67216 Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1944

RIN 0575–AC15

Rural Rental Housing (RRH)

Assistance

AGENCIES: Rural Housing Service, Rural

Business-Cooperative Service, Rural

Utilities Service, and Farm Service

Agency, USDA.

ACTION: Final rule.

SUMMARY: The Rural Housing Service

(RHS), formerly Rural Housing and

Community Development Service

(RHCDS), a successor Agency to the

Farmers Home Administration (FmHA),

amends its regulations for the Rural

Rental Housing (RRH) program. This

action is taken to implement legislative

reforms mandated by the Agriculture,

Rural Development, Food and Drug

Administration, and Related Agencies

Appropriations Act, 1997, Pub. L. 104–

180, enacted August 6, 1996, and to

implement Pub. L. 105–86, enacted

November 18, 1997, which amends the

maximum loan term for Section 515

loans from 50 years to 30 years. The

intended effect of these reforms is to

improve the effectiveness and efficiency

of the Section 515 RRH program.

DATES: The effective date of this final

rule is January 22, 1998.

FOR FURTHER INFORMATION CONTACT:

Linda Armour or Carl Wagner, Senior

Loan Specialists, Multi-Family Housing

Processing Division, RHS, U.S.

Department of Agriculture, Room

5349—South Building, Stop 0781, 1400

Independence Ave., S.W., Washington,

D.C. 20250–0781, telephone (202) 720–

1608.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be

not significant for purposes of Executive

Order 12886 and therefore has not been

reviewed by the Office of Management

and Budget.

Paperwork Reduction Act

The information collection

requirements contained in this

regulation have been previously

approved by the Office of Management

and Budget (OMB) under the provisions

of 44 U.S.C. chapter 35 and have been

assigned OMB control number 0575–

0047, in accordance with the Paperwork

Reduction Act of 1995. Under the

Paperwork Reduction Act of 1995, no

persons are required to respond to a

collection of information unless it

displays a valid OMB number. The valid

OMB control number assigned to the

collection of information in these final

regulations is displayed at the end of the

affected section of the regulation. This

rule does not impose any new

information collection requirements

from those approved by OMB.

Civil Justice Reform

This rule has been reviewed under

Executive Order 12988, Civil Justice

Reform.

In accordance with this rule: (1) all

state and local laws and regulations that

are in conflict with this rule will be

preempted; (2) no retroactive effect will

be given to this rule; and (3)

administrative proceedings in

accordance with 7 CFR part 11 must be

exhausted before bringing suit in court

challenging action taken under this rule.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates

Reform Act of 1995 (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 the private

sector. Under section 202 of the UMRA,

RHS generally must prepare a written

statement, including a 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 one year. When such a

statement is needed for a rule, section

205 of the UMRA generally requires

RHS 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

provisions of Title II of the UMRA) for

State, local, and tribal governments or

the private sector. Therefore, this rule is

not subject to the requirements of

sections 202 and 205 of the UMRA.

National Performance Review

This regulatory action is being taken

as part of the National Performance

Review program to eliminate

unnecessary regulations and improve

those that remain in force.

Programs Affected

The affected program is listed in the

Catalog of Federal Domestic Assistance

under Number 10.415, Rural Rental

Housing Loans.

Intergovernmental Consultation

For the reasons set forth in the Final

Rule related Notice to 7 CFR part 3015,

subpart V, this program is subject to

Executive Order 12372 which requires

intergovernmental consultation with

State and local officials. RHS has

conducted intergovernmental

consultation in the manner delineated

in RD Instruction 1940–J.

Environmental Impact Statement

This document has been reviewed in

accordance with 7 CFR part 1940,

subpart G, ‘‘Environmental Program.’’ It

is the determination of RHS that this

action does not constitute a major

Federal action significantly affecting the

quality of the human environment and

in accordance with the National

Environmental Policy Act of 1969, Pub.

L. 91–190, an Environmental Impact

Statement is not required.

Background

On August 6, 1996, Congress enacted

the Agriculture, Rural Development,

Food and Drug Administration, and

Related Agencies Appropriations Act,

1997, Pub. L. 104–180 (herein referred

to as the Act). The Act included six

reforms to the multifamily housing

(MFH) program, which the Agency was

directed to implement without delay.

Four of the six reforms were directive

and could be implemented as enacted

without the need for public comment.

However, public comment was needed

for the other two reforms, which

provided for substantive changes in the

manner in which MFH loan requests are

processed and gave the Secretary

administrative discretion in their

implementation. Because of the

mandate to implement the reforms

immediately, the rule was published as

an interim final rule on May 7, 1997 (62

FR 25062), effective upon publication.

The rule included a 60-day comment

period, which ended on July 7, 1997.

Discussion of Comments

A total of seventeen written

comments were received from

developers, nonprofit groups, Rural

Development staff, members of

Congress, and state housing agencies.

The Agency appreciates the time and

effort that went into these comments,

many of which offered detailed and

constructive suggestions.

Several commentors expressed their

support for the four directive reforms,
Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations 67217

which have been adopted without

change in this final rulemaking

document:

(1) Assurance That Project Transfers

Are in the Best Interest of the Tenants

and the Government

Two commentors indicated support

for the provisions pertaining to project

transfers. One stressed the importance

of maintaining the Agency’s inventory

in good condition to avoid health and

safety problems.

(2) Elimination of the Occupancy

Surcharge

Two commentors indicated their

support of this legislative change. One

suggested that the monies collected

prior to the elimination of the surcharge

be used for other program opportunities

such as funding the Section 538

program or for servicing rental

assistance (RA), if not returned to the

properties. The Agency will consider

these recommendations on this issue.

(3) Changes to the Equity Loan Program

Two comments were received on the

equity loan program. One indicated

support for the legislative changes and

noted that the Agency has not yet

established an office of rental housing

preservation which would make

decisions relative to prepayment and

incentives, as authorized by section 537

of the Housing Act of 1949. The second

commentor expressed the opinion that

the preservation of low income housing

stock could not be accomplished

without significant financial incentives

for borrowers and predicted that new

approaches to the prepayment issue

would be forthcoming from the courts or

Congress in the near future.

(4) Implementation of Penalties for

Equity Skimming by Project Owners and

Managers

Two commentors indicated their

support for this legislation. One urged

the Agency to act quickly in pursuing

parties who abuse the program to the

detriment of residents and other

borrowers.

The majority of the comments on the

interim final rule addressed the two

reforms that included administrative

discretion in their implementation: (1)

Prioritization of assistance and (2)

assurances that the amount of assistance

provided is no more than necessary.

Based on comments received, several

minor changes have been made in the

final rule.

(1) Prioritization of Assistance

Sections 1944.228, ‘‘Ranking of rural

places based on greatest need for

Section 515 housing,’’ and 1944.229,

‘‘Establishing the list of designated

places for which Section 515

applications will be invited,’’ were

added to 7 CFR part 1944 to implement

the statutory requirements pertaining to

prioritization of Section 515 assistance.

The statute directs the Secretary to

identify and designate rural areas with

the greatest need for Section 515

housing, taking into consideration the

incidence of poverty, the lack of

affordable housing and existence of

substandard housing, the lack of

mortgage credit, the rural characteristics

of the location, and other factors

determined by the Secretary that

demonstrate the need for affordable

housing.

Section 1944.228 of the interim rule

provides that places will be ranked as

follows: Places must qualify as rural

areas in accordance with 7 CFR 3550.10,

lack mortgage credit for borrowers in

accordance with § 1944.211(a)(2), and

demonstrate a need for multifamily

housing based on the following factors,

with equal weight given to each: the

incidence of poverty, measured by

determining households below 60

percent of the county rural median

income; the incidence of substandard

housing, measured by determining the

number of occupied housing units

lacking complete plumbing or having

more than one occupant per room; and

the lack of affordable housing, measured

by determining households below 60

percent of rural median income who are

paying more than 30 percent of income

in rent.

Twelve commentors addressed the

provisions of § 1944.228 and offered

thoughtful suggestions for modifying the

ranking system. Specific areas

addressed were:

Ranking Factors

Several commentors felt the ranking

factors should be expanded. One

commentor suggested using additional

factors such as the availability of

existing subsidized housing, the number

of vacancies in existing subsidized

housing, demand, the availability of

services, the anticipated growth of the

area, and the availability of adequate

utilities. We agree that these factors

need to be considered and, in fact, they

are taken into consideration, either in

the selection of ranked places for the

designated place list or in the market

feasibility determination. For example,

after places have been ranked using the

Census data, the list is reviewed to

determine if any of the ‘‘build and fill’’

conditions exist, one of which is a high

vacancy rate in existing RHS or similar

assisted rental units. Places with any

‘‘build and fill’’ condition may not be

included on the designated place list;

they are deferred until the condition no

longer exists. The other recommended

factors (demand, anticipated growth,

availability of housing, services, and

utilities) are part of the market

feasibility determination. The Agency

believes this is the most effective way to

take these factors into consideration. It

would not be feasible to obtain and

maintain current market data on all

rural communities for inclusion in the

initial ranking process.

Weights of the Ranking Factors

Three commentors felt the formula

provided an advantage to larger rural

communities and two of these expressed

the opinion that the Agency should

consider percentages instead of raw

numbers to give smaller rural

communities a better opportunity to

compete. In fact, the formula used by

the Agency, which was not published in

the Federal Register, considered both

raw numbers and percentages. A

ranking score was assigned to each

place for the three factors (income, rent

overburden, and substandard housing)

based on the percentage of its total

households and on the actual number of

households or substandard units. Each

score for these six rankings was totaled

to reach a final ranking score. This

method targets communities that

demonstrate a high potential need for

housing assistance both by raw numbers

and high percentages of their total

households. This has resulted in a good

mix of small to mid-size rural

communities, and we plan to continue

with this methodology.

One commentor suggested giving less

weight to substandard housing; another

suggested giving more weight to rent

overburden. We considered these

suggestions and ran data for several

States with the adjusted factors. The

results were inconclusive and we feel

that, in the absence of supporting data

or documentation, it would be

premature to make changes in the

formula. We intend to leave the weights

unchanged for the remainder of the 3-

year designated place cycle but will

continue to evaluate the benefits of

modifying the formula for future cycles.

Use of 60 Percent of County Rural

Median Income

Two commentors disagreed with the

Agency’s use of 60 percent of county

rural median income to determine

households in poverty. One commentor

suggested using 80 percent; the other

felt strongly that 30 percent more

closely represented households in

poverty, and thus areas of greatest need,
67218 Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations

as required by the statute. The Agency

has compared the various percentages of

county rural median income in several

states to the National poverty figure.

Based on our review, we agree that 30

percent more closely approximates the

National poverty figure. As a result,

ranking will be based on households at

or below 30 percent of county rural

median income. The ranking data has

been calculated for all States based on

this figure and will be used to select any

additional designated places. Places that

are currently on the designated place

list will remain on the list for the

remainder of their 3-year designation

period, or until removed or deferred in

accordance with § 1944.229(d). The

revised ranking data and list of

designated places are discussed further

in the ‘‘Implementation Proposal’’.

Adding Counties to the Ranking List

Two commentors suggested the

Agency rank counties as well as

communities. This is an issue that was

considered at length in the development

of the interim final rule. Because the

statute mandates the Secretary to

identify and target areas of greatest

need, we felt that a county-wide

designation was too broad, since the

needs of the communities within a

county can vary widely. If an entire

county were designated, an applicant

might well choose areas that have

higher incomes and less substandard

housing, even though the true need for

housing may be greater in another

community. We believe it is necessary

to identify and designate specific

communities to ensure that funds are

directed to areas of greatest need and,

therefore, we have not revised this

provision.

Flexibility in the Ranking Factors

Eight commentors felt the ranking

factors should allow more flexibility for

state and local conditions. This is

another issue that was discussed at

length in the development of the interim

final rule. We recognize that conditions

and goals vary from state to state;

however, we believe it is critical to

maintain National standards for

program consistency. In addition, it

would be difficult for States to obtain

objective data that could be added to the

ranking formula. Instead of providing

flexibility in the ranking factors, we

provided flexibility in the selection of

designated places. This was

accomplished in the regulation by

allowing States to select places from

further down the ranking list, but still

within the top ranked, that have been

identified as high need areas in the state

Consolidated Plan or state needs

assessment. To provide further

flexibility, we have included provisions

in the final rule for States with an active

state leveraging program. Details are

given below under the heading

‘‘Designated places for States with an

active state leveraging program’’.

As published in the interim final rule,

§ 1944.229, ‘‘Establishing the list of

designated places for which Section 515

applications will be invited’’, provides

that the number of designated places

may equal up to 5 percent of the State’s

total eligible rural places but must

equal, in all cases, at least 10 places. To

be included on the list of designated

places, a place must have 250 or more

households as a minimum feasibility

threshold for multifamily housing and

may not have any of the ‘‘build and fill’’

conditions specified in § 1944.213(f)(2).

Places that meet the minimum size

threshold and do not have any ‘‘build

and fill’’ conditions are then selected in

rank order to form the list of designated

places. This section provides the

flexibility for States, with National

Office concurrence, to select up to 10

percent of their designated places to

provide geographic diversity or to reach

high need areas, provided such places

are within the top-ranked 10 percent of

the state’s total rural places.

Nine commentors addressed the

provisions of § 1944.229 in the

following areas:

Establishing the Number of Designated

Places

Five commentors felt that the limit of

5 percent of the state’s total eligible

rural places was too restrictive and did

not provide sufficient diversity.

Recommended percentages ranged from

10 to 20 percent. One commentor

recommended a percentage of places

equal to 25 percent of the state’s total

rural households. An analysis of several

states showed that the latter suggestion

was equivalent to approximately 10

percent of the states’ total rural places.

We reviewed the ranking data for

several States and found that there was

little difference in the ranking scores

between places that rank in the top 5

percent compared to those within the

top 10 to 20 percent, simply because of

the volume of places being ranked.

Therefore, a small increase in the

percentage of designated places will still

target the neediest communities.

Accordingly, the 5 percent limit has

been modified in the final rule to allow

States to designate up to 10 percent of

their total eligible rural places. In

addition, based on comments that

expressed concern that Indian

reservations, colonias, Empowerment

Zone and Enterprise Communities (EZ/

ECs), and Rural Economic Area

Partnership (REAP) communities were

frequently not included on the list of

designated places, the final rule

provides that States may designate these

special high-need areas in addition to

their 10 percent or minimum 10 places.

Build and Fill Conditions

Three commentors mentioned their

support for ‘‘build and fill’’, which is

widely understood to mean that no

additional Section 515 housing will be

approved if other Section 515 or similar

assisted units have been approved, are

under construction, or not yet filled.

However, the ‘‘build and fill’’ provisions

include other conditions which indicate

that the market does not currently need

additional rental housing: existing

Section 515 or similar assisted housing

units are experiencing high vacancies; a

request for a Servicing Market Rate Rent

(SMR) is pending or in effect and still

needed; or the need in the market area

is for additional rental subsidies and not

for additional housing units. Places with

any of these conditions may not be

included on the designated place list.

States are responsible for reviewing

their ranking list, consulting with HUD

and other housing agencies, and

deferring places with ‘‘build and fill’’

conditions. In response to the comments

we received recommending that the

Agency consider these or similar market

factors in the ranking data, we believe

the provision which defers places with

‘‘build and fill’’ conditions

accomplishes just that. One commentor

noted that places were listed on the

designated place list with high

vacancies in assisted housing

complexes. Any such instances should

be brought to the attention of the RHS

State office staff for their review. The

Agency will continue to stress the

importance of reviewing the designated

place list annually for ‘‘build and fill’’

conditions. Another commentor

recommended including low income

housing tax credit (LIHTC) units in the

definition of assisted housing

complexes for purposes of ‘‘build and

fill’’. We agree and have added a

specific reference to LIHTC units in the

‘‘build and fill’’ provisions in

§ 1944.213(f)(2).

Minimum Number of Households for

Designated Places

Four commentors objected to the

requirement that designated places have

a minimum of 250 households and

noted that market demand should be the

determining factor, not an arbitrary size

requirement. We agree that market

demand should determine project

feasibility; however, we feel that places
Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations 67219

with fewer than 250 households rarely

have sufficient demand or the support

services necessary for multifamily

complexes. We believe it is prudent to

maintain a National feasibility standard

and, therefore, have retained this

provision. We have also retained the

ability for States that have been

successful in developing and operating

multifamily units in very small

communities to request an exception

from the National Office to establish a

lower state-wide feasibility threshold. In

addition, based on concerns that Indian

reservations are sometimes excluded

because households are frequently split

between two or more communities

within the same reservation, we have

modified this provision to specify that,

for Indian reservations, there must be

250 or more households on the

reservation.

Designated Places for States With an

Active State Leveraging Program

Eight comments were received from

Rural Development State staff, state

housing agencies, members of Congress,

and applicants, urging the Agency to

provide more flexibility for States with

an active state leveraging program. It

was noted that, in many cases, the areas

targeted by the state agencies did not

correspond to the RHS designated

places. As a result, funds that had been

set aside by state agencies for leveraging

with RHS funds were not able to be

fully used. The Agency is committed to

partnering with other providers of

resources; however, at the same time,

we have a legislative mandate to

designate rural areas of greatest need

and to direct RHS funds to those areas.

To accomplish both priorities, we have

added provisions in the final rule to

allow States with a formal state

leveraging program and agreement with

their state agency to develop a

partnership designated place list with

the state agency, which must be

approved by the National Office. Places

selected for the list must be high-need

areas based on criteria consistent with

the Agency’s statutory requirements as

well as the state’s authorizing

requirements. All loan requests

(including those for places on the

partnership designated place list) will

be scored together as one group. In order

of point score or, where there are point

score ties, in order of point score and

number assigned in accordance with

§ 1944.231(b)(3), two ranking lists will

be formed: the RHS ranking list will

include loan requests for places on the

RHS place list, and the partnership

ranking list will include loan requests

for places on the partnership place list.

Selection for further processing will be

as follows: Loan requests must first be

selected from the RHS ranking list that,

based on total development cost (TDC),

are proportionate to the State’s RHS

allocation. Loan requests will then be

selected in order of highest point score

(or point score and tie-breaker number),

regardless of whether the loan requests

are on the RHS ranking list or the

partnership ranking list. For example, a

State with a Section 515 allocation of $2

million has three loan requests on the

RHS ranking list with point scores of 20,

9, and 5 respectively; and two loan

requests on the partnership ranking list

with point scores of 18 and 15. The first

loan request that will be processed is

the highest ranked proposal on the RHS

list, with a point score of 20. This

request has a TDC of $1.2 million, of

which the RHS loan request is $500,000.

The next request that will be processed

is the second ranked proposal on the

RHS list, with a point score of 9. This

loan request has a TDC of $1 million, of

which the RHS loan request is $750,000.

The total amount of RHS funds

requested for these two proposals

($1,250,000) is less than the RHS

allocation of $2 million; however, the

total TDC for the two requests equals

$2.2 million, which exceeds the State’s

allocation. This satisfies the provision

that loans must be funded in places on

the RHS designated place list

proportionate to the RHS allocation.

Having satisfied this provision, the next

loan requests will be selected in order

of highest point score, regardless of

whether they are on the RHS list or the

partnership list. In this example,

assuming there are sufficient funds

remaining, the next loan request to be

processed would be the 18-point request

on the partnership list, followed by the

15-point request on the partnership list,

and then by the 5-point request on the

RHS list.

Section 1944.230 was added in the

interim final rule to establish provisions

on loan application submission

deadlines and the availability of funds.

This section specifies that the Agency

will publish annually in the Federal

Register a Notice of Funds Availability

(NOFA), any limits on the amount of

individual loan requests, the dates for

the funding cycles, and the deadline for

submission of loan applications.

Five commentors addressed this

section. Two commentors expressed

their support for the NOFA system; one

commentor was opposed; the other two

offered suggestions but did not indicate

strong feelings one way or the other.

One of the supporters felt the NOFA

system was a very cost effective way for

developers to participate in the program

without having development money

tied up for several years waiting for

funds to become available. We agree,

and would like to add that the decision

to move to a NOFA system was reached

with extensive input from the Section

515 stakeholders who participated in

the development of the reform

regulations.

The commentor who opposed the

NOFA system felt that it: (1) Encouraged

applicants to expend funds for

proposals that might not materialize; (2)

eliminated nonprofit applicants because

they lack the time and money to put

together an application; and (3) nearly

eliminated leveraging because of the

problems coordinating with partners.

On the first issue, we believe the NOFA

system will be more cost effective, not

less, since applicants do not have to

incur costs over a period of time waiting

for funds to become available. The

submission requirements for applicants

are the same under the NOFA system as

under the previous regulations, so the

cost of submitting a loan request has not

changed; the difference is that, under

the previous system, applicants were

required to maintain the site option and

update the market and financial

information annually and still were not

guaranteed of funding because of the

backlog of requests and limited

availability of funds. Under the NOFA

system, applicants know within a short

timeframe whether their loan request

has been selected. No further costs are

incurred unless or until the applicant

reapplies in the next funding cycle. As

a point of interest, the Agency is

reviewing the Section 515 submission

requirements to determine if the initial

cost to applicants can be reduced, for

example, by modifying the initial

market analysis requirements. These

changes are being considered as part of

the Agency’s ‘‘reinvention’’ regulation,

which is scheduled to be published for

comment early in 1998. On the second

issue, we do not believe the NOFA

system precludes nonprofits from

applying. In fiscal year 1997, the period

of time for submitting applications was

shortened because of the time involved

in writing and publishing the

regulations. However, in future years,

the Agency will publish NOFA as early

as possible in the fiscal year and

provide a longer application period. In

addition, places are designated for 3

years, so applicants can continue to

develop applications prior to

publication of NOFA. On the third issue

of coordinating NOFA with other

funding cycles, we believe this issue

will also be alleviated by the

publication of NOFA early in the fiscal

year. The earlier publication of NOFA
67220 Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations

will enable States to coordinate the RHS

funding cycle with the state agency’s

funding cycle. Three other commentors

on this section also mentioned the

importance of coordinating with other

funding cycles and publishing the

NOFA as early as possible.

One commentor suggested adding a

provision that a project must have full

funding committed by the end of the

fiscal year and must start construction

within a specified number of days (270

was suggested) or lose its obligation. We

agree that it is necessary to establish and

enforce processing deadlines or

timeframes and we are addressing this

issue in the reinvention of the

multifamily regulations.

Section 1944.231, processing loan

requests, was revised in the interim

final rule to incorporate processing

procedures for the NOFA system and to

add provisions for scoring and ranking

loan requests under the new system. Six

commentors addressed this section in

the following areas:

Application Requirements

Two commentors discussed the

application process and requirements.

One suggested that the Agency develop

a uniform application package and

checklist to ensure that all applications

are received in the same format and

judged by compliance to that format. We

think this is an excellent idea and are

developing a checklist and

administrative guidance on determining

a complete application that will be

provided to States concurrently with the

publication of this rule. The other

commentor objected to the elimination

of the term ‘‘preapplication’’, believing

this served no useful purpose and was

changed merely for the sake of change.

We adopted the term ‘‘initial loan

request’’ (or ‘‘initial application’’)

because we believe it to be more

appropriate for the NOFA process,

which is a one-step annual selection

process instead of the two-step process

previously used, in which

preapplications were kept on hand until

funds became available. We also feel the

terms are more consistent with those

used by other lenders.

Scoring Loan Requests

The interim regulation provides that

loan requests will be scored based on

five factors:

(1) The presence and extent of

leveraged assistance (including services,

abatement of taxes, etc.) for the units

that will serve RHS income-eligible

tenants, not including tax credits or

donated land. (0 to 20 points)

Five commentors addressed this loan

scoring factor. One commentor felt the

Agency needed to quantify amounts for

services and tax abatements; another felt

the 0–20 point range was too subjective.

The same commentor recommended

that the Agency reexamine its decision

to give points for leveraged assistance

because the benefits of the leveraged

funds might be offset by an increase in

demand for rental assistance. Another

commentor felt that leveraging should

not dominate the scoring and suggested

that the Agency consider several

additional factors, which are discussed

below in ‘‘Other scoring factors’’. One

commentor said it was unclear whether

tax credit funds were eligible to receive

points for leveraging, and three

commentors recommended that tax

credit funds that are dedicated back to

the project’s development or operation

or to tenant subsidies be eligible to

receive points.

In response to the comment that the

range of 0 to 20 points is too subjective,

the Agency provided separate

administrative guidance to RHS staff at

the time the regulation was published to

ensure that all loan requests were scored

consistently. We also provided guidance

on establishing a value for services and

tax abatements. On the issue of whether

tax credit funds may be considered

leveraged assistance for purposes of

awarding points, we agree that any

funds the applicant contributes to the

proposal in excess of his or her required

contribution, including tax credit

proceeds, should be eligible for

consideration for points as long as there

is an equal or positive impact on basic

rents. We have modified this provision

accordingly in the final rule. Regarding

the demand for rental assistance (RA),

we do not foresee a major impact on RA

usage, especially with the increased

interest in developing mixed-income

complexes that require only partial RA.

(2) The loan request is for units to be

developed in a colonia, tribal land, or

EZ/EC community, or in a place

identified in the state Consolidated Plan

or state needs assessment as a high need

community for multifamily housing. (20

points)

No comments were received on this

loan selection factor; however, the

Agency inadvertently omitted REAP

(Rural Economic Area Partnership)

communities in the list of high need

areas in the interim final rule. This

omission has been corrected in the final

rule.

(3) The loan request is in support of

a National Office initiative announced

in NOFA. (20 points)

One commentor addressed this factor,

expressing a concern that, without

specific parameters, the factor could be

used for politically motivated

initiatives.

This factor was developed to ensure

there is flexibility in the regulation for

initiatives that are consistent with the

statute that would enable the Secretary

to direct funds to specific areas or for

specific purposes in the event of

unforeseen circumstances or events. We

feel it is important to maintain this

flexibility and, in the absence of other

opposing comments, we have retained

this provision.

(4) The loan request is in support of

an optional factor developed by the

State that promotes compatibility with

special housing initiatives in

conjunction with state-administered

housing programs such as HOME funds

or low income housing tax credits

(LIHTC). A factor thus developed cannot

duplicate factors already included in

this paragraph and must be provided to

the National Office prior to the funding

cycle for concurrence and inclusion in

the NOFA. (20 points)

One comment was received on this

provision. The commentor felt that the

factor needed further description and

expressed a concern that it could be

used to give preference to LIHTC loan

requests, effectively excluding other

loan requests.

This provision was included to give

Rural Development State Directors more

flexibility in working with their states to

accomplish common housing goals,

which we believe is critical to the

Agency’s partnership efforts. Factors

developed under this provision require

National Office concurrence, and we

have retained this provision in the final

rule.

(5) The loan request includes donated

land meeting the provisions of

§ 1944.215(r)(4). (5 points)

One commentor felt that the Agency

needed to redefine its provisions

pertaining to preference for donated

land in § 1944.215(r)(4), stating that the

1-year ownership requirement was too

restrictive. The same commentor

expressed the opinion that the value of

land provided at no cost to the project

should be included as leveraging or

factored into the evaluation of costs.

On the first issue, the provisions for

donated land preference are based on

statute, and pertain to land donated by

States, units of local government, public

bodies, and nonprofit organizations. The

1-year ownership restriction was added

to prevent abuse of this preference and

may be waived by the State Director if

it is clearly documented that there was

no intent to circumvent the provisions.

On the issue of including donated

land as leveraged assistance or factoring

the value into the evaluation of costs,
Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations 67221

the regulations do provide for this.

Section 1944.211(a)(4) provides that the

borrower’s contribution may be in the

form of cash, land, or a combination

thereof. Any land value (as determined

by the appraisal) that exceeds the

borrower’s required contribution may be

considered leveraged assistance up to

the amount which, when added to the

loan and grant amounts from all

sources, does not exceed the security

value of the project. This applies to all

donated land; therefore, donated land

meeting the provisions of

§ 1944.211(a)(4) may receive 5 points

under the donated land scoring factor

and may also be eligible for points for

leveraged assistance under the leveraged

assistance factor. We have revised the

point score factor for leveraged

assistance to remove the exclusion of

donated land.

Other Scoring Factors

Several commentors suggested

additional factors for scoring loan

requests. One commentor recommended

awarding points for proposals in

communities with RUS financed water

or sewer systems to encourage total

rural development. We agree there is

merit in encouraging total rural

development; however, awarding points

for RUS financed facilities would

penalize other communities with

adequate systems that were not

developed through RUS, or

communities whose residents are

unable to support the cost of these

systems. In developing the interim final

rule, we considered a similar provision

whereby communities would be

required to have water and sewer

systems to qualify as a designated place;

however, for the same reason, i.e., that

communities that could not support the

cost would be penalized, we did not

adopt this provision. Another

commentor noted that leveraged

assistance should not dominate the

scoring, and suggested other factors to

consider such as design, construction

quality, experience of the development

team, resident services, ease of

maintenance, and compatibility with

the community. We agree these factors

are critical to a successful proposal and,

in developing the interim final rule, we

considered awarding points for many of

these same factors. However, we felt it

would not be possible to develop

standards for factors that require

subjective judgments, such as an

assessment of quality or experience, that

could be equally applied to all

proposals. With our competitive

selection process, we believe it is

essential to maintain an objective

scoring process and, therefore, we have

not adopted these factors.

Nonprofit Preference

One commentor supported the

preference for nonprofit applicants but

asked for clarification on how the

preference was given; another

commentor stated that loan requests

from nonprofit applicants should be

selected by merit and not by lottery. In

response to the first comment,

preference is given to loan requests from

nonprofit or public body applicants

meeting the provisions of § 1944.231(e)

by giving preference in the event of

point score ties. If there are point score

ties for loan requests from two or more

applicants meeting the provisions of

§ 1944.231(e), selection is made by

lottery. In response to the suggestion

that applicants be selected by merit and

not by lottery, we feel it would not be

possible to develop objective standards

for judging the quality or experience of

applicants that could be uniformly

applied; therefore, we have retained the

lottery provisions for point score ties.

Conditional Commitments

Two commentors recommended that

the Agency issue a conditional or ‘‘soft’’

commitment when funding from other

sources is contingent upon RHS

funding. We recognize that this has been

a problem in many instances, with both

parties wanting the other to make the

first commitment. The following policy

will be followed: The Agency will

publish NOFA as early in the year as

possible to coordinate with other

funding cycles. Loan proposals that

include secondary funds from other

sources that have been requested but

have not yet been committed will be

scored and ranked based on the

requested funds: Provided, That (1) the

applicant includes evidence of a filed

application for funds, and (2) the

funding date of the requested funds will

permit processing of the loan request in

the current year, or, in the event the

applicant does not receive the requested

funds, will permit processing of the next

highest ranked proposal in the current

year. States will issue a conditional

commitment letter to the applicant with

a specific deadline for providing a

commitment of funds from the other

lender. If the deadline is not met, the

application will be returned as

incomplete. The next highest ranked

proposal will then be selected for

further processing.

(2) Assurances That the Amount of

Assistance Provided is No More Than

Necessary

Section 1944.213 was revised in the

interim final rule to implement the

statutory reforms pertaining to

necessary assistance. Four commentors

expressed their support for these

provisions and recommended minor

revisions as follows:

Developer’s Fees

One commentor noted that the section

on developer’s fees was included twice,

once in § 1944.213(a)(1)(iv) and again in

§ 1944.213(a)(2). This error has been

corrected in the final rule.

Fee Norms

One commentor expressed support for

the fee norms in § 1944.213(a)(1) but

suggested that the rule clarify that the

fee norms are to be used only in cases

where an executed Memorandum of

Understanding (MOU) with the state

agency is not in effect.

The regulation pages provided to RHS

staff included a provision to this effect,

as well as other administrative

guidance, that was not published in the

Federal Register. Interested parties may

obtain a copy of the regulation pages

from any Rural Development office.

Loan Request Analysis

The same commentor expressed

support for the requirement that RHS

consult with the applicant and the state

allocating agency in cases of potential

excess assistance to strive to reach an

agreement for reducing any excess, and

asked that the phrase ‘‘and state agency’’

be added after the words, ‘‘In the event

that excess assistance is not reduced

through an agreement with the

applicant,’’ in § 1944.213(a)(3)(iii). This

revision has been made in the final rule.

Excess Assistance

Two commentors suggested that if

excess assistance is determined, the

funds be put into project reserves or

otherwise used to benefit the project,

instead of reducing the amount of

assistance. One of the commentors

noted that current mandated reserve

levels are minimal and it would make

good sense to increase the reserve level.

We agree that additional funds could

be used to benefit the project; however,

we do not believe this would be

consistent with our statutory mandate to

provide only the amount of assistance

necessary for the development of the

project. As a point of interest, the

project reserve requirements are being

revised as part of the reinvention effort,

which should alleviate the problems we
67222 Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations

have experienced because of

underfunded reserves.

In addition to the reforms discussed

above, this rule includes a change in the

maximum loan term for Section 515

loans from 50 years to 30 years. This

change is mandated by Pub. L. 105–86,

enacted November 18, 1997.

Implementation Proposal

The provisions of this rule become

effective 30 days from the date of

publication and all loans will be

processed in accordance with the

revised regulations. The final rule

changes the income basis for the ranking

data from 60 percent of county rural

median income to 30 percent and

increases the number of designated

places that may be selected. This, in

turn, may affect loan requests on hand

that were issued an AD–622, ‘‘Notice of

Preapplication Review Action,’’ inviting

a formal application prior to November

7, 1996 (the date Agency staff were

advised not to issue additional AD–622s

pending the implementation of the new

statutory requirements). For purposes of

this discussion, these loan requests will

be referred to as ‘‘AD–622s’’.

The interim final rule announced the

Agency’s intent to fund AD–622s on

hand, in date order received, provided

they met the new statutory requirements

and were in designated places. Agency

staff were directed to return AD–622s

that were not in designated places. This

was later amended by a Notice

published in the Federal Register (62

FR 32752) on June 17, 1997, which

directed Agency staff to hold the AD–

622s until after the publication of the

final rule because of anticipated changes

in the designated place requirements.

Based on the large number of

comments supporting an increase in the

number of designated places, the final

rule has been modified to allow States

to select designated places up to 10

percent of their total rural places. Places

currently on the designated place list

will remain on the list for the duration

of their 3-year designation period or

until removed or deferred in accordance

with § 1944.229(d). States may add

places from the new ranking list up to

the maximum 10 percent.

Using the revised place list, States

may process AD–622s in designated

places, in date order the complete

application was received, up to the

amount of the State’s allocation.

Existing AD–622s may be processed in

this manner until the beginning of FY

2000. As in FY 1997, NOFA for FY 1998

will list those States that have AD–622s

on hand that will use their direct

allocation.

List of Subjects in 7 CFR Part 1944

Administrative practice and

procedure, Aged, Handicapped, Loan

programs—housing and community

development, Low and moderate

income housing—Rental, Mortgages,

Nonprofit organizations, Rent subsidies,

Rural areas.

Therefore, chapter XVIII, title 7, Code

of Federal Regulations is amended as

follows:

PART 1944—HOUSING

1. The authority citation for part 1944

continues to read as follows:

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

Subpart E—Rural Rental and Rural

Cooperative Housing Loan Policies,

Procedures, and Authorizations

2. Section 1944.205 is amended in the

definition of ‘‘Eligible tenants or

cooperative members’’ by revising the

words ‘‘exhibit C of subpart A of this

part 1944 (available in any FmHA or its

successor agency under Pub. L. 103–354

office)’’ to read ‘‘7 CFR 3550.53’’, and by

adding in alphabetical order definitions

to read as follows:

§ 1944.205 Definitions.

* * * * *

EZ/EC. Empowerment Zone or

Enterprise Community.

* * * * *

REAP. Rural Economic Area

Partnership.

* * * * *

3. Section 1944.213 is amended by

removing paragraph (a)(1)(iv), in

paragraph (a)(3)(iii) by adding the words

‘‘and state agency’’ following the words

‘‘In the event that excess assistance is

not reduced through an agreement with

the applicant’’; and by adding the word

‘‘, LIHTC’’ following the word ‘‘HUD’’ in

the introductory text of paragraph (f)(2)

and in the first sentence of paragraphs

(f)(2)(ii) and (f)(2)(iii).

4. Section 1944.214 is amended by

revising paragraph (b) to read as follows:

§ 1944.214 Rates and terms.

* * * * *

(b) Amortization period. Each loan

will be scheduled for payment within a

period that is necessary to assure that

the loan will be adequately secured,

taking into account the probable

depreciation of the security. The

payment period will not exceed 30

years; however, if necessary to ensure

affordability, the loan may be amortized

for a period not to exceed 50 years.

5. Section 1944.228 is amended in

paragraphs (c)(1) and (c)(3) by revising

the words ‘‘60 percent’’ to read ‘‘30

percent’’.

6. Section 1944.229 is amended by

revising paragraphs (a), (b)(1), (c), and

(d), and by adding a new paragraph (f)

to read as follows:

§ 1944.229 Establishing the list of

designated places for which Section 515

applications will be invited.

* * * * *

(a) Establishing the number of

designated places. Initially, the number

of designated places may equal up to 10

percent of the state’s total eligible rural

places ranked in accordance with

§ 1944.228, but must equal, in all cases,

at least 10 places. For example, in a

state with 1,000 total rural places, the

State may designate up to 10 percent, or

100 places. However, in a state with 60

total rural places, the State would use

the minimum number of 10 places,

since 10 percent of 60 equals 6. In states

where 10 percent equals more than the

minimum number of 10, consideration

in determining the number of places to

include on the list should be given to

the size and population of the state,

funding levels, and the potential for

leveraging. If warranted by funding

levels, the Administrator may authorize

in NOFA the selection of designated

places up to 20 percent of the States’

total rural places.

(1) States may designate a higher

number of places than 10 percent or the

minimum 10 places to reach high-need

areas in accordance with paragraph

(c)(3) of this section.

(2) States that anticipate high loan

activity because of leveraging may

designate a number of places higher

than 10 percent or the minimum 10

places with the concurrence of the

National Office.

(b) * * *

(1) Must have 250 or more households

as a minimum feasibility threshold for

multi-family housing, or, for Indian

reservations, must have 250 or more

households within the boundaries of the

reservation; and

* * * * *

(c) Selection of designated places.

Places meeting the requirements of

paragraph (b) of this section will be

selected from the ranking list as follows:

(1) At least 80 percent of the State’s

total designated places must be selected

in rank order from the list.

(2) With concurrence from the

National Office, up to 20 percent of the

State’s designated places may be

selected for geographic diversity. For

example, in a state with 1,000 total rural

places, the State has elected to select

designated places equal to the

maximum 10 percent, or 100 places. Of
Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations 67223

the 100 places, at least 80 percent, or 80

places, must be selected from the places

that meet the requirements of paragraph

(b) of this section in order of their

ranking; up to 20 percent, or 20 places,

may be selected for geographic

diversity. Places selected for geographic

diversity must be the highest ranked

place in each geographic division

designated by the State, which must

correspond with established State

divisions, such as districts, regions, or

servicing areas.

(3) In addition to the designated

places selected in accordance with

paragraphs (c)(1) and (c)(2) of this

section, States may designate the

following high need areas for multifamily housing:

(i) Places identified in the state

Consolidated Plan or similar state plan

or needs assessment report.

(ii) EZ/ECs, Indian reservations or

communities located within the

boundaries of tribal allotted or trust

land, colonias, or REAP communities.

(d) Length of designation. Places will

remain on the list of designated places

for 3 years or until a loan request is

selected for funding or the community

is otherwise deferred for other ‘‘build

and fill’’ conditions, whichever occurs

first. Places that are deferred before the

end of the 3-year designation period

will be reviewed annually for potential

inclusion on the next year’s list of

designated places. A place may be

removed from the list prior to the end

of the 3-year designation period because

of a substantial loss of income-eligible

population or an increase in the

affordable rental housing supply, for

example, a place that experiences the

closing of a military base or other major

employer.

* * * * *

(f) Partnership designated place list.

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.

Ranking and selection of loan requests

for places on the partnership designated

place list will be in accordance with

§ 1944.231(b)(3)(iii) and § 1944.231

(b)(6) of this subpart.

7. Section 1944.231 is amended by

revising paragraphs (b)(2)(iii)(A) and

(b)(2)(iii)(B), and by adding paragraphs

(b)(3)(iii) and (b)(6) to read as follows:

§ 1944.231 Processing loan requests.

* * * * *

(b) * * *

(2) * * *

(iii) * * *

(A) The presence and extent of

leveraged assistance for the units that

will serve RHS income-eligible tenants

at basic rents comparable to those if

RHS provided full financing. Eligible

types of leveraged assistance include

loans and grants from other sources,

contributions from the borrower above

the required contribution indicated by

the Sources and Uses Comprehensive

Evaluation, and tax abatements or other

savings in operating costs provided that,

at the end of the abatement period when

the benefit is no longer available, the

basic rents are comparable to or lower

than the basic rents if RHS provided full

financing. Scoring will be based on the

presence and extent of leveraged

assistance for each loan request

compared to the other loan requests

being reviewed, computed as a

percentage of the total development cost

of the units that will serve RHS incomeeligible tenants. A total monetary value

will be determined for leveraged

assistance such as tax abatements or

services in order to compare such items

equitably with leveraged funds. As part

of the loan application, the applicant

must include specific information on

the source and value of the services for

this purpose. Proposals will then be

ranked in order of the percent of

leveraged funds and assigned a point

score accordingly. Loan proposals that

include secondary funds from other

sources that have been requested but

have not yet been committed will be

processed as follows: the proposal will

be scored based on the requested funds:

Provided, that the applicant includes

evidence of a filed application for the

funds; and the funding date of the

requested funds will permit processing

of the loan request in the current

funding cycle, or, if the applicant does

not receive the requested funds, will

permit processing of the next highest

ranked proposal in the current year. The

Agency will issue a conditional

commitment to the applicant with a

specific deadline for providing a

commitment of funds from the other

source. If the deadline is not met, the

application will be returned as

incomplete and the next ranked

proposal will be processed. (0 to 20

points)

(B) The loan request is for units to be

developed in a colonia, tribal land, EZ/

EC, or REAP community, or in a place

identified in the state Consolidate Plan

or state needs assessment as a high need

community for multi-family housing.

(20 points)

* * * * *

(3) * * *

(iii) States with a partnership

designated place list developed in

accordance with § 1944.229(f) of this

subpart, will score and rank loan

requests as follows:

(A) All loan requests (including those

for places on the partnership designated

place list) will be reviewed and scored

together as one group, following the

process described in paragraph (b)(2) of

this section.

(B) Using the point score and rank

order established in accordance with

paragraphs (b)(3)(i) and (b)(3)(ii) of this

section, two separate ranking lists will

be formed: the RHS ranking list will

consist of loan requests for places on the

State’s designated place list; the

partnership ranking list will consist of

loan requests for places on the

partnership designated place list.

Selection of loan requests for further

processing will be in accordance with

paragraph (b)(6) of this section.

* * * * *

(6) Selection of loan requests for

further processing for States with a

partnership ranking list. States with a

partnership ranking list developed in

accordance with paragraph (b)(3)(iii) of

this section, will use the following

process:

(i) Loan requests must first be selected

in rank order from the RHS ranking list

that, based on total development cost

(TDC), are proportionate to the State’s

RHS allocation amount.

(ii) After loan requests have been

selected in accordance with paragraph

(b)(6)(i) of this section, remaining RHS

funds must be used for the next highest

scoring loan requests (or point score and

tie-breaker number assigned in

accordance with paragraph (b)(3) of this

section), regardless of whether they are

on the RHS ranking list or the

partnership ranking list.

* * * * *

8. Section 1944.233 is amended in

paragraph (a)(3) by revising both

occurrences of the words ‘‘debt service’’

to read ‘‘basic rent’’, and in paragraph

(b)(5) by revising the words ‘‘a debt

service’’ to read ‘‘basic rents’’.

9. Exhibit A of subpart E is amended

in section IV.B.2.c. in the second

sentence by revising the words ‘‘50

years’’ to read ‘‘30 years, with an

amortization period not to exceed 50

years.’’

10. Exhibit A–7 of subpart E is

amended by removing paragraph VII

and by redesignating paragraphs VIII

and IX as paragraphs VII and VIII

respectively.
67224 Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 / Rules and Regulations

11. Exhibit A–9 off subpart E is

amended by adding a new paragraph 17

to read as follows:

Exhibit A–9—Additional Information

To be Submitted for Rural Rental

Housing (RRH) and Rural Cooperative

Housing (RCH) Loan Requests

* * * * *

17 Comments must be submitted in

accordance with 7 CFR, part 3015,

subpart V, ‘‘Intergovernmental Review

of Department of Agriculture Programs

and Activities.’’ See RD Instruction

1940–J (available in any Rural

Development office).

12. Exhibit H of subpart E is amended

in the fourth sentence by revising the

words ‘‘50-year maximum life of the

loan’’ to read ‘‘30-year maximum life of

the loan’’.

Dated: December 18, 1997.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 97–33396 Filed 12–22–97; 8:45 am]

BILLING CODE 3410–XV–U