avoid 

issues and questions during auditing 

times, as well as for auditors to provide 

clearer explanations on sources of 

expenditures or findings. 

Response: The Agency thanks the 

commenters for sharing these concerns. 

The Agency designed the interim final 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69079

rule to provide guidelines to ensure that 

borrowers manage their properties as 

effectively and efficiently as possible. 

Topic: One commenter said that if a 

borrower chooses to advance funds to 

properties to meet short-term needs, 

then the Agency should accommodate 

repayment. The commenter believed 

that the limited return limits the ability 

to repay advances even if funds are later 

available, and that RHS should allow 

owners a priority repayment to 

encourage advances to protect 

operations. 

Response: The Agency appreciates the 

comment. The Agency has modified the 

regulation and allows repayment of 

such advances to projects to meet shortterm needs, but prior Agency approval 

is required. This can be found at 

§ 3560.307 of the interim final rule. 

Topic: With regard to the borrower’s 

financial management of Agencyfinanced multi-family housing, one 

commenter said that adequate 

documentation must be defined so it is 

objective, not subjective. This 

individual believed that adequate 

documentation should mean supporting 

documentation such as invoices, general 

ledger receipts, or other readily 

available information to support the 

books and records. 

Response: The Agency thanks the 

commenter for this observation. Section 

3560.302 of the interim final rule sets 

forth the Agency’s basic requirements 

for project accounting, bookkeeping, 

budgeting, and financial management 

systems. ‘‘Adequate’’ or ‘‘supporting’’

documentation is any documentation 

required to substantiate the books, 

records and accounting systems. 

Topic: One commenter noted that the 

requirement to notify tenants of rent 

increases should be compatible with 

State and local laws, and that there is no 

need for longer notification periods. 

Another commenter mirrored this 

concern and said that a 105-day 

notification period is too long, 

especially as rent increases would not 

be approved unless they were necessary 

and justified. The commenter believed 

that the current requirement for 60 days 

should be continued subject to State 

law. 

Response: The Agency appreciates the 

commenters’ concerns. As stated 

previously, the Agency has revised the 

budget submission timeline so that the 

process in the interim final rule is 

similar to that of the existing budget 

submission/tenant notification timeline. 

By revising some target dates, the 

Agency gives the tenant 90-day 

notification of the impending rent 

increase. Generally, State laws require a 

shorter timeframe for notification to 

tenants, so the 90-day period should 

provide adequate notice. 

Topic: Several commenters said that, 

in principle, they agree with the 

Agency’s requirement to tie reserve for 

replacement deposit amounts to capital 

needs assessments, but that this policy 

could be used by borrowers to inflate 

project rents. 

Response: RHS has decided to publish 

an interim final rule that does not 

include § 3560.103(c)(3) and 

§ 3560.306(k)(1) of the proposed rule, 

until their impacts can be assessed and 

policy decisions can be made for a longterm strategy. For the interim final rule, 

the Agency incorporated the relevant 

language from the existing regulation (7 

CFR part 1930, subpart C). 

Topic: Several commenters noted that 

the Agency is not always in the senior 

debt position and that any senior debt 

needs to be reflected as a priority over 

Agency debt; since the Agency is 

allowing conventional loans to be in the 

senior debt position, this needs to be 

reflected throughout the regulations as 

necessary. Another commenter said that 

this is critical if the Agency wishes to 

continue leveraging other sources of 

debt, which is necessary given low 

program funding levels.

Response: The Agency appreciates the 

commenters’ concerns and has revised 

in the interim final rule § 3560.303. This 

paragraph states that the first priority of 

planned and actual budget expenditures 

is the senior position lienholder, if any. 

Topic: One commenter said that the 

proposed rule should explain the appeal 

rights available to the borrower if the 

borrower’s proposed budget is rejected. 

Response: While the Agency 

acknowledges the commenter’s concern, 

the borrower’s appeal rights are covered 

in § 3560.9 of the interim final rule and 

in greater detail in 7 CFR part 11. 

Topic: Several commenters noted that 

some of the regulatory citations were 

incorrect: 

• In § 3560.306(f), the section 

references should be § 3560.65 and 

§ 3560.302(c)(5). Section 3560.305(f) 

should be changed to § 3560.306(f). 

• Section 3560.306(m) references 

§§ 3560.102(c), (d), and (i). The correct 

references appear to refer to 

§§ 3560.102(g), (j), and (k). 

• Section 3560.306(f) regarding funds 

invested in securities should refer to 

§ 3560.306(g) instead of § 3560.305(f). 

Response: The Agency thanks the 

commenters for their suggestions and 

has made these changes to the interim 

final rule. 

Topic: One commenter said that 

§ 3560.306 of the proposed rule needed 

‘‘grammatic cleanup’’ and has ‘‘many 

long, run-together thoughts.’’

Response: The Agency acknowledges 

the commenter’s concern and has 

substantially revised § 3560.306 in the 

interim final rule to be much clearer and 

more concise. 

Topic: There were several comments 

about the Agency’s proposed guidelines 

for investing reserve for replacement 

funds. Two commenters said that the 

proposed rule establishes very narrow 

guidelines for investing reserve funds—

State- and Federal-backed securities and 

AAA-rated tax-exempt bonds. They 

thought that this latitude should be 

expanded to include investment funds 

commonly used by State and local 

Governmental organizations. For 

instance in California, housing 

authorities and public bodies routinely 

place funds in the Local Agency 

Investment Fund (LAIF). The 

commenters felt that such prudent 

State-sponsored investment funds 

should be allowable investments. In 

West Virginia, the monitoring and 

maintenance of investments necessitate 

significant staff time; significant losses 

have occurred in West Virginia when 

CDs have been pledged as security for 

nonproject loans. 

Response: The Agency appreciates the 

commenters’ concerns and has revised 

§ 3560.306(f) in the interim final rule to 

allow for more flexibility in the 

investment of reserve funds but still 

requires reserves to be held at a 

Federally insured domestic institution. 

This policy ensures that the Agency 

maintains its fiduciary responsibilities. 

Subpart H—Agency Monitoring 

Topic: One commenter asked that the 

Agency revise the regulatory language in 

§ 3560.352(c)(3) and in § 3560.352(b)(4) 

to remove ‘‘the Fair Housing 

Amendments Act of 1988’’ because this 

language is redundant with language 

earlier in the paragraph. 

Response: The Agency appreciates the 

comment and has revised the regulatory 

language in both § 3560.352(c)(3) and 

§ 3560.352(b)(4) to incorporate this 

suggestion. 

Topic: Several comments were 

received regarding the Agency’s 

monitoring techniques and borrower 

responsibilities. Commenters suggested 

including information related to 

inspections, supervisory visits, 

triannual supervisory visits, and 

compliance reviews in the final rule. 

One commenter expressed concern that 

the proposed rule did not describe how 

often onsite monitoring reviews would 

be performed nor the specific review 

procedures. However, another 

commenter expressed appreciation that 

the Agency did specify the frequency of 

monitoring activities in the proposed 

69080 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

rule because it gives the Agency the 

flexibility to ‘‘focus on the most 

important tasks and problem cases.’’

Response: The Agency purposefully 

did not include the specific procedures 

in the interim final rule’s regulatory 

language, as was suggested by the 

commenters, in order to retain 

regulatory flexibility. However, the 

Agency describes its monitoring 

activities (e.g., timing of monitoring 

activities, items examined during 

monitoring activities) in its internal 

Agency procedures, which have been 

updated in conjunction with the 

issuance of the interim final rule. 

Topic: Several commenters were 

concerned about the policy of 

scheduling onsite monitoring reviews 

without giving the borrower prior notice 

and whether the Agency has the right to 

enter private property without 

providing notice to property owners. 

The commenters requested some 

assurance for borrowers that tenantlandlord law will be followed. One 

commenter noted that onsite visits 

without notice could subject owners to 

greater insurance liability claims, and 

requested that borrowers ‘‘receive 

protection, financial and otherwise, 

from the Agency for any claims from 

tenants regarding a violation of their 

privacy rights based on the actions of 

Agency staff.’’ Another commenter 

suggested that staff seeking access for an 

Agency review should have some 

standard of notice as any unit 

inspection must comply with local 

tenant-landlord law to not disrupt either 

property operations or residents’ homes. 

Response: The Agency recognizes the 

commenters’ concerns. The proposed 

rule specifies: ‘‘Generally, the Agency 

will provide the borrower prior notice of 

an onsite monitoring review * * *.’’ In 

the interim final rule, the Agency has 

retained the authority to conduct onsite 

reviews without prior notice because 

RHS needs the flexibility to conduct 

these reviews in cases where it is not 

feasible to reach the borrower or give 

the borrower prior notice. The Agency 

has no interest in causing the borrower 

or the tenants any discomfort about the 

inspection process. We respect the 

tenant’s rights to privacy and the 

landlord’s responsibility to manage the 

property without interference from the 

Agency. However, there may be isolated 

instances in which the Agency needs to 

inspect the property or a unit as part of 

an emergency to protect the health and 

safety of the resident population and 

therefore the Agency reserves this right. 

Subpart I—Servicing

Topic: One commenter indicated that 

the proposed rule gives almost no 

attention to the problems associated 

with a significantly reduced Agency 

budget. The commenter also stated that 

the proposed rule does not adequately 

take into account the extent of 

leveraging of funds that currently occurs 

in the program and that has increased 

substantially in recent years. The 

commenter believed that the Agency’s 

policies tend to reflect the same 

perspective as when the Agency 

provided 100 percent of the funding. 

The commenter recommended that the 

regulation’s servicing requirements be 

relaxed or waived when other funding 

sources are participating in a project. 

Response: The Agency acknowledges 

the commenter’s concern. However, the 

Agency wants to emphasize that it has 

made a number of changes in both its 

requirements and procedures for 

flexibility when multiple funding 

sources are involved in a project. There 

has been language added to § 3560.406 

of the interim final rule that 

acknowledges the use of third-party 

loans and the ability to subordinate 

Agency loans. A change in internal 

Agency procedures is allowing the 

Agency to use appraisal reports and 

capital need assessments (CNA) from 

other funding sources provided the 

appraisal and ‘‘CNA’’ meet the 

guidelines as established by the Agency. 

The combination of these actions will 

reduce the duplication of work needed 

to finance these deals and expedite the 

current time frames. 

Topic: Several comments were 

received on § 3560.405 and its 

requirement for borrowers to certify 

annually that there has been no change 

to the ownership entity. Commenters 

said that reporting organizational 

changes to the Agency would be unduly 

burdensome. Others were opposed to 

having proposed organizational changes 

approved by the Agency. 

Response: The Agency does not 

require annual reporting but does 

require annual certification by the 

borrower. Only changes in the 

organizational structure need to be 

reported. Further, Agency approval is 

only required prior to a change in the 

controlling interest of the ownership 

entity. This responsibility is already a 

requirement under existing regulations, 

and these requirements provide the 

Agency with information that is 

fundamental to RHS in maintaining 

borrower accountability and ensuring 

compliance. For this reason, the Agency 

has made no change to this requirement 

in the interim final rule. 

Topic: Regarding § 3560.405(a)(2), the 

commenters requested clarification to 

the definition of ‘‘substantial 

influence.’’ To illustrate potential points 

of confusion, a commenter asked 

whether a limited partner with limited 

control rights that buys a 99 percent 

ownership interest or an instance of 

upper-tier syndicated ownership, such 

as the general partner of the 99 percent 

limited partner of the ownership entity, 

would be seen to exercise substantial 

influence. In both instances, the 

commenter believed that such entities 

may not exert substantial influence and 

asked that the Agency clarify this term. 

Another commenter asked whether the 

paragraph indicated that a management 

company had a controlling interest. 

Response: The Agency has removed 

this paragraph. The guidance of the 

phrase ‘‘controlling interest’’ in 

§ 3560.405(a) should be sufficient to 

describe a general partner in a limited 

partnership entity, rather than noncontrolling limited partners or 

management agents. 

Topic: One commenter addressed the 

Agency’s limited recourse when a 

borrower makes a change in ownership 

or transfer of ownership interest without 

Agency consent as outlined in 

§ 3560.406(b). The commenter advised 

that when a borrower makes a change in 

organizational structure or transfers a 

title without Agency consent, the 

Agency should have the power to 

subject the project to restrictive-use 

provisions; moreover, if the new 

ownership entity or transferee will not 

execute a restrictive-use agreement, then 

the Agency should take steps to 

judicially impose such restrictions on 

the project. 

Response: Failure to obtain Agency 

approval for a change in ownership or 

transfer of ownership interest is 

considered a default and handled in 

accordance with subpart J of the 

regulation. Subpart J of the regulation 

covers Special Servicing, Enforcement, 

Liquidation and Other Actions. A 

noncompliance issue of this nature 

could constitute the initiation of the 

liquidation process, or lesser penalties 

such as subjecting the borrower to civil 

money penalties provided in the new 

regulations. The imposition of a 

restrictive-use agreement does not deter 

someone from conducting this type of 

activity without prior approval. An 

action of this nature must be handled in 

accordance with the section of the 

interim final rule that imposes actions 

against owners who undertake actions 

without prior Agency approval. 

Topic: The Agency received a 

comment recommending a change to the 

proposed rule allowing an exception to 

the processing limitations contained in 

§ 3560.406(b)(2) for partners that were 

not present during a default or recent 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69081

substitution of partners approved by 

Rural Development.

Response: The Agency acknowledges 

the commenter’s concern but the 

reference citation provided refers to 

‘‘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’’. The citation does not 

reference the presence of members 

during a default or recent substitution of 

partners. 

Topic: Numerous comments were 

received asking the Agency to 

streamline its property transfer process. 

These comments included suggestions 

that there should be expedited 

processing of those transfers where 

purchasers seek to preserve affordable 

housing or rescue troubled properties. 

Several commenters said that to 

expedite the transfer process, 

environmental reviews should not be 

required when existing security 

property is being transferred. 

Response: The Agency agrees with the 

intent behind many of the comments. 

The Agency is implementing procedural 

steps to streamline the transfer process. 

While the Agency acknowledges the 

commenters’ concern about requiring an 

environmental review for all properties 

being sold, it has made no change 

because such a review is an established 

requirement of 7 CFR part 1940, subpart 

G. 

Topic: Comments received by the 

Agency advocate for a firm time limit 

for processing transfers. One comment 

suggested a minimum of 60 days for 

processing. Others suggested that within 

90 days of the submission of a transfer 

application, the appropriate State Office 

must process and approve or reject the 

application, and if the office rejects the 

application, then it must provide 

specific reasons and suggestions for 

approval. The commenter felt that if 

such action is not taken, then the 

Agency should allow applicants to 

pursue their application with the 

National Office. 

Response: The Agency appreciates 

these comments but has not 

incorporated arbitrary processing 

timeframes in this interim final rule. 

While the Agency is committed to 

processing transfers as expeditiously as 

possible, the coordination of resources 

and action of all participants in the 

transactions makes the imposition of 

deadlines in all cases difficult and 

unreasonable. 

Topic: With respect to the transfer of 

‘‘at risk’’ properties, several commenters 

stated that the policy for the transfer 

and assumption of at risk MFH projects 

should be clearly defined in the 

proposed rule. 

Response: The Agency appreciates 

these comments and notes that 

§ 3560.406(b)(1) states: ‘‘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.’’ Currently, this 

is the extent to which the Agency will 

go toward establishing a definition for at 

risk properties. 

Topic: The Agency received 

comments that suggest at the closing of 

escrow accounts, the balance in each of 

the operating, tax and insurance, and 

reserve accounts should be released to 

the transferor, provided the transferee 

fully replaces the funds in each account. 

Response: The Agency notes this 

concern and has revised the regulatory 

language to allow for the release of the 

reserve to the transferor. The release of 

these funds is contingent on the new 

owner funding the reserve account in an 

amount sufficient to cover the project’s 

immediate needs. 

Topic: Comments were received on 

the Agency’s requirement for restrictiveuse provisions for transferred 

properties. Several commenters said 

that purchasers should not be bound by 

these restrictions because doing so 

penalizes buyers and sellers seeking to 

stay in the program without further 

accommodation, by increasing the use 

restrictions. One commenter said that 

the Agency should track the format of 

HUD Notice 00–8 (available from HUD) 

for preserving section 236 properties. 

Another commenter noted that the 

proposed rule does not institute any 

new requirements with regard to 

restrictive-use provisions. The 

commenter went on to state that 

subordination is a serious servicing 

action and should carry with it a 

requirement for a new, extended 

restrictive-use agreement. 

Response: While the Agency 

acknowledges the commenters’

concerns, the Agency has made changes 

in the process throughout § 3560.406 to 

allow for equity at the time of transfer 

based on the period of time the 

borrower is willing to agree to 

restrictive-use provisions. Also at the 

time of transfer, it is the Agency’s goal 

to have a Capital Needs Assessment 

completed and all necessary work 

completed through rehabilitation. It is 

the aim of the Agency to extend the 

useful life of the property through 

rehabilitation at least through the 

restrictive-use period. The transfer 

process is being utilized to preserve the 

existing portfolio for years to come and 

provide the needed housing for those 

who otherwise could not afford it. The 

Agency has made no changes to 

§ 3560.406(g) of the interim final rule. 

The Agency will continue to monitor 

this requirement to assess whether it 

serves to discourage transfers, which 

help preserve the supply of affordable 

housing. 

Topic: Summarizing the views of 

several commenters, one commenter 

suggested that § 3560.406 ‘‘should 

provide a form use restriction agreement 

that can be amended for form for local 

legal and recording requirements.’’

Commenters also suggested that when 

purchasers agree to both use such a form 

and extend existing use restrictions, 

then the purchaser should be able to 

obtain other Federal, state or local 

financing to pay for purchase and 

rehabilitation. They thought that RHS 

should agree to subordinate and, if 

requested, reamortize its existing 

section 515 loan. The commenters 

suggested that the Agency refer to HUD 

Notice 00–8 (available from HUD) for 

more information on such a transfer 

structure. 

Response: In § 3560.406 of the interim 

final rule, the Agency encourages the 

use of third-party financers in order to 

preserve affordable housing. This 

includes clarifying process requirements 

such as determining capital needs and 

simplifying servicing actions such as 

subordination or reamortization 

requests. The Agency streamlined the 

transfer process utilizing a new 

processing checklist to be used by 

Agency personnel for transfers which 

should expedite these type transactions. 

Topic: The Agency received a 

comment suggesting that changes in or 

transfers of MFH ownership should only 

be approved by the Agency in cases 

where further availability of housing 

would be in the best interest of the 

resident and the Federal Government.

Response: The Agency appreciates 

this comment and has outlined a 

process to determine if the transfer 

would be in the best interest of the 

government in § 3560.406. This process 

takes into account current market 

conditions, need for the existing 

housing, existing condition of the 

property, and cost to rehabilitate the 

property in order to preserve the 

property for years to come. The Agency 

believes that the requirements regarding 

ownership transfer and sales adequately 

protect the Government’s interest and 

the availability of affordable housing. 

Topic: The Agency received 

comments on appraisals and security 

69082 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

issues. Several commenters questioned 

the use of the ‘‘as-improved value’’ for 

security property to be transferred. 

Several comments recommended using 

‘‘as-is market value.’’ One commenter 

stated: ‘‘There should not be a $100,000 

limit as long as the approval official 

documents that security is adequate,’’ a 

concern echoed by several other 

commenters. One commenter urged that 

the word ‘‘market’’ be deleted from 

§ 3560.406(d)(3)(i) because it creates 

confusion. According to the commenter, 

the value of the housing project should 

be a ‘‘prospective value-in-use,’’ not a 

‘‘market value.’’ Other comments 

concerned the rights of purchasers to 

obtain an appraisal. 

Response: The Agency acknowledges 

these concerns regarding the use of 

appraisal terminology and throughout 

§ 3560.406, it has made revisions as 

necessary and appropriate. The 

requirements for determining the value 

of security property have been clarified 

and may be found in subpart P of this 

part. To determine what is in the best 

interest of the Government, the Agency 

determined that the appraisal process is 

necessary when the value of the 

property exceeds $100,000. 

Topic: Reflecting several commenters’

concerns, one commenter said: ‘‘The 

subordination of interest or a junior lien 

will not cause the debt from all sources 

to exceed the value of the security 

property; however, total debt should be 

allowed to exceed the value of the 

property on a temporary basis during 

rehabilitation, provided the transferee 

can demonstrate that permanent 

financing will not exceed the value of 

the property.’’

Response: The Agency acknowledges 

this concern but has made no change 

because it believes that permitting total 

debt to exceed the value of the property 

fails to adequately protect the 

government’s interest. This issue is 

addressed adequately in § 3560.409. 

Topic: A commenter stated that CRCU 

should apply to initial loans, as well as 

to transfers. 

Response: The Agency has made no 

change because initial loans are subject 

to CRCU as described in subpart B of 

this part. 

Topic: The Agency received a 

comment regarding the proposed rule’s 

remedy against an unauthorized junior 

lien, for which the Agency must declare 

a default and pursue liquidation of the 

borrower’s loan. The commenter 

expressed concern with this approach, 

citing the Agency’s obligation to 

preserve its housing stock. The 

commenter asked the Agency to explore 

other options outside of the acceleration 

and foreclosure process (e.g., enforce the 

contract, impose fines on the borrower, 

seek a receivership, and impose 

continued use restrictions) and amend 

the regulation accordingly. 

Response: The Agency is not required 

to pursue liquidation. The regulation 

provides for a cure period and 

opportunities for the borrower to resolve 

the issue. The Agency does not believe 

the regulation needs further 

amendment. 

Topic: The Agency received 

comments expressing concern that the 

proposed rule does not allow project 

accounts to be encumbered by others. 

The commenters stated that this 

restriction is unrealistic and 

unnecessary, especially given the need 

to leverage other lenders’ funds. 

According to one commenter: ‘‘Other 

lenders will want to encumber project 

accounts, and this should be allowed 

provided the Government’s position is 

not unduly impaired,’’ a statement that 

reflects other commenters’ concerns. 

Response: The Agency appreciates 

these comments but has decided to 

retain the language in the interim final 

rule. The Agency has decided not to 

change the rule because it already 

allows for liens under conditions that 

are advantageous to the project and to 

the Government and has determined 

that it is not appropriate to reduce its 

standards. 

Topic: One commenter expressed that 

§ 3560.406(e)(2) ‘‘should be modified to 

allow a non-Agency prior lien to also be 

transferred to the transferee if 

previously accepted by the Agency for 

the transferor.’’

Response: The Agency disagrees with 

the commenter. A non-Agency prior lien 

would reduce the equity and therefore, 

should be paid off before any equity is 

paid to the borrower.

Topic: One commenter indicated that 

§ 3560.409 entitled ‘‘Subordination or 

junior liens against security property—

other liens’’ appears to be unnecessary 

and duplicative of what is already in 

§ 3560.408. 

Response: The Agency appreciates 

this comment but disagrees that § 3560. 

409 is duplicative of § 3560.408. Section 

3560.408 deals with the lease of security 

property and does not explain the 

procedures of § 3560.409, which deals 

with the subordination and junior liens 

against security property. In light of 

this, it is necessary to keep both sections 

as stated in the interim final rule. 

Topic: Several commenters addressed 

the issue of final balloon payments that 

are routinely set up under section 515 

loans. Under the current regulation, as 

loans approach the 30-year balloon 

payment, they may be reamortized as a 

servicing action, without the need to 

extend any new funds. The commenters 

are concerned that the proposed rule 

discontinues this practice. 

Response: The Agency wants to 

clarify that this practice is allowable 

and is addressed in § 3560.74. No 

change was needed. 

Topic: One commenter requested that 

RHS or a third party provide training 

and assistance to existing owners and 

local groups to explain the 

responsibilities that come along with 

property ownership. 

Response: The Agency agrees with the 

comment but training is outside of the 

scope of the regulation. The Agency is 

issuing administrative guidance on 

processing transfers more effectively. A 

training request should be forwarded to 

the Agency. This type of training can be 

provided on all levels. If such a request 

is received, the Agency will make every 

effort to accommodate the needs of its 

customers. It must also be noted though 

that with the Agency’s current budget 

constraints, it would be advisable to 

also seek alternative solutions for 

obtaining this type training, such as 

housing organizations, non-profit 

training centers, etc. 

Topic: A commenter asked whether 

all transfers would be for new rates. 

Response: The Agency believes that 

§ 3560.406(i) clearly states how the 

interest rate is determined in 

conjunction with an ownership transfer 

or sale. In most cases transfers will be 

based on new rates and terms in order 

to accommodate the preservation 

activity taking place with the transfer. In 

other instances loans will be transferred 

on new rates and terms if it is 

advantageous to the government. There 

may be some instances where transfers 

take place utilizing same rates and terms 

but only on rare occasion. 

Topic: One commenter addressed the 

language used in § 3560.406. The 

commenter suggested changing all 

occurrences of ‘‘the transfer should be 

in the financial interest of the 

government’’ to ‘‘the transfer should not 

result in a negative impact to either the 

government or the tenants.’’

Response: The Agency appreciates the 

intent of this comment. However, the 

Agency has made no change to the 

language in the interim final rule to 

ensure that a transfer affirmatively 

achieves the goals of the program. This 

provision is based on the statute section 

515(h) of title V of the Housing Act of 

1949. 

Topic: A commenter stated that local 

and State Rural Development offices do 

not have an adequate list of local 

nonprofit organizations. The commenter 

believed that Rural Development offices 

must be given assistance in developing 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69083

and maintaining up-to-date lists of 

active local nonprofit organizations and 

public bodies. 

Response: The Agency appreciates 

this comment. The Agency works with 

local and State offices to ensure that 

they have the necessary materials and 

information they need. The 

implementation of the Prepayment 

Information Exchange (PIX) as 

mentioned in this document’s 

discussion of subpart N will greatly 

improve the Agency’s ability to 

maintain a complete listing of non-profit 

organizations interested in Agency 

rental programs. 

Topic: One comment raised as an 

issue the practice that banks do not 

accept stocks as a form of collateral. 

Response: The Agency notes that this 

comment is outside the scope of this 

regulation. The Agency has no control 

over what financial institutions accept 

as collateral and therefore has no 

authority to change and regulate the 

daily procedures of these institutions. 

Topic: The Agency received a 

comment urging that a borrower and 

RHS give notice to residents that the 

borrower has applied to RHS to transfer 

the development to another entity. 

Further, the commenter believed that 

residents should be given an 

opportunity to comment on the transfer. 

The commenter thought that residents 

should be asked to report to the Agency 

any needed repairs and/or 

improvements in operations; if residents 

make legitimate suggestions, the Agency 

should include corrections of those 

issues as conditions for completing the 

transfer. 

Response: The Agency appreciates the 

comment. However, the Agency does 

not believe the tenants need to be 

involved in a borrower’s business 

transaction (transfer) that otherwise 

does not affect the availability or 

affordability of the rental housing. The 

Agency believes that the regulation as 

written requires identification of repairs 

and improvements needed prior to 

transfer approval. 

Topic: One commenter identified an 

issue with the authority to transfer or 

sell developments under special rates, 

terms, and conditions as discussed in 

§ 3560.406(l). According to the 

commenter, the authority fails to 

consider the Agency’s statutory 

prepayment obligations. The commenter 

thought that the proposed rule would 

effectively authorize a borrower to sell 

a development outside the program 

restrictions whenever it is considered in 

the Government’s best interest, that the 

section must be revised to also 

condition the sale upon the prepayment 

restrictions set out in subpart N. 

Response: The Agency appreciates 

this comment but has determined that 

no change is required to the proposed 

regulation because § 3560.406(l) does 

not establish any criteria that would 

exempt new owners from being required 

to accept restrictions. Any project that 

would leave the program would be 

required to pay off the loan and leave 

the program in accordance with subpart 

N.

Topic: A commenter suggested that 

the Agency should allow for a reduction 

of the interest rate for the note at either 

the transfer of general partners’ interest 

or the sale. According to the comment, 

many properties have interest rates 

approaching 18 percent. If the note 

could be reduced to a lower rate, then 

note rent could be lower, which could 

increase the possibility of attracting 

moderate-income applicants. 

Response: In § 3560.406(i), the interim 

final rule allows for loan restructuring 

during such transactions to set the 

interest rate at the current level or at 

closing level, whichever is lower. This 

should address the commenter’s 

concerns. 

Topic: One commenter stated that 

current regulation and the proposed rule 

make it almost impossible for national 

nonprofit organizations to acquire 

properties. As such, the commenter 

thought that the definition of ‘‘nonprofit 

organization’’ in § 3560.11 must be 

revised and simplified to require only 

that entities be not-for-profit under 

section 501(c) of the Internal Revenue 

Code. 

Response: The Agency acknowledges 

the commenter’s concerns and has 

revised and simplified the definition of 

‘‘nonprofit organization’’ in § 3560.11. 

Topic: One commenter urged RHS to 

recognize the lack of market value in 

some properties that nonetheless serve 

an important resident and market need. 

The commenter asserted that RHS 

should revise its regulation to allow for 

recasting a portion of the existing loan 

as a soft note payable from cash flow. 

According to the commenter, this would 

most likely be needed where a portion 

of the section 515 loan could not be 

supported by existing income or where 

a portion of the existing section 515 

loan, through subordination or 

otherwise, would be undersecured. 

Response: The Agency acknowledges 

the commenter’s position. The Agency 

is currently reviewing its ability to 

recast a portion of the loan as a note not 

requiring fixed installment payments 

(soft note). 

Topic: A commenter expressed 

confusion regarding the type of thirdparty financing that is permitted given 

the language in § 3560.406(f). 

Specifically, the commenter believed 

that the proposed rule limits the 

borrower’s financing options. 

Response: The Agency has rewritten 

§ 3560.406(f) to more clearly state the 

borrower’s options. These options state 

that equity funding to the borrower may 

be provided in cash or through a loan 

either by the Agency or through a 3rd 

party lender. This will enable the 

borrower to receive their equity from a 

3rd party lender in the event the Agency 

is unable to provide the funding. 

Topic: The Agency received a 

comment regarding the use of project 

funds for the purchase of computer 

equipment relating to industry interface 

and tenant certifications. The 

commenter believed that states are not 

modifying their security agreements to 

include this equipment. Further, the 

commenter indicated that costs have 

skyrocketed based on requests to use 

project funds for these purchases. The 

commenter believed that the proposed 

rule should address this issue. 

Response: The Agency appreciates 

this comment, which requires a change 

in the security agreement to include the 

equipment at the property site. The 

Agency has modified the security 

agreement. 

Topic: Two comments were received 

that encourage the Agency to revise the 

proposed rule to allow for the donation 

or below-market sale of portions of a 

MFH security property. They argued 

that the requirement of 

§ 3560.407(b)(3)(i) that ‘‘the value of the 

security will not be reduced’’ is not 

adequately permissive to allow such 

transfers. 

Response: The Agency appreciates 

this comment and has considered 

whether to adopt this recommendation. 

However, the Agency has made no 

change to the interim final rule because 

it has determined that while such a 

donation or below-market sale may 

benefit the owner, the project may not 

benefit from such action. 

Topic: Several comments addressed 

§ 3560.408(b), asking why borrowers are 

prohibited from leasing their property to 

public housing authorities and 

suggesting that there may be times when 

it is in the Government’s interest to 

allow this practice. 

Response: The Agency acknowledges 

the comments. However, the 

commenters did not provide any 

examples when it would be 

advantageous and therefore the Agency 

has declined to make the change in the 

regulation. 

Topic: One comment was made 

regarding the requirement that lessees 

pay all prorated expenses associated 

with what is being leased. The 

69084 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

commenter believed that this may be 

difficult to determine and, instead, such 

lessees should only demonstrate that 

they are in the financial best interest of 

the project and tenants, and that the 

project itself will not be adversely 

affected financially. 

Response: The Agency appreciates 

this comment but has made no change 

to the interim final rule. The rule is 

written to protect any expenses to the 

project that were not previously taken 

care of prior to the lessor leasing the 

property to the lessee. There is no way 

to know if some unforeseen expenses 

will adversely affect the property or not; 

therefore, by having rules in place to 

cover the cost ensures the financial 

stability of the property. 

Topic: The Agency received a 

comment specifying that the new loans 

obtained by nonprofit purchasers 

seeking to acquire and preserve section 

515 properties generally cover the 

following: (1) Cost of improvements or 

repairs, (2) a payment to seller, (3) 

purchaser’s due diligence and 

transaction costs, (4) a debt service 

reserve for the new lender, and (5) 

lender’s fee and cost of counsel. The 

commenter believed that nonprofit 

purchasers should not be expected to 

come out of pocket with monies to 

accomplish a preservation transaction. 

Response: The Agency appreciates 

this comment but made no changes to 

the interim final rule. It is the Agency’s 

position that these costs are part of the 

cost of doing business that every entity 

must be responsible for addressing.

Topic: A commenter stated that under 

existing regulations, phased properties 

could be consolidated as long as the 

entities were the same, regardless of 

when they were closed. A commenter 

asked whether this practice would still 

be allowed. 

Response: The Agency acknowledges 

the commenter’s position and there was 

no change in the new regulations. 

Consolidations are permitted as long as 

they are feasible and in the best interest 

of the government. 

Topic: Several comments were 

received regarding loan consolidations. 

Commenters urged the Agency to add a 

paragraph to the regulation allowing 

loans for projects made to multiple 

borrowers to be consolidated when 

transferred to a new single borrower. 

Response: The Agency wants to 

clarify that the proposed rule allows this 

type of loan consolidation and 

§ 3560.410 of the interim final rule 

continues this policy. No change was 

needed. It should be noted that for a 

consolidation to occur the same 

borrower must own all projects that are 

to be consolidated. This common 

ownership can occur after a transfer as 

described by the commenter.

Subpart J—Special Servicing, 

Enforcement, Liquidation, and Other 

Actions 

Topic: The Agency received several 

comments expressing concern about a 

loophole related to acceleration that was 

not closed by the language in the 

proposed rule. Commenters noted that 

this loophole could allow borrowers to 

save their property during acceleration 

after the restrictive-use provisions have 

been removed and thereby circumvent 

the established prepayment process. 

Commenters stated that the loss of use 

restrictions after acceleration results in 

a loss of affordable housing, and some 

claimed that it is an approach used by 

owners to avoid being subjected to such 

provisions. Commenters requested that 

the Agency add language to the 

regulation allowing RHS to retain 

restrictive-use provisions on a property 

during and after acceleration and 

foreclosure. 

Response: The Agency acknowledges 

these comments and has made revisions 

to the interim final rule to address 

owners that force acceleration in an 

effort to evade the prepayment process. 

The Agency has added language to 

§ 3560.456 in the interim final rule that 

allows it to take alternative actions, 

such as suing for specific performance, 

when the Agency determines that the 

owner’s motivation is to circumvent the 

prepayment process. 

Topic: Several commenters requested 

that RHS adopt additional remedies and 

actions as part of special servicing 

actions. The objective of these remedies, 

proposed by commenters, is designed to 

preserve the supply of affordable 

housing. Suggested additional actions 

included being able to impose fines, 

appointing a receiver, recasting a 

portion of the RHS loan as a soft note 

payable from cash flow, and adding 

restrictive-use provisions in conjunction 

with special servicing actions, including 

loan restructuring. 

Response: The Agency acknowledges 

the concerns raised by the commenters. 

RHS has authority to use a number of 

enforcement actions beyond those 

established in the current instruction. 

These additional actions have been 

incorporated into the interim final rule 

in § 3560.460 through § 3560.463 and 

have expanded the enforcement tools 

available to the Agency. RHS has also 

added the authority to require that 

expiring loan or assistance agreements 

not be extended unless the owner 

executes an agreement to comply with 

additional conditions prescribed by the 

Agency, or executes a loan or assistance 

agreement in the form prescribed by the 

Agency. The Agency is currently 

reviewing its ability to recast a portion 

of the loan as a note not requiring fixed 

installment payments (soft note). 

Topic: A commenter recommended 

that the Agency acknowledge that past 

servicing actions may have an impact on 

the cash flow for a project, which can 

affect a borrower’s ability to address 

deteriorated physical conditions. The 

concern expressed is that some projects’

cash flow may be insufficient to quickly 

correct deficiencies, particularly 

physical deficiencies. The commenter 

asked that the Agency explicitly 

recognize in the rule that some projects 

may need additional time to correct 

deficiencies due to the extent of funds 

available to the project. 

Response: The Agency acknowledges 

that there are situations and 

circumstances that will require 

additional time to correct deficiencies. 

In such cases, the Agency requires the 

borrower to submit a workout agreement 

that identifies the time periods required 

to address these deficiencies. 

Topic: A commenter requested that 

the regulation cross-reference 7 CFR 

part 1900, subpart D and the 

administrative appeals rules. 

Response: The Agency notes that a 

cross reference to 7 CFR part 11 and 7 

CFR part 1900, subpart D appears in 

§§ 3560.9 and 3560.10 of subpart A, and 

this reference continues in the interim 

final rule. 

Topic: A commenter suggested that 

workout agreements should supersede 

management plans and requested that 

the Agency be required to notify an 

owner before canceling a workout 

agreement so that the owner has an 

opportunity to respond to Agency 

concerns. 

Response: The Agency views the two 

documents—workout agreement and 

management plan—as serving distinct, 

but related, functions. RHS disagrees 

that the workout agreement should 

supersede the management plan. Rather, 

the two need to be consistent. The 

Agency has retained the language from 

the proposed rule in § 3560.453 (e)(i) of 

the interim final rule, which establishes 

that updating the management plan to 

be consistent with the content of the 

workout agreement is a condition of 

Agency approval of the workout 

agreement. Further, RHS has added 

language to § 3560.453(e)(2) of the 

interim final rule indicating that the 

Agency will provide notice to the 

borrower upon cancellation of the 

workout agreement for a property. 

Topic: With regard to the occupancy 

waiver in § 3560.454(b), a commenter 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69085

raised the concern that the language as 

written could create an impasse at 

properties where the vacancy issue is 

the need for rental assistance and none 

is currently available. The commenter 

suggested that the requirement for 

housing applicants on the waiting list 

before any over-income applicant be 

revised so that it better matches with the 

availability of rental assistance.

Response: The Agency recognizes that 

in circumstances when RA is not 

available, higher income tenants need to 

be considered for occupancy and 

§ 3560.454(b) of the interim final rule 

allows for this type of situation. 

Topic: Multiple commenters 

requested that the Agency allow a 

borrower to reamortize its loan if the 

borrower is current with all payments. 

One commenter suggested that an 

appraisal should not be required as part 

of a reamortization regardless of debt, 

with proper cash flow. 

Response: The Agency wants to 

clarify that a reamortization is allowable 

in these circumstances as is shown in 

§ 3560.455(b)(3) of the interim final rule. 

The circumstances when appraisals are 

required are covered in § 3560.455(b)(3) 

of the interim final rule. As long as there 

is other adequate evidence that the 

Agency’s security interest is protected 

as required by § 3560.455(b)(1)(ii), an 

appraisal would not be necessary. 

Finally, § 3560.454(b) of the interim 

final rule does allow for reamortizations 

in situations other than just 

delinquency. 

Topic: A commenter requested further 

clarification from the Agency on the 

meaning of ‘‘suspending’’ rental 

assistance. 

Response: Information regarding 

suspension of rental assistance can be 

found at § 3560.456(b)(2) of the interim 

final rule. The Agency notes that, 

generally, rental assistance is suspended 

when interest credit has been cancelled 

due to a default. The rental assistance 

can be restored once the default has 

been resolved. 

Topic: A few commenters addressed 

the write-down provisions in 

§ 3560.455. One commenter 

recommended that the Agency change 

the requirement from one write-down 

per property to one write-down per 

owner. Another commenter stated that 

the sections dealing with write-downs 

and reamortizations were excellent and 

would help maintain viable projects in 

very rural areas. 

Response: The Agency agrees with the 

comment that requiring no previous 

write-down of indebtedness associated 

with a housing project as a condition to 

receive a write-down is too restrictive. 

The Agency has removed this condition 

from the interim final rule. The Agency 

has not further restricted these 

requirements to one write-down per 

owner because the Agency does not 

believe the servicing remedy is 

necessarily related to the owner but 

rather to the performance of the 

property. 

Topic: A commenter requested that 

the Agency allow for a write-down of 

debt without a change to the current 

ownership, if there are no issues with 

the ownership members. 

Response: The Agency wants to 

clarify that the interim final rule does 

allow loan write-downs for the current 

ownership as specified in § 3560.455(c). 

Topic: A commenter requested that 

§ 3560.456 be revised to specifically 

include the ability to make a reasonable 

bid at a foreclosure sale. The commenter 

recommended that the regulation allow 

a discounted bid, as allowed by Single 

Family Housing, to include holding 

time, sale cost, and other factors. 

Response: The Agency appreciates the 

commenter’s suggestion and has 

incorporated the language from 7 CFR 

3550 (at 3560.456(c)), which gives the 

Agency additional flexibility to accept a 

discounted bid. 

Topic: In reference to § 3560.452, a 

commenter requested that the proposed 

rule explicitly allow RHS to extend the 

time period for correction or resolution 

of a default. 

Response: The Agency notes that the 

proposed rule does allow for workout 

agreements to extend beyond 2 years. 

This provision under § 3560.453(e) 

allows the Agency to extend the period. 

Topic: A few commenters requested 

that the Agency include a provision 

under § 3560.454 that would allow an 

applicant or resident who does not want 

to provide income and asset 

documentation, but is willing to pay 

market rent, be allowed to live in the 

property on an ineligible basis. Such 

residents would need to vacate the unit 

if needed by an eligible applicant. 

Response: The Agency understands 

the commenters’ concern but has made 

no change to § 3560.454. Under the 

applicable statute, RHS must have 

documentation of a tenant’s eligibility 

for occupancy. Section 3560.454(b) and 

§ 3560.158(c) allow for ineligible 

applicants to reside in a property with 

Agency approval if the specific unit 

type has no waiting list, or if accepting 

an over-income tenant is necessary to 

maintain the financial viability of a 

property. An Agency waiver is required 

in these circumstances, and only 

properties that have received a waiver 

may admit tenants that do not meet or 

will not document income eligibility 

requirements. 

Topic: A few respondents commented 

on the authority of State and Field 

Offices to approve workout agreements 

and other special servicing actions. One 

commenter appreciated the Agency 

position of not requiring State Office 

approval of workout agreements longer 

than 2 years. Other commenters 

requested that the Agency provide the 

authority below the State Office for 

approval of Affirmative Fair Housing 

Marketing Plans, workout agreements, 

servicing market rents, and change of 

project designation. 

Response: Approval levels are 

internal Agency procedure and not set 

forth in Agency regulations. 

Topic: A few commenters noted that 

subpart J in the proposed rule did not 

include specific language on 

enforcement. 

Response: The Agency has added four 

sections to the interim final rule to more 

specifically address enforcement: 

§ 3560.460 (Double damages), 

§ 3560.461 (Enforcement provisions), 

§ 3560.462 (Money laundering), and 

§ 3560.463 (Obstruction of Federal 

audits). 

Topic: A commenter noted the actions 

that an owner may take or fail to take 

that would cause the Agency to 

determine that the loan is at risk. The 

commenter noted that the Agency may 

remove the management agent if the 

Agency determines that a compliance 

violation or loan default was caused, in 

full or in part, by the management agent. 

The commenter stated that it agreed 

with the Agency’s strengthened ability 

to remove a management agent that 

causes compliance violations or loan 

defaults.

Response: The Agency appreciates the 

commenter’s support. 

Topic: A commenter inquired 

whether equity skimming is considered 

a non-monetary default under 

§ 3560.462. 

Response: The Agency appreciates 

this comment and agrees that equity 

skimming is a form of non-monetary 

default but has made no changes to 

§ 3560.462. Additional procedural 

information on handling suspected 

cases of equity skimming are addressed 

in the Agency’s internal procedures. 

Topic: A commenter requested that 

the Agency provide clear definitions for 

when a payment is considered past due 

and how the Agency calculates 10-,

20-, and 30-days past due. 

Response: The language in the 

definitions section of subpart A for 

‘‘Default,’’ and in §§ 3560.401(c) and 

3560.451(c) has been revised to provide 

that a past due obligation is one which 

remains unpaid or unperformed for 

more than 30 days after the due date. 

69086 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

The references to 10 and 20 days in the 

proposed rule were clear and were not 

changed. 

Topic: A commenter noted that 

§ 3560.452(e) included an incorrect 

cross-reference to enforcement and 

liquidation sections. 

Response: The Agency appreciates 

this comment and has corrected the 

cross-reference in the interim final rule. 

Topic: A commenter noted that the 

discussion in § 3560.453 concerning 

workout agreement budgets does not 

reflect the fact that the Agency may not 

be the senior debt. The commenter 

recommended that the Agency add 

language reflecting Agency procedures 

when it is in a junior lien position. 

Response: The Agency appreciates 

this comment and has added language 

to § 3560.453(d) in the interim final rule 

recognizing the prior lienholder’s 

position, if any, in the order of cash 

disbursements under a workout 

agreement budget. 

Topic: In reference to § 3560.454(e) 

regarding the termination of the 

management agreement, a commenter 

stated that the Agency must give the 

management agent and owner due 

process and allow them a joint 

opportunity to contest the termination. 

Response: The Agency agrees with the 

commenter that the management agent 

and owner have the right to contest a 

termination but has made no changes to 

this section in the interim final rule 

because these rights are provided under 

the Agency’s appeals procedures. 

Topic: A commenter noted that 

procedures for the Debt Collection 

Improvement Act of 1996 were 

developed for the Agency, but that MFH 

was excluded because its own handbook 

was under development. The 

commenter recommended that the rule 

refer to 7 CFR part 3 covering debt 

collection for the Department or include 

language directly in the regulation. 

Response: The Agency appreciates the 

comment and has added language 

regarding debt collection procedures to 

§ 3560.460 in the interim final rule. 

Topic: A few commenters noted 

typographical errors in §§ 3560.455 and 

3560.456. 

Response: The Agency appreciates 

these comments and has corrected these 

errors in the interim final rule. 

Topic: A few commenters noted that 

§ 3560.456(a)(2) regarding payment 

subsidy conflicts with guidance 

provided in the draft Project Servicing 

Handbook which was made available 

online when the proposed rule was 

published. 

Response: The Agency appreciates 

this comment. The regulation is correct 

as written and changes have been made 

to the Agency’s internal procedures to 

ensure that it reflects the regulation. 

Topic: With regard to § 3560.456(a)(2), 

a commenter asked whether the Agency 

needs to wait until the appeals process 

is complete, rather than immediately 

following acceleration, to suspend 

interest credit and rental assistance. 

Response: The Agency has removed 

the phrase ‘‘immediately following the 

issuance of an acceleration notice’’ from 

the regulation to clarify that interest 

credit and rental assistance will be 

suspended upon acceleration. 

Topic: With regard to § 3560.456(c), a 

commenter asked whether the Agency 

has the ability to foreclose on a 

mortgage without going through the U.S. 

Attorney’s office, which can slow down 

the process. 

Response: The Agency appreciates 

this comment but has made no changes 

because representation of the Agency by 

the Department of Justice is a Federal 

requirement and litigation is necessary 

to initiate a judicial foreclosure action 

in those states requiring judicial 

foreclosure. 

Topic: A commenter stated that the 

Agency’s procedures in dealing with 

deceased owners were unclear, in 

particular when there is no heir who 

wants to operate the property as 

affordable housing. 

Response: The Agency appreciates 

this comment but the property is still 

subject to the restrictions and the 

Agency will work with the heirs, as 

necessary, to facilitate the transfer of the 

property to an eligible borrower. 

Subpart K—Management and 

Disposition of Real Estate Owned (REO) 

Properties

Topic: A few commenters requested 

that preference be given to eligible 

nonprofit organizations for the 

disposition of REO property. 

Response: Section 3560.504(c)(1) of 

the interim final rule has been revised 

to explain that the Agency will publicly 

solicit requests for sealed bids and 

publicize auctions. The successful 

bidder will be the applicant with the 

highest bid. It is the Agency’s policy to 

get the best price for the property and 

not limit the potential pool of 

applicants. 

Topic: A commenter requested that 

the Agency include language similar to 

the language from the current regulation 

in 7 CFR 1965.223(c), which provides 

for the continuation of restrictive-use 

provisions on projects sold out of 

inventory. 

Response: The Agency appreciates 

this comment and believes its interim 

final rule adequately addresses this 

issue. When inventory properties are 

sold as ‘‘program’’, then § 3560.505(d) of 

the interim final rule requires the loan 

closing follow the requirements of 

subpart B (see § 3560.62(a)(2) of the 

interim final rule) for executing a 

restrictive-use contract acceptable to the 

Agency. 

Topic: A commenter requested that 

the Agency change the requirement for 

nonprofit organizations from having 

experience in the Agency’s MFH 

programs to having experience in 

providing affordable housing. 

Response: The Agency appreciates 

this comment but has determined that 

all applicants need experience in 

operating MFH to be eligible to own and 

manage this type of housing. The 

Agency notes that § 3560.102(e) of the 

interim final rule adequately covers 

acceptable management agent criteria 

and, therefore, determined that no 

change to the regulation is needed. 

Topic: A commenter recommended 

that the Agency revise its policy stated 

in § 3560.504(c)(1) that the Agency will 

make an award to the first offer drawn 

as part of a sealed bid process for REO 

property. The commenter suggested that 

it would be in the Agency’s interest to 

open all bids and accept the highest 

eligible bid. 

Response: The Agency agrees with 

this comment and has revised 

§ 3560.504(c)(1) of the interim final rule 

to clarify that RHS will accept the 

highest eligible bid or, if no acceptable 

bids are received, the Agency may 

negotiate a sale without further public 

notice. 

Subpart L—Off-Farm Labor Housing 

Topic: Several comments were 

received on § 3560.576 (formerly 

§ 3560.575(b)(2) of the proposed rule) 

and the requirement that a substantial 

portion of income for Farm Labor 

Housing households come from farm 

labor employment. Commenters 

expressed concern that the standard for 

domestic and migrant farm laborers will 

increase so greatly that it will make 

many existing tenants ineligible, limit 

new occupancy, hurt the people that the 

program was intended to serve, and 

place existing properties at risk. Other 

commenters expressed concern because 

they were not able to see specifically 

how the income standard would change 

and there was no definition. One 

commenter also noted that exhibit J of 

RD Instruction 1944–D (available in any 

Rural Development office) has not been 

published annually by the Agency. 

Response: Section 514 of the Housing 

Act of 1949 defines ‘‘domestic farm 

labor,’’ in part, as ‘‘* * * any person 

(and the family of such person) who 

receives a substantial portion of his or 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69087

her income from primary production of 

agriculture or aquaculture commodities 

* * *.’’ Previously, exhibit J of RD 

Instruction 1944–D (available in any 

Rural Development office) provided 

‘‘Federal Regional Income Limits for 

Hired Farmworkers.’’ Domestic farm 

labors, other than migrant farmworkers, 

were required to earn actual dollars 

from farm labor for at least 65 percent 

of the annual income limits found in 

exhibit J. Migrant farmworkers were 

required to have at least 50 percent of 

the annual income limits. Exhibit J was 

distributed as a Procedural Notice on 

July 2, 1986, and has not been updated 

since that time. The proposed rule 

indicated that the Agency would be 

replacing exhibit J and updating the 

limits. However, the Agency has not 

changed its basic policy here in the 

interim final rule. 

The Agency believes that commenters 

misunderstood the Agency’s intent and 

the policy presented in the proposed 

rule. The examples provided suggest 

that the commenters interpreted the 

proposed rule as requiring the use of the 

income limits published by the Agency 

for eligibility in RRH as the basis for 

calculating 65 percent or 50 percent of 

income from farm labor. The Agency is 

not using the RRH income limits as the 

basis for the income standard for 

percentage of income from farm labor. 

The Agency has retained the basic 

method used in § 3560.576(b)(2)(i)(A) of 

the interim final rule to determine 

whether a substantial portion of a 

household’s income comes from farm 

labor employment. However, the 

Agency has raised the income limits 

that were previously published in 

exhibit J by 50 percent to reflect 

increases in farm worker incomes since 

1986 (when the income limits were last 

published). When revising the income 

limits, the Agency used data from the 

Bureau of Labor Statistics. The new 

limits are found in internal Agency 

guidance and will be updated 

periodically, not annually, to reflect 

changes in the workforce. The changes 

will be announced in the Federal 

Register prior to the time that they take 

effect. The Agency has revised language 

from the proposed rule in an effort to 

clarify its policy on this topic. 

Topic: One commenter questioned the 

statutory basis by which the Agency 

uses income to determine eligibility and 

stated that the proposed rule should 

comply with the statute. Further, the 

commenter added that if ‘‘Congress had 

intended to place income limits on 

tenants, it would have explicitly said so 

in the Act.’’ Another commenter 

recommended that moderate-income 

farmworker families be able to live in 

section 514/516 projects with continued 

use of the priority system (preferred no 

change to the existing system). 

Response: The Agency has made no 

change to the current policy. Section 

3560.576 of the interim final rule 

continues the current eligibility policy 

requirement that farmworkers must not 

have income which exceeds the 

moderate income limit (previously 

published at 7 CFR 1944.153) but will 

also continue to allow farmworkers with 

above moderate incomes to occupy 

units if there are no eligible applicants 

on the waiting list.

Topic: Several commenters were 

concerned with tenant priorities for offfarm labor housing. These commenters 

felt that the priorities were too 

confusing and cumbersome. 

Response: The Agency agreed with 

these comments and has simplified the 

priorities in the interim final rule at 

§ 3560.577(a). 

Topic: One commenter said that 

priority for occupancy in off-farm labor 

housing should be based on annual 

household income, rather than on the 

percentage derived from farm labor. 

Response: The Agency agrees with 

this comment and has eliminated this 

requirement from the interim final rule 

but still has to meet the definition of 

Domestic Farm Laborer which includes 

receiving a substantial portion of their 

income from the primary production of 

agricultural or aquacultural 

commodities or the handling of such 

commodities in the unprocessed stage. 

Topic: A number of commenters felt 

that the requirements for a nonprofit 

organization should be simplified and 

that too much emphasis was placed on 

local representation. One commenter 

asked the Agency to use a standard 

definition of a nonprofit organization—

one similar and/or used for other 

programs such as the LIHTC program. 

The commenter also thought it would be 

appropriate to include public agencies, 

such as public housing authorities and 

redevelopment Agencies. 

Several others requested clarification 

on what ‘‘reflect the demographics of 

the community’’ means as opposed to 

‘‘representation on the board from the 

area where the housing is located’’

because the proposed language in 

§§ 3560.55(a) and (b) does not speak to 

reflecting community demographics and 

§ 3560.55(c) only lists additional 

eligibility requirements for nonprofit 

organizations. The commenters thought 

that the three sections do not address 

the instruction in § 3560.555(a)(1) that 

requires board representation from the 

housing area instead of a board that 

reflects the community’s demographics. 

One commenter also stated that 

paragraph (9) in the definition of nonprofit organization (§ 3560.11) requires 

‘‘capacity’’ as an underwriting issue and 

should not be in the definition; the 

Agency should clarify its intent prior to 

finalizing the proposed rule. 

Response: As stated in the description 

of comments for subpart A, the Agency 

agrees and has revised the definition of 

a nonprofit organization. The Agency 

has also added, language to § 3560.555 

to specify that to be eligible for an offfarm labor housing loan or grant, a 

nonprofit organization must be a 

‘‘broad-based’’ nonprofit organization. 

RHS has added this language so that the 

regulation is consistent with sections 

514 and 516 of the Housing Act of 1949. 

The Agency has brought forward a 

sentence from the current regulation to 

describe what is meant by a ‘‘broadbased’’ nonprofit organization. 

Topic: Several commenters 

questioned why limited partnerships 

were ineligible for Farm Labor Housing 

grants. 

Response: The Agency notes that 

there is no authority under section 516 

of the Housing Act of 1949 to provide 

grants to limited partnerships. For this 

reason, limited partnerships remain 

ineligible for Farm Labor Housing 

grants. 

Topic: Several comments were 

received concerning § 3560.559, some of 

which concerned the requirement that 

off-farm labor housing incorporate 

exterior washing facilities (showers) as 

necessary to protect the resident and the 

property from excess dirt and chemical 

exposure. A few commenters thought 

that exterior washing facilities should 

be encouraged but not required. 

Response: The Agency agrees with 

these comments and has revised its 

position in the interim final rule. 

Topic: Another commenter thought 

that the Agency should use different 

terminology so that ‘‘washing facilities’’

is not confused with ‘‘laundry 

facilities.’’

Response: The Agency agrees with 

this comment and has changed ‘‘exterior 

washing’’ facilities to ‘‘outdoor showers, 

boot washing station, and/or hose bibb’’

in the interim final rule. 

Topic: A commenter contended that 

exterior washing facilities were not 

needed and thought that the idea 

sounded discriminatory. 

Response: The Agency does not agree 

with the commenter and believes that 

there are instances when outdoor 

showers can improve the quality of life 

of farmworkers by giving them the 

opportunity to wash off excess dirt and 

chemicals before entering their homes.

Topic: Several comments were 

received concerning construction 

69088 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

financing requirements for off-farm 

labor housing. These commenters want 

the Agency to allow grant funds to be 

used before loan funds to reduce 

interest costs. 

Response: The Agency has made no 

change to the requirement because it 

contends that a borrower’s own 

resources, including loans, need to be 

utilized prior to the disbursement of 

grant funds. The Agency notes, 

however, that this section of the 

regulation has been rewritten to state 

that equity contributions being made by 

the borrower or grantee must be 

contributed and disbursed prior to the 

disbursement of loan or grant funds. 

Topic: One commenter also asked that 

the Agency include fees for oversight in 

its provisions for an asset management 

fee for owners of Farm Labor Housing 

projects that are not self-managed in 

subpart L. An additional comment 

wanted the Agency to allow an 

operating line item for the provision of 

services because the provision of 

services is used as criteria for funding 

projects by both Rural Development and 

some states. 

Response: In the proposed rule, the 

Agency inadvertently left out the key 

language from the earlier Operating 

Subsidy Proposed Rule. The Agency has 

inserted the missing language into the 

interim final rule. The Agency believes 

that this additional language addresses 

the commenter’s concerns. In 

accordance with § 3560.303(b), 

cooperatives and nonprofit 

organizations may use housing project 

funds, with prior Agency approval, for 

asset management expenses directly 

attributable to ownership 

responsibilities. The Agency has 

decided not to include a separate 

operating line item for the provision of 

services. However, if a Farm Labor 

Housing complex has a Tenant Services 

Plan and incurs administrative expenses 

while carrying out that Plan, those 

expenses can be budgeted for on the 

budget’s ‘‘Other Administrative 

Expenses’’ line provided the expenses 

are directly attributable to housing 

project operations and are necessary to 

carry out successful operations. 

Topic: A number of commenters 

expressed their concern with the 

distinction between off-farm and onfarm labor housing. One commenter 

noted that the Agency does not define 

the terms and suggested that they are 

used inconsistently. 

Response: Definitions for the terms 

‘‘On-farm labor housing’’ and ‘‘Off-farm 

labor housing’’ have been added to the 

definition section of the interim final 

rule in § 3560.11. 

Topic: The Agency was asked by two 

commenters to provide more detail to 

§ 3560.556. The first commenter asked 

that the Agency specifically use ‘‘may’’

instead of ‘‘will’’ in the final regulatory 

text and consider offering over-thecounter funds from time to time without 

being tied to a formal NOFA process. 

The second commenter asked to make 

§ 3560.556 similar to § 3560.56 and to 

provide more detail. The commenter 

suggested that the minimum acceptable 

level of detail would be that a proposal 

or initial application should be 

submitted in accordance with the NOFA 

and those with the highest rankings will 

submit a final application. 

Response: The NOFA that is annually 

published by the Agency contains much 

of the same detailed information that is 

found in § 3560.56. In this manner, the 

Agency will have more flexibility in 

modifying the application and 

processing procedures, without having 

to implement a change to the 

regulations. It may be necessary to have 

this flexibility to respond to changes in 

funding levels or shifts in program 

priorities. The Agency also retained the 

words ‘‘will be published’’ because the 

Agency will continue with a 

competitive application process, rather 

than making funds available ‘‘over-thecounter’’ from time to time, as suggested 

by the commenter. 

Topic: One commenter asked the 

Agency to provide more flexibility in its 

occupancy limits for seasonal housing. 

The 6-month limit may be too 

restrictive, such as in the Northwest 

where seasonal work can last for 10 

months per year. They offered that 

different units should be on a rolling 

seasonal schedule so that all do not 

close on one date, but perhaps on 

different dates throughout the offmonths. The commenter also asked to 

have more flexible opening and closing 

dates for off-farm units. 

Response: The Agency believes that 

the commenter misunderstood § 3560.60 

as it does not establish an 8-month 

occupancy limit for seasonal housing. 

Section 3560.559 establishes a design 

requirement for off-farm labor housing 

that is housing occupied less than 8 

months per year. The Agency has made 

one additional change from the 

proposed rule to allow seasonal housing 

to be constructed for full-year 

occupancy to provide additional 

flexibility with regard to this issue 

according to § 3560.559(a). 

Topic: Two commenters were 

concerned with § 3560.562 and its use 

of the terms ‘‘security value’’ and 

‘‘value-in-use,’’ both of which one 

commenter asked the Agency to clarify 

in its final rule. Specifically, the 

commenter thought that value-in-use 

should actually refer only to the value 

of the subject real estate, as restricted. 

The commenter felt that the problem 

with basing the term security value on 

the term value-in-use is that the valuein-use of a subject property, as restricted 

including the value of the interest credit 

subsidy, does represent security value, 

but the value-in-use of a subject 

property, as restricted including the 

value of the interest credit subsidy and 

the value of the section 516 grant, does 

not represent security value. 

This commenter believed that there is 

a catch-22 for securing section 516 

grants because their value must be 

added to the value-in-use of the subject 

property to secure the grant but value 

cannot be added because it does not 

represent security value. The 

commenter suggested revising 

§§ 3560.562(a) and (c) so that section 

516 grants do not have to be secured by 

the value-in-use of the Farm Labor 

Housing project but instead, are based 

strictly on total development cost, not 

on security value. 

The second commenter also had 

issues with the proposed regulatory 

language in that both the loan and grant 

must be securitized by the value of an 

appraisal or the total development cost, 

if it is less; yet, there are few 

comparable properties upon which to 

base ‘‘comps’’ in rural areas, so 

appraisals often come in below the total 

development costs. Since these rural 

area projects are often only feasible as 

a result of grants (RHS and others) the 

commenter requested that the Agency 

either not require an appraisal to cover 

the grant or allow exceptions to the 

appraisal requirements. 

Response: The Agency acknowledges 

the commenters’ concern and has 

revised §§ 3560.562(a) and (c) to clarify 

that the maximum amount of the grant 

is not limited by the security value of 

the property. The grant is limited to the 

lesser of: (1) 90 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.

Topic: Multiple commenters asked 

whether it is practical (as stated at 

§ 3560.565(b)(2) of the proposed rule) to 

lock the Agency into providing 100 

percent of rental assistance if there are 

more affordable, alternate sources 

available. 

Response: The Agency appreciates the 

comment and has revised the language 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69089

in § 3560.565(b) of the interim final rule 

to delete the 100 percent requirement. 

Topic: A commenter wondered why 

the Agency allows the 50-year grant 

term to exceed the 33-year loan 

amortization period. 

Response: The Agency has revised 

§ 3560.566(c) of the interim final rule by 

removing the reference to a 50-year 

grant term. This was done so that the 

regulation is consistent with the grant 

agreement. The grant agreement requires 

that the housing be used for authorized 

purposes for as long as it is needed. 

Topic: Several commenters focused 

on Agency requirements for loan and 

grant closings. One commenter 

suggested that all loan applicants 

should be executing loan agreements, 

and all such loan and grant agreements, 

regardless of applicant, should include 

the provisions listed in § 3560.571(b)(1) 

through (3). Three others asked the 

Agency to ensure that the 

documentation requirements for loan 

and grant closings are the same. 

One of these commenters asked about 

the restrictive-use period, which the 

proposed rule states is specified in 

subpart N. They were uncertain if this 

referred to § 3560.662(a) with its 20-year 

restrictive-use period. They asked 

whether the Agency would disallow 

prepayment (commensurate with the 

section 515 program) and instead 

require a 33-year restrictive-use period 

(commensurate with the section 514 

loan term). 

Response: The Agency has deleted 

§ 3560.571(b)(1) through (3) and has also 

revised § 3560.571 in the interim final 

rule to clarify the restrictive-use 

provisions for off-farm labor housing. 

Additional details are provided in 

§ 3560.72(a)(2) and subpart N. The 

Agency agreed with the commenters 

and revised this section. The items that 

were listed in § 3560.571(b)(1) through 

(3) have been deleted from this section 

and have been placed in the Agencyapproved loan and/or grant resolution, 

loan agreement, and grant agreement 

forms. 

Topic: Two commenters stated that 

the Agency should include provisions 

governing the alternative option to use 

section 521 rental assistance as an 

operating subsidy in off-farm migrant 

labor projects. They added that the 

option was ‘‘enacted into law a number 

of years ago and there is no legitimate 

reason for omitting it here.’’

Another commenter was disappointed 

that provisions for an operating subsidy 

on seasonal units was not incorporated 

into the Agency’s proposed rule. 

Response: The Agency has adopted 

the language from the earlier Operating 

Subsidy Proposed Rule for the interim 

final rule. 

Topic: Two commenters expressed 

their support for the Agency’s effort to 

provide increased latitude in verifying 

Farm Labor Housing tenant income and 

farm employment. 

Response: The Agency appreciates the 

commenters’ support for this provision. 

Topic: The Agency heard from a 

commenter asking that provisions for 

section 514/516 technical assistance 

grants be included in the final rule. 

Response: The Agency has adopted 

the commenter’s suggestion in the 

interim final rule at § 3560.553(b) and 

(c). 

Topic: A commenter stated that 

§ 3560.575(a) be modified to clarify that 

for Farm Labor Housing properties 

operated under the LIHTC program, the 

borrower may restrict occupancy to only 

those farm laborers who also qualify 

under the LIHTC program. 

Response: The Agency has made no 

change because the tenants, by 

definition, must comply with the LIHTC 

program requirements. 

Topic: Multiple commenters 

requested a reduced servicing 

requirement for grant-only projects, one 

for § 3560.577 and one for § 3560.578 

(which is now § 3560.578 and 

§ 3560.579 in the interim final rule). 

Response: The Agency will not reduce 

servicing requirements for grant-only 

projects because RHS believes these 

activities are necessary to ensure the 

continued viability and compliance of 

such projects. 

Topic: A commenter stated that 

§ 3560.574 should be moved to subpart 

M since it deals with on-farm labor 

housing only. 

Response: The Agency believes that 

the commenter may have 

misunderstood the intent of § 3560.574 

since it does not deal with on-farm labor 

housing, so it has made no change. 

Topic: One commenter saw no reason 

to distinguish between domestic and 

migrant farmworkers in the Agency’s 

programs. They anticipate that the 50 

percent requirement included for 

migrant farmworkers would be less 

onerous to both residents and 

borrowers. 

Response: The Agency has made no 

change because this distinction is 

necessary, since migrant farmworkers 

are the ones in greatest need and are the 

program’s primary focus.

Topic: Multiple commenters were 

interested in ensuring that surviving 

households be able to remain in housing 

but did not expect or think it reasonable 

for this to be a priority to gain tenancy. 

Response: The Agency appreciates the 

comment and has deleted the provision 

from § 3560.576(d)(1), which addresses 

a surviving household of a deceased 

farm laborer. The rights of surviving 

households to remain in their units are 

already addressed in § 3560.158. 

Topic: Multiple commenters stated 

that developers are recognizing the need 

for senior Off-Farm Labor Housing 

projects and asked that the Agency 

expressly state that elderly Farm Labor 

Housing applications may be targeted 

for admission. 

Response: The Agency has revised 

§ 3560.576(b) and (c) to make retired 

farm laborers a priority for such 

housing, with ‘‘retired farm laborer’’

being defined in subpart A to be 

workers at or in excess of 55 years old. 

Although the Agency does not finance 

Farm Labor Housing projects that are 

restricted to the elderly, Farm Labor 

Housing should be marketed to all

eligible persons, including, but not 

limited to, persons who meet the 

definition of a retired domestic farm 

laborer. 

Topic: A commenter asked about the 

policy in § 3560.575(d) in which the 

Agency allows section 514/516 

properties to be rented to nonfarmworkers. The commenter notes this 

section does not provide a process for 

seeking approval or setting time limits 

and asks that a formal waiver process be 

included in the final rule. 

Multiple commenters stated that the 

Agency should broaden its Farm Labor 

Housing statute definition to meet 

Congressional intent. One commenter 

suggested that the Agency mirror that of 

HUD (reference 42 U.S.C. 1436a(a)) and 

thereby address Congressional intent; 

specifically, the Agency should adopt 

the ‘‘legal or qualified alien’’ definition 

for all Farm Labor Housing, just as it has 

for other multi-family housing. 

Response: The Agency appreciates the 

first commenter’s suggestion and has 

revised § 3560.575(d) in the Interim 

Final Rule to account for the suggested 

change. The Agency has made no 

change to the definitions because its 

requirements for citizenship are 

statutory. 

Topic: A commenter asked that 

§ 3560.575(d) be revised to address 

when areas cease to have farmworkers, 

which would include identifying the 

exception process to allow the 

development to permanently rent to 

non-farm laborers. 

Response: The Agency has revised its 

proposal to identify a process by which 

non-farm laborer tenants are able to 

occupy units. In the interim final rule, 

§ 3560.576(e), the Agency has reserved 

however, the authority for such units to 

revert to farm laborer tenants if the need 

again arises. 

69090 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Subpart M—On-Farm Labor Housing 

Topic: Commenters stated that as long 

as the Agency’s loan is adequately 

secured, then the Agency should not 

prescribe what comprises adequate 

security. 

Response: The Agency understands 

this point and has revised § 3560.610(b) 

to read: ‘‘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 Agency-financed property 

in all instances, however, the Agency 

may accept a junior lien position if the 

Federal Government’s interests are 

adequately secured.’’ This language is 

both less prescriptive and less 

restrictive and should address the 

commenters’ concerns. 

Topic: Regarding the on-farm labor 

housing program, several commenters 

said that rather than providing 

flexibility, the proposed regulation 

would add many restrictions that would 

disqualify agricultural housing 

providers. One commenter pointed out 

that the proposed regulation fails to 

recognize or provide a transition for 

owners with section 514 loans who 

agreed not to charge rent to their 

farmworkers. 

Response: The Agency appreciates the 

commenters’ concerns. However, the 

proposed regulations do not add any 

restrictions that are not currently in 

place. With respect to a transition for 

farmworkers who agreed not to charge 

rent, the regulations do not require that 

farmworkers pay rent; the regulations 

require that if rent is charged, it must 

first be approved by the Agency. 

Topic: Several comments were 

received regarding the regulations on 

on-farm farm labor housing. 

Commenters were concerned that the 

regulation creates barriers to housing 

access for farmworkers and similarly 

disqualifies agricultural housing 

providers. One commenter noted that 

requiring proof of the tenant’s eligibility 

prior to move in would make seasonal 

housing especially difficult to secure; in 

most cases, tenants do not usually have 

to certify their eligibility until after they 

move in. Another commenter noted that 

the proposed regulation would 

disqualify agricultural housing 

providers, such as a farmer with two or 

more employees, and such restrictions 

are unhelpful. 

Response: The Agency does not know 

what was meant by the term 

‘‘agricultural housing provider.’’

However, the regulation does not make 

farmers with two or more employees 

ineligible. Requiring proof of tenant 

eligibility prior to move in simply 

conforms the on-farm regulations with 

other MFH provided by the Agency. 

Topic: Commenters stated that the 

program should use language to 

facilitate growth of the Farm Labor 

Housing program and increased 

connections between affordable housing 

nonprofit organizations and farm 

owners. One commenter suggested that 

the program should be brought in line 

with other owned and operated rental 

properties by allowing a professional 

property manager firm to manage the 

property so that the farmers can 

concentrate on farming. Another 

commenter said that the proposed rule 

should allow limited partnerships to 

participate in the ownership of on-farm 

housing, similar to that done with 

LIHTC projects.

Response: The Agency acknowledges 

the commenters’ concerns. While 

nonprofit organizations are allowed to 

work with farmers to develop on-farm 

labor housing by statute, this is not a 

specific objective of the program. While 

farmers are encouraged to manage their 

on-farm labor housing properties 

effectively, these are not conventional 

properties and should not be managed 

as such. However, there is nothing in 

the interim final rule to preclude 

professional management of on-farm 

labor housing projects. At the same 

time, the Agency does not anticipate the 

need for professional management 

except, perhaps, on rare occasions when 

there are a significant number of onfarm housing units at one farm. There is 

no statutory authority to allow on-farm 

labor housing loans to be made to 

limited partnerships. 

Topic: One comment noted that in 

addition to the program objectives in 

§ 3560.602, farmers should be allowed 

to receive grants as an incentive for 

providing affordable housing. 

Response: Under section 516 of the 

Housing Act of 1949, only the following 

entities are eligible for farm labor 

housing grants: States or political 

subdivisions thereof, Indian tribes, 

broad-based public or private nonprofit 

organizations incorporated within the 

state, and nonprofit organizations of 

farmworkers incorporated within the 

state. 

Topic: One commenter noted that the 

proposed rule should give leasing and 

renting priority to employees of the 

farmer but should also allow 

nonemployee agricultural workers an 

opportunity to rent or lease a unit if the 

units are vacant for an extended amount 

of time. Another commenter noted that 

farm borrowers should be allowed, on a 

case-by-case basis, to provide housing 

for immediate relatives if the Agency 

can document that these family 

members are farmworkers in the best 

interest of both parties and essential for 

farm operation. 

Response: The Agency acknowledges 

the commenters’ concerns. The interim 

final rule gives the Agency the authority 

to provide exceptions to on-farm labor 

housing borrowers to enable them to 

rent to ineligibles on a temporary basis. 

The borrower must, however, 

demonstrate that efforts have been made 

to fill the units with eligible applicants. 

Topic: Several comments were 

received concerning the limitations of 

the definitions of ‘‘farmer’’ and ‘‘farm 

owner’’ found in § 3560.11. Many 

commenters were concerned that such 

definitions might significantly restrict 

the pool of eligible farmer applicants. 

The commenter thought that this section 

should be amended to remove 

references to ‘‘family size farm’’

requirements and the reference to 7 CFR 

1941.4. The commenter believed that 

the regulation ‘‘de-motivates’’ farmers 

who are legitimately interested in 

housing their workforce but cannot 

participate because they are not 

included in this definition. One 

commenter noted that the program 

should be available to all farmers on an 

equal basis because the one being 

helped is the farmworker, not the 

farmer; further, the section about 

ineligible farmers should be eliminated. 

Response: The Agency acknowledges 

the commenters’ concerns. The Agency 

has revised definitions of ‘‘farm’’ and 

‘‘farm owner’’ in the interim final rule 

to be consistent with the current 

regulation and statute. In addition, a 

definition for ‘‘farm’’ is now included in 

the interim final rule. The revised 

definitions are less restrictive than those 

included in the proposed rule. 

Topic: One commenter expressed 

concern that the proposed rule would 

increase the amount of work farmers 

have to do, especially when having to 

provide information from lenders 

indicating that they are unqualified to 

obtain credit from a commercial source. 

Response: The Agency acknowledges 

the commenter’s concern. The 

requirement that borrowers must 

provide documentation that they have 

sought credit elsewhere and have been 

refused is not a new one. The goal of the 

section 514 program is to provide 

financing to those who cannot obtain 

credit elsewhere. The ‘‘test for credit’’

requirement is a statutory requirement. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69091

Section 3560.605(a)(3) of the interim 

final rule has been revised so that it is 

consistent with the statute and the prior 

regulation. 

Topic: Several commenters expressed 

concern over the strong language about 

demonstrating that the farmer could not 

develop the housing without the USDA 

assistance. They felt that the 

requirement is counterproductive and 

should be removed; tying financing to 

borrowers’ financial resources misses 

the mission of the Farm Labor Housing 

program. 

Response: The Agency wishes to 

clarify the policy described by the 

commenters. Section 3560.605(a)(3) 

states that the applicant must be unable 

to provide the housing using the 

applicant’s own resources. This is true 

for all the Agency’s direct MFH loans. 

The Agency’s mission is to provide 

financing for MFH in rural areas and/or 

for farmworkers by providing financing 

to those who cannot obtain it from 

another source. The requirement is a 

statutory requirement. 

Topic: Several comments were 

received regarding the accessibility of 

the labor housing. One commenter 

noted that the farmer should only be 

required to add accessibility features on 

a reasonable accommodation basis 

rather than a mandatory feature; 

mandatory accessibility design feature 

requirements increase costs and may act 

as a disincentive for farmers to provide 

affordable housing for workers. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

added § 3560.605(d) to state: ‘‘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).’’

Topic: Several comments addressed 

site and construction requirements. One 

commenter said that all housing should 

be built to permanent unit requirements 

because of the low-construction quality 

and lack of maintenance of seasonal 

units. The commenter went on to 

suggest building an integrated 

community of permanent and seasonal 

worker units, which would be easier to 

maintain and manage. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

modified § 3560.608(c)(2) to state: 

‘‘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.’’

Topic: There were several comments 

made concerning reserve accounts. One 

comment suggested that the reserve 

account requirement apply only when 

on-farm housing operations include 13 

or more units, rather than the proposed 

number of five or more units. Another 

commenter noted that imposing 

standards on only five or more units 

sounds good but is an unnecessary 

burden and could discourage some 

farmers from applying. 

Response: The Agency thanks the 

commenters for raising this issue and 

has modified § 3560.614 to state that the 

reserve account requirement applies 

when on-farm housing operations 

include 12 or more units. 

Topic: Several comments were 

received regarding participation with 

other funding sources. One commenter 

noted that § 3560.615 cross-references 

§ 3560.66, discussing the availability of 

rental assistance, but should make clear 

that on-farm labor housing projects may 

not receive rental assistance. Another 

commenter said that encouraging the 

use of other funding sources is 

incongruent with the rest of the 

proposed rule—the goal is to obtain 

nondebt financing for projects, not more 

debt financing. The commenter said that 

the regulation is written as if USDA 

were providing 100 percent of the 

financing, which is not always the case; 

this does nothing to help USDA partner 

with funding sources, an essential 

element. 

Response: The Agency acknowledges 

the commenters’ concerns. The 

reference to § 3560.66 in § 3560.615 

refers to situations in which the 

borrower obtains other funding sources. 

With regard to additional funding 

sources, the Agency’s intent is to 

encourage on-farm labor housing 

borrowers to obtain other funding 

sources, either debt or non-debt. There 

is no restriction against nonprofit 

organizations assisting farmers to obtain 

funds from other sources. Section 

3560.254 has been revised to clarify that 

on-farm labor housing is not eligible for 

rental assistance. 

Topic: One comment noted that the 

term of the loan should be 50 years 

instead of 33 years to allow for lower 

monthly debt service payments and 

lower monthly rent payments by the 

tenant. 

Response: The Agency appreciates the 

commenter’s concern but has made no 

change because the 33-year limit is 

statutory. 

Topic: One commenter suggested that 

funds for on-farm labor housing should 

only be provided as permanent 

financing after the development work is 

complete. 

Response: The Agency notes that onfarm labor housing borrowers are 

subject to the same financing 

requirements as off-farm labor housing 

and section 515 borrowers, as described 

in § 3560.71. 

Topic: The Agency received several 

comments concerning housing 

management and occupancy 

restrictions. One commenter noted that 

on-farm labor housing borrowers 

generally have a single-family unit, 

where imposing a management plan 

requirement is burdensome for both 

Rural Development staff and the 

borrower.

Response: The Agency acknowledges 

these concerns. The requirements for 

management plans for on-farm labor 

housing projects are minimal. 

Topic: Several comments were 

received concerning tenant eligibility. 

One commenter stated that any change 

in tenant eligibility should take 

previously existing tenants into 

consideration or grandfather them in. 

Another commenter noted that a 

definition of eligibility for Farm Labor 

Housing projects based on ‘‘annual 

income limits published by the Agency’’

will have very negative consequences 

for existing tenants; given that 

farmworkers are often some of the 

lowest paid workers, many of these 

tenants could be displaced if the 

proposed rule is adopted as currently 

written. 

Response: The Agency acknowledges 

the commenters’ concerns. However, the 

Agency wants to clarify that it has not 

changed the eligibility requirements for 

tenants of on-farm labor housing, and 

the annual income limits only apply to 

tenants of off-farm labor housing 

projects with a nonrestrictive farm labor 

clause, as stated in § 3560.575(b)(2)(iv). 

Topic: One commenter noted that the 

proposed rule requires an Affirmative 

Fair Housing Marketing Plan even 

though on-farm labor housing is by 

definition restricted to employees only. 

The commenter thought that the 

regulatory language should explain 

clearly what is expected given these 

circumstances. 

Response: Borrower’s with on-farm 

labor housing loans for less than 5 units 

are not required to submit an 

Affirmative Fair Housing Marketing 

Plan. The Agency acknowledges that the 

Affirmative Fair Housing Marketing 

Plan might be an abbreviated version 

since the borrower is required to restrict 

occupancy to farm employees. However, 

the Agency intention is to ensure that 

there are no violations of fair housing 

and civil rights laws in providing onfarm labor housing. 

69092 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Topic: Regarding establishing and 

modifying rental charges, one 

commenter noted that the Agency 

should only require sufficient financial 

information to show that the housing 

operation is operating in a nonprofit 

manner for the rental rate imposed. The 

commenter felt that the owners should 

be allowed the flexibility to provide 

budget information for the unit that is 

acceptable to the State Director. 

Response: The Agency wishes to 

clarify the issue raised by the 

commenter. The interim final rule states 

that the borrower is to document the 

need for a rent increase and obtain 

approval from the Agency in accordance 

with subpart E. Subpart E does not 

specify what the borrower must submit 

to the Agency; only that ‘‘borrowers 

must fully document that changes to 

rents and utility allowances are 

necessary to cover housing or utility 

costs.’’

Topic: One commenter thought that 

the regulations pertaining to the on-farm 

program should continue to ensure that 

existing borrowers not charge rent to 

their laborers. 

Response: The Agency appreciates the 

comment. The Agency’s policy is that 

the on-farm borrower can choose to 

charge rent or not. The interim final rule 

provides the option in § 3560.628 by 

stating ‘‘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.’’

Topic: One comment was received 

regarding security deposits. The 

commenter noted that this should only 

be addressed as required lease language 

and make no reference to multi-family 

regulations as stated as § 3560.204. 

Response: The Agency wishes to 

clarify this issue. On-farm labor housing 

borrowers are not required to charge 

security deposits. If they choose to do 

so, however, the terms set forth in 

§ 3560.204 must be followed to protect 

both the tenant and borrower and 

ensure that the borrower is in 

compliance with applicable State and 

local laws. 

Subpart N—Housing Preservation 

Topic: The Agency received 

numerous comments on the sale to 

nonprofit organizations or to public 

agencies and the priority for local 

nonprofits. Some commenters indicated 

that this requirement is too restrictive 

and will slow down the preservation 

process as it limits the entities that can 

participate. Some suggested broadening 

the definition of nonprofits to facilitate 

the participation of National and 

regional nonprofit organizations (which 

are limited by the board composition 

requirements under the current 

definition), as well as nonprofit general 

partners who otherwise agree to the use 

restrictions (which would allow for the 

use of LIHTCs and tax-exempt bonds). 

Others suggested eliminating the 

preference all together to allow for 

limited nonprofit and for-profit entities 

that agree to use restrictions. Other 

commenters, however, stated that the 

priority of nonprofit buyers is critical to 

the preservation of affordable housing 

and should be made more explicit in the 

regulation. It was also suggested that 

nonprofits be offered all available 

incentives to assist them in acquiring 

and preserving properties. 

Response: The Agency has not 

removed the sale to the nonprofit 

organization and public body process 

from the interim final rule because the 

requirement is statutory. However, the 

Agency has simplified the definition, as 

stated above under subpart A. The rule 

will retain the preference to local 

nonprofits, as that is required by statute 

as well. The Agency has also taken 

several administrative and procedural 

steps to facilitate nonprofit purchases by 

providing them better access to loans 

and advances. 

Topic: The Agency received 

numerous comments about restrictiveuse provisions. Comments fell into four 

major categories: 

• A lack of clarity about how the 

provisions are determined, 

• Opposition to restrictive-use 

provisions, 

• A call for greater use and 

enforcement of restrictive-use 

provisions, and 

• The impact of the restrictive-use 

provisions on future transfers.

Topic: There were general complaints 

about lack of clarity about the Agency’s 

regulatory authority to require 

restrictive-use provisions and the 

process by which they are determined. 

Commenters raised questions about 

specific dates cited in the rule, the 

application of the requirements to 

limited partnerships, language on 

affected households, and the exception 

for properties receiving another USDA 

loan. They also argued that there are no 

standards laid out in the rule for 

determining the applicable-use 

restrictions and objected to language 

stating that the provisions will be ‘‘as 

determined by the Agency.’’

Response: The Agency acknowledges 

the commenters’ concern and while the 

requirements are statutory, the Agency 

has revised § 3560.658 and § 3560.662 to 

clarify its requirements and provide the 

terms of the restriction. The statute (42 

U.S.C. 1472(c)) specifies which loans 

are subject to restrictive-use provisions 

and provides the terms of the 

restriction. The Agency cannot change 

this. The Agency incorporated the 

specific language for restrictions into 

forms, guided by the detailed 

descriptions at § 3560.662. 

Topic: There were also significant 

objections to the restrictive-use 

provisions in general. Commenters 

indicated that these provisions place an 

undue burden on borrowers who have 

already fulfilled the obligations of their 

agreements. Commenters also indicated 

that, in some cases, the restrictive-use 

provisions are not needed (e.g., in areas 

where other housing opportunities exist 

or in properties where other loans place 

restrictive-use provisions on the 

property). They also questioned the 10- 

and 20-year extensions to use 

restrictions. 

Response: The Agency has not 

removed the requirement for restrictiveuse provisions because it is statutory. 

However, the rule does allow alternative 

options for properties that are not 

needed in the program or have other 

restrictions in place. The Agency added 

the 10-year use restriction to provide 

owners with additional options when 

agreeing to sell to a nonprofit 

organization or public body, rather than 

imposing additional requirements. 

Topic: Several commenters stressed 

the need for effective enforcement of the 

restrictive-use provisions. They 

indicated that tenant involvement is 

important to enforcement efforts but 

that Agency action will be important as 

well. They suggested that language 

about Agency enforcement of provisions 

be included in the applicable legal 

documents. Commenters also expressed 

concern that some properties have not 

had restrictive-use provisions applied 

because of their section 8 status. They 

indicated that a property might lose its 

section 8 assistance and no longer be 

subject to affordability requirements. 

Response: The Agency will use the 

resources it has available to enforce its 

restrictive-use provisions; however, the 

involvement of tenants and other 

interested parties will be critical to 

maximizing the Agency’s enforcement 

resources. The restrictive-use provisions 

required by § 3560.662 will have to be 

included in Agency approved legal 

documents. Current regulations require 

that the availability of section 8 will not 

be considered when determining if 

restrictions are required. The Agency 

contemplates no change in that 

administrative process. 

Topic: Several commenters stated that 

the proposed rule places another 

restriction on the property if bought by 

a nonprofit/public body—not only must 

it be operated as affordable housing for 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69093

the remaining useful life of the housing, 

but it cannot be transferred to new 

owners without Agency concurrence. 

The commenters asked why the Agency 

must approve subsequent transfers if 

restrictive-use provisions bind the 

purchasers. 

Response: The Agency acknowledges 

the commenters’ concerns but has made 

no change to § 3560.659 as this 

requirement is required by 42 U.S.C. 

1472(c)(5)(E). 

Topic: The list of requirements for 

prepayment requests drew many 

comments and question on this list of 

items, the burden of complying, and 

how to comply. 

Topic: The Agency received 

numerous comments on the list of items 

required for a preservation application 

and suggested edits and changes. 

Several commenters said that 

requirement to provide 3 years of 

operating budgets should be eliminated 

because if the purchaser provides the 

Agency with a market study, the Agency 

should be assured that the market rents 

are sufficient to cover the property’s 

operating costs. Several commenters, 

however, suggested that the requirement 

for a market study be eliminated 

because of the cost factor involved, 

unless the cost can be funded through 

incentives. Commenters also suggested 

that the requirement to provide a 

balance sheet be eliminated, as the 

Agency should already have a copy, and 

that the request for the waiting list 

should be eliminated because it is 

irrelevant in determining prepayment 

eligibility. One commenter also 

suggested that the Agency distinguish 

between ‘‘complete information’’ and 

‘‘responsive information’’ as a way to 

pare down the materials to be 

submitted. 

Response: The Agency appreciates 

these comments and has significantly 

reduced the number of submissions, 

eliminating the requirements for the 

balance sheet, waiting list, operating 

budgets, and market study. The 

remaining required submissions include 

only evidence of the borrower’s ability 

to prepay and documentation of the 

borrower’s willingness to comply with 

applicable State and Federal laws on 

prepayment, including Fair Housing 

rules and tenant protection through the 

lease. With this greatly reduced 

reporting burden the Agency sees no 

need for a further delineation between 

‘‘complete’’ and ‘‘responsive’’

submissions. 

Topic: The requirements for 

prepayment requests also elicited 

numerous comments and questions 

about the burden associated with the 

application packet. Some stated that the 

amount of information required posed a 

burden on the borrowers and that the 

Agency should take on more 

responsibilities as outlined in the 

Emergency Low Income Housing 

Preservation Act (ELIPHA). One 

commenter indicated that compliance 

with State laws is important and agreed 

that the burden should be on the 

borrower to demonstrate compliance. 

Response: The Agency has made a 

serious effort to balance the burden of 

compliance with the Agency’s 

responsibility to assess the prepayment 

requests. The changes discussed above 

reduce the borrower’s burden 

considerably without jeopardizing the 

Agency’s ability to assess the request. 

Topic: Finally, commenters raised a 

number of questions about the contents 

of prepayment requests, specifically, 

how to demonstrate ability to prepay, 

lease language on prepayment, and the 

Fair Housing certification.

Response: The Interim Final Rule 

outlines the required submissions while 

leaving the detail on how to submit 

them in the handbook. The Agency 

recognizes the complexity of these 

issues and provides additional detail on 

how the Agency will make these review 

determinations in Agency guidance 

about program procedures. 

Topic: The Agency received many 

comments on the prepayment notice 

requirements, regarding the new 

frequency of the notices, the tenant/

Agency meetings, the way notice is 

provided, and responsibilities regarding 

new tenants. 

Topic: Commenters offered different 

points of view on the new prepayment 

notice and meeting requirements. Some 

argued that the new notices and the 

Agency meeting are overly burdensome 

and tend to cause confusion among 

tenants rather than provide useful 

information. However, others stressed 

the critical importance of informing 

tenants through the notices and 

meetings, and argued for further 

requirements to strengthen the notice 

requirements, such as requiring 

borrowers to provide tenant names and 

addresses as part of their prepayment 

application, allowing greater response 

time for tenants, and including the 

sample notices, currently found in 

internal Agency guidance. Commenters 

also had suggestions for the delivery of 

the notices related to the language, the 

use of regular versus certified mail, and 

the Agency’s responsibility for 

delivering the notices. 

Response: The Agency appreciates all 

the comments. The notices as outlined 

in the proposed rule are not new and 

represent, in the Agency’s estimation, 

the best compromise between burden 

for the borrowers and for the Agency 

and the tenants’ need for information. 

For example, the Agency automated 

information system called MFIS 

currently contains information on 

tenant names and addresses, and their 

income status, so borrower provision of 

these data is redundant and was 

eliminated. The rule establishes 

minimum requirements for keeping 

tenants adequately informed of the 

prepayment process at all stages 

including response times. All notices 

must be approved by the Agency and 

the Agency will consider adopting a 

pre-approved sample notice. The 

Agency feels that a further level of detail 

is unnecessary in its regulations. The 

Agency will issue subsequent guidance 

on approved notice procedures 

including content and delivery and how 

the notification process fits into the 

prepayment process. The Agency’s 

regulations do not require it to provide 

the notices. 

Topic: One commenter raised an issue 

regarding the notification of new tenants 

after a borrower has applied to prepay 

a loan. The commenter indicated that 

some borrowers might use this 

provision to warn potential tenants 

about the potential changes in the 

property to discourage low-income 

tenants from taking the units, thereby 

reducing their prepayment obligations. 

The commenter asserted that provisions 

should be put in the rule to limit this 

behavior. 

Response: The Agency acknowledges 

this comment. However, based on the 

Agency’s experience as it has worked 

with borrowers during the prepayment 

process, RHS has found that this type of 

action is not common practice. Further, 

the significant loss of rental revenue 

that would occur if borrowers took this 

type of action in an effort to obtain 

possible relief from prepayment 

obligations to tenants is a strong 

disincentive against this practice. For 

this reason, the Agency decided to make 

no change to the interim final rule. 

Topic: The Agency received many 

comments on the timeframes 

established for receiving incentives and 

closing deals with nonprofit 

organizations or public agencies. On the 

15-month timeframe for receiving 

incentives, several commenters stated 

that the new process is not significantly 

improved and urged additional 

streamlining to reduce the 15-month 

wait time. Others stressed the 

importance of securing adequate 

funding in the Agency budget to meet 

the 15-month deadline. Still others 

opposed the 15-month cap, stating that 

it violates the Agency’s responsibilities 

under ELIPHA to preserve housing and 

69094 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

will allow borrowers to opt out. On the 

24-month timeframe, several 

commenters welcomed the limit but 

requested that an exception be made in 

cases where the purchaser has not 

received adequate cooperation from the 

Agency or the borrower. Some argued 

for a 48-month timeframe to address the 

intense competition for resources, while 

others stated that 24-months is 

commercially unreasonable. Some 

commented on wait list procedures and 

proposed putting borrowers on the list 

sooner to speed up the process. 

Response: The Agency acknowledges 

the commenters’ concerns and has 

revised § 3560.660(a) to incorporate the 

suggestion for an exception to the 24-

month deadline. The Agency has 

significantly reduced the waiting period 

for incentives since the proposed rule 

was published and expects that 

performance to continue. Otherwise, the 

timeframes and wait list procedures 

remain in effect, as the most feasible 

compromises among the various 

interests. Additional details on these 

timeframes and procedures are covered 

in Agency guidance about program 

procedures. The Agency appreciates the 

commenter’ suggestions about the 

borrower’s desire to opt out but hopes 

to have sufficient resources available so 

that the waiting list timeframes remain 

relatively short, although overall 

program funding is not under the 

control of the Agency. We also note that 

borrow cooperation is a critical 

component to help meet timeframes. For 

wait list integrity, the borrower must 

accept an incentive offer before they can 

establish a position on the waiting list. 

Topic: Several comments were 

received regarding the third party 

financing in preservation transactions. 

Several commenters said that the 

proposed rule does not enumerate the 

authorities that permit use of third party 

financing and instead refers back to 

subpart I. The commenters further state 

that § 3560.406(f) prohibits the use of 

project funds to pay for such financing, 

which effectively eliminates all thirdparty financing options. 

Response: The Agency thanks the 

commenters for highlighting this issue 

and has modified § 3560.406(f) so that it 

does not eliminate participation of third 

party financing during the transfer 

process. Also, § 3560.657 clarifies that 

third party loans are acceptable as part 

of the prepayment process. The Agency 

has been and intends to continue using 

third party financing as an option when 

prepayment is requested. 

Topic: Commenters also discussed 

third-party loans as possible incentives. 

They asked that provisions be added to 

the rule to specifically allow borrowers 

to obtain an outside equity loan as a 

possible incentive. Commenters also 

asked the Agency to revise the 

regulation to more clearly recognize the 

range of financing mechanisms it has 

recently implemented through 

Administrative Notices that allow third 

parties to bring private and public 

financing into the section 515 program.

Response: The Agency finds that the 

interim final rule allows third party 

financing in § 3560.659(g). Third-party 

equity loans are permissible as long as 

they are approved by the Agency in 

accordance with subpart I. 

Topic: The Agency also heard from 

commenters focused on appraisal issues 

under subpart N. Several of these 

commenters stated that the requirement 

for two appraisals, especially for a sale 

to a nonprofit organization, is excessive. 

They stated that if the borrower and the 

Agency can agree to a sales price after 

one appraisal is conducted, then a 

second one should not be required. 

Similarly, commenters suggested that if 

the difference between the two 

appraisals is less than 10 percent they 

should split the difference, rather than 

seek a third appraisal. Commenters also 

suggested that to help streamline the 

process, the Agency should allow for 

the owner to provide an appraisal, 

subject to review and approval by the 

Agency. Finally, there were some 

comments indicating that the appraisal 

requirements are not clear. 

Response: While the Agency 

appreciates these suggestions, it has 

made no change because the 

requirement for two or three appraisals 

is statutory. In response to several 

commenters who stated that the 

appraisal requirements are confusing, 

the Agency recommends reviewing 

subpart P of this part for detailed 

information on appraisal requirements. 

Topic: The Agency received several 

comments on identity-of-interest 

relationships in preservation 

transactions. These commenters said 

that prohibiting any identity-of-interest 

between seller and buyers, particularly 

nonprofit buyers, punishes persons who 

seek to convert ownership from forprofit to nonprofit status. The 

commenters suggested that the Agency 

adopt the IRS antichurning rule 

standards that any person or entity that 

has an interest in the seller must have 

a less than 10 percent owner interest in 

the buyer. 

Response: While the Agency 

acknowledges the commenters’

concerns, it believes that there are 

sufficient numbers of nonprofit 

organizations that do not have an 

identity-of-interest relationship with 

borrowers of section 515 properties. The 

prohibition on IOI relationships is 

statutory. 

Topic: The Agency received several 

comments on the determination of 

minority impact. Some commenters 

asked for additional information on how 

the determination is made and clearer 

definitions of such terms as ‘‘market 

area,’’ ‘‘adverse impact,’’ and ‘‘housing 

opportunities for minorities.’’ Several 

commenters indicated that this 

determination is of such importance 

that the standards for conducting this 

analysis should be included in the 

interim final rule instead of in the 

handbooks. Commenters also expressed 

concern that these determinations 

sometimes fail to correctly identify 

adverse impacts. Specifically, they 

stated that the Agency sometimes made 

incorrect assumptions about the need 

for the housing based on availability of 

section 8 housing, the lack of minorities 

in the property, or the size of the units. 

They suggested additional tools for the 

analysis, including the local section 8 

wait list and a stronger definition of the 

term ‘‘market area.’’ Finally, some 

commenters ventured that the standard 

creates a new barrier to prepayment and 

is virtually impossible to meet. 

Response: The requirement regarding 

minority impact is statutory. While 

some commenters feel review criteria 

were too loose and others express 

concern that they will be too tight, the 

Agency strives to review relevant 

criteria in an objective manner. The 

Agency added language in § 3560.658(b) 

that describes the information that will 

be reviewed when the Agency makes 

this determination. The Agency agrees 

that ‘‘market area’’ needed a better 

definition and has added one to subpart 

A. Further the Agency agreed that 

‘‘adverse impact’’ needed further 

clarification and has clarified that the 

adverse impact should be 

disproportionate. The Agency also felt 

that some clarification was needed for 

‘‘housing opportunities for minorities.’’

Therefore the Agency has clarified that 

an evaluation must be made of housing 

opportunities for minority tenants, 

applicants, and the market area in 

general. As to the suggestion of using 

local section 8 waiting lists in making 

these determinations, the Agency feels 

that this level of detail is unnecessary in 

its regulations. Additional details on 

how the Agency will review relevant 

information is available in Agency 

guidance about program procedures. 

Topic: Several comments were 

received regarding the borrower’s right 

to prepay. These commenters said that 

the Agency has no right to prohibit 

prepayment because the provisions of 

ELIPHA are no longer valid, and they 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69095

stressed the Agency’s obligation to 

comply with the terms of their loan 

agreements. In addition, several 

commenters said that given the Agency 

chooses not to acknowledge the 

borrower’s right to prepay, it should 

further streamline the prepayment 

process to assist in the preservation of 

affordable housing. 

Response: The Agency’s right to 

establish conditions for prepayment is 

statutory. The Agency has simplified the 

provisions throughout subpart N of the 

interim final rule to reduce the burden 

of preparing a prepayment application 

and retain only the requirements 

necessary to meet the statutorily 

required process.

Topic: The Agency received several 

comments stating that the rule does 

little to clarify or streamline the process 

and stressing the need for alternatives to 

the prepayment process. Commenters 

emphasized the importance of an 

efficient process to keep properties in 

the program and to facilitate the 

borrower’s ability to bring new 

financing (such as tax credits) into the 

property. Some suggested revising 

specific timeframes for review and 

response. Others suggested creating 

separate tracks and alternative 

mechanisms for dealing with properties 

that meet certain conditions. For 

example, they suggested that the Agency 

create an expedited process for 

properties that are prepaying but remain 

subject to use restrictions because of 

another loan, for properties where the 

borrower preemptively rejects 

incentives, and for obsolete and highvacancy properties. Several commenters 

stated there should be two tracks for 

preservation deals, one for prepayment 

without restrictions and another for 

prepayment with restrictions, and that 

the timelines for each should be 180 and 

90 days, respectively. Others stated that 

the transfer process should be 

streamlined to facilitate transfers to 

nonprofit organizations and loan 

assumptions where the same rates and 

terms remain in place, which could 

alleviate some of the strain on the 

prepayment process by taking some 

properties out of that process. Finally, 

they suggested that the roles of the 

Preservation Office and the State Offices 

be clarified to avoid operational issues. 

Response: The Agency has made 

many changes to reduce burden and 

simplify the process, in administrative 

practices, and both in the proposed rule 

and in the interim final rule, as the 

statute allows. The Agency has also 

streamlined the procedures for transfers 

and now allows for equity loans at the 

time of transfer in subpart I and 

encourages borrowers to take this route 

in lieu of prepayment. In essence, these 

actions have now created two tracks for 

borrowers to follow to exit the program 

while preserving the affordable rental 

housing project. Otherwise the Agency 

has not adopted a separate track 

program nor a special process for 

nonprofits because the prepayment 

statute (42 U.S.C. 1472(c)) provides for 

a linear single track process. One of 

those tracks is within subpart I while 

the other is found in subpart N. Actions 

taken administratively have already 

reduced processing timeframes for most 

prepayments below the 180- and 90-day 

timeframes mentioned by the 

commenter. For example, offering 

general incentives has been a method 

the Agency has administratively 

implemented that greatly reduces 

processing time when a borrower 

indicates they have no desire to receive 

a specific incentive offer. Our 

discussion of the improvements made to 

the transfer process are detailed in our 

comments on subpart I including 

bringing new financing into the 

property. 

Topic: Several commenters stated that 

the processing of prepayment requests 

takes more time than it should, and that 

the interim final rule should include an 

application processing timeline. They 

questioned the validity of the 180-day 

threshold for submitting a proposal 

given the process can take longer than 

that and also questioned the 180-day 

rule for restricted loans as these loans 

already stipulate timeframes in the loan 

documents. They also suggested adding 

a 30-day deadline for Agency review of 

the application. 

Response: The Agency appreciates 

these comments and, as described in the 

Agency response to other public 

comments on subpart N, RHS has taken 

many steps to reduce burden, streamline 

the process and minimize delays. The 

30-day tenant and nonprofit and public 

body notice and the 180-day 

advertisement period for sales to a 

nonprofit and public body are statutory 

(42 U.S.C. 1472(c)). Additional 

information on internal Agency 

processing timelines is included in 

Agency guidance about program 

procedures. The Agency has retained 

the 180-day period before an anticipated 

prepayment as a reasonable attempt to 

allow borrowers sufficient time to meet 

their plans for a payment date in light 

of the procedural steps and possible 

contingencies they may face. Of course 

the 180-day period is a minimum notice 

period and the borrower can provide 

earlier notice if they feel that it is 

required. The interim final rule 

significantly reduced the number of 

required components of a complete 

application subject to review. This fact, 

by itself should greatly reduce the 

amount of time required by the Agency 

to review a prepayment application. 

However, the Agency has not adopted 

the suggestion for a 30-day review 

period because it considers this to be a 

matter of internal Agency procedure. 

Topic: The Agency received 

numerous comments on the public 

notice requirements. While some 

commenters indicated that the lower 

burden on the Agency would be helpful 

to the overall process, others 

complained that the requirements shift 

the notice responsibility from the 

Agency to the borrower and that this is 

burdensome to the borrower. They 

stated that the notice to other Agencies 

should be an Agency responsibility. 

They also stated that there is no 

mechanism for maintaining the contact 

lists and that existing lists are 

incomplete, outdated, and include 

insufficient contact information. They 

suggested that the owner be permitted to 

select a nonprofit organization to sell to, 

without going through the notice 

requirements, subject to Agency 

approval of the buyer. They also 

suggested that public notice be made the 

Agency’s responsibility instead of the 

borrower’s. 

Response: The Agency agrees with 

these comments and has adopted them 

into subpart N. Specifically, the Agency 

has developed a Web-based system, 

called the Prepayment Information 

Exchange (PIX), for providing electronic 

notices required during the prepayment 

process. PIX will also include a listing 

or nonprofit and public bodies that wish 

to be notified of prepayment requests or 

sales offers. The Agency also made 

changes to subpart N of the interim final 

rule that will permit the Agency to 

determine that no local nonprofits are 

available, to allow faster access to 

regional and national nonprofits. 

Topic: The discussion of incentives 

generated significant numbers of 

comments. These comments fell into 

three major areas: (1) The availability of 

incentives, (2) the structure of 

incentives, and (3) the process for 

calculating incentives. 

Topic: On the availability of 

incentives, commenters stressed the 

importance of providing promised 

incentives in a timely manner if the 

incentives are to be attractive to 

borrowers. They emphasized the need 

for sufficient budget and adherence to 

the timeframes in the processing 

timeline. 

Response: The Agency recognizes the 

need for timely provision of incentives 

and has tried to reduce burden and 

streamline the process precisely for this 

69096 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

reason. The Agency also worked to open 

avenues to third party resources to 

provide funding for equity when a 

prepayment request has been filed. 

Agency guidance about program 

procedures outlines the Agency’s 

procedures for adhering to established 

timeframes. The Agency is unable to 

control its budget.

Topic: Commenters also had a 

number of questions and comments 

about how incentives are structured: 

first, there was approval of the increased 

clarity on what the Agency can offer as 

incentives; however, this increased 

clarity inevitably raises new questions. 

One commenter asked if the Agency 

intends to retain both the specific and 

the general incentive offers. Several 

commenters asked why equity loans are 

capped at 90 percent. Some commenters 

asked that the Agency exercise 

flexibility with regard to exception rents 

where this is the most economically 

feasible approach to keeping a borrower 

in the program. And commenters had 

questions about the 50-year 

amortization period for 1 percent loans. 

Others proposed edits for clarity around 

such concepts as equity and investment. 

Response: The Agency has developed 

detailed procedures for developing 

offers, which will be described in 

Agency guidance about program 

procedures. The general and specific 

incentive offer will be retained. The 90 

percent limitation on equity loan 

incentives is statutory. The Agency has 

reserved the authority to exceed market 

rents and will follow procedural 

guidance on establishing the most valid 

amortization period. The Agency has 

developed these procedures with careful 

consideration to provide a fair incentive 

that assures adequate resources to 

borrowers so they can operate the 

properties in conformance with 

applicable property standards while 

meeting the Agency’s statutory 

responsibility to retain affordable 

housing units. The Office of Rural 

Housing Preservation will work to 

coordinate preservation efforts so that 

processes are followed consistently and 

compatible guidance is developed as 

new issues emerge. The Agency adopted 

all edits which it felt added clarity to its 

prepayment process. 

Topic: Commenters raised a number 

of questions about how the incentives 

are calculated. Some asked that if the 

Agency provides an increase in annual 

return on the investment, the increase 

should be included in the project’s 

operating expense budget to ensure that 

the borrower actually receives the 

money. Others asked about the 

applicability of the 30-year Treasury 

rate and what to do in the absence of 

such a rate. Some asked how to factor 

deferred maintenance into the 

determination of incentives. Others had 

questions about the statement that once 

established, incentive offers can not be 

renegotiated, though they can be 

changed. Still others had questions 

about the determination for equity loans 

that other incentives are not adequate. 

Response: When the Agency develops 

an incentive, it commits to rents 

sufficient to fund the incentive. The 30-

year Treasury rate has been changed to 

the 15-year Treasury rate. Further 

procedural guidance has been 

developed to clarify what the Agency 

interprets as deferred maintenance. 

Incentives are not renegotiated to 

preserve the integrity of the original 

commitment. These and other topics 

related to process rather than policy are 

described in Agency guidance about 

program procedures. The statute 

requires the Agency to determine that 

other incentives are not adequate to 

encourage an owner to accept additional 

restrictions prior to offering an equity 

loan. The Agency makes this 

determination based on its knowledge of 

the market and the borrowers’ interests. 

Topic: Commenters questioned when 

LOPEs would be used, given the 

prohibition on prepayment in properties 

where there is an adverse impact on 

tenants. Commenters also stated that 

LOPEs are not sufficient to guarantee 

housing in tight markets. Further, they 

asked why there was a time limit placed 

on tenants seeking LOPEs. 

Response: The Agency expects that 

the LOPEs will be used in properties 

where prepayment is approved. The 

Agency recognizes that the LOPEs do 

not address all housing problems faced 

by tenants. 

Topic: A number of commenters 

raised questions about the applicability 

of prepayment rules. One commenter 

observed that this subpart should 

specify that it does not apply to 

borrowers who make their last payment 

in accordance with their promissory 

note and amortization schedule. 

Another stated that the rule should 

allow for prepayment only in cases of 

payment in full as the current procedure 

does. And one commenter stated that all 

distressed properties should be eligible 

for prepayment incentive assistance, not 

simply those between 1979 and 1989. 

Response: The Agency has made no 

changes to the eligibility for 

prepayment, or the incentives, as the 

statute establishes both. The statute 

does not distinguish between distressed 

or fully operational properties. Paying 

off a mortgage in accordance with the 

last scheduled payment at the end of the 

loan’s full amortization schedule does 

not constitute prepayment. 

Topic: A few commenters suggested 

that the Office of Rental Housing 

Preservation (ORHP) adopt a broader 

strategy for preserving housing that 

addresses the long-term upkeep and 

rehabilitation of properties and the need 

to do this for funding and for new 

owners to achieve these goals. One 

commenter suggested a ‘‘recovery 

program’’ under which the ORHP would 

review and restructure financing on 

aging properties, working with for-profit 

and nonprofit developers who focus on 

troubled properties. Through this 

recovery effort, the ORHP would 

expedite transfers, prepayments, and 

loan workouts and would provide a 

subsidy clearinghouse for owners 

willing to take on troubled properties. 

Response: The Agency appreciates 

these comments and is examining new 

ways to facilitate these actions 

including examining the issues 

surrounding the ‘‘recovery program’’

concept. Any procedural changes made 

are covered in Agency guidance about 

program procedures. Any changes in 

policy identified by the Agency will be 

addressed in subsequent rulemaking as 

needed and appropriate. 

Topic: There were several comments 

on appeal rights. Some commenters 

questioned whether borrowers had the 

right to appeal the prepayment 

decisions. Others asked the tenants’

rights to an appeal and suggested that 

notices provided to tenants should 

advise them of this right. 

Response: The Agency notes that 

subpart A states that Agency decisions 

that may negatively affect an applicant 

or borrower may be appealed pursuant 

to 7 CFR part 11. Tenants have a right 

to file grievances in cases where owners 

do not fulfill their responsibilities under 

the program, as outlined in subpart D, 

however, they cannot file grievances in 

cases of displacement or other adverse 

actions as a result of loan prepayment. 

Topic: One commenter asked if in 

§ 3560.655 whether the Agency meant 

‘‘expired restricted loan’’ or ‘‘expired 

restrictive-use provisions.’’

Response: The Agency did not find 

the reference, however, at § 3560.652, 

the Agency explicitly refers to ‘‘expired 

restrictive-use provisions.’’

Topic: Commenters suggested several 

minor editorial changes for clarity in the 

section on borrower rejection of the 

incentives and asked for more detail on 

the definition of the market area. 

Response: The Agency has made 

several editorial changes to this section 

for clarity. Market area is now defined 

in subpart A of the interim final rule. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69097

Topic: A commenter asked if the 

language in § 3560.659(e) 

inappropriately excludes new moderateincome residents from moving into a 

property that is in the process of 

accepting restrictions. 

Response: Any moderate-income 

exclusion is prescribed by statute (42 

U.S.C. 1472(c)(5)(B)). The moderateincome exclusion would only take effect 

if a nonprofit or public body buys the 

project and leaves the program. 

Topic: Commenters had many 

questions about the process for selling 

to nonprofit organizations and public 

agencies. These comments focused on 

the advances, the selection of buyers, 

the sales process, and bona fide offers. 

Topic: Commenters welcomed the 

provision for advances to nonprofit 

organizations but suggested that more 

money is needed to make these sales 

occur and asked for more information 

about how the advances will occur. 

They also suggested that in addition to 

the funds, technical assistance would be 

helpful to nonprofits. 

Response: The Agency appreciates 

these comments and is striving to 

maximize the resources available to 

properties. The procedural guidance on 

how advances are requested and 

approved is covered in Agency guidance 

about program procedures. The Agency 

believes this guidance will be adequate 

and no significant change is anticipated 

from previous guidance provided in 

previous Agency instructions. 

Topic: Several commenters had 

questions about the selection of the 

nonprofit buyer. Some asked for more 

information on how to contact nonprofit 

organizations. The language in 

§ 3650.659(d) confused several 

commenters. They asked if the Agency 

is limiting nonprofit organizations to 

acquire, at most, one prepaid section 

515 property. Other commenters asked 

for guidance on how to select among 

qualified nonprofits and asked that the 

rule specify that it is permissible to 

accept the highest acceptable offer. 

Response: The Agency notes that 

§ 3650.659(d) addresses identity-ofinterest issues and does not limit the 

number of properties a nonprofit 

organization can acquire. The 

prohibition on the IOI between 

purchasing nonprofit or public body 

entities and entities that have prepaid a 

loan is statutory. The rule does address 

the selection between similar offers at 

§ 3560.659(f). 

Topic: Commenters also had 

questions on the sales process in 

general. They suggested edits to several 

parts of § 3560.659 for clarity. 

Commenters asked for more clarity on 

the information to be provided to 

potential nonprofit buyers and offered 

some additional suggestions. Two 

commenters also asked that the rule 

specify some limits on the disclosure of 

information provided by the borrower to 

a prospective buyer. 

Response: Section 3650.659 of the 

interim final rule describes the types of 

information to be made available so that 

potential purchasers understand the 

project’s physical and operational 

status. The Agency guidance about 

program procedures provides specific 

examples and added clarity of what 

borrowers must release to potential 

nonprofit buyers to provide sufficient 

information to allow for an informed 

offer to purchase. 

Topic: Commenters asked for a more 

extensive definition of a ‘‘bona fide’’

offer, for example, clarifying how 

committed an offerer’s financing must 

be. 

Response: No further guidance will be 

provided on whether an offer is bona 

fide in this rule. The Agency feels that 

sufficient guidance is already provided 

in the rule and also independently 

reviews this issue (for example see 

§ 3560.659(e)(3)). However the Agency 

does want to note that in order to be a 

bona fide offer, the offer must be 

consistent with the appraised value 

established in accordance with 

§ 3560.659(a). The Agency will 

subsequently provide additional 

guidance on the factors it will use to 

evaluate whether an offer is bona fide. 

Section 3650.659(k) of the interim final 

rule also establishes a 24-month 

timeframe for the completion of the 

transaction. Since this is a business 

transaction, the credibility of any sales 

transaction will not be established in a 

regulation but by the terms of the sales 

contract. 

Topic: Commenters noted that all 

agreements currently reference 7 CFR 

part 1930, subpart C and will therefore 

need to be updated. 

Response: The Agency appreciates 

these comments and has updated the 

references in the agreements.

Subpart O—Unauthorized Assistance 

Topic: One commenter expressed 

concern that the focus of this subpart 

was solely on unauthorized assistance, 

and that the Agency also specifically 

should address cases where tenants 

receive ‘‘too little assistance’’ because 

they inadvertently over report their 

income or do not know the exclusions 

or deductions to which they are 

entitled. 

Response: The Agency appreciates the 

concern and will consider this 

suggestion as it updates its internal 

Agency procedures. 

Topic: Another commenter noted that 

the proposed rule does not explicitly 

establish the policy that repayment 

plans need to be feasible given an 

tenant’s capacity to pay.

Response: The Agency believes that 

§ 3560.705(c) provides adequate 

guidance regarding this issue. No set 

structure is given intentionally, so 

flexibility is available depending on the 

tenant’s situation. It should be noted, 

that the Agency is committed to 

collecting unauthorized assistance that 

was received by either the borrower or 

tenant. 

Topic: Multiple commenters 

indicated that they did not see an 

explicit statement in the rule 

establishing that when tenants receive 

unauthorized assistance due to borrower 

error, the borrower may not seek to 

recover this unauthorized assistance 

from the tenant. 

Response: The Agency acknowledges 

the comment, and notes that this was 

the Agency’s intent in the proposed 

rule. RHS has revised the language in 

§ 3560.708(d) to clarify this policy. 

Topic: Several commenters addressed 

the topic of using project funds to pay 

for unauthorized assistance. Several 

commenters agreed with the language in 

the proposed rule prohibiting the use of 

project funds to pay for unauthorized 

assistance due to borrower error. Other 

commenters strongly disagreed, noting 

that because the program rules are 

complex, honest and/or inadvertent 

mistakes can occur. These commenters 

noted that in the cases of honest 

mistakes, the additional funds go to the 

project or the tenant, not to the manager 

or borrower. They requested that the 

Agency prohibit the use of project funds 

to repay unauthorized assistance only in 

cases of borrower fraud. 

Response: The Agency agrees with the 

commenters that the prohibition on 

using project funds to repay 

unauthorized assistance should only 

apply to cases of borrower fraud. The 

Agency has made this change in 

§ 3560.705(g). 

Topic: Several commenters addressed 

the language in the proposed rule 

relieving borrowers of responsibility for 

seeking repayment of unauthorized 

assistance to tenants in cases when the 

tenant has moved out of the property. 

Numerous commenters agreed with this 

change, noting that borrowers have very 

little practical authority to compel 

tenants to repay such funds once they 

no longer live at the property. They also 

noted that the process of trying to 

pursue former tenants can often be 

difficult and time-consuming for staff, 

69098 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

and collection agencies may not always 

be a viable option. Other commenters 

strongly disagreed with the policy as 

presented in the proposed rule. They 

indicated that borrowers often have the 

best information about such persons and 

often have provided the information to 

a collection agency. These commenters 

expressed concern that relieving 

borrowers of this responsibility will 

only increase the burden on Rural 

Development staff who are not in as 

strong a position to collect these funds. 

Response: The Agency acknowledges 

the concerns raised by commenters but 

has decided to retain the policy as 

described in the proposed rule because 

this policy gives RHS greater flexibility 

to apply resources cost-effectively 

toward the cases that most deserve to be 

pursued and reduces the burden on 

borrowers and projects. No changes to 

the regulation were made in response to 

these comments. 

Topic: Multiple commenters 

expressed concern that some of the 

language in the subpart appeared to 

hold borrowers responsible for the acts 

of residents. The commenters agreed 

that borrowers have a responsibility to 

take action to identify and collect 

unauthorized assistance received by 

tenants but took the position that 

borrowers are not responsible for 

another party’s fraud or 

misrepresentations of income. 

Response: Borrowers must use due 

diligence in verifying tenant income. 

The Agency, however, acknowledges 

the concerns expressed by the 

commenters and has simplified and 

clarified the language in § 3560.708. 

Topic: Multiple commenters 

expressed support for the use of offsets 

as an effective tool for collecting 

unauthorized assistance, and one 

commenter described how it and the 

Treasury’s Cross-Servicing Program had 

worked well. 

Response: The Agency appreciates 

these comments. 

Topic: One commenter questioned the 

reference to 7 CFR 3550.210 regarding 

the use of offsets and asked whether a 

more appropriate reference would be to 

7 CFR part 3. 

Response: The Agency understands 

the question but has made no change 

because the reference to the Single 

Family Housing regulation is specific to 

housing programs. 

Topic: Multiple commenters asked 

questions about procedures related to 

unauthorized assistance and 

enforcement referrals. Another 

commenter perceived inconsistencies 

between the proposed rule and the 

program handbooks. 

Response: The Agency will describe 

how it intends to address unauthorized 

assistance and enforcement referrals 

when it updates its internal Agency 

procedures in conjunction with the 

issuance of the interim final rule. 

Topic: One commenter suggested 

asking tenants to sign a document 

similar to an Applicant Certification 

related to Federal Collection Policies for 

Consumer or Commercial Debt at the 

time that they apply for occupancy as a 

possible way to further protect the 

government’s interests. 

Response: This form is not necessary 

to be completed by the tenant. The 

Tenant Certification form has been 

amended to provide adequate language 

to protect the government’s interests.

Subpart P—Appraisals 

Topic: Several commenters asked the 

Agency to clarify the circumstances 

when the different types of appraisals 

identified in the regulation should be 

performed. In particular, multiple 

commenters asked that the regulation 

indicate that a ‘‘value-in-use’’ appraisal 

is needed when a project is receiving 

another type of housing assistance. 

Another commenter wanted 

clarification that an ‘‘as-improved’’

appraisal is needed when a project is 

being rehabilitated. Further, some 

commenters asked for clarification 

about the methods to be used in 

conducting the appraisals.

Response: The Agency has clarified 

the language in this subpart. In making 

the revisions, the Agency has used 

terminology that reflects current use 

within the appraisal industry in an 

effort to reduce the potential for 

confusion when a borrower or Rural 

Development requests an appraisal. 

Information about methods to be used 

when conducting appraisals will be 

provided in the program handbooks. 

Topic: Multiple commenters 

expressed concern about the language in 

the proposed rule restricting the release 

of appraisals to borrowers. 

Response: The Agency acknowledges 

the concern raised by the commenters 

and has revised § 3560.752(c) of the 

proposed rule (now § 3560.752(d) of the 

interim final rule) to allow the release 

of appraisals to borrowers or applicants 

upon their request. 

Topic: One commenter expressed 

concern that the terms ‘‘security value’’

and ‘‘value-in-use’’ were not adequately 

defined. 

Response: The Agency provides 

further clarification of the definition of 

‘‘security value’’ in the handbooks. RHS 

has deleted the term ‘‘value-in-use’’

from the regulation and has included 

the term ‘‘market value, subject to 

restricted rents’’, along with a 

definition, in this subpart. The latter 

term will be more readily understood by 

appraisers and users of appraisals. 

Topic: One commenter expressed 

concern that the language in this 

subpart contradicts the definition of 

current appraisal in subpart A. 

Response: The Agency has made the 

language consistent with the subpart A 

definition. 

Topic: One commenter expressed 

concern about using appraisals that are 

more than 12 months old if there is 

mutual agreement between the Agency 

and the borrower or applicant because 

this allowance could be abused. 

Response: An exception to the use of 

a current appraisal if the Agency and 

the applicant or borrower mutually 

agree to the use of an appraisal that is 

not current is considered by the Agency 

a prudent policy that allows for 

flexibility in individual cases that 

warrant it. It is unlikely that this policy 

could be abused if the Agency and the 

applicant, or borrower, both agree to it. 

Therefore, no change has been made 

based on this comment. 

Topic: One commenter stated that 

§ 3560.753 implied that appraisers had 

to be members of a professional 

organization to do appraisals, which 

conflicts with State licensing laws. 

Response: The Agency did not intend 

that membership in a professional 

organization is a qualification 

requirement for appraisers to write 

appraisals for the Agency. The Agency 

revised paragraph (b) of this section to 

clarify that MFH appraisals prepared for 

the Agency will be written by Agency 

appraisers or independent fee appraisers 

who are State-certified general 

appraisers, certified or licensed in the 

state where the property is located. 

Topic: One commenter requested that 

the proposed rule include a statement 

on due diligence and that due diligence 

be conducted in accordance with 

American Society for Testing and 

Materials standards. 

Response: Agency appraisal 

procedures concerning environmental 

issues that might impact value simply 

clarify established regulatory 

requirements and are being provided in 

the updated internal Agency procedures 

being prepared in conjunction with the 

issuance of the interim final rule. 

Topic: One commenter questioned 

whether the phrase ‘‘consummation of a 

sale as of a specified date’’ in § 3560.752 

is inconsistent with the sale to a 

nonprofit organization under subpart N. 

Response: The Agency has made no 

change based on this comment because 

the phrase ‘‘consummation of a sale as 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69099

of a specified date’’ is part of the most 

commonly used definition of ‘‘market 

value’’ used in the appraisal industry. 

The phrase is an essential part of the 

definition and is not inconsistent with 

sale procedures under subpart N. 

Topic: One commenter expressed 

concern that subpart P uses terms and 

language that are inconsistent with the 

Uniform Standards of Professional 

Appraisal Practice (USPAP) and 

appraisal literature in general.

Response: The Agency has made 

minor wording changes throughout the 

subpart as suggested to be consistent 

with USPAP. 

Topic: One commenter suggested that 

the Agency’s handbook language 

regarding appraisals could be a guide for 

the regulation. 

Response: The Agency agrees with the 

commenter. Updated Agency internal 

procedures being issued in conjunction 

with the interim final rule will clarify 

procedures for satisfying the 

requirements established by this 

subpart. 

Discussion of Comments—Proposed 

Rule Regarding Operating Assistance 

for Off-Farm Migrant Farmworker 

Projects 

The proposed rule was published in 

the Federal Register on November 2, 

2000 (65 FR 65790), with a 60-day 

comment period that ended January 2, 

2001. Four comments were received 

about the language in the proposed rule. 

The public comments about the 

proposed rule are discussed below. The 

regulatory provisions of operating 

assistance for Off-Farm Labor Housing 

projects are now addressed in 7 CFR 

part 3560, subpart L. RHS sincerely 

appreciates the time and effort of all 

commenters. 

Topic: Several commenters noted that 

Pub. L. 106–569 had been enacted since 

the publication of the proposed rule, 

and suggested that the rule be revised to 

include the provisions from this statute 

allowing the use of section 521 funds as 

an operating subsidy in Off-Farm Labor 

Housing projects that house both 

migrant and year-round farmworkers. 

Response: The Agency agreed with 

the commenters and incorporated the 

provisions of Pub. L. 106–569 allowing 

the use of section 521 as an operating 

subsidy in Off-Farm Labor Housing 

projects that house both migrant and 

year-round farmworkers in § 3560.575(a) 

of the interim final rule. 

Topic: Multiple commenters 

expressed concern that in some cases 

MTFS data will not exist and suggested 

that the regulations allow alternative 

methods for establishing prevailing 

migrant farmworker incomes and the 

amount of income from farmwork. 

Response: The Agency agreed with 

the commenters. Neither the proposed 

rule nor the final rule mandated the use 

of MTFS data. Owners may utilize other 

reliable data to establish the average 

adjusted monthly household income of 

migrant farmworker households in the 

area. 

Topic: One commenter stated that 30 

percent of a migrant worker’s income is 

more than a worker can afford for rent 

because most migrant workers also have 

to bear the cost of housing at their home 

base as well. This commenter suggested 

that 20 percent is a more reasonable 

portion of a migrant farmworker’s 

income to be used for housing. 

Response: The Agency acknowledges 

the commenter’s concern and 

considered the suggestion. However, the 

Agency retained 30 percent as the 

standard for the amount of income 

occupants of such housing are able to 

pay toward shelter costs in § 3560.574 

(c)(1) of the interim final rule. The 

Agency retained this standard because it 

enables the program to serve more 

farmworkers with the available funds, 

while keeping the amount that tenants 

must pay for shelter reasonable by the 

standard used in many other affordable 

housing programs, such as the section 

515 program. Further, the Agency 

retained this standard to keep it 

consistent with the standard used in the 

Agency’s section 515 rental housing 

program. 

Topic: One commenter suggested that 

operating assistance be paid in a single 

annual payment, instead of the 

proposed equal monthly payments. The 

commenter observed that during the 

peak operating season cash demands are 

higher and that monthly payments 

could cause cash flow problems for 

properties during the peak season. 

Response: The Agency acknowledges 

the commenter’s concern and 

considered the suggestion. However, the 

Agency retained the monthly payment 

provision in § 3560.574(c)(3) of the 

interim final rule. The Agency 

acknowledges that cash flow may vary 

during the year, however, it believes 

that these fluctuations should not be a 

problem for borrowers operating such 

projects. Existing projects should be 

fiscally sound and have adequate 

operating reserves to cover any shortterm operating deficiencies. Further, 

new projects are required to have a two 

percent operating reserve to offset any 

short-term cash deficiencies. 

Topic: One commenter noted that 

since operating assistance payments are 

estimated, there should be a mechanism 

for adjusting the actual assistance 

payments if estimates are incorrect. 

Response: The Agency agrees with the 

commenter’s remark. The Agency notes 

that the provision for annual 

adjustments was contained in the 

proposed rule at § 1944.182(b)(3) and is 

included in the interim final rule. In 

§ 3560.574(a) of the interim final rule, 

the Agency established that the amount 

of operating assistance payments is 

determined each year based on the 

project’s budget, and may not exceed 90 

percent of the annual operating costs 

attributable to the migrant units. The 

Agency notes that if the payments for 

the previous year resulted in a shortfall 

or a surplus, these circumstances can be 

addressed in the budget for the coming 

year, and consequently in the operating 

assistance payment amounts for the 

coming year. 

Regulatory Crosswalk 

The following is a crosswalk that 

shows where the content of the 14 

regulations that have been consolidated 

can be found in 7 CFR part 3560.

Topic Previous location 

Location in: 

7 CFR part 3560 Handbooks 

General Provisions and Definitions:Numerous Instructions: Subpart A: All Three Handbooks:

Civil rights ................................... 7 CFR part 1901, subpart E ......... § 3560.2 ........................................ Loan Origination Chapters 1 & 3, 

Asset Management Chapter 1, 

Project Servicing Chapter 1. 

State, local, or tribal laws ........... 7 CFR 1930.105(b)(6); 7 CFR 

1944.53(c)(1); 7 CFR 

1944.164(e)(2)(ii); 7 CFR 

1944.169(c)(3); 7 CFR 

1944.224(d).

§ 3560.5 ........................................ Loan Origination Chapter 1, Asset 

Management Chapter 1, Project 

Servicing Chapter 1. 

69100 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Topic Previous location 

Location in: 

7 CFR part 3560 Handbooks 

Borrower responsibility and requirements.7 CFR 1944.211(b); 7 CFR 

1930.101; 7 CFR part 1930, 

subpart C, Exhibit B, Para. III.

§ 3560.6 ........................................ Loan Origination Chapters 3–13, 

Asset Management Chapters 

3–9, Project Servicing Chapters 

4–15. 

Administrator’s exception authority.7 CFR 1930.144 ........................... § 3560.8 ........................................ Loan Origination Chapter 1, Asset 

Management Chapter 1, Project 

Servicing Chapter 1. 

Definitions ................................... All regulations listed under ‘‘Implementation Proposal’’.§ 3560.11 ...................................... Loan Origination, Asset Management, Project Servicing, 

Throughout all three. 

Direct Loan and Grant Origination:7 CFR Part 1944, Subpart E: Subpart B: Loan Origination:

Eligible use of funds ................... 7 CFR 1944.212 ........................... § 3560.53 ...................................... Loan Origination, Chapter 4. 

Processing Section 515 housing 

proposals.

7 CFR 1944.231 ........................... § 3560.56 ...................................... Loan Origination, Chapter 4. 

Initial operating capital contribution.7 CFR 1944.211(a)(6) .................. § 3560.64 ...................................... Loan Origination, Chapter 4. 

Reserve account ........................ 7 CFR part 1944, subpart E, Exhibit A–9, Para. 10.b.§ 3560.65 ...................................... Loan Origination, Chapter 4. 

Participation with other funding 

or financing sources.

7 CFR 1944.233 ........................... § 3560.66 ...................................... Loan Origination, Chapter 4. 

Rates and terms for section 515 

loans.

7 CFR 1944.214 ........................... § 3560.67 ...................................... Loan Origination, Chapter 5. 

Permitted return on investment 

(ROI).

7 CFR 1944.215(n) ....................... § 3560.68 ...................................... Loan Origination, Chapter 5. 

Supplemental requirements for 

congregate housing and group 

homes.

7 CFR 1944.224 ........................... § 3560.69 ...................................... Loan Origination, Chapter 11. 

Subsequent loans ...................... 7 CFR 1944.237 ........................... § 3560.73 ...................................... Loan Origination, Chapter 10. 

Borrower Management and Operations Responsibilities:7 CFR Part 1930, Subpart C, Exhibit B:Subpart C: Asset Management:

Housing project management .... 7 CFR part 1930, subpart C, Exhibit B, Para. V.§ 3560.102 .................................... Asset Management, Chapter 3. 

Maintaining housing projects ...... 7 CFR part 1930, subpart C, Exhibit B, Para. X.§ 3560.103 .................................... Asset Management, Chapter 5. 

Fair housing ............................... 7 CFR 1930.103 and 104, 7 CFR 

Part 1930, Subpart C, Exhibit 

B, Para. VI.

§ 3560.104 .................................... Chapter 1 in all 3 Handbooks 

Asset Management Chapter 6. 

Insurance and taxes ................... 7 CFR part 1930 subpart C, Exhibit B, Para. XV.§ 3560.105 .................................... Asset Management Chapter 3. 

Multi-Family Housing Occupancy:7 CFR Part 1930, Subpart C, Exhibit B:Subpart D: Asset Management:

Tenant eligibility .......................... 7 CFR part 1930, subpart C, Exhibit B, Para. VI.§ 3560.152 .................................... Asset Management Chapter 6. 

Calculation of household income 

and assets.

7 CFR part 1930, subpart C, Exhibit B, Para. VII.§ 3560.153 .................................... Asset Management Chapter 6. 

Tenant selection ......................... 7 CFR part 1930, subpart C, Exhibit B, Para. VI.§ 3560.154 .................................... Asset Management Chapter 6. 

Assignment of rental units and 

occupancy policies.

7 CFR part 1930, subpart C, Exhibit B, Para. VI.§ 3560.155 .................................... Asset Management Chapter 6. 

Lease requirements .................... 7 CFR part 1930, subpart C, Exhibit B, Para. VIII.§ 3560.156 .................................... Asset Management Chapter 6 

Occupancy rules ......................... 7 CFR part 1930, subpart C, Exhibit B, Para. VIII.§ 3560.157 .................................... Asset Management Chapter 6. 

Changes in tenant eligibility ....... 7 CFR part 1930, subpart C, Exhibit B, Para. VI.§ 3560.158 .................................... Asset Management Chapter 6. 

Termination of occupancy .......... 7 CFR part 1930, subpart C, Exhibit B, Para. XIV.§ 3560.159 .................................... Asset Management Chapter 6. 

Tenant grievances ...................... 7 CFR part 1944, subpart L ......... § 3560.160 .................................... Asset Management Chapter 6. 

Rents: 7 CFR Part 1930, Subparts B 

and C:

Subpart E: Asset Management:

Establishing rents and utility allowances.7 CFR part 1930, subpart C, Exhibit C.§ 3560.202 .................................... Asset Management Chapter 7. 

Tenant contributions ...................... 7 CFR part 1930, subpart C, Exhibit B, Para. II.§ 3560.203 .................................... Asset Management Chapter 7. 

Security deposits and membership fees.7 CFR part 1930, subpart C, Exhibit B, Para. VIII H.§ 3560.204 .................................... Asset Management Chapter 7. 

Rent and utility allowance changes 7 CFR part 1930, subpart C, Exhibit C.§ 3560.205 .................................... Asset Management Chapter 7. 

Rents during eviction or failure to 

recertify.

7 CFR part 1930, subpart C, Exhibit B, Para. XIV.A.§ 3560.208 .................................... Asset Management Chapter 7. 

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Topic Previous location 

Location in: 

7 CFR part 3560 Handbooks 

Special note rents (SNRs) ......... 7 CFR part 1930, subpart C, Exhibit C, Para. IX.§ 3560.210 .................................... Asset Management Chapter 7. 

Rental Subsidies: 7 CFR Part 1930, Subpart C, Exhibit E :Subpart F: Asset Management:

Authorized rental subsidies ........ 7 CFR part 1930, subpart C, Exhibit E, Para. II.§ 3560.252 .................................... Asset Management Chapter 8. 

Eligibility for rental assistance .... 7 CFR part 1930, subpart C, Exhibit E, Para. II. A.§ 3560.254 .................................... Asset Management Chapter 8. 

Rental assistance payments ...... 7 CFR part 1930, subpart C, Exhibit E, Para. X.§ 3560.256 .................................... Asset Management Chapter 8. 

Assigning rental assistance ........ 7 CFR part 1930, subpart C, Exhibit E, Para. XI.§ 3560.257 .................................... Asset Management Chapter 8. 

Rental subsidies from non-Agency sources.7 CFR part 1930, subpart C, Exhibit B, Paras. IV. C, D, and E.§ 3560.260 .................................... Asset Management Chapter 8 

Financial Management: 7 CFR Part 1930, Subpart C, Exhibit B:Subpart G: Asset Management:

Accounting, bookkeeping, budgeting, and financial management systems.7 CFR 1930.122, 7 CFR part 

1930, subpart C, Exhibit B, 

Para. XIII.

§ 3560.302 .................................... Asset Management Chapter 4. 

Housing project budgets ............ 7 CFR part 1930, subpart C, Exhibit B, Para. XII.A.§ 3560.303 .................................... Asset Management Chapter 4. 

Initial operating capital ............... 7 CFR part 1930, subpart C, Exhibit B, Para. XIII.B.2.a.(1).§ 3560.304 .................................... Asset Management Chapter 4. 

Return on investment ................. 7 CFR part 1930, subpart C, Exhibit B, Para. XII.A.8.§ 3560.305 .................................... Asset Management Chapter 4. 

Reserve account ........................ 7 CFR part 1930, subpart C, Exhibit B, Para. XIII.B.2.c.§ 3560.306 .................................... Asset Management Chapter 4. 

Annual financial reports .............. 7 CFR 1930.122(b)(4); 7 CFR 

part 1930, subpart C, Exhibit 

A–1.

§ 3560.308 .................................... Asset Management Chapter 4. 

Agency Monitoring: 7 CFR Part 1930, Subpart C: Subpart H: Asset Management:

Agency monitoring scope, purpose, and borrower responsibilities.7 CFR 1930.109, 110, 113, 117 .. § 3560.352 .................................... Asset Management Chapter 9. 

Scheduling of on-site monitoring 

reviews.

7 CFR 1930.119(d) ....................... § 3560.353 .................................... Asset Management Chapter 9 

Borrower response to monitoring 

review notifications.

7 CFR 1930.119(f) ........................ § 3560.354 .................................... Asset Management Chapter 9. 

Servicing: 7 CFR Part 1951, Subpart A and 

7 CFR Part 1965, Subpart B:

Subpart I: Project Servicing:

Account servicing ....................... 7 CFR part 1951, subpart A ......... § 3560.403 .................................... Project Servicing Chapter 4. 

Final loan payments ................... 7 CFR part 1951, subpart D ......... § 3560.404 .................................... Project Servicing Chapter 4. 

Borrower organizational structure or ownership interest 

changes.

7 CFR 1965.63 ............................. § 3560.405 .................................... Project Servicing Chapter 5. 

Multi-family housing ownership 

transfers or sales.

7 CFR 1965.65 ............................. § 3560.406 .................................... Project Servicing Chapter 7 

Subordinations or junior liens 

against security property.

7 CFR 1965.83 ............................. § 3560.409 .................................... Project Servicing Chapter 8. 

Consolidations ............................ 7 CFR 1965.68 ............................. § 3560.410 .................................... Project Servicing Chapter 11. 

Special Servicing, Enforcement, 

Liquidation, and Other Actions:

Numerous Instructions: Subpart J: Project Servicing:

Monetary and non-monetary defaults.7 CFR 1955.15(d)(2) .................... § 3560.452 .................................... Project Servicing Chapter 10 

Workout agreements .................. 7 CFR part 1965, subpart B, Exhibit B.§ 3560.453 .................................... Project Servicing Chapter 10. 

Special servicing actions related 

to housing operations.

7 CFR part 1930, subpart C, Exhibit C, Para. IX.§ 3560.454 .................................... Project Servicing Chapter 10 

Special servicing actions related 

to loan accounts.

7 CFR 1965.85 ............................. § 3560.455 .................................... Project Servicing Chapter 10. 

Liquidation .................................. 7 CFR part 1955, subpart A ......... § 3560.456 .................................... Project Servicing Chapter 12 

Negotiated debt settlement ........ 7 CFR 1956.57(c) ......................... § 3560.457 .................................... Project Servicing Chapter 12. 

Management and Disposition of 

Real Estate Owned (REO) 

Properties:

7 CFR Part 1955, Subparts B 

and C:

Subpart K: Project Servicing:

Conversion of single family type 

REO property to multi-family 

housing use.

7 CFR 1955.114(c) ....................... § 3560.506 .................................... Project Servicing Chapter 14. 

69102 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

Topic Previous location 

Location in: 

7 CFR part 3560 Handbooks 

Off-Farm Labor Housing: 7 CFR Part 1944, Subpart D: Subpart L: Loan Origination:

Eligibility requirements for offfarm labor housing loans and 

grants.

7 CFR 1944.157 ........................... § 3560.555 .................................... Loan Origination Chapter 13. 

Design and construction requirements.7 CFR part 1944, subpart D, Exhibit A–3.§ 3560.559 .................................... Loan Origination Chapters 3 & 13. 

Loan and grant limits .................. 7 CFR 1944.164 ........................... § 3560.562 .................................... Loan Origination Chapters 5 & 13. 

Participation with other funding 

or financing sources.

7 CFR 1944.163 ........................... § 3560.565 .................................... Loan Origination Chapters 6 & 12. 

Loan and grant rates and terms 7 CFR 1944.159 ........................... § 3560.566 .................................... Loan Origination Chapters 5 & 13. 

Supplemental requirements for 

seasonal off-farm labor housing.

7 CFR 1944.163(e) ....................... § 3560.568 .................................... Loan Origination Chapter 13. 

Rental assistance ....................... 7 CFR 1944.182 ........................... § 3560.573 .................................... Loan Origination Chapters 4 & 13, 

Asset Management Chapter 8. 

Occupancy restrictions ............... 7 CFR 1944.154 ........................... § 3560.576 .................................... Loan Origination Chapter 13, 

Asset Management Chapter 6. 

Tenant priorities for labor housing.7 CFR 1944.154 ........................... § 3560.577 .................................... Loan Origination Chapter 13, 

Asset Management Chapter 6. 

On-Farm Labor Housing: 7 CFR Part 1944, Subpart D: Subpart M: Loan Servicing:

Eligibility requirements ............... 7 CFR 1944.157 ........................... § 3560.605 .................................... Loan Origination Chapter 13. 

Site and construction requirements.7 CFR part 1944, subpart D, Exhibit A–3.§ 3560.608 .................................... Loan Origination Chapters 3 & 13. 

Loan limits .................................. 7 CFR 1944.164 ........................... § 3560.612 .................................... Loan Origination Chapters 5 & 13. 

Reserve accounts ...................... 7 CFR part 1944, subpart E, Exhibit A–9, Para. 10.b.§ 3560.614 .................................... Loan Origination Chapters 4 & 13. 

Participation with other funding 

sources.

7 CFR 1944.163 ........................... § 3560.615 .................................... Loan Origination Chapters 6 & 13. 

Rates and terms ......................... 7 CFR 1944.159 ........................... § 3560.616 .................................... Loan Origination Chapters 5 & 13. 

Supplemental requirements for 

on-farm labor housing.

7 CFR 1944.163(e) ....................... § 3560.618 .................................... Loan Origination Chapter 13. 

Housing management and operations.7 CFR part 1944, subpart D, Exhibit B.§ 3560.623 .................................... Loan Origination Chapters 13, 

Asset Management Chapter 3. 

Occupancy restrictions ............... 7 CFR 1944.154 ........................... § 3560.624 .................................... Loan Origination Chapters 13, 

Asset Management Chapter 6. 

Housing Preservation: 7 CFR Part 1965, Subpart E: Subpart N: Project Servicing:

Prepayment and restrictive-use 

categories.

7 CFR 1965.208 and 209 ............. § 3560.652 .................................... Project Servicing Chapter 15. 

Prepayment requests ................. 7 CFR 1965.205 ........................... § 3560.653 .................................... Project Servicing Chapter 15. 

Tenant notification requirements 7 CFR 1965.206(b)(5) and (b)(6); 

7 CFR 1965.215(e)(3) and (f)(2).

§ 3560.654 .................................... Project Servicing Chapter 15. 

Agency requested extension ...... 7 CFR 1965.215(f)(2) ................... § 3560.655 .................................... Project Servicing Chapter 15. 

Incentive offers ........................... 7 CFR 1965.213 ........................... § 3560.656 .................................... Project Servicing Chapter 15. 

Processing and closing incentive 

offers.

7 CFR 1965.214 ........................... § 3560.657 .................................... Project Servicing Chapter 15. 

Borrower rejection of incentive 

offer.

7 CFR 1965.214(b) ....................... § 3560.658 .................................... Project Servicing Chapter 15. 

Sale or transfer to nonprofit organizations and public bodies.7 CFR 1965.217 ........................... § 3560.659 .................................... Project Servicing Chapter 15. 

Acceptance of prepayments ...... 7 CFR 1965.215 ........................... § 3560.660 .................................... Project Servicing Chapter 15. 

Unauthorized Assistance: 7 CFR Part 1951, Subpart N: Subpart O: Project Servicing:

Identification of unauthorized assistance.7 CFR 1951.656 ........................... § 3560.703 .................................... Project Servicing Chapter 9. 

Unauthorized assistance determination notice.7 CFR 1951.657 ........................... § 3560.704 .................................... Project Servicing Chapter 9. 

Recapture of unauthorized assistance.7 CFR 1951.658 ........................... § 3560.705 .................................... Project Servicing Chapter 9. 

Program participation and corrective actions.7 CFR 1951.658(b) ....................... § 3560.707 .................................... Project Servicing Chapter 9. 

Unauthorized assistance received by tenants.7 CFR 1951.661(a)(3) .................. § 3560.708 .................................... Project Servicing Chapter 9. 

Demand letter ............................. 7 CFR 1951.658(c) ....................... § 3560.709 .................................... Project Servicing Chapter 9. 

Appraisals: 7 CFR Part 1922, Subpart B: Subpart P: Project Servicing:

Appraisal use, request, review, 

and release.

7 CFR 1922.52 ............................. § 3560.752 .................................... Loan Origination Chapter 7, 

Project Servicing Chapter 8. 

Agency appraisal standards and 

requirements.

7 CFR part 1922, subpart B, Exhibit A.§ 3560.753 .................................... Loan Origination Chapter 7, 

Project Servicing Chapter 7. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69103

List of Subjects 

7 CFR Part 1806 

Buildings, Community development, 

Disaster assistance, Flood plains, 

Housing, Insurance, Loan programs—

Agriculture, Loan programs—Housing 

and community development, Real 

property insurance, Rural areas. 

7 CFR Part 1822 

Loan programs—Housing and 

community development, Low and 

moderate income housing, Mortgages, 

Nonprofit organizations, Rural housing. 

7 CFR Part 1902 

Accounting, Banking, Grant 

programs—Housing and community 

development, Loan programs—

Agriculture, Loan programs—Housing 

and community development. 

7 CFR Part 1925 

Real property taxes, Taxes. 

7 CFR Part 1930 

Accounting, Administrative practice 

and procedure, Grant programs—

Housing and community development, 

Loan programs—Housing and 

community development, Low and 

moderate income housing, Reporting 

and recordkeeping requirements. 

7 CFR Part 1940 

Administrative practice and 

procedure, Agriculture, Allocations, 

Grant programs—Housing and 

community development, Loan 

programs—Agriculture, Rural areas 

7 CFR Part 1942 

Community development, 

Community facilities, Loan programs—

Housingand community development, 

Loan security, Rural areas, Waste 

treatment and disposal—Domestic, 

Water supply—Domestic. 

7 CFR Part 1944 

Administrative practice and 

procedure, Aged, Farm labor housing, 

Grant programs—Housing and 

community development, Handicapped, 

Home improvement, Loan programs—

Housing and community development, 

Low and moderate income housing—

Rental, Migrant labor, Mobile homes, 

Mortgages, Nonprofit organizations, 

Public housing, Rent subsidies, 

Reporting requirements, Rural housing, 

Subsidies. 

7 CFR Part 1951 

Accounting, Accounting servicing, 

Credit, Debt restructuring, Grant 

programs—Housing and community 

development, Loan programs—

Agriculture, Loan programs—Housing 

and community development, Low and 

moderate income housing loans—

Servicing, Mortgages, Rent subsidies, 

Reporting requirements, Rural areas. 

7 CFR Part 1955 

Foreclosure, Government acquired 

property, Government property 

management. 

7 CFR Part 1956 

Accounting, Loan programs—

Agriculture, Rural areas. 

7 CFR Part 1965 

Administrative practice and 

procedure. 

7 CFR Part 3560 

Accounting, Administrative practice 

and procedure, Aged, Conflict of 

interests, Government property 

management, Grant programs—Housing 

and community development, 

Insurance, Loan programs—Agriculture, 

Loan programs—Housing and 

community development, Low and 

moderate income housing, Migrant 

labor, Mortgages, Nonprofit 

organizations, Public housing, Rent 

subsidies, Reporting and recordkeeping 

requirements, Rural areas. 

7 CFR Part 3565 

Banks, Civil rights, Credit, Guaranteed 

loans, Low and moderate income 

housing, Mortgages.

■ Therefore, Chapters XVIII and XXXV, 

title 7, Code of Federal Regulations are 

amended as follows: 

Chapter XVIII—[Amended]

PART 1806—INSURANCE

■ 1. The authority citation for part 1806 

continues to read as follows:

Authority: 75 U.S.C. 301; 7 U.S.C. 1989; 42 

U.S.C. 1480.

Subpart A—Real Property Insurance

§ 1806.4 [Amended]

■ 2. Section 1806.4 is amended in the 

introductory text of paragraph (a)(2) by 

removing the sentence after the 

paragraph heading.

Subpart B—National Flood Insurance

■ 3. Section 1806.21 is amended in 

paragraph (a) by adding a sentence at the 

end of the paragraph to read as follows:

§ 1806.21 General. 

(a) * * * This subpart does not apply 

to the Rural Rental Housing, Rural 

Cooperative Housing, or Farm Labor 

Housing programs of the Rural Housing 

Service.

* * * * *

PART 1822—RURAL HOUSING LOANS 

AND GRANTS

■ 4. The authority citation for part 1822 

is revised to read as follows:

Authority: 5 U.S.C. 301; 42 U.S.C. 1480.

Subpart G—Rural Housing Site Loan 

Policies, Procedures, and 

Authorizations

§ 1822.271 [Amended]

■ 5. Section 1822.271 is amended:

■ a. In the table in paragraph (e) by 

removing the entire entry for ‘‘Form 

FmHA or its successor agency under 

Public Law 103–354 1944–50’’ and by 

revising the form number ‘‘1944–51’’ to 

read ‘‘3560–51’’ in the last entry of the 

table.

■ b. In paragraph (g), in the second 

sentence of the introductory text, by 

removing the words ‘‘and submit to the 

FmHA or its successor agency under 

Public Law 103–354 Finance Office 

through field office terminals that 

information contained in Form FmHA or 

its successor agency under Public Law 

103–354 1944–50, ‘Multiple Family 

Housing Borrower/Project 

Characteristics.’ ’’

■ c. By revising paragraph (d)(1) to read 

as follows:

§ 1822.271 Processing applications.

* * * * *

(d) * * *

(1) Request for obligation of funds and 

fund analysis. Form RD 3560–51, 

‘‘Multiple Family Housing Obligation 

Fund Analysis’’ will be completed in 

accordance with the Forms Manual 

Insert (FMI).

* * * * *

■ 6. Section 1822.272 is revised to read 

as follows:

§ 1822.272 Approval or disapproval of a 

loan. 

The provisions of 7 CFR part 3560, 

subpart B will be followed.

■ 7. Section 1822.273 is revised to read 

as follows:

§ 1822.273 Actions subsequent to loan 

approval. 

After the loan is approved, actions to 

be taken will be in accordance with 7 

CFR part 3560, subpart B.

§ 1822.274 [Amended]

■ 8. Section 1822.274 is amended by 

revising the words ‘‘Form FmHA or its 

successor agency under Public Law 103–

354 1944–52’’ to read ‘‘Form RD 3560–

52’’ in both the introductory text of 

paragraph (c) and in paragraph (c)(2), 

and by revising the words ‘‘Form FmHA 

or its successor agency under Public Law 

69104 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

103–354 1944–51’’ to read ‘‘Form RD 

3560–51’’ in paragraph (c)(1).

§ 1822.277 [Amended]

■ 9. Section 1822.277 is amended by 

revising the words ‘‘§ 1944.239 of part 

1944, subpart E of this chapter’’ to read 

‘‘7 CFR 3560.2.’’

§ 1822.278 [Amended]

■ 10. Section 1822.278 is amended in 

paragraph (f) by revising the words 

‘‘Form FmHA or its successor agency 

under Public Law 103–354 1944–52’’ to 

read ‘‘Form RD 3560–52.’’

■ 11. Section 1822.279 is revised to read 

as follows:

§ 1822.279 Loan supervision and 

servicing. 

Loan supervision and loan servicing 

will be provided according to 7 CFR 

part 3560.

PART 1902—SUPERVISED BANK 

ACCOUNTS

■ 12. The authority citation for part 1902 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 7 

U.S.C. 6991, et seq.; 42 U.S.C. 1480; 

Reorganization Plan No. 2 of 1953 (5 U.S.C. 

App.).

Subpart A—Disbursement of Loan, 

Grant, and Other Funds

§ 1902.1 [Amended]

■ 13. Section 1902.1 is amended in 

paragraph (a) by revising the words 

‘‘Form FmHA or its successor agency 

under Public Law 103–354 1944–51’’ to 

read ‘‘Form RD 3560–51’’ in both places.

§ 1902.2 [Amended]

■ 14. Section 1902.2 is amended in 

paragraph (d) by revising the words 

‘‘Form FmHA or its successor agency 

under Public Law 103–354 1944–51’’ to 

read ‘‘Form RD 3560–51’’ and in 

paragraph (e) by revising the words 

‘‘Form FmHA or its successor agency 

under Public Law 103–354 1944–53’’ to 

read ‘‘Form RD 3560–53.’’

§ 1902.4 [Amended]

■ 15. Section 1902.4 is amended:

■ a. In paragraph (a)(4) by revising the 

words ‘‘subpart C of part 1930 of this 

chapter’’ to read ‘‘7 CFR part 3560, 

subpart G.’’

■ b. In paragraph (a)(5) by revising the 

words ‘‘subpart C of part 1930 of this 

chapter’’ to read ‘‘7 CFR part 3560, 

subpart G.’’

■ c. In paragraph (a)(6) by revising the 

words ‘‘subpart C of part 1930 of this 

chapter’’ to read ‘‘7 CFR part 3560, 

subpart G.’’

PART 1925—TAXES

■ 16. The authority citation for part 1925 

is revised to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 

U.S.C. 1480.

Subpart A—Real Estate Tax Servicing

■ 17. Section 1925.3 is amended by 

revising the last sentence in paragraph 

(c) to read as follows:

§ 1925.3 Servicing taxes.

* * * * *

(c) * * * The Multi-Family Housing 

Information System (MFIS) will be used 

in posting servicing actions on 

delinquent taxes.

PART 1930—GENERAL

■ 18. The authority citation for part 1930 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 

U.S.C. 1005.

Subpart C—Management and 

Supervision of Multiple Family 

Housing Borrowers and Grant 

Recipients

■ 19. Subpart C (§§ 1930.1930.101 

through 1930.150 and all exhibits) is 

removed and reserved.

PART 1940—GENERAL

■ 20. The authority citation for part 1940 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 

U.S.C. 1480.

Subpart L—Methodology and 

Formulas for Allocation of Loan and 

Grant Program Funds

■ 21. Exhibit B to subpart L of part 1940 

is amended by revising paragraphs IV., 

VII.A., and VII.F. to read as follows: 

Exhibit B to Subpart L of Part 1940—

Section 515 Nonprofit Set Aside (NPSA)

* * * * *

IV. Nondiscrimination. Rural Development 

reemphasizes the nondiscrimination in use 

and occupancy and location requirements of 

7 CFR 3560.104.

* * * * *

VII. * * *

A. Preapplications/applications for 

assistance from eligible nonprofit entities 

under this subpart must continue to meet all 

loan making requirements of 7 CFR part 

3560, subpart B.

* * * * *

F. Provisions for providing preference to 

loan requests from nonprofit organizations is 

contained in 7 CFR 3560.56. Limited 

partnerships, with a nonprofit general 

partner, do not qualify for nonprofit 

preference.

* * * * *

PART 1942—ASSOCIATIONS

■ 22. The authority citation for part 1942 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989.

Subpart A—Community Facility Loans

§ 1942.17 [Amended]

■ 23. Section 1942.17 is amended by 

removing paragraph (q)(1)(iii) and 

redesignating paragraph (q)(1)(iv) as 

(q)(1)(iii).

PART 1944—HOUSING

■ 24. The authority citation for part 1944 

continues to read as follows:

Authority: 5 U.S.C. 301; 42 U.S.C. 1480.

Subpart B—Housing Application 

Packaging Grants

■ 25. Exhibit B to subpart B of part 1944 

is amended by revising paragraph 

II.(B)(4) to read as follows: 

Exhibit B to Subpart B of Part 1944—

Housing Application Packaging Grant 

(HAPG) Fee Processing

* * * * *

II. * * *

(B) * * *

(4) The 55 percent balance paid when the 

loan is approved. Funds for this 55 percent 

will be drawn from loan funds in accordance 

with 7 CFR 3560.53 (o).

* * * * *

■ 26. Exhibit C to subpart B of part 1944 

is revised to read as follows: 

Exhibit C to Subpart B of Part 1944—

Requirements for Housing Application 

Packages

A package will consist of the following 

requirements for the respective program. 

A. Section 502—Complete application 

packages will be submitted in accordance 

with the requirements of 7 CFR part 3550. 

The package must also include the following:

Form RD 410–9—‘‘Statement Required by the 

Privacy Act’’

Form RD 1910–11—‘‘Applicant Certification 

Federal Collection Policies for Consumer 

or Commercial Debts’’

Form RD 1944–3—‘‘Budget and/or Financial 

Statement’’

B. Section 504—Complete application 

packages will be submitted in accordance 

with 7 CFR part 3550. The package must 

include the forms listed in paragraph A. of 

this exhibit and the following: 

The appropriate Agency application form 

for Rural Housing assistance (non-farm tract) 

(available in any Rural Development office). 

The appropriate Agency form to request 

verification of employment (available in any 

Rural Development office). 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69105

The appropriate Agency Rural Housing 

Loan application package (available in any 

Rural Development office).

Evidence of ownership in accordance with 

7 CFR part 3550. 

Cost estimates or bid prices for removal of 

health or safety hazards in accordance with 

7 CFR part 3550. 

C. Section 514/516—Complete application 

packages will be submitted in accordance 

with the Notice of Funding Availability that 

will be published in the Federal Register

each Fiscal Year. 

D. Section 515—Complete application 

packages will be submitted in accordance 

with the Notice of Funding Availability that 

will be published in the Federal Register

each Fiscal Year. 

E. Section 524—Complete application 

packages will be submitted in accordance 

with § 1822.271(a) of subpart G of part 1822 

of this chapter (paragraph XI.A. of RD 

Instruction 444.8). After Rural Development’s 

review and as instructed, the application 

should be completed in accordance with 

§ 1822.271(c) of subpart G of part 1822 of this 

chapter (paragraph XI.C. of RD Instruction 

444.8). 

F. Section 533—Complete application 

packages will be submitted in accordance 

with the requirements of subpart N of part 

1944 of this chapter.

Subpart D—Farm Labor Housing Loan 

and Grant Policies, Procedures, and 

Authorizations

■ 27. Subpart D (§§ 1944.151 through 

1944.200 and all exhibits) is removed 

and reserved.

Subpart E—Rural Rental and Rural 

Cooperative Housing Loan Policies, 

Procedures, and Authorizations

■ 28. Subpart E (§§ 1944.201 through 

1944.250 and all exhibits) is removed 

and reserved.

Subpart I—Self-Help Technical 

Assistance Grants 

Exhibit F to Subpart I of Part 1944 

[Amended]

■ 29. Exhibit F to subpart I of part 1944 

is amended in paragraph VII by revising 

the words ‘‘Form FmHA or its successor 

agency under Public Law 103–354 1944–

51’’ to read ‘‘Form RD 3560–51.’’

Subpart L—Farmers Home 

Administration or Its Successor 

Agency Under Public Law 103–354 

Tenant Grievance and Appeals 

Procedure 

30. Subpart L (§§ 1944.551 through 

1944.600 and all exhibits) is removed 

and reserved.

Subpart N—Housing Preservation 

Grants

■ 31. Section 1944.656 is amended by 

revising the definition of 

‘‘Overcrowding’’ to read as follows:

§ 1944.656 Definitions.

* * * * *

Overcrowding. Guidance is provided 

at 7 CFR 3560.155(e). These guidelines 

should result in an ideal range of 

persons per housing unit.

* * * * *

PART 1951—SERVICING AND 

COLLECTIONS

■ 32. The authority citation for part 1951 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1932 

Note; 7 U.S.C. 1989; 31 U.S.C. 3716; 42 

U.S.C. 1480.

Subpart A—Account Servicing Policies

§ 1951.1 [Amended]

■ 33. Section 1951.1 is amended by 

revising the words ‘‘subpart K of part 

1951 of this chapter’’ to read ‘‘7 CFR part 

3560, subpart I.’’

Subpart D—Final Payment on Loans

■ 34. Section 1951.151 is amended by 

revising the last sentence to read as 

follows:

§ 1951.151 Purpose. 

* * * This subpart does not apply to 

direct single family housing customers 

or to the Rural Rental Housing, Rural 

Cooperative Housing, or Farm Labor 

Housing programs of the RHS.

Subpart E—Servicing the Community 

and Direct Business Programs Loans 

and Grants

§ 1951.220 [Amended]

■ 35. Section 1951.220 is amended:

■ a. In the last sentence of paragraph (f) 

by revising the words ‘‘noted on Form 

FmHA or its successor agency under 

Public Law 103–354 1905–10 

‘Management System Card—

Association’ ’’ to read ‘‘tracked in the 

Multi-Family Housing Information 

System (MFIS).’’

■ b. In the last sentence of paragraph (g) 

by revising the words ‘‘on Form FmHA 

or its successor agency under Public Law 

103–354 1905–10’’ to read ‘‘in MFIS.’’

§ 1951.223 [Amended]

■ 36. Section 1951.223 is amended in 

paragraph (b)(4) by revising the words 

‘‘Form FmHA or its successor agency 

under Public Law 103–354 1951–33’’ to 

read ‘‘Form RD 3560–15’’ and in 

paragraph (c)(3) by revising the words 

‘‘Form FmHA or its successor agency 

under Public Law 103–354 1951–33’’ to 

read ‘‘Form RD 3560–15.’’

Subpart F—Analyzing Credit Needs 

and Graduation of Borrowers

■ 37. Section 1951.266 is revised to read 

as follows:

§ 1951.266 Special requirements for MFH 

borrowers. 

All requirements of 7 CFR part 3560, 

subpart K must be met prior to 

graduation and acceptance of the full 

payment from an MFH borrower.

Subpart K—Predetermined 

Amortization Schedule System (PASS) 

Account Servicing

■ 38. Subpart K (§§ 1951.501 through 

1951.550) is removed and reserved.

Subpart N—Servicing Cases Where 

Unauthorized Loan or Other Financial 

Assistance Was Received—Multiple 

Family Housing

■ 39. Subpart N (§§ 1951.651 through 

1951.700) is removed and reserved.

PART 1955—PROPERTY 

MANAGEMENT

■ 40. The authority citation for part 1955 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 

U.S.C. 1480.

Subpart A—Liquidation of Loans 

Secured by Real Estate and 

Acquisition of Real and Chattel 

Property

■ 41. Section 1955.1 is amended by 

adding a sentence at the end to read as 

follows:

§ 1955.1 Purpose. 

* * * This subpart does not apply to 

the Rural Rental Housing, Rural 

Cooperative Housing, or Farm Labor 

Housing programs of RHS.

■ 42. Section 1955.10 is amended by 

revising paragraph (d)(9) and in 

paragraph (h)(6) by removing the fifth 

sentence and by revising the last two 

sentences to read as follows:

§ 1955.10 Voluntary conveyance of real 

property by the borrower to the 

Government.

* * * * *

(d) * * * 

(9) For MFH loans, assignment of 

Housing Assistance Payments (HAP) 

Contracts will be obtained. Rental 

Assistance will be retained until the 

State Director is advised by OGC that 

69106 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

the Agency has title to the property. 

After a voluntary conveyance, the 

Agency may transfer Rental Assistance 

in accordance with 7 CFR part 3560, 

subpart F.

* * * * *

(h) * * * 

(6) * * * If the project is to be 

removed from the Rural Development 

program, a minimum of 180 days’ notice 

to the tenants is required. Letters of 

Priority Entitlement must be made 

available to any tenants that will be 

displaced.

* * * * *

■ 43. Section 1955.15 is amended in 

paragraph (d)(2)(v) by removing the fifth 

sentence and by revising the first and last 

sentences to read as follows:

§ 1955.15 Foreclosure by the Government 

of loans secured by real estate.

* * * * *

(d) * * * 

(2) * * * 

(v) For MFH loans, the acceleration 

notice will advise the borrower of all 

applicable prepayment requirements, in 

accordance with 7 CFR part 3560, 

subpart N. * * * Letters of Priority 

Entitlement must be made available.

* * * * *

Subpart B—Management of Property

■ 44. Section 1955.51 is amended in the 

introductory text by adding a sentence 

after the third sentence to read as 

follows:

§ 1955.51 Purpose. 

* * * This subpart does not apply to 

the Rural Rental Housing, Rural 

Cooperative Housing, or Farm Labor 

Housing programs of RHS. * * *

* * * * *

■ 45. Section 1955.55 is amended in 

paragraph (b)(2)(i) by revising the words 

‘‘Subpart C of Part 1930 of this chapter’’

to read ‘‘7 CFR part 3560’’ and in 

paragraph (a) by revising the first 

sentence to read as follows:

§ 1955.55 Taking abandoned real or chattel 

property into custody and related actions. 

(a) * * * (Multi-family housing type 

loans will be handled in accordance 

with 7 CFR part 3560, subpart J.) * * *

* * * * *

§ 1955.61 [Amended]

■ 46. Section 1955.61 is amended by 

revising the words ‘‘Subpart L of Part 

1944 of this chapter’’ to read ‘‘7 CFR part 

3560, subpart D.’’

■ 47. Section 1955.65 is amended in 

paragraph (c)(1) by removing the fourth 

sentence and by revising the sixth 

sentence to read as follows:

§ 1955.65 Management of inventory and/or 

custodial real property.

* * * * *

(c) * * * 

(1) * * * For MFH projects, tenant 

occupancy and selection will be in 

accordance with the occupancy 

standards set forth in 7 CFR part 3560, 

subpart D. * * *

* * * * *

§ 1955.66 [Amended]

■ 48. Section 1955.66 is amended in 

paragraph (a)(2)(ii) by revising the words 

‘‘subpart C of part 1930 of this chapter’’

to read ‘‘7 CFR part 3560.’’

Subpart C—Disposal of Inventory 

Property

§ 1955.101 [Amended]

■ 49. Section 1955.101 is amended by 

adding the words ‘‘or to the Rural Rental 

Housing, Rural Cooperative Housing, 

and Farm Labor Housing programs’’ to 

the end of the last sentence.

§ 1955.114 [Amended]

■ 50. Section 1955.114 is amended:

■ a. In paragraph (b) by revising the 

words ‘‘subpart E of part 1965 of this 

chapter’’ to read ‘‘7 CFR part 3560, 

subpart N.’’

■ b. In paragraph (c)(3) by revising the 

words ‘‘the information outlined in 

Exhibit A–7 of subpart E of part 1944 of 

this chapter’’ to read ‘‘documentation as 

required by the Agency.’’

■ c. In paragraph (c)(4) by revising the 

words ‘‘subpart E of part 1944 of this 

chapter’’ to read ‘‘7 CFR part 3560.’’

■ d. In paragraph (c)(5) by revising the 

words ‘‘the definition of ‘project’ set 

forth in subpart E of part 1944 of this 

chapter’’ to read ‘‘the requirements of 7 

CFR part 3560, subpart K.’’

§ 1955.115 [Amended]

■ 51. Section 1955.115 is amended in 

paragraph (b) by revising the words 

‘‘subpart E of part 1965 of this chapter’’

to read ‘‘7 CFR part 3560, subpart N.’’

§ 1955.117 [Amended]

■ 52. Section 1955.117 is amended in 

paragraph (c) by revising the words 

‘‘FmHA or its successor agency under 

Public Law 103–354 1944–51’’ to read 

‘‘RD 3560–51.’’

§ 1955.118 [Amended]

■ 53. Section 1955.118 is amended in 

paragraph (b)(3) by revising the words 

‘‘Form FmHA or its successor agency 

under Public Law 103–354 1944–51’’ to 

read ‘‘Form RD 3560–51.’’

§ 1955.141 [Amended]

■ 54. Section 1955.141 is amended:

■ a. In paragraph (d) by revising the 

words ‘‘Exhibit C of Subpart C of Part 

1930 of this chapter’’ to read ‘‘7 CFR part 

3560, subpart E.’’

■ b. In paragraph (e) by revising the 

words ‘‘Exhibit E of subpart C of part 

1930 of this chapter’’ to read ‘‘7 CFR part 

3560, subpart F.’’

PART 1956—DEBT SETTLEMENT

■ 55. The authority citation for part 1956 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 31 

U.S.C. 3711; 42 U.S.C. 1480.

Subpart B—Debt Settlement—Farm 

Loan Programs and Multi-Family 

Housing

■ 56. Section 1956.51 is amended by 

revising the last sentence to read as 

follows:

§ 1956.51 Purpose. 

* * * This subpart does not apply to 

RHS direct Single Family Housing 

(SFH) loans, RHS NP loans secured by 

SFH property, or to the Rural Rental 

Housing, Rural Cooperative Housing, 

and Farm Labor Housing programs.

§ 1956.85 [Amended]

■ 57. Section 1956.85 is amended in 

paragraph (b)(1) by removing the words 

‘‘on Form FmHA or its successor agency 

under Public Law 103–354 1944–9, 

‘‘Multiple Family Housing Payment 

Transmittal,’’.’’

Subpart C—Debt Settlement—

Community and Business Programs

§ 1956.143 [Amended]

■ 58. Section 1956.143 is amended in 

paragraph (c)(3)(iv)(G)(1) by revising the 

words ‘‘Form FmHA or its successor 

agency under Public Law 103–354 1951–

33’’ to read ‘‘Form RD 3560–15.’’

PART 1965—REAL PROPERTY

Subpart B—Security Servicing for 

Multiple Housing Loans

■ 59. Subpart B (§§ 1965.51 through 

1965.100) is removed and reserved.

Subpart E—Prepayment and 

Displacement Prevention of MultiFamily Housing Loans

■ 60. Subpart E (§§ 1965.201 through 

1965.250 and all exhibits) is removed 

and reserved.

Chapter XXXV—[Amended]

■ 61. Part 3560, consisting of subparts A 

through P, is added to read as follows:

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69107

PART 3560—DIRECT MULTI-FAMILY 

HOUSING LOANS AND GRANTS

Subpart A—General Provisions and 

Definitions 

Sec. 

3560.1 Applicability and purpose. 

3560.2 Civil rights. 

3560.3 Environmental requirements. 

3560.4 Compliance with other Federal 

requirements. 

3560.5 State, local or tribal laws. 

3560.6 Borrower responsibility and 

requirements. 

3560.7 Delegation of responsibility. 

3560.8 Administrator’s exception authority. 

3560.9 Reviews and appeals. 

3560.10 Conflict of interest. 

3560.11 Definitions. 

3560.12–3560.49 [Reserved] 

3560.50 OMB control number.

Subpart B—Direct Loan and Grant 

Origination 

3560.51 General. 

3560.52 Program objectives. 

3560.53 Eligible use of funds. 

3560.54 Restrictions on the use of funds. 

3560.55 Applicant eligibility requirements. 

3560.56 Processing section 515 housing 

proposals. 

3560.57 Designated places for section 515 

housing. 

3560.58 Site requirements. 

3560.59 Environmental requirements. 

3560.60 Design requirements. 

3560.61 Loan security. 

3560.62 Technical, legal, insurance, and 

other services. 

3560.63 Loan limits. 

3560.64 Initial operating capital 

contribution. 

3560.65 Reserve account. 

3560.66 Participation with other funding or 

financing sources. 

3560.67 Rates and terms for section 515 

loans. 

3560.68 Permitted return on investment 

(ROI). 

3560.69 Supplemental requirements for 

congregate housing and group homes. 

3560.70 Supplemental requirements for 

manufactured housing. 

3560.71 Construction financing.

3560.72 Loan closing. 

3560.73 Subsequent loans. 

3560.74 Loan for final payments. 

3560.75–3560.99 [Reserved] 

3560.100 OMB control number.

Subpart C—Borrower Management and 

Operations Responsibilities 

3560.101 General. 

3560.102 Housing project management. 

3560.103 Maintaining housing projects. 

3560.104 Fair housing. 

3560.105 Insurance and taxes. 

3560.106–3560.149 [Reserved] 

3560.150 OMB control number.

Subpart D—Multi-Family Housing 

Occupancy 

3560.151 General. 

3560.152 Tenant eligibility. 

3560.153 Calculation of household income 

and assets. 

3560.154 Tenant selection. 

3560.155 Assignment of rental units and 

occupancy policies. 

3560.156 Lease requirements. 

3560.157 Occupancy rules. 

3560.158 Changes in tenant eligibility. 

3560.159 Termination of occupancy. 

3560.160 Tenant grievances. 

3560.161–3560.199 [Reserved] 

3560.200 OMB control number.

Subpart E—Rents 

3560.201 General. 

3560.202 Establishing rents and utility 

allowances. 

3560.203 Tenant contributions. 

3560.204 Security deposits and 

membership fees. 

3560.205 Rent and utility allowance 

changes. 

3560.206 Conversion to Plan II (Interest 

Credit). 

3560.207 Annual adjustment factors for 

Section 8 units. 

3560.208 Rents during eviction or failure to 

recertify. 

3560.209 Rent collection. 

3560.210 Special note rents (SNRs). 

3560.211–3560.249 [Reserved] 

3560.250 OMB control number.

Subpart F—Rental Subsidies 

3560.251 General. 

3560.252 Authorized rental subsidies. 

3560.253 [Reserved] 

3560.254 Eligibility for rental assistance. 

3560.255 Requesting rental assistance. 

3560.256 Rental assistance payments. 

3560.257 Assigning rental assistance. 

3560.258 Terms of agreement. 

3560.259 Transferring rental assistance. 

3560.260 Rental subsidies from non-Agency 

sources. 

3560.261 Improperly advanced rental 

assistance. 

3560.262–3560.299 [Reserved] 

3560.300 OMB control number.

Subpart G—Financial Management 

3560.301 General. 

3560.302 Accounting, bookkeeping, 

budgeting, and financial management 

systems. 

3560.303 Housing project budgets. 

3560.304 Initial operating capital. 

3560.305 Return on investment. 

3560.306 Reserve account. 

3560.307 Reports. 

3650.308 Annual financial reports. 

3560.309 Advancement (loan) of funds to a 

RRH project by the owner, member of the 

organization, or agent of the owner. 

3560.310–3560.349 [Reserved] 

3560.350 OMB control number.

Subpart H—Agency Monitoring 

3560.351 General. 

3560.352 Agency monitoring scope, 

purpose, and borrower responsibilities. 

3560.353 Scheduling of on-site monitoring 

reviews. 

3560.354 Borrower response to monitoring 

review notifications. 

3560.355–3560.399 [Reserved] 

3560.400 OMB control number.

Subpart I—Servicing 

3560.401 General. 

3560.402 Loan payment processing. 

3560.403 Account servicing. 

3560.404 Final loan payments.

3560.405 Borrower organizational structure 

or ownership interest changes. 

3560.406 MFH ownership transfers or sales. 

3560.407 Sales or other disposition of 

security property. 

3560.408 Lease of security property. 

3560.409 Subordinations or junior liens 

against security property. 

3560.410 Consolidations. 

3560.411–3560.449 [Reserved] 

3560.450 OMB control number.

Subpart J—Special Servicing, Enforcement, 

Liquidation, and Other Actions 

3560.451 General. 

3560.452 Monetary and non-monetary 

defaults. 

3560.453 Workout agreements. 

3560.454 Special servicing actions related 

to housing operations. 

3560.455 Special servicing actions related 

to loan accounts. 

3560.456 Liquidation. 

3560.457 Negotiated debt settlement. 

3560.458 Special property circumstances. 

3560.459 Special borrower circumstances. 

3560.460 Double damages. 

3560.461 Enforcement provisions. 

3560.462 Money laundering. 

3560.463 Obstruction of Federal audits. 

3560.464–3560.499 [Reserved] 

3560.500 OMB control number.

Subpart K—Management and Disposition of 

Real Estate Owned (REO) Properties 

3560.501 General. 

3560.502 Tenant notifications and 

assistance. 

3560.503 Disposition of REO property. 

3560.504 Sales price and bidding process. 

3560.505 Agency loans to finance 

purchases of REO properties. 

3560.506 Conversion of single family type 

REO property to MFH use. 

3560.507–3560.549 [Reserved] 

3560.550 OMB control number.

Subpart L—Off-Farm Labor Housing 

3560.551 General. 

3560.552 Program objectives. 

3560.553 Loan and grant purposes. 

3560.554 Use of funds restrictions. 

3560.555 Eligibility requirements for offfarm labor housing loans and grants. 

3560.556 Application requirements and 

processing. 

3560.557 [Reserved] 

3560.558 Site requirements. 

3560.559 Design and construction 

requirements. 

3560.560 Security. 

3560.561 Technical, legal, insurance and 

other services. 

3560.562 Loan and grant limits. 

3560.563 Initial operating capital. 

3560.564 Reserve accounts. 

3560.565 Participation with other funding 

or financing sources. 

3560.566 Loan and grant rates and terms. 

3560.567 Establishing the profit base on 

initial investment. 

69108 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

3560.568 Supplemental requirements for 

seasonal off-farm labor housing. 

3560.569 Supplemental requirements for 

manufactured housing. 

3560.570 Construction financing. 

3560.571 Loan and grant closing. 

3560.572 Subsequent loans. 

3560.573 Rental assistance. 

3560.574 Operating assistance. 

3560.575 Rental structure and changes. 

3560.576 Occupancy restrictions. 

3560.577 Tenant priorities for labor 

housing. 

3560.578 Financial management of labor 

housing. 

3560.579 Servicing off-farm labor housing. 

3560.580–3560.599 [Reserved] 

3560.600 OMB control number.

Subpart M—On-Farm Labor Housing 

3560.601 General. 

3560.602 Program objectives. 

3560.603 Loan purposes. 

3560.604 Restrictions on use of funds. 

3560.605 Eligibility requirements. 

3560.606 Application requirements and 

processing. 

3560.607 [Reserved] 

3560.608 Site and construction 

requirements. 

3560.609 [Reserved] 

3560.610 Security. 

3560.611 Technical, legal, insurance and 

other services. 

3560.612 Loan limits. 

3560.613 [Reserved] 

3560.614 Reserve accounts. 

3560.615 Participation with other funding 

sources. 

3560.616 Rates and terms. 

3560.617 [Reserved]

3560.618 Supplemental requirements for 

on-farm labor housing. 

3560.619 Supplemental requirements for 

manufactured housing. 

3560.620 Construction financing. 

3560.621 Loan closing. 

3560.622 Subsequent loans. 

3560.623 Housing management and 

operations. 

3560.624 Occupancy restrictions. 

3560.625 Maintaining the physical asset. 

3560.626 Affirmative Fair Housing 

Marketing Plan. 

3560.627 Response to resident complaints. 

3560.628 Establishing and modifying rental 

charges. 

3560.629 Security deposits. 

3560.630 Financial management. 

3560.631 Agency monitoring. 

3560.632–3560.649 [Reserved] 

3560.650 OMB control number.

Subpart N—Housing Preservation 

3560.651 General. 

3560.652 Prepayment and restrictive-use 

categories. 

3560.653 Prepayment requests. 

3560.654 Tenant notification requirements. 

3560.655 Agency requested extension. 

3560.656 Incentives offers. 

3560.657 Processing and closing incentive 

offers. 

3560.658 Borrower rejection of the 

incentive offer. 

3560.659 Sale or transfer to nonprofit 

organizations and public bodies. 

3560.660 Acceptance of prepayments. 

3560.661 Sale or transfers. 

3560.662 Restrictive-use provisions and 

agreements. 

3560.663 Post-payment responsibilities for 

loans subject to continued restrictive-use 

provisions. 

3560.664–3560.699 [Reserved] 

3560.700 OMB control number.

Subpart O—Unauthorized Assistance 

3560.701 General. 

3560.702 Unauthorized assistance sources 

and situations. 

3560.703 Identification of unauthorized 

assistance. 

3560.704 Unauthorized assistance 

determination notice. 

3560.705 Recapture of unauthorized 

assistance. 

3560.706 Offsets. 

3560.707 Program participation and 

corrective actions. 

3560.708 Unauthorized assistance received 

by tenants. 

3560.709 Demand letter. 

3560.710–3560.749 [Reserved] 

3560.750 OMB control number.

Subpart P—Appraisals 

3560.751 General. 

3560.752 Appraisal use, request, review, 

and release. 

3560.753 Agency appraisal standards and 

requirements. 

3560.754–3560.799 [Reserved] 

3560.800 OMB control number.

Authority: 42 U.S.C. 1480.

Subpart A—General Provisions and 

Definitions

§ 3560.1 Applicability and purpose. 

(a) This part sets forth requirements, 

policies, and procedures for multifamily housing (MFH) direct loan and 

grant programs to serve eligible verylow, low- and moderate income 

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)). 

(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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69109

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 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. Loan 

and grant processing and servicing 

actions taken by RHS under this part are 

subject to an environmental review 

conducted in accordance with 7 CFR 

part 1940, subpart G or any successor 

regulation.

§ 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 1940-J, 

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. 

(c) Clean Air Act and Water Pollution 

Control Act Requirements. For any 

contract, all applicable standards, orders 

or requirements issued under section 

306 of the Clean Air Act; section 508 of 

the Clean Water Act, Executive Order 

11738, and 40 CFR part 32. 

(d) Historic preservation 

requirements. The provisions of 7 CFR 

part 1901, subpart F or any successor 

regulation. 

(e) Lead-based paint requirements. 

The applicable provisions of 24 CFR 

part 35, subparts A through D, J, and R, 

as published by the U.S. Department of 

Housing and Urban Development.

§ 3560.5 State, local or tribal laws. 

Borrowers must comply with all 

applicable state and local laws, and 

laws of Federally-recognized Indian 

tribes to the extent they are not 

inconsistent with this part.

§ 3560.6 Borrower responsibility and 

requirements. 

(a) Borrower responsibilities and 

requirements specified in this part may 

be carried out by an individual or entity 

designated by the borrower to act on 

behalf of the borrower such as a resident 

manager or management agent. Ultimate 

accountability to the Agency, however, 

is with the borrower whether or not the 

borrower designated another person or 

entity to act on the borrower’s behalf. 

(b) Borrowers who have not executed 

a loan agreement, and who were not 

required to execute a loan agreement by 

the regulations in effect at the time of 

their loan closing are exempt from the 

requirements of subparts D through G of 

this part, as long as the borrower is not 

in default of any applicable 

requirement, security instrument, 

payment, or any other agreement with 

the Agency. Such borrowers must 

provide evidence of tenant income 

eligibility in accordance with 

§ 3560.152(a), except in Farm Labor 

Housing where the tenant is not paying 

shelter cost.

§ 3560.7 Delegation of responsibility. 

The RHS Administrator may delegate, 

on an individual or other basis, any 

decision-making responsibility for 

Agency programs, unless otherwise 

noted.

§ 3560.8 Administrator’s exception 

authority. 

The RHS Administrator may make an 

exception to any provision of this part 

or address any omissions provided that 

the exception is consistent with the 

applicable statute, does not adversely 

affect the interest of the Federal 

Government, and does not adversely 

affect the accomplishment of the 

purposes of the MFH programs or 

application of the requirement would 

result in undue hardship on the tenants. 

Exception requests presented to the RHS 

Administrator must have the 

concurrence of a Rural Development 

State Director or a Deputy Administrator 

for MFH.

§ 3560.9 Reviews and appeals. 

Rural Housing Service decisions may 

be appealed pursuant to 7 CFR part 11.

§ 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 

69110 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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 MFHMFH 

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. 

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; 

(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 self-employed) 

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. 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. 

Engagement. An Agency defined 

financial review of a housing project’s 

financial status that a borrower will 

contract with a certified public 

accountant or other qualified individual 

to perform. An engagement will result 

in annual financial reports for use by 

the Agency as described in § 3560.308. 

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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69111

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 offfarm 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. 

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 co-tenant, 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 

(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 AlaskanNative Village, which is considered an 

eligible recipient under the Indian SelfDetermination 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 

69112 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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. 

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 low-income 

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 a 

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 a 

management agreement. 

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. 

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-ofinterest (or any persons or parties 

related to any person with identity-ofinterest) in loans financed under section 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69113

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. 

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 

project-based 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. 

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 Agencyfunded 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-today 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, 

69114 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

and (B) has a serious lack of mortgage 

credit for lower and moderate-income 

families, as determined by the Secretary 

and the Secretary of 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. 

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.

Subpart B—Direct Loan and Grant 

Origination

§ 3560.51 General. 

This subpart contains the Agency’s 

loan origination requirements for multifamily 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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69115

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. 

(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. 

(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 off-farm 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 

69116 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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; 

(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 appropriate level of 

environmental review in accordance 

with 7 CFR part 1940, subpart G has 

been completed.

§ 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. Nonfederal 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. 

(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)). 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69117

(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. (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: 

(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 lowincome 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 limitedprofit 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 non-selection, 

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, 

(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 the appropriate 

level of environmental review in 

accordance with 7 CFR part 1940, 

subpart G. 

(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, 

69118 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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: 

(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 

(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 Agencyfinanced 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. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69119

(d) Densities. Allowable site densities 

will be determined based on the 

following criteria: 

(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 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 at least 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 in 

accordance with 7 CFR part 1940, 

subpart G, or any successor regulation. 

Likewise, the applicant should be 

informed that the environmental review 

must be completed and considered 

before the Agency can make a 

commitment of resources to the project.

§ 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. 

(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. 

(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 

69120 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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. 

(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: 

(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 lowincome housing tax credits, limits will 

be those specified in § 3560.53(l). 

(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 lowincome housing tax credit purposes, or 

by another Federal Government 

program. Likewise for transfer proposals 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69121

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. 

(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. 

To meet major capital expenses of a 

housing project, borrowers must 

establish and fund a reserve account 

that meets requirements of § 3560.306. 

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 the total 

development cost until the reserve 

account equals 10 percent of the total 

development cost.

§ 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. 

(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-bycase 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 incomeeligible households financially able to 

afford the projected rents without such 

a subsidy for the units not receiving RA 

or similar tenant subsidy. 

(b) Rental assistance. The Agency 

may provide rental assistance with MFH 

loans participating with other sources of 

funding under the following conditions: 

(1) The Agency’s loan equals at least 

25 percent of the housing’s total 

development cost. 

(2) The rental assistance is provided 

only to those rental units where the 

basic rents do not exceed what basic 

rents would have been had the Agency 

provided full financing. 

(3) The provisions of subpart F of this 

part are met. 

(c) Security requirements. The 

security requirements of § 3560.61 must 

be met for all Agency-financed MFH 

participating with other sources of 

funding. 

(d) Reserve requirements. Reserve 

account requirements will be 

determined on a case-by-case basis, 

taking into consideration the reserve 

requirements of the other participating 

lenders, so that the aggregate fully 

funded reserve account is consistent 

with the requirements of § 3560.65. 

Reserve requirements and procedures 

for reserve account withdrawals must be 

agreed upon by all lenders and included 

in the intercreditor or participation 

agreement. 

(e) Design requirements. Housing and 

related facilities must be planned and 

constructed in accordance with 7 CFR 

1924, subparts A and C. If housing 

includes non-Agency financed common 

facilities, the following conditions must 

be met: 

(1) The non-Agency-financed 

common facility’s operating and 

maintenance costs must be paid through 

collection of a user fee from residents 

who use the facility, 

(2) The non-Agency-financed 

common facility must be designed and 

operated with appropriate safeguards for 

the health and safety of tenants, and 

(3) The facility must be fully available 

and accessible to all tenants.

§ 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. 

69122 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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).

§ 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; 

(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.

§ 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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69123

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 dealercontractor, 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.

§ 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 must be 

completed in accordance with 7 CFR 

part 1940, subpart G, prior to issuance 

of the interim financing letter. 

(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 Agencyapproved 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 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 State 

Director 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 

69124 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

will notify all parties of the cancellation 

and the reasons for the cancellation in 

accordance with 7 CFR part 1927, 

subpart B.

§ 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 requirements.

Subsequent loans are subject to the 

completion of an environmental review 

in accordance with 7 CFR part 1940, 

subpart G. 

(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). 

(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.

§ 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. 

(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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69125

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; 

(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 thereunder 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; 

(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 selfmanage 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-ofinterest 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; 

(ii) The borrower or management 

agent and the providers of supplies and 

services to the housing project; and 

(iii) The borrower or the management 

agent and employees of any of the 

above. 

(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. 

69126 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(3) After disclosure of an identity-ofinterest 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: 

(1) The management fee may 

compensate the management entity only 

for the specifically identified bundle of 

services to be provided to the housing 

project. Costs and services to be paid as 

part of the bundle of services include: 

(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) Training provided to on-site staff 

at the project site. 

(v) Preparation and submission of 

proposed annual budgets and 

negotiation of approval with the 

Agency, other governmental agencies 

and the borrowers. 

(vi) Preparation and distribution of 

the Agency or other governmental 

agency forms and routine financial 

reports to borrowers. 

(vii) Preparation and distribution of 

required year-end reports to the Agency 

or other governmental agency and 

borrowers. 

(viii) Preparation of requests for 

reserve withdrawals, rent increases, or 

other required adjustments. 

(ix) Arranging for preparation by 

outside contractors of energy audits and 

utility allowance analysis. Implement 

appropriate changes.

(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, the Agency or other 

governmental agency and with the 

borrowers. 

(C) Postage expenses related to the 

normal responsibility for mailings to the 

properties, the Agency or other 

governmental agency, the tenants, the 

vendors, and the owners. 

(D) Expense of telephone and 

facsimile communication to the 

properties, tenants, the Agency or other 

governmental agency, and the 

borrowers. 

(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. 

(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) Insurance coverage for agent’s 

office and operations (Property, Auto, 

Liability, E&O, Casualty, Workers 

Compensation, etc.) 

(I) Travel of agent staff to the 

properties for on-site inspection, 

training, or supervision activities. 

(J) 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 or 

agreements. 

(xvi) Coordination of U.S. Department 

of Housing and Urban Development 

(HUD) certifications or vouchers with 

tenants, including all reporting to all 

pertinent agencies and borrowers. 

(xvii) Directing the investment of 

project funds into required accounts. 

(xviii) Maintenance of bank accounts 

and monthly reconciliations. 

(xix) 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. 

(xx) Account maintenance, 

settlement, and disbursement of security 

deposits. 

(xxi) Working with third party 

auditors for initial set-up of audits and 

annually thereafter for audit preparation 

and review. Assistance with 

supplemental letters and preparation of 

Agency financial reports or other 

governmental agency reports. 

(xxii) Storage of records and 

adherence to records retention 

requirements. 

(xxiii) Assist on-site staff with tenant 

relations and problems. Provide 

assistance to on-site staff in severe 

actions (eviction, death, insurance loss, 

etc.). 

(xxiv) Oversight of general and 

preventive maintenance procedures and 

policies. 

(xxv) Development and oversight of 

asset replacement plans. 

(xxvi) Oversight of preparation of 

section 504 reviews, development of 

plans, and implementation of 

improvements necessary to comply with 

plans and section 504 requirements. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69127

(xxvii) Reporting to general and 

limited partners and State agencies for 

Low Income Housing Tax Credit 

(LIHTC)-compliance purposes. 

(2) Management fees may consist of a 

base per occupied 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) Allowable Administrative 

Expenses. (i) Identifying the Type of 

Administrative Expense. Management 

Plans and Agreements must describe if 

administrative expenses are to be paid 

from the management fee or paid for as 

a project cost. 

(A) A management plan is required 

for all projects. The management plan 

should describe administrative expenses 

paid from management agent fees or 

project operations. The management 

plan should provide job descriptions for 

the site manager, the management agent 

and other personnel. It is important that 

these documents accurately reflect the 

duties being performed by the various 

personnel. The management plan must 

meet the standards set out in this rule. 

(B) 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. 

(C) 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. 

(ii) Allowable Administrative 

Expenses. Payroll related administrative 

expenses are allowable expenses. 

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, 

and 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. 

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. Correspondence or reports 

required for record retention or project 

compliance are allowable project 

expenses. The cost or expense of 

equipment and any related equipment 

service contract is a management agent 

direct expense, unless the machine 

becomes the property of the project after 

purchase. 

(iii) 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. 

(A) 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. 

(B) 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 disapproval and/or 

a demand for recovery action. 

(4) Unallowable Administrative 

Expenses. 

(i) Certain expenses are not allowable 

such as legal fees, association dues, 

bonuses or monetary performance 

awards, parties, computer hardware and 

some software, and telephone 

purchases. 

(ii) 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). Where there is 

no finding of a borrower’s fault, 

commercially reasonable legal expenses 

and costs for defending or settling 

lawsuits (without admission of liability) 

are allowable. 

(iii) 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. 

(iv) Association dues to be paid by the 

project should only 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.

(v) It is inappropriate for the project 

to 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. 

(vi) Billing the project for parties that 

are large or unreasonable, such as 

renting expensive party halls or hotel 

rooms and payment for alcoholic 

beverages or gifts to management agent 

staff are also inappropriate. 

(vii) It is inappropriate to bill 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. 

(viii) It is inappropriate to bill the 

project for practices that are inefficient 

such as routine use of collect calls from 

a site manager to a management agent 

office. 

(j) Management certification. (1) As a 

condition of approval of the 

management agent and the management 

fee, the borrower and the management 

agents must execute an Agencyapproved certification establishing an 

allowable management fee to be paid 

69128 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

out of the housing project’s general 

operating account and certifying that: 

(i) The borrower and management 

agent agree to operate the housing 

project in accordance with the 

management plan; 

(ii) The borrower and the management 

agent will comply with Agency 

requirements, loan or grant agreements, 

applicable local, state 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) The borrower and the 

management agent will comply with 

Agency notices or other policy 

directives that relate to the management 

of the housing project; 

(iv) The management agreement 

between the borrower and management 

agent complies with the requirements of 

this section; 

(v) The borrower and the management 

agent 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 a management agent is 

proposed and 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. 

(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 graffiti. 

(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. 

(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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69129

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. 

(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. 

(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 energyefficient operation of the housing 

project. 

69130 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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 four 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. 

(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 lowincome 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 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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69131

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. 

(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.

§ 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 nonmonetary 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 or the 

terms of the grant expire. 

(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)(8) 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. 

(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,’’

69132 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

‘‘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. 

(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. 

(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. 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. 

(ii) Fidelity coverage amounts and 

deductible:

Fidelity coverage Deductible

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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69133

(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.. 

(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 

(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, 

elderly units in mixed 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, elderly units 

in mixed housing, and congregate 

housing or group homes: 

(1) For elderly housing, elderly units 

in mixed 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. 

69134 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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: 

(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-tomonth 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. (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). 

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); 

(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 sex 

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. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69135

(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. 

(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 moderateincome 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. 

(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 may 

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. 

(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. 

69136 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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 onebedroom 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. 

(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 § 3560.655(d) 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 Agencyapproved 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; and 

(iv) The Age Discrimination Act of 

1975. 

(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. 

(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, or federal law) while in or on 

any part of this apartment complex 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, or Federal law) in any 

local, state, or Federal court. 

The landlord may require any lessee or 

other adult member of the tenant household 

occupying the unit (or other adult or nonadult person outside the tenant household 

who is using the unit) who commits a drug 

violation to vacate the leased unit 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69137

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, 

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 

when an appropriate unit becomes 

available or when the unit is needed by 

an eligible individual with disabilities. 

Additionally, the lease clause must 

require the borrower to provide tenants 

written notification of the date by which 

they must move to another unit in the 

project. 

(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 cotenants, 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; 

(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; 

(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 projectbased 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.

69138 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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.

§ 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 nonAgency 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. 

(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 cotenant; 

(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 

as follows: 

(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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69139

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; 

(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 noncompliance 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. If occupancy is 

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, 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 

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 nonEnglish speaking individuals, the 

borrower must provide grievance 

procedures in both English and the nonEnglish 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: 

(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; 

69140 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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 handdelivered 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. 

(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. 

(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 another 

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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69141

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.

(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 Agencyfinanced 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; 

(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. 

(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

69142 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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. 

(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 

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, the borrower will deliver a 

notice announcing the rent or utility 

allowance change to the tenants to be 

effective 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.

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69143

§ 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 

note and basic rents for housing 

receiving HUD project based Section 8 

assistance, as specified in 

§ 3560.202(c)(3). 

(1) Borrowers must notify the Agency 

of any HUD rent changes. 

(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: 

(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) HUD section 8 assistance, 

including project-based and vouchers; 

(3) Private rental subsidies; or 

(4) 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 

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. 

69144 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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. 

(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)(2) 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 

established by the borrower in 

accordance with § 3560.155(e); and 

(5) Who have a signed, unexpired 

tenant certification form on file with the 

borrower.

§ 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.

§ 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 lowincome 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 lowincome tenants paying the highest 

percentage of their adjusted annual 

income for Agency approved shelter 

costs. 

(iv) Fourth priority, if the housing 

project has vacant rental units, is to 

eligible low-income applicants on the 

waiting list. 

(v) Fifth priority is to households 

which are residing in a rental unit for 

which they do not qualify on the basis 

of an occupancy waiver or other special 

approval situations. 

(2) In order to provide rental 

assistance to the third, fourth, and fifth 

priority categories, a borrower must 

fully document either that there are no 

very low-income households on the 

housing project’s waiting list or that 

occupancy by low-income households is 

limited as follows: 

(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. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69145

(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 be consistent 

with available funding. Rental 

assistance agreements expire when the 

funds obligated for rental assistance 

units are fully disbursed in accordance 

with the conditions of the agreement. 

(b) Replacing expiring obligations. To 

the extent funds are available for 

replacement units, the Agency will 

renew rental assistance agreements.

§ 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 or prepayment; 

(4) To the extent permitted by law, 

when any rental assistance units have 

not been used for a 6-month period; or 

(5) When the loan cannot be closed. 

(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.

§ 3560.260 Rental subsidies from nonAgency 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.

§ 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 Agencyfinanced multi-family housing (MFH) 

projects, including accounts, budgets, 

reports, and engagements. 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 engagement and must be able to 

report accurate operational results to the 

Agency from these accounts and 

records. 

(b) Acceptable methods of accounting.

(1) Borrowers may use a cash, accrual, 

or modified accrual method of 

accounting, bookkeeping, and budget 

preparations as long as the method is 

consistent with the statements required 

by the engagement in accordance with 

the standards identified in § 3560.308. 

69146 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(2) Borrowers must describe their 

accounting, bookkeeping, budget 

preparation, and financial reporting 

procedures, including Agency-approved 

engagements, 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. 

(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); 

(iii) Reserve account; 

(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, backed by 

collateral provided by the bank, 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. If funds exceed the amount 

covered by Federal deposit insurance, 

borrowers must obtain a collateral 

pledge from the institution to cover all 

funds or must move funds to an 

institution that will insure the funds. 

(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 nonprogram purposes constitutes nonmonetary 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, must be held in trust 

by the borrower for the loan obligation 

until used and serve as security for the 

Agency loan or grant. 

(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. 

(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 the 

engagement and financial reports. Upon 

request, these materials will 

immediately be made available to the 

Agency, its representatives, the USDA 

Office of the Inspector General (OIG), or 

the General 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. 

(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 81⁄2 × 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). 

(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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69147

objectives of the loan and in accordance 

with the applicable Agency 

requirements. 

(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 

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. 

(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 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; 

(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 mini-blind 

replacement. (Turnover maintenance). 

(E) Preventive maintenance expenses 

including occupied unit repairs and 

maintenance as well as common area 

systems repairs and maintenance. 

(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) The cost of duplicating forms for 

those properties not owning a copier. 

This will include the costs of producing 

or purchasing forms and mailing or 

delivering those forms to the project 

site. 

(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, radio, cable TV, and 

telephone books. 

(F) Postage and delivery costs from 

the site including expenses to the 

Agency or other governmental agencies, 

tenants, verifying third parties, central 

management offices, etc. 

(G) Partnership or corporate business 

expenses including state taxes and other 

mandated 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 

including actual costs and surcharges as 

well as deposits and expense of utility 

bonds in lieu of bonds. 

(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). 

(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) Costs of collecting rents on-site 

including bookkeeping supplies and 

recordkeeping items. 

(M) Costs of preparing and 

maintaining tenant files and processing 

tenant certifications including all office 

supplies, copies and other associated 

expenses. 

(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 HFAs. 

(P) All insurance deductibles as well 

as adjuster expenses. 

(Q) Professional service contracts 

(audits and compilations, tax returns, 

energy audits, utility allowances, 

architectural, construction, 

rehabilitation and inspection contracts, 

etc.) 

(R) On-site training pre-approved by 

the Agency provided by outside training 

vendors. 

(S) Site manager salary for additional 

hours associated with congregate 

housing. 

(vii) With prior Agency approval, 

cooperatives and nonprofit 

organizations may use housing project 

funds to pay asset management 

expenses directly attributable to 

ownership responsibilities. Such 

expenses may include:

(A) Errors and omissions insurance 

policy for the Board of Directors. 

(B) Board of Director review and 

approval of proposed Agency’s annual 

operating budgets, including proposed 

repair and replacement outlays and 

accruals. 

(C) Board of Director review and 

approval of capital expenditures, 

financial statements, and consideration 

of any management comments noted. 

(D) Long-term asset management 

reviews. 

(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. 

69148 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(iv) 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. 

(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. 

(vi) 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. 

(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 that are large 

or unreasonable, such as renting 

expensive party halls or hotel rooms 

and payment for alcoholic beverages 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. 

(c) Priorities. The priority order of 

planned and actual budget expenditures 

will be: 

(1) Senior position lienholder, if any; 

(2) Operating and maintenance 

expenses, including taxes and 

insurance; 

(3) Agency debt payments; 

(4) Reserve account requirements; 

(5) Other authorized expenditures; 

and 

(6) Return on owner investment. 

(d) Agency review and approval. (1) 

The Agency will only approve housing 

project budgets that meet the 

requirements of paragraphs (a), (b) and 

(c) 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), (b), and 

(c) 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), (b), 

and (c) 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: 

(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 on the basis of 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. 

(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.

(b) Financial management of the 

reserve account. 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, exceeds 20 

percent of the operating and 

maintenance expenses. If the borrower 

is escrowing taxes and insurance 

premiums, include the amount that 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69149

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, 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. 

(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 Agency 

countersignatures on all withdrawals. 

(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 preapproval by the Agency. 

(2) The Agency will indicate any 

conditions governing withdrawals from 

a reserve account at the time it approves 

the withdrawal. 

(3) In emergency situations, the 

Agency may specify special procedures 

to provide an expedited approval 

process for the use of the reserve 

account. 

(4) 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. 

(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 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: 

(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-ofinterest, 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 Agencyapproved 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. Borrowers must submit 

annual financial reports that meet the 

requirements of this section. The annual 

financial reports to be submitted are the 

Multi-Family Housing (MFH) Project 

Budget with actual expenditures and the 

MFH Balance Sheet. Annual financial 

reports are due to the Agency within 90 

days of the end of the borrower’s fiscal 

year. 

(1) Borrowers with 16 or more units 

in their housing project must base their 

annual financial reports on an 

engagement report completed according 

to agreed upon procedures established 

by the Agency as specified in paragraph 

(b) of this section. Borrowers must 

include the engagement report with 

their annual financial reports submitted 

to the Agency. 

(2) Borrowers with less than 16 units 

in their housing project must submit 

annual financial reports using a limited 

scope engagement based on Agency 

approved procedures and certify that 

the housing meets the performance 

standards established in paragraph (c) of 

this section. Borrowers may use a CPA 

to prepare this report. For properties 

69150 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

that prepare a limited scope 

engagement, the Agency may undertake 

random audits, once every two or three 

years. 

(3) If a third party requires it, the 

borrower may have a CPA prepare an 

audit in accordance with generally 

accepted government auditing standards 

(GAGAS). Costs incurred to obtain this 

audit are an allowable project expense. 

(b) Engagement requirements.

Borrowers required to submit annual 

financial reports based on an 

engagement performed by a CPA must 

meet the following requirements: 

(1) Borrowers must use an Agency 

approved engagement letter. Borrowers 

must submit the results of an 

engagement that examines specific 

records using agreed upon procedures 

established by the Agency and that 

describes the borrower’s performance in 

meeting the standards described in 

paragraph (c) of this section. 

(2) The engagement will be initiated 

by the borrower using the Agency’s 

engagement letter, which will specify 

the engagement program and establish 

the reporting requirements for the 

engagement. 

(3) The engagement must be 

conducted by a CPA in accordance with 

American Institute of Certified Public 

Accountant (AICPA) Standards and 

Agency requirements. 

(4) All engagement reports must be 

prepared for use by the Agency.

(c) 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. 

(d) Other financial reports. (1) 

Nonprofit and public borrower entities 

must submit audits in accordance with 

7 CFR part 3052 that must also include 

the requirements set forth in the limited 

scope engagement. 

(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: 

(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 costeffective 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.

§ 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 Agencyfinanced 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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69151

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.

§ 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 

non-compliance 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. 

(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 whenever a loan servicing action 

on the account involves a change in the 

loan rates or terms or whenever a 

subsequent loan to the borrower is 

closed. 

(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.) 

(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 

69152 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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. 

(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. 

(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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69153

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. 

(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.

(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, an 

environmental review, as required 

under the National Environmental 

Policy Act and in accordance with 7 

CFR part 1940, subpart G, must be 

conducted on all property related to the 

ownership transfer or sale. If 

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. 

(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 

69154 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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. 

(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. 

(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.

(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 through an ownership transfer 

or sale over a period not to exceed the 

remaining economic life of the housing 

or 50 years, whichever is less. 

(2) The Agency may extend the term 

of the loan to a period not to exceed 30 

years or the remaining economic life of 

the housing, whichever is less. 

(3) When loans assumed through an 

ownership transfer or sale are amortized 

on an annual payment basis, the loans 

will be converted, at the 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. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69155

(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. 

(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-ofway through property serving as 

security property. An environmental 

review must be completed in 

accordance with 7 CFR part 1940, 

subpart G, before the Agency approves 

all such sales or other dispositions of 

security property. 

(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. An environmental review must be 

completed in accordance with 7 CFR 

part 1940, subpart G, before the Agency 

can give lease approval for real property 

serving as security for Agency loans. 

(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.

69156 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

§ 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 (i.e., 

granting of a prior interest to another 

lender.) An environmental review must 

be completed in accordance with 7 CFR 

part 1940, subpart G, before the Agency 

can consent to a subordination or junior 

lien against the property. Borrowers 

must use an Agency approved 

subordination agreement. 

(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. 

(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 nonprogram 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. 

(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.

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69157

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. 

(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 nonmonetary default. 

(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. 

(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 

69158 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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, 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 nonidentity 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. 

(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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69159

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 

(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.

(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. 

(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: 

69160 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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 review 

in accordance with 7 CFR part 1940, 

subpart G, 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 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 due 

diligence report.

§ 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. 

(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. 

(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. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69161

(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. (i) The amount of a civil 

penalty imposed under this section 

must not exceed the greater of twice the 

damages the Agency or the project that 

is secured for a loan under this section 

suffered or would have suffered as a 

result of the violation, or $50,000 per 

violation. 

(ii) Determination. 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; 

and 

(G) 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) Remedies for noncompliance. (i) 

Judicial intervention. 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, in the court’s discretion, 

include attorney’s fees and other 

expenses incurred by the United States 

in connection with the action. 

(ii) Reviewability of determination. In 

an action under this paragraph, the 

validity and appropriateness of a 

determination by the Agency imposing 

the penalty must not be subject to 

review. 

(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]

§ 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’ nonprogram 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.

§ 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 

69162 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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. 

(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 nonwarranty 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 Agencyfinanced 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 forprofit 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.

§§ 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.

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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69163

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.

§ 3560.555 Eligibility requirements for offfarm 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 broadbased 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 nonprofit 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 onetenth 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. 

(c) Davis-Bacon wage requirements.

Construction financed with the 

assistance of a Section 516 grant will be 

subject to the provisions of the DavisBacon 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.

§ 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.

69164 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

§ 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).

§ 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 Agencyapproved 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 offfarm 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: 

(1) Off-farm labor housing projects 

financed under section 514 or section 

516 with units that are for migrant 

farmworkers. Housing units for yearround 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.

§ 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. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69165

(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 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 nonrental 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 State Director’s 

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.

§ 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 lowincome 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 onfarm 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.

§ 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 

69166 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

(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). Onfarm 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. 

(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. 

(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 multi-family. 

(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 Agency-financed property 

in all instances, however, the Agency 

may accept a junior lien position if the 

Federal government’s interests are 

adequately secured. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69167

(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.

§ 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, onfarm 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.

§ 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. 

(a) 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 non-profit manner.

§ 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.

69168 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

§§ 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.

§ 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 restrictiveuse 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. 

(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 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 (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 of the prepayment 

request and 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. 

(e) If the Agency determines that the 

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 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 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69169

with the borrower to discuss the 

prepayment request. The Agency and 

other providers of housing assistance for 

very-low, 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 restrictiveuse 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. 

(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 will 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 affect. 

(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 

‘‘as-is’’ 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% of the 

comparable rent for conventional unit 

rent level; and 

(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 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. 

(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 §§ 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). 

(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. 

(iii) If an incentive offer for an equity 

loan is accepted, the equity loan may be 

69170 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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 projectbased 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 the incentive 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. 

(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 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 restrictiveuse 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 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 restrictive-use period offer to 

sell the housing to a qualified nonprofit 

organization or public body in 

accordance with § 3560.659. 

(3) If restrictive-use provisions are not 

in place prior to 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 the Agency determines that 

prepayment will have an adverse impact 

on minorities, then the borrower must 

offer to sell to a qualified nonprofit 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69171

organization or public body in 

accordance with the provisions of 

paragraph (a) of this section. 

(2) 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. 

(3) 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. 

(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-ofinterest (or any persons or parties 

related to any person with identity-ofinterest) 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 low-income families or 

persons for the remaining useful life of 

the housing and related facilities. 

However, currently eligible moderateincome 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. 

(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 bona 

fide 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 

69172 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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). 

(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) 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. 

(c) Owners will provide certification 

stating that they will meet state and 

local laws prior to prepayment 

acceptance.

§ 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 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)(3), or 

(2) Very low-, low-, or moderateincome 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)(2); 

(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 (a)(2); 

(5) The remaining useful life of the 

housing and related facilities if required 

by § 3560.658(a)(3); 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; 

(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 restrictiveuse provisions. 

(a) If a borrower prepays a loan and 

the housing project remains subject to 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69173

restrictive-use provisions, the 

requirements of this section apply after 

prepayment. 

(b) Owners of prepaid housing 

projects will be responsible for ensuring 

that the restrictive-use 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 restrictiveuse 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.

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. 

(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 

69174 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

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. 

(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. 

(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.

§§ 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.

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 69175

Subpart P—Appraisals

§ 3560.751 General. 

This subpart sets forth appraisal 

policies for Agency-financed multifamily 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, lowinterest loans from other sources, taxexempt 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 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. 

(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

69176 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Rules and Regulations 

to the solution of the appraisal problem; 

or 

(iii) A restricted use report, intended 

for Agency use only, that briefly 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 non-contiguous sites, a 

separate appraisal must be developed 

for each site.

§§ 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.

PART 3565—GUARANTEED RURAL 

RENTAL HOUSING PROGRAM

■ 62. The authority citation for part 3565 

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 

U.S.C. 1480.

Subpart E—Loan Requirements

§ 3565.204 [Amended]

■ 63. Section 3565.204 is amended in 

paragraph (c)(2) by removing the words 

‘‘part 1944, subpart E’’ and by adding in 

its place the word ‘‘3560.63 (d).’’

Subpart H—Project Management

§ 3565.351 [Amended]

■ 64. Section 3565.351 is amended in 

paragraph (c) by removing the words 

‘‘part 1944, subpart L’’ and by adding in 

their place the words ‘‘part 3560, subpart 

D.’’

Dated: November 12, 2004. 

Gilbert Gonzalez, 

Acting Under Secretary, Rural Development.

Dated: November 12, 2004. 

J.B. Penn, 

Under Secretary, Farm and Foreign 

Agricultural Services.

[FR Doc. 04–25599 Filed 11–24–04; 8:45 am] 

BILLING CODE 3410–XV–P