39452 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business—Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Parts 1940 and 3565

RIN 0575–AC14

Guaranteed Rural Rental Housing

Program

AGENCIES: Rural Housing Service, Rural

Business—Cooperative Service, Rural

Utilities Service, Farm Service Agency,

USDA.

ACTION: Interim final rule with request

for comments.

SUMMARY: The Rural Housing Service

(RHS) is issuing new regulations for the

Guaranteed Rural Rental Housing

Program (GRRHP). This action is taken

to implement the ‘‘Housing Opportunity

Program Extension Act of 1996.’’ The

program is intended to increase the

supply of affordable rural multifamily

housing through partnerships between

the Agency and major lending sources,

including banks, state and local housing

finance agencies, and bond issuers.

DATES: The effective date of this interim

final rule is July 22, 1998. Written

comments must be received on or before

September 21, 1998. The comment

period for information collection under

the Paperwork Reduction Act of 1995

continues through September 21, 1998.

ADDRESSES: Submit written comments,

in duplicate, to the Chief, Regulations

and Paperwork Management Branch,

Rural Housing Service, U.S. Department

of Agriculture, Stop 0743, 1400

Independence Avenue, SW,

Washington, DC 20250–0743. Also,

comments may be submitted via the

Internet by addressing them to

‘‘comments@rus.usda.gov’’ and must

contain the word ‘‘Housing’’ in the

subject line. All written comments will

be available for public inspection during

regular work hours at the above address.

FOR FURTHER INFORMATION CONTACT: Carl

W. Wagner, Acting Division Director,

Multi-Family Housing Processing

Division, Rural Housing Service, USDA,

STOP 0781, 1400 Independence

Avenue, SW, Washington, DC 20250–

0781, telephone: (202) 720–1604.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be

significant for the purposes of Executive

Order 12886 and therefore has been

reviewed by the Office of Management

and Budget.

Discussion of Use of Interim Final Rule

The Rural Housing Service exercises

its emergency authority pursuant to

section 534(c) of the Housing Act of

1949 to issue interim regulations for the

section 538 Guarantee Rural Rental

Housing program. Rural areas have been

particularly impacted by a series of

major natural disasters over the past six

months, including the tornado

destruction in the central and southern

states. Only by providing funding under

this interim rule will critically needed

multi-family rental projects be

undertaken and completed as soon as

possible this year. This is important

because the Agency will give priority in

guarantee approvals provided under this

interim rule for housing developments

in designated disaster areas. This will

help ensure that low and moderateincome families served by these projects

will have greater likelihood of securing

safe, decent, affordable housing prior to

winter. Further, the Agency finds the

interim rule a reasonable step under the

unusual circumstances since most

interested parties have had ample

opportunity to comment on the section

538 program from pilots conducted by

the Agency over the past two years and

since these same parties will have

ample opportunity to comment on the

interim rule prior to the publication of

the final rule for Fiscal Year 1999

funding cycle. For the same reason,

good cause is shown for publication of

the rule without advance notice and

opportunity for comment. However,

comments will be accepted for 60 days

after publication of this interim rule and

will be considered when the rule is

finalized.

Program funding levels are made

public in a ‘‘Notice of Funds

Availability’’ (NOFA) published

concurrently with this interim final

rule. Approximately $38 million in

guaranteed loans is available in this

fiscal year. Potential applicants are

encouraged to apply as soon as possible

and specifically take note of the priority

to be given to areas impacted by

Presidentially-declared disasters.

Civil Justice Reform

This rule has been reviewed under

Executive Order 12988, Civil Justice

Reform. In accordance with this order:

(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 unless those regulations

specifically allow bringing suit at an

earlier time.

Programs Affected

The affected program is listed in the

Catalog of Federal Domestic Assistance

under Number 10.415, Rural Rental

Housing Loans.

Intergovernmental Consultation

The program is subject to Executive

Order 12372 which requires

intergovernmental consultation with

state and local officials.

Intergovernmental consultation has

been conducted in accordance with 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 the Agency 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, an

Environmental Impact Statement is not

required.

Regulatory Flexibility Act

This 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 of

this document that this rule will not

have a significant economic impact on

a substantial number of small entities

even though this rulemaking action does

involve a new program. At current

funding levels of approximately $38

million, less than 30 applications are

likely to be approved for guarantees.

The requirements for participation will

not affect small entities to a greater

extent than large entities.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates

Reform Act of 1995 (UMRA), 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, the

Agency generally must prepare a written

statement, including a cost-benefit

analysis, for 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 the Agency to
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39453

identify and consider a reasonable

number of regulatory alternatives and

adopt the least costly, more costeffective, or least burdensome

alternative that achieves the objections

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.

Background

The ‘‘Agriculture, Rural Development,

Food and Drug Administration, and

Related Agencies Appropriation Act,

1996’’, provided funds to the

Department to implement a multifamily

mortgage guarantee program subject to

enactment of authorizing legislation. On

March 28, 1996, President Clinton

signed the ‘‘Housing Opportunity

Program Extension Act of 1996,’’ which

authorized the section 538 Guaranteed

Rural Rental Housing Program for the

1996 fiscal year. Appropriations acts

have extended the program through the

1998 fiscal year. The program is

intended to reach the needs of rural

America by complementing the section

515 Rural Rental Housing direct loan

program. It is anticipated that

beneficiaries of the program will be

rural residents with low and moderate

incomes. The rural residents will be

provided rental housing through

borrowers who receive financing from

lenders encouraged to support

multifamily affordable housing by the

use of loan guarantees. Participants are

encouraged to utilize the section 538

program in conjunction with other

affordable housing financing and equity

sources.

The Agency has developed

regulations which are based on

information gathered during the

implementation of the fiscal year (FY)

1996 and 1997 demonstration programs.

The demonstration programs were based

upon informal listening sessions that

were conducted by the Agency which

were attended by approximately fifty

different stakeholders, primarily those

individuals representing mortgage

bankers, federal agencies, housing

interest groups, secondary market

institutions, commercial bankers,

private developers and various

government regulatory agencies. The

Agency received numerous comments

and suggestions that were instructive in

designing and structuring the

demonstration program. The four most

significant suggestions that were

instituted in the demonstration program

were: (1) use of NOFA with one point

of contact, (2) simple application

package, (3) no second underwriting

review, and (4) compatibility with

products already found in the secondary

market. The Agency and stakeholders

were clear about using the guarantee

program to serve low and moderateincome families in strong markets. The

Agency took many of the

recommendations provided by the

stakeholders for the demonstration

programs, as well as for the regulation

that follows.

In the first demonstration in FY 1996,

the Agency sought to explore the

optimum level of the initial guarantee

fee, response to a 90 percent guarantee,

and the need and receptiveness in rural

markets to a guaranteed multifamily

housing loan program. In that

demonstration year, 50 proposals were

received. Agency funding was sufficient

for 10 proposals, two of which used tax

exempt bonds permitted for the firstyear demonstration. In most proposals,

a combination of leverage and strong

markets produced units that were

affordable by low and moderate-income

families. An initial guarantee fee of 1

percent and a limitation for the interest

rate spread of 300 basis points (3

percent) over the 30 year bond rate were

accepted in the marketplace. Of the

proposals that are now built and

renting, the rate of occupancy is above

average, evidencing the need and

demand for this housing in rural

America.

In the FY 1997 demonstration, the

Agency reduced the interest rate spread

to 200 basis points (2 percent) and

added a one-half percent annual

renewal fee to the guarantee fee. Tax

exempt bonds were not permitted for

the FY 97 demonstration. It was also

clear the demonstration program was

completely viable without the use of tax

exempt bonds. The Agency received 20

proposals and funded 16. The reduced

number of proposals was determined to

be the result of a late notice, short

turnaround time for submission of the

proposals, lack of formal regulations,

and some confusion as to the

availability of the program in States that

received approval of a proposal the first

year. In all other regards, though, the

fact that feasible projects were

developed on such short notice

illustrated a strong interest and need for

the program.

While the Agency is soliciting

comments on all provisions of the

regulation, the Agency is specifically

looking for comments on the following

areas:

(1) Occupancy Requirements

The Agency is capping rents

(including any tenant-paid utilities) at

30 percent of 115 percent of the area

median income (the maximum rent that

can be charged and still have the unit

affordable to a moderate income family).

However, to assure longer-term

affordability to moderate-income

tenants, the Agency also requires the

average rents for all units to not exceed

30 percent of 100 percent of area

median income. This should be easily

accomplished since many proposals

include Low-Income Housing Tax

Credits that would restrict tenant

eligibility to those at 60 percent of

median income or below. The Agency is

specifically looking for comments on

the following: Does this rule unduly

restrict borrower participation in the

program? Is it a practical step to assure

long term affordability to intended low

and moderate-income families? Does it

affect the ability of developers to

acquire other financing, or to

rehabilitate complexes in the out years?

Is this preferable to requiring tenant

certifications to assure the complex is

serving low-and moderate-income

families?

(2) Competitive Process and Selection

Criteria

The regulations are developed for a

fully funded program where funding

authority would be sufficient to meet

demand. Therefore, the regulations do

not include selection criteria and give

the Agency Administrator the discretion

to establish such criteria in NOFA that

entails a competitive process. The

Agency intends to review the potential

demand for the program annually and

use a competitive process when it

appears that demand outweighs

available funding.

Purpose and Program Summary

The program has been designed to

increase the availability of affordable

multifamily housing through

partnerships between the Agency and

lending sources, as well as state and

local housing finance agencies and bond

issuers. Qualified lenders will be

authorized to originate, underwrite, and

close loans for multifamily housing

projects to be guaranteed under this

program. Projects may be for new

construction or acquisition with

substantial rehabilitation. The Agency

will guarantee such loans upon review

of the lender’s underwriting package,

appraisal report, appropriate

certifications, project information, and

satisfactory completion of the

appropriate level of environmental
39454 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

review by the Agency. Lenders will be

responsible for loan underwriting,

management and servicing associated

with these projects. The lender will be

expected to provide servicing or

contract for servicing of each loan it

underwrites. In turn, RHS will

guarantee the lender’s loan up to 90

percent of total development cost and

commits to pay up to a maximum of 90

percent of the outstanding principal and

interest balance of such loan in the case

of default of the loan and filing of a

claim. In no event will the Agency pay

more than 90 percent of the original

principal amount. This means that the

Agency will have a risk exposure under

the GRRHP of approximately 80 percent

of the total development cost. Any

losses would be split on a pro-rata split

between the lender and the Agency from

the first dollar lost.

Program applicability and funding

will be announced by NOFA published

in the Federal Register. When program

funding levels exceed $100 million,

funds are allocated to states based on

the following criteria: (1) State’s

percentage of National rural population,

2) State’s percentage of the National

number of rural households between 50

and 115 percent of the area median

income, and (3) State’s percentage of

National average cost per unit. These

criteria for allocation of funds to the

states are consistent with other Agency

housing programs. The criteria will

enable the Agency to allocate funds

based on a state’s population and

available households with income

sufficient to meet the proposed rents,

and to adjust the allocation for per unit

new construction cost. The purpose of

having a cost factor is to assure units

produced reflect criteria for need,

especially for high cost states. Eighty

percent of the weight will be divided

equally between population and income

and 20 percent based on cost. When the

funding levels are under $100 million,

funds will all be held in a National

office reserve and made available

administratively in accordance with the

NOFA and program regulations.

Subpart A—General Provisions

This subpart includes the purpose

and legislative authority for GRRHP,

definitions of terms found in the

regulation, the general provisions and

federal requirements applicable to the

program, and the authority to issue a

competitive NOFA in the event demand

exceeds available funding. Key policies

of this subpart are:

Section 3565.5 Ranking and Selection

Criteria

The Agency intends to guarantee

proposals that provide housing to the

areas of greatest need. While a variety of

financing packages is possible, the

demand in the eligible market areas will

determine the economic and market

feasibility of the proposed development.

In the event demand is projected to

exceed available funds, the Agency

reserves the option to establish selection

criteria in an annual NOFA. This

flexibility permits the Agency to create

and modify the criteria to assure that

facilities with guaranteed loans are

geographically dispersed and ensure

that the high need areas are served.

Criteria used in the demonstration

programs and under consideration may

include the following:

(1) Partnering and Leveraging

In order to develop the maximum

number of housing units and promote

partnerships with states, local

communities, and other partners with

similar housing goals, participation

loans and leveraging are encouraged.

(2) Priority Based On Interest Rate

Priority will be provided to the

proposals that set the lowest interest

rate spread (difference between the 30-

year Treasury Bill rate and the note

rate). However, the program will permit

proposals that require up to 200 basis

points (2 percent) over the 30 year

Treasury Bill rate.

(3) Preference for Proposals in a

Colonia, Tribal Land or EZ/EC

Community or State Identified Place.

Those proposals 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,

will receive preference.

(4) Geographic Diversity

Priority will be given for smaller rural

communities versus larger rural

communities.

(5) Commitment to Maintain Low-and

Moderate-Income Occupancy

Preference will be given for

commitments by the applicant to

maintain occupancy throughout the

term of the loan for neediest (based on

income) of the target population, with a

priority at initial occupancy for lowincome families.

(6) Preference for Family Proposals

Proposals addressing a need for

family units with large bedroom mixes

(3–5 bedrooms) will receive preference.

(7) Administrator’s discretion

The Agency reserves the

Administrator’s discretion to effectively

use funding to best explore program

structure and effectiveness consistent

with the best interests of the

Government.

Section 3565.6 Exclusion of Taxexempt Debt

Tax-exempt financing is not eligible

for a loan guarantee in this program.

However, the Agency has structured the

program to be compatible with other

affordable housing programs such as the

Low Income Housing Tax Credit,

taxable bonds, HOME Investment

Partnerships Program (HOME) funds,

and other State or locally funded tenant

assistance or grants. Reviewers will note

that regulations addressing eligibility of

lenders, lien position, and minimum

reporting to the Agency are intended to

foster compatibility with the secondary

market and other lenders’ standards.

Subpart B—Guarantee Requirements

This subpart describes loans eligible

for guarantee, extent of the guarantee

and the guarantee fees. This subpart

includes the transferability of the

guarantee and the procedures the

Agency will follow in the event the

guarantee is reduced, suspended, or

terminated. Key policies of this subpart

are:

Section 3565.51 Eligible Loans and

Advances

The Agency will guarantee a

permanent loan or a combination

construction and permanent loan. The

Agency will not guarantee a

construction loan that will not be

converted into a permanent loan with

an Agency guarantee. The construction

loan may not exceed 12 months. The

Agency will guarantee construction

contracts (not to exceed 90 percent of

the work in place) which have credit

enhancements, such as an acceptable

irrevocable letter of credit or pledge of

collateral or both, to protect the

government’s guarantee. The Agency

believes that providing construction

guarantees will foster greater

participation in the program, especially

in many rural areas which suffer from

a lack of available mortgage credit.

Section 3565.52 Extent of Guarantee

The Agency will guarantee repayment

of an amount not to exceed 90 percent

of the total unpaid principal and
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39455

interest of the loan but, in all cases, not

more than 90 percent of the original

principal amount. Any losses would be

based on a pro-rata sharing of the risk

between the Agency and the lender. For

example: assume the total development

cost is $1,000,000, with the original loan

principal amount being 90 percent of

the total development cost or $900,000.

The Agency guarantees 90 percent of

$900,000, providing a maximum

guarantee equal to $810,000. If this loan

were liquidated and the property sold

for $600,000, the claim would be for

$270,000 ($900,000-$600,000=$300,000

× 90 percent = $270,000). The lender’s

loss would be $30,000.

Section 3565.53 Guarantee Fees

At the time of issuance of a loan

guarantee under this program, the

Agency will collect an initial guarantee

fee equal to 100 basis points (1 percent)

of the guaranteed principal obligation of

the loan from the lender. The Agency

will also collect an annual servicing fee

of 50 basis points (1⁄2 percent) based on

the outstanding principal and interest of

the guarantee portion of the loan on the

first and each subsequent anniversary of

the loan as long as the guarantee

remains outstanding. These fees are

fairly standard in the industry. They

were used under the section 538

demonstration programs and found to

be acceptable. They also significantly

reduce the cost of the program.

Subpart C—Lender Requirements

This subpart provides the Agency

policy on types of lenders and their

eligibility requirements for participation

in the program. Lender review and

approval for participation in the

program is covered in this subpart. A

lender must be eligible and approved to

participate in the program. This subpart

also covers a lender’s ongoing eligibility

requirements and responsibilities.

§ 3565.101 Responsibility of lenders

A participating lender must originate

and service a guaranteed loan in

accordance with the regulation and

program requirements throughout the

life of a loan or guarantee, whichever is

less. In exceptional circumstances the

Agency, in its sole discretion, may

permit the transfer of servicing from the

originating lender to a servicer.

Section 3565.102 Lender Eligibility

Those lenders currently approved and

considered eligible by the Federal

National Mortgage Association, the

Federal Home Loan Mortgage

Corporation, the Federal Home Loan

Bank Members, or the Department of

Housing and Urban Development for

guaranteed loan programs supporting

multifamily housing are included as

eligible lenders for this program. In

addition, State Housing Finance

Agencies (HFAs) are also considered

eligible to participate in the program

provided they demonstrate they have

the ability to underwrite, originate,

process, close, service, manage, and

dispose of multifamily housing loans in

a prudent manner. Other lenders have

the opportunity to enter into a

correspondent bank relationship with

approved lenders in order to participate

in the program. The Agency is striving

to have as broad a pool of eligible

lenders as possible.

Section 3565.103 Approval

Requirements

To become an approved lender,

eligible lenders (see § 3565.102) must

meet a set of requirements for ongoing

participation in the program. The

Agency will establish and maintain a

‘‘list of approved lenders.’’ The Agency

will establish threshold requirements

for becoming an approved lender and

then require annual certification to

show compliance with the continuing

requirements for retaining the status of

approved lender. The Agency

‘‘approved lender’’ list and review

procedures meet the legislative

requirements without placing

unnecessary burden on the lenders

participating or wanting to participate

in the program.

The Agency is also considering

requiring that approved lenders have

computer systems that comply with year

2000 technology. The Agency is

specifically interested in comments on

such an eligibility requirement, the

potential vulnerability to the servicing

of a guaranteed portfolio with systems

that are not year 2000 compliant, the

potential vulnerability to the Agency,

and the requirement’s impact on lenders

participation in the program.

Subpart D—Borrower Eligibility

Requirements

This subpart contains the basic

eligibility and loan underwriting

requirements for loans on which an

Agency guarantee is requested. It also

contains identity of interest

requirements, limitations for borrowers,

as well as required certifications. These

reinforce the Agency’s intention not to

re-underwrite the loan when borrower

thresholds are met. Subparts H and I of

this part outline the Agency’s broad

oversight responsibilities of the lender,

the borrower and the project.

Subpart E—Loan Requirements

This subpart provides the Agency’s

direction to the lender in evaluating

loans for compatibility with GRRHP.

Also provided in this subpart are

acceptable loan rates and terms. Key

policies of this subpart are:

Section 3565.202 Tenant Eligibility

and Section 3565.203 Restrictions on

rents.

The Agency recognizes that many of

the proposals seeking a guarantee under

this program may have alternate

financing sources that will be more

restrictive in terms of income limits for

eligible tenants. The law establishes a

mandate to serve low and moderateincome families. Therefore, the rent cap

for initial occupancy corresponds to the

maximum ‘‘affordable’’ rent (based on

legislated standard of 30 percent of

income for rent and utilities) for

moderate-income families. After initial

occupancy, a tenant’s income may

exceed these limits; however, the

Agency plans to restrict the average

rents, including utilities, for the overall

project to no more than 30 percent of

100 percent of area median income for

the term of the loan. This is intended to

assure broader marketability and longer

occupancy by low-and moderate-income

families. Lenders will be required to

provide an annual rent certification, and

the Agency intends to monitor rents.

Section 3565.204 Maximum Loan

Amount

The enabling legislation mandates

that the maximum loan amount eligible

for guarantee involve a principal

amount (including initial service

charges, appraisal, inspection, and other

reasonable fees) not to exceed 97

percent of the development costs of the

housing and related facilities or the

value of the housing and facilities

(whichever is less) for a borrower that

is a nonprofit organization or an agency

or body of any State or local

government. For a borrower that is a forprofit entity, the principal amount

eligible for guarantee may be up to 90

percent of the development costs of the

housing and related facilities or the

value of the housing and facilities

(whichever is less). In order to contain

costs and keep project units modest in

design and amenities, the Agency has

set a cap for such part of the property

as may be attributable to dwelling use

equal to the applicable maximum per

unit dollar amount limitations under

section 207(c) of the National Housing

Act, which has built-in flexibility for

high and low cost markets.
39456 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

As with other multifamily housing

programs, loans are subject to a review

conducted in conjunction with the

applicable tax credit administration

entity to determine if the proposal is in

conformance with the Agency’s subsidy

layering requirements under its rural

rental housing direct loan program (see

7 CFR 1944.213). The Agency will not

guarantee a loan which is for more than

the minimum amount of assistance

necessary to make the complex

financially feasible.

Section 3565.207 Form of Lien

The enabling legislation mandates

that loans guaranteed under this

program shall be secured by a first

mortgage on the housing and related

facilities for which the loan is made, or

be secured by a parity lien in the case

where the loan upon which the Agency

guarantee is requested is not the

primary funding source.

Section 3565.208 Maximum Loan

Term

The enabling legislation mandates

that loans must be completely amortized

by periodic payments for a term not to

exceed 40 years. A fixed rate of interest

must be agreed upon by the borrower

and the lender that does not exceed the

maximum allowable rate established by

the Administrator.

Section 3565.210 Maximum Interest

Rate

The maximum allowable rate will be

set in the annual NOFA as a number of

basis points over the 30-year Treasury

Bond Rate as published in the ‘‘Wall

Street Journal’’ as of the business day

previous to the business day the rate is

set. Priority may be given to proposals

that have rates lower than the

maximum, with the lowest number of

basis points receiving the highest

priority.

Section 3565.211 Interest Credit

The law provides that, for at least 20

percent of the loans made under this

program, the Agency shall provide the

borrower with assistance in the form of

interest credits to the extent necessary

to reduce the rate of interest to the

Applicable Federal Rate (AFR), as such

term is used in section 42(I)(2)(D) of the

Internal Revenue Code of 1986. For the

FY 1997 demonstration program, the

AFR was 6.25 percent. The Agency

intends to limit use of this authority to

no more than a guarantee of $1.5 million

per complex in order to maximize

available budget authority and assist

more rural residents. This policy is also

necessary for program management and

budgeting of the interest credit available

in any fiscal year.

Section 3565.214 Release of Liability

The legislation imposes a restriction

of non-assumability by a party other

than the original borrower when any

portion of the principal obligation or

interest remains outstanding with a

GRRHP loan. The borrower may not be

relieved of liability with respect to the

loan, notwithstanding the transfer of

property for which the loan was made.

Loans guaranteed under this program

may be made on a recourse or nonrecourse basis. The lender should make

the decision about whether to make a

recourse or non-recourse loan.

Subpart F—Property Requirements

The guidance in the section provides

direction for the lender and the

borrower on property requirements and

contains the Agency’s overall policy on

housing design and standards.

Flexibility is provided to meet needs of

the rural communities in which the

housing is to be located. Key policies of

this subpart are:

Section 3565.251 Eligible Property

The Agency is required to guarantee

loans on units located in rural areas as

defined in 7 CFR 3550.10. Each State

Director is responsible for designating

the rural area for his or her state and

providing such information to the

public upon request. The definition of a

rural area, in part, is one that is located

in a place of 10,000 population or less;

or a place of 20,000 population or less

that is not associated with a

Metropolitan Statistical Area. The

Agency’s direct rural rental housing

program’s requirements on prioritizing

and designating most needy places are

not applicable to the guarantee program.

Section 3565.252 Housing Types

Complexes may contain modular or

manufactured units, that are attached,

detached, semi-detached, row houses, or

multifamily structures. The Agency

proposes to guarantee proposals for new

construction or acquisition with

rehabilitation of at least $15,000 per

unit. Refinancing of existing housing

and indebtedness is not an authorized

purpose. The portion of the guaranteed

funds for acquisition with rehabilitation

is limited to 25 percent of the program

authority. The Agency’s objective,

consistent with the enabling legislation,

is to expand the housing stock. New

construction is typically more cost

effective in both the short and long

term.

Subpart G—Processing Requirements

This subpart establishes the loan

origination, underwriting and appraisal

standards, as well as the allowable fees,

processing steps, guarantee process, and

closing requirements. The requirements

for lender loan processing and project

servicing, management and disposition

are clearly listed in this subpart. Key

policies of this subpart are:

Section 3565.303 Issuance of Loan

Guarantee

In order to reduce the Agency risk and

encourage the lender and borrower to

provide the necessary housing as

quickly as possible, the Agency will

only issue the loan guarantee when a

final certificate of occupancy and an

acceptable level of occupancy has been

reached. The Agency will require the

lender, as part of the guarantee package

for the permanent loan, to certify that

the appropriate occupancy has been

reached and that the final certificate of

occupancy has been issued.

Subpart H—Project Management

This subpart contains the required

project management thresholds. Key

policies are:

Section 3565.351 Project Management

The enabling legislation requires the

Agency to provide tenant protection.

The Agency currently has regulations

for tenant protection under the direct

program and intends to provide tenants

in units financed with a loan guarantee

the same protections already contained

in 7 CFR part 1944, subpart L. The

borrower must inform tenants in writing

of these rights.

Section 3565.352 Preservation of

Affordable Housing

Enabling legislation requires the

placement of ‘‘use restrictions’’ on the

property so that the housing remains

available for initial occupancy by lowand moderate-income households for

the original term of the guaranteed loan.

This requirement will be included in a

deed restriction or other instrument

acceptable to the Agency.

Subpart I—Servicing Requirements

The minimum requirements for

servicing responsibilities are listed in

this subpart. The Agency has divided

the servicing into the lender’s

responsibilities and the borrower’s

responsibilities. While the Agency

intends to maintain prudent oversight

responsibility for the program, the rules

attempt to balance the need for quality

servicing while providing a reasonable

impact on the lender. Key policies of

this subpart are:
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39457

Section 3565.401 Servicing Objectives

The following four servicing

objectives provide the foundation for all

of the servicing on the guaranteed loan.

(1) Protecting the interests of tenants,

(2) Preserving the value of the loan

and real estate,

(3) Avoiding or limiting potential loss

to the lender and Agency, and

(4) Furthering program objectives.

Subpart J—Assignment, Conveyance

and Claims

This subpart reflects the Agency’s

intent to make this product compatible

with the other products that exist on the

secondary market. The enabling

legislation is silent on most of the areas

under this subpart. Therefore, the

Agency looked to guarantee programs of

other Federal and government

sponsored entities for guidance and

models. Advice and recommendations

in this area are welcome. Key policies

of this subpart are:

Section 3565.453 Disposition of the

Property

The lender is responsible for

liquidation of the security in most cases

prior to filing a claim for payment under

the guarantee. Foreclosure action will be

taken by the lender, under state law.

The Agency provides direction in this

subpart to the lender in coordinating the

liquidation of the security with the

Agency.

Section 3565.455 Alternative

Disposition Methods

The Agency authorizes alternative

methods for disposition of the security,

such as assignment or conveyance to the

Agency, but these methods may be used

at the Agency’s sole discretion. At this

time, the Agency would view these

methods as unusual for disposition of

the security.

Section 3565.456 Filing a Claim

The Agency will look to the lender to

dispose of the property before filing a

final claim for the guaranteed portion of

allowable losses. This is consistent with

other guarantee programs and industry

standards.

Also included within this document

is an amendment to 7 CFR part 1940,

subpart L which establishes the formula

for allocation of funds to Rural

Development State Offices.

Paperwork Reduction Act

The reporting requirements contained

in this regulation have received

temporary emergency clearance by the

Office of Management and Budget

(OMB) under Control Number 0575–

0174. However, in accordance with the

Paperwork Reduction Act of 1995, RHS

will seek standard OMB approval of the

reporting requirements contained in this

regulation and hereby opens a 60-day

public comment period.

On March 28, 1996, President Clinton

signed the ‘‘Housing Opportunity

Program Extension Act of 1996.’’ One of

the provisions of the Act was the

authorization of the section 538

Guaranteed Rural Rental Housing

Program, adding the program to the

Housing Act of 1949. The program has

been designed to increase the supply of

affordable multifamily housing through

partnerships between RHS and major

lending sources, as well as State and

local housing finance agencies and bond

issuers. Qualified lenders will be

authorized to originate, underwrite, and

close loans for multifamily housing

projects requiring new construction or

acquisition with rehabilitation of at least

$15,000 per unit.

The housing must be available for

occupancy only by low or moderate

income families or persons, whose

incomes at the time of initial occupancy

do not exceed 115 percent of the median

income of the area. After initial

occupancy, a tenant’s income may

exceed these limits; however, rents,

including utilities, are restricted to no

more than 30 percent of the 115 percent

of area median income for the term of

the loan.

Units must be located in areas

considered eligible as defined in 7 CFR

3550.10.

The Secretary is authorized under

section 510(k) of the Housing Act of

1949 to prescribe regulations to ensure

that these federally funded loans are

made to eligible applicants for

authorized purposes. The lender must

evaluate the eligibility, cost, benefits,

feasibility, and financial performance of

the proposed project. The information

submitted by the lender to the Agency

is used by the Agency to manage, plan,

evaluate, and account for Government

resources. The reports are required to

ensure the proper and judicious use of

public funds.

Estimate of Burden: Public reporting

burden for this collection of information

is estimated to average .39 man hours

per response.

Respondents: Profit and nonprofit

organizations and public bodies.

Estimated Number of Respondents:

50.

Estimated Number of Responses per

Respondent: 33.

Estimated Total Annual Burden on

Respondents: 644.39 hours.

The subject regulation is published

for public review and comment.

Additional copies of the interim rule or

copies of this information collection can

be obtained from Tracy Gillin,

Regulations and Paperwork

Management Branch, Support Services

Division, Rural Development, at (202)

692–0039.

Comments are invited on: (a) whether

the proposed collection of information

is necessary for the proper performance

of the functions of RHS, including

whether the information will have

practical utility; (b) the accuracy of

RHS’ estimate of the burden of the

proposed collection of information

including the validity of the

methodology and assumptions used; (c)

ways to enhance the quality, utility and

clarity of the information to be

collected; and (d) ways to minimize the

burden of the collection of information

on those who are to respond, including

through the use of appropriate

automated, electronic, mechanical, or

other technological collection

techniques or other forms of information

technology.

All responses with regard to

paperwork burden will be summarized,

included in the request for OMB

approval, and will become a matter of

public record. Comments should be

submitted to Tracy Gillin, Regulations

and Paperwork Management Branch,

U.S. Department of Agriculture, Rural

Development, STOP 0742, 1400

Independence Ave. SW, Washington,

DC 20250–0742.

List of Subjects

7 CFR Part 1940

Administrative practice and

procedure, Agriculture, Grant

programs—Housing and community

development, Loan programs—

Agriculture, Rural areas.

7 CFR Part 3565

Bankruptcy, Banks, banking Civil

rights, Conflict of interests, Credit,

Environmental impact statements, Fair

housing, Government procurement,

Guaranteed loans, Hearing and appeal

procedures, Housing standards,

Lobbying, Low and moderate income

housing, Manufactured homes,

Mortgages, Real property acquisition,

Surety bonding.

Therefore, chapters XVIII and XXXV,

title 7, Code of Federal Regulations are

amended as follows:
39458 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

CHAPTER XVIII—RURAL HOUSING

SERVICE, RURAL BUSINESSCOOPERATIVE SERVICE, RURAL UTILITIES

SERVICE, AND FARM SERVICE AGENCY,

DEPARTMENT OF AGRICULTURE

PART 1940—[Amended]

1. The authority citation for part 1940

continues to read as follows:

Authority: 5 U.S.C. 301, 7 U.S.C. 1989, and

42 U.S.C. 1480.

2. Section 1940.560 is added to read

as follows:

§ 1940.560 Guarantee Rural Rental

Housing Program.

When funding levels are under

$100,000,000, all funds will be held in

a National Office reserve and made

available administratively in accordance

with the Notice of Funding Availability

(NOFA) and program regulations. When

program levels are sufficient for a

nationwide program, funds are allocated

based upon the following criteria and

weights.

(a) Amount available for allocations.

See § 1940.552(a) of this subpart.

(b) Basic formula criteria, data source

and weight. See § 1940.552(b) of this

subpart .

Each factor will receive a weight

respectively of 40%, 40% and 20%. The

criteria used in the basic formula are:

(1) State’s percentage of National rural

population,

(2) State’s percentage of the National

number of rural households between 50

and 115 percent of the area median

income, and

(3) State’s percentage of National

average cost per unit. Data source for the

first two of these criterion are based on

the latest census data available. The

third criterion is based on the cost per

unit data using the applicable maximum

per unit dollar amount limitations

under section 207(c) of the National

Housing Act, which can be obtained

from the Department of Housing and

Urban Development. The percentage

representing each criterion is multiplied

by the weight assigned and totaled to

arrive at a State factor.

State Factor = (criterion No. 1 × weight

of 40%)+ (criterion No. 1 × weight

of 40%)+ (criterion No. 1 × weight

of 20%)

(c) Basic formula allocation. See

§ 1940.552(c).

(d) Transition formula. See

§ 1940.552(d).

(e) Base allocation. See § 1940.552(e).

Jurisdictions receiving administrative

allocations do not receive base

allocations.

(f) Administrative allocations. See

§ 1940.552(f). Jurisdictions receiving

formula allocations do not receive

administrative allocations.

(g) Reserve. See § 1940.552(g).

(h) Pooling of funds. See

§ 1940.552(h).

(i) Availability of the allocation. See

§ 1940.552(i).

(j) Suballocation by the State Director.

See § 1940.552(j).

(k) Other documentation. Not

applicable.

CHAPTER XXXV-RURAL HOUSING

SERVICE, UNITED STATES DEPARTMENT

OF AGRICULTURE

3. Part 3565 is added to read as

follows:

PART 3565—Guaranteed Rural Rental

Housing Program

Subpart A—General Provisions

Sec.

3565.1 Purpose.

3565.2 Applicability and authority.

3565.3 Definitions.

3565.4 Availability of assistance.

3565.5 Ranking and selection criteria.

3565.6 Exclusion of tax-exempt debt.

3565.7 Agency environmental

requirements.

3565.8 Civil rights.

3565.9 Compliance with federal

requirements.

3565.10 Conflict of interest.

3565.11–3565.12 [Reserved]

3565.13 Exception authority.

3565.14 Review and appeals.

3565.15 Oversight and monitoring.

3565.16 [Reserved]

3565.17 Demonstration programs.

3565.18–3565.49 [Reserved]

3565.50 OMB control number.

Subpart B—Guarantee Requirements

3565.51 Eligible loans and advances.

3565.52 Extent of the guarantee.

3565.53 Guarantee fees.

3565.54 Transferability of the guarantee.

3565.55 Participation loans.

3565.56 Suspension or termination of loan

guarantee agreement.

3565.57 Modification, extension,

reinstatement of loan guarantee.

3565.58–3565.99 [Reserved]

3565.100 OMB control number.

Subpart C—Lender Requirements

3565.101 Responsibility of lenders.

3565.102 Lender eligibility.

3565.103 Approval requirements.

3565.104 Application requirements.

3565.105 Lender compliance.

3565.106 Construction lender requirements.

3565.107 [Reserved]

3565.108 Responsibility for actions of

agents and mortgage brokers.

3565.109 Minimum loan prohibition.

3565.110 Insolvency of lender.

3565.111 Lobbying activities.

3565.112–3565.149 [Reserved]

3565.150 OMB control number.

Subpart D—Borrower Eligibility

Requirements

3565.151 Eligible borrowers.

3565.152 Control of land.

3565.153 Experience and capacity of

borrower.

3565.154 Previous participation in state and

federal programs.

3565.155 Identity of interest.

3565.156 Certification of compliance with

federal, state, and local laws and with

Agency requirements.

3565.157–3565.199 [Reserved]

3565.200 OMB control number.

Subpart E—Loan Requirements

3565.201 General.

3565.202 Tenant eligibility.

3565.203 Restrictions on rents.

3565.204 Maximum loan amount.

3565.205 Eligible uses of loan proceeds.

3565.206 Ineligible uses of loan proceeds.

3565.207 Form of lien.

3565.208 Maximum loan term.

3565.209 Loan amortization.

3565.210 Maximum interest rate.

3565.211 Interest credit.

3565.212 Multiple guaranteed loans.

3565.213 Geographic distribution.

3565.214 Release of liability.

3565.215 Special conditions.

3565.216–3565.249 [Reserved]

3565.250 OMB control number.

Subpart F—Property Requirements

3565.251 Eligible property.

3565.252 Housing types.

3565.253 Form of ownership.

3565.254 Property standards.

3565.255 Environmental requirements.

3565.256 Architectural services.

3565.257 Procurement actions.

3565.258–3565.299 [Reserved]

3565.300 OMB control number.

Subpart G—Processing Requirements

3565.301 Loan standards.

3565.302 Allowable fees.

3565.303 Issuance of loan guarantee.

3565.304 Lender loan processing

responsibilities.

3565.305 Mortgage and closing

requirements.

3565.306–3565.349 [Reserved]

3565.350 OMB control number.

Subpart H—Project Management

3565.351 Project management.

3565.352 Preservation of affordable

housing.

3565.353 Affirmative fair marketing.

3565.354 Fair housing accommodations.

3565.355 Changes in ownership.

3565.356–3565.399 [Reserved]

3565.400 OMB control number.

Subpart I—Servicing Requirements

3565.401 Servicing objectives.

3565.402 Servicing responsibilities.

3565.403 Special servicing.

3565.404 Transfer of mortgage servicing.

3565.405–3565.449 [Reserved]

3565.450 OMB control number.
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39459

Subpart J—Assignment, Conveyance, and

Claims

3565.451 Preclaim requirements.

3565.452 Decision to liquidate.

3565.453 Disposition of the property.

3565.454 [Reserved]

3565.455 Alternative disposition methods.

3565.456 Filing a claim.

3565.457 Determination of claim amount.

3565.458 Withdrawal of claim.

3565.459–3565.499 [Reserved]

3565.500 OMB control number.

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

U.S.C. 1480.

Subpart A—General Provisions

§ 3565.1 Purpose.

The purpose of the Guaranteed Rural

Rental Housing Program (GRRHP) is to

increase the supply of affordable rural

rental housing, through the use of loan

guarantees that encourage partnerships

between the Rural Housing Service,

private lenders and public agencies.

§ 3565.2 Applicability and authority.

The regulation prescribes the policies,

authorizations, and procedures for the

guarantee of multifamily loans under

section 538 of the Housing Act of 1949.

§ 3565.3 Definitions.

Administrator. The Administrator of

the Rural Housing Service, or his or her

designee.

Agency. The Rural Housing Service,

or a successor agency.

Allowable claim amount. The total

losses incurred by the lender, as

calculated pursuant to subpart J of this

part.

Applicable Federal Rate (AFR). The

interest rate set by the federal

government for federal financing

programs pursuant to section 42 of the

Internal Revenue Code.

Approved lender. An eligible lender

who has been authorized by the Agency

to originate and service guaranteed

multifamily loans under the program.

Assignment. The delivery by a lender

to the Agency of the note and any other

security instruments securing the

guaranteed loan; and any and all liens,

interest, or claims the lender may have

against the borrower.

Assistance. Financial assistance in the

form of a loan guarantee or interest

credit received from the Agency.

Borrower. The individuals or entities

responsible for repaying the loans.

Claim. The presentation to the Agency

of a demand for payment for losses

incurred on a loan guaranteed under the

program.

Combination construction and

permanent loan. The Agency may

guarantee a construction contract which

has credit enhancements to protect the

Government’s interest. The construction

guarantee will be converted to a

permanent guarantee when construction

is completed and the requirements

contained in the conditional

commitment are met.

Conditional commitment. The written

commitment by the Agency to guarantee

a loan subject to the stated terms and

conditions.

Correspondent relationship. A

contractual relationship between an

approved lender and a non-approved

lender or mortgage broker in which the

correspondent performs certain

origination, underwriting or servicing

functions for the approved lender.

Default. Failure by a borrower to meet

any obligation or term of a loan, grant,

or regulatory agreement, or any program

requirement.

Delinquency. Failure to make a timely

payment under the terms of the

promissory note or regulatory

agreement.

Department of Housing and Urban

Development (HUD). A federal agency

which may be a partner in some of the

Agency guarantees.

Due diligence. The process of

evaluating real estate in the context of

a real estate transaction for the presence

of contamination from release of

hazardous substances, petroleum

products, or other environmental

hazards and determining what effect, if

any, the contamination has on the

regulatory status or security value of the

property.

Eligible borrower. A borrower who

meets the requirements of subpart D of

this part.

Eligible lender. A lender who meets

the requirements of subpart C of this

part or any successor regulation.

Eligible loan. A loan that meets the

requirements of subpart E of this part or

any successor regulation.

Eligible rural area. An eligible rural

area is an area which meets the

requirements of part 3550 of this

chapter or any successor regulation.

Fannie Mae. A Federally chartered—

publicly owned enterprise created by

Congress to purchase, sell or otherwise

facilitate the purchase or sale of

mortgages in the secondary mortgage

market.

Federal Home Loan Bank System. A

system of member savings and loans,

banks and other lenders whose primary

business is the making of housing loans.

Final claim payment. The amount due

to the lender (or the Agency) after

disposition of the collateral is complete

and the proceeds from liquidation, as

well as any other claim payments, are

applied against the allowable claim

amount.

Foreclosure. The process by which the

ownership interest of a borrower in a

mortgaged property is extinguished and

the security is liquidated with the

proceeds applied to the loan.

Freddie Mac. A Federally chartered,

publicly owned enterprise created to

purchase, sell or otherwise facilitate the

purchase or sale of mortgages in the

secondary mortgage market.

GRRHP. Guaranteed Rural Rental

Housing Program.

Guarantee fees. The fees paid by the

lender to the Agency for the loan

guarantee.

(1) An initial guarantee fee is due at

the time the guarantee is issued.

(2) An annual guarantee fee is due at

the beginning of each year that the

guarantee remains in effect.

Guaranteed loan. Any loan for which

the Agency provides a loan guarantee.

Housing Finance Agency (HFA). A

state or local government

instrumentality authorized to issue

housing bonds or otherwise provide

financing for housing. Identity of

interest. With respect to a project, an

actual or apparent financial interest of

any type, that exists or will exist among

the borrower, contractor, lender,

syndicator, management agent,

suppliers of materials or services,

including professional services, or

vendors (including servicing and

property disposal), in any combination

of relationships which may result in an

actual or perceived conflict of interest

Income eligibility. A determination

that the income of a tenant at initial

occupancy does not exceed 115 percent

of the area median income as such area

median income is defined by HUD or a

successor agency.

Interest credit. A subsidy available to

eligible borrowers that reduces the

effective interest rate of the loan to the

AFR.

Land lease. A written agreement

between a landowner and a borrower for

the possession and use of real property

for a specified period of time.

Lease. A contract containing the rights

and obligations of a tenant or

cooperative member and a borrower,

including the amount of the monthly

occupancy charge and other terms

under which the tenant will occupy the

housing.

Lender. A bank or other financial

institution, including a housing finance

agency, that originates or services the

guaranteed loan.

Lender Agreement. The written

agreement between the Agency and the

lender containing the requirements the

lender must meet on a continuing basis

to participate in the program.
39460 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

Loan. A mechanism by which a

lender funds the acquisition and

development of a multifamily project. A

loan in this context is secured by a

mortgage executed by the lender and

borrower.

Loan guarantee. A pledge to pay part

of the loss incurred by a lender in the

event of default by the borrower.

Loan guarantee agreement. The

written agreement between the Agency

and the lender containing the terms and

conditions of the guarantee with respect

to an individual loan.

Loan participation. A loan made by

more than one lender wherein each

lender funds an individual portion of

the loan.

Loan-to-value ratio. The amount of

the loan divided by the appraised

market value of the project.

Maximum guarantee payment. The

maximum payment by the Agency

under the guarantee agreement

computed by applying the guarantee

percentage times the allowable claim

amount, but not to exceed original

principal amount.

Mortgage. A written instrument

evidencing or creating a lien against real

property for the purpose of providing

collateral to secure the repayment of a

loan. For program purposes, this may

include a deed of trust or any similar

document.

Multifamily project. A project

designed with five or more living units.

NOFA. A ‘‘Notice of Funding

Availability’’ published in the Federal

Register to inform interested parties of

the availability of assistance and other

non-regulatory matters pertinent to the

program.

Non-monetary default. A default that

does not involve the payment of money.

Note. Any note, bond, assumption

agreement, or other evidence of

indebtedness pertaining to a guaranteed

loan.

Office of Inspector General (OIG). The

agency of USDA established under the

Inspector General Act.

Payment effective date. For the month

payment is due, the day of the month

on which payment will be effectively

applied to the account by the lender,

regardless of the date payment is

received.

Permanent loan. A loan that becomes

effective upon Agency acceptance of a

lender certification of an acceptable

minimum level of occupancy.

Prepayment. The payment of the

outstanding balance on a loan prior to

the note’s maturity date.

Project. The total number of rental

housing units and related facilities

subject to a guaranteed loan that are

operated under one management plan

and one Regulatory Agreement.

Program requirements. Any

requirements contained in any loan

document, guarantee agreement, statute,

regulation, handbook, or administrative

notice.

Promissory Note. See ‘‘Note’’.

Qualified alien. For the purposes of

this part, qualified alien refers to any

person lawfully admitted into the

country who meets the criteria of 42

U.S.C. 1436a.

Real Estate Owned. Denotes real

estate that has been acquired by the

lender or the Agency (often known as

‘‘inventory property’’).

Recourse. The lender’s right to seek

satisfaction from the borrower’s

personal financial resources or other

resources for monetary default.

Regulatory Agreement. The agreement

that establishes the relationship among

the Agency, the lender, and the

borrower; and contains the borrower’s

responsibilities with respect to all

aspects of the management and

operation of the project.

RHS. The Rural Housing Service

within the Rural Development mission

area, or a successor agency, which

administers section 538 guarantees.

Rural area. A geographic area as

defined in section 520 of the Housing

Act of 1949.

Rural Development. A mission area

within USDA which includes RHS,

Rural Utilities Service, and Rural

Business-Cooperative Service.

Servicing. The broad scope of

activities undertaken to manage the

performance of a loan throughout its

term and to assure compliance with the

program requirements.

Single asset ownership. A borrower

who owns only one project.

Surplus cash. The borrower’s

remaining funds at the project’s fiscal

year end, after making all required

payments, excluding required reserves

and escrows.

Tenant. The individual that holds the

right to occupy a unit in accordance

with the terms of a lease executed with

the project owner.

U.S. citizen. An individual who

resides as a citizen in any of the 50

States, the District of Columbia, the

Commonwealth of Puerto Rico, the U.S.

Virgin Islands, Guam, American Samoa,

the Commonwealth of the Northern

Marinas, the Federated States of

Micronesia, the Republic of Palau, or

the Republic of the Marshall Islands.

USDA. The United States Department

of Agriculture.

§ 3565.4 Availability of assistance.

The Agency’s authority to enter into

commitments, guarantee loans, or

provide interest credits is limited to the

extent that appropriations are available

to cover the cost of the assistance. The

Agency will publish a NOFA in the

Federal Register to notify interested

parties of the availability of assistance.

§ 3565.5 Ranking and selection criteria.

(a) Threshold criteria. Applications

for loan guarantee submitted by lenders

must include a loan request for a project

that meets all of the following threshold

criteria:

(1) The project must involve an owner

and a development team with

qualifications and experience sufficient

to carry out development, management,

and ownership responsibilities, and the

owner and development team must not

be under investigation or suspension

from any government programs;

(2) The project must involve the

financing of a property located in an

eligible rural area;

(3) Demonstrate a readiness, for the

project to proceed, including

submission of a complete application

for a loan guarantee and evidence of

financing;

(4) Demonstrate market and financial

feasibility; and

(5) Include evidence that the credit

risk is reasonable, taking into account

conventional lending practices, and

factors related to concentration of risk in

a given market and with a given

borrower.

(b) Priority projects. The Agency may,

at its sole discretion, set aside assistance

for or rank projects that meet important

program goals. Assistance will include

both loan guarantees and interest

credits. Priority projects must compete

for set-aside funds. The Agency will

announce any assistance set aside and

selection criteria in the NOFA.

§ 3565.6 Exclusion of tax-exempt debt.

Consistent with Administration

Policy, tax-exempt financing cannot be

used as a source of capital for the

guaranteed loan.

§ 3565.7 Agency environmental

requirements.

The Agency will take into account

potential environmental impacts of

proposed projects by working with

applicants, other federal agencies,

Indian tribes, State and local

governments, and interested citizens

and organizations in order to formulate

actions that advance the program goals

in a manner that will protect, enhance,

and restore environmental quality.

Actions taken by the Agency under this

subpart are subject to an environmental

review conducted in accordance with

the requirements of 7 CFR part 1940,

subpart G or any successor regulations.
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39461

§ 3565.8 Civil rights.

(a) All actions taken by the Agency, or

on behalf of the Agency, by a lender or

borrower, will be conducted without

regard to race, color, religion, sex,

familial status, marital status, national

origin, age, or disability, pursuant to 7

CFR part 15 (1998). This includes any

actions in the sale, rental or advertising

of the dwellings; in the provision of

brokerage services; or in making

available residential real estate

transactions involving Agency

assistance. See the Fair Housing Act, as

amended, 42 U.S.C. 3601–3619 (1994);

see also the Equal Credit Opportunity

Act, 42 U.S.C. 1691–1691(f) (1994 and

Supp. I, 1995). It is unlawful for a

lender or borrower participating in the

program to:

(1) Refuse to make accommodations

in rules, policies, practices, or services

if such accommodations are necessary

to provide a person with a disability an

opportunity to use or continue to use a

dwelling unit and all public and

common use areas; and

(2) Refuse to allow an individual with

a disability to make reasonable

modifications to a unit at his or her

expense, if such modifications may be

necessary to afford the individual full

enjoyment of the unit.

(b) Any resident or prospective

resident seeking occupancy or use of a

unit, property or related facility for

which a loan guarantee has been

provided, and who believes that he or

she is being discriminated against may

file a complaint with the lender, the

Agency or the Department of Housing

and Urban Development. A written

complaint should be sent to the

Secretary of Agriculture or of the

Department of Housing and Urban

Development in Washington, DC.

(c) Lenders and borrowers that fail to

comply with the requirements of title

VIII of the Civil Rights Act of 1968, as

amended (the Fair Housing Act), are

liable for those sanctions authorized by

law.

§ 3565.9 Compliance with federal

requirements.

The Agency and the lender are

responsible for ensuring that the

application is in compliance with all

applicable federal requirements,

including the following specific

statutory requirements:

(a) Intergovernmental review. 7 CFR

part 3015, subpart V,

‘‘Intergovernmental Review of

Department of Agriculture Programs and

Activities’’, or 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

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 EPA regulations at part 32,

of title 40.

(d) Historic preservation

requirements. The provisions of 7 CFR

part 1901, subpart F or successor

regulation.

(e) Section 504 of the Rehabilitation

Act of 1973; the Fair Housing Act; and

the Americans with Disabilities Act.

(f) Lead-based paint requirements.

The provisions of 7 CFR part 1924,

subpart A, or successor regulation.

§ 3565.10 Conflict of interest.

(a) Objective. It is the objective within

the Rural Development mission area to

maintain the highest standards of

honesty, integrity, and impartiality by

employees.

(b) Rural Development requirement.

To reduce the potential for employee

conflict of interest, all Rural

Development activities will be

conducted in accordance with 7 CFR

part 1900, subpart D, or successor

regulation by Rural Development

employees who:

(1) Are not themselves a beneficiary;

(2) Are not family members or known

relatives of any beneficiary; and

(3) Do not have any business or

personal relationship with any

beneficiary or any employee of a

beneficiary.

(c) Rural Development employee

responsibility. Rural Development

employees must disclose any known

relationship or association with a lender

or borrower or their agents, regardless of

whether the relationship or association

is known to others. Rural Development

employees or members of their families

may not purchase a Real Estate Owned

property, security property from a

borrower, or security property at a

foreclosure sale.

(d) Loan closing agent responsibility.

Loan closing agents (or members of their

families) who have been involved with

a particular property are precluded from

purchasing such properties.

(e) Lender and borrower

responsibility. Lenders, borrowers, and

their agents must identify any known

relationship or association with a Rural

Development employee.

§§ 3565.11–3565.12 [Reserved].

§ 3565.13 Exception authority.

An Agency official may request and

the Administrator or designee may make

an exception to any requirement or

provision, or address any omission of

this part if the Administrator determines

that application of the requirement or

provision, or failure to take action,

would adversely affect the government’s

interest or the program objectives.

§ 3565.14 Review and appeals.

Whenever RHS makes a decision that

is adverse to a lender or a borrower,

RHS will provide written notice of such

adverse decision and of the right to a

USDA National Appeals Division

hearing in accordance with 7 CFR part

11 or successor regulations. The lender

or borrower may request an informal

review with the decision maker and the

use of available alternative dispute

resolution or mediation programs as a

means of resolution of the adverse

decision. Any adverse decision, whether

appealable or non-appealable may also

be reviewed by the next level RHS

supervisor. Adverse decisions affecting

project tenants or applicants for tenancy

will be handled in accordance with 7

CFR part 1944, subpart L or successor

regulations.

§ 3565.15 Oversight and monitoring.

The lender, borrower, and all parties

involved in any manner with any

guarantee under this program must

cooperate fully with all oversight and

monitoring efforts of the Agency, Office

of Inspector General, the U.S. General

Accounting Office, and the U.S.

Department of Justice or their

representatives including making

available any records concerning this

transaction. This includes the annual

eligibility audit and any other oversight

or monitoring activities. If the Agency

implements a requirement for an

electronic transfer of information, the

lender and borrower must cooperate

fully.

§ 3565.16 [Reserved]

§ 3565.17 Demonstration programs.

To test ways to expand the

availability or enhance the effectiveness

of the guarantee program, or for similar

purposes, the Agency may, from time to

time, propose demonstration programs

that use loan guarantees or interest

credit. Toward this end, the Agency

may enter into special partnerships with

lenders, financial intermediaries, or

others to carry out one or more elements
39462 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

of a demonstration program.

Demonstration programs will be

publicized by notices in the Federal

Register.

§§ 3565.18–3565.49 [Reserved]

§ 3565.50 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart B—Guarantee Requirements

§ 3565.51 Eligible loans and advances.

Upon approval of an application from

an approved lender, the Agency will

commit to providing a guarantee for a

permanent loan or a combination

construction and permanent loan,

subject to the availability of funds. The

Agency will not guarantee a

construction loan that is not a

combination construction and

permanent loan.

§ 3565.52 Extent of the guarantee.

A guarantee of a permanent loan will

be made once the project has attained a

minimum level of acceptable occupancy

as determined by the lender with

Agency concurrence. The required

occupancy level must be reached before

the commitment for a loan guarantee,

including any extensions, expires. For

combination construction and

permanent loans, the Agency will

guarantee advances during the

construction loan period (which can not

exceed 12 months). The guarantee of

construction loan advances will convert

to a permanent loan guarantee once the

required level of occupancy has been

reached.

(a) Maximum guarantee amount. The

maximum guarantee for a permanent

loan will be 90 percent of the unpaid

principal and interest of the loan. The

Agency liability under any guarantee

will decrease or increase, in proportion

to any increase or decrease in the

amount of the unpaid portion of the

loan, up to the maximum amount

specified in the guarantee document.

The Agency will guarantee construction

contracts not to exceed 90 percent of the

work in place which have credit

enhancements to protect the

Government’s guarantee. Acceptable

credit enhancements include:

(1) Surety bonding or performance

and payment bonding are the preferred

credit enhancement;

(2) An irrevocable letter of credit

acceptable to the Agency; and

(3) A pledge by the lender of

acceptable collateral.

(b) Lesser guarantee amount. The

Agency may provide a lesser guarantee

based upon its evaluation of the credit

quality of the loan.

(c) Cancellation or reduction to the

guarantee amount. In cases of fraud,

misrepresentation, abuse, negligence, or

failure to follow the terms of the

guarantee or the note, the Agency may

cancel the guarantee.

§ 3565.53 Guarantee fees.

As a condition of receiving a loan

guarantee, the Agency will charge the

following guarantee fees to the lender.

(a) Initial guarantee fee. The Agency

will charge an initial guarantee fee equal

to 100 basis points (1 percent) of the

principal amount of the loan. The fee

will be collected at the time of

commitment.

(b) Annual guarantee fee. An annual

guarantee fee of at least 50 basis points

(one-half percent) of the outstanding

principal amount of the loan will be

charged each year or portion of a year

that the guarantee is in effect. Each

calendar year, this fee will be collected

in advance, beginning on the first

anniversary of the loan.

(c) Surcharge for guarantees on

construction advances. The Agency

may, at its sole discretion, charge an

additional fee on the portion of the loan

advanced during construction. This fee

will be charged in advance at the start

of construction and will be announced

in NOFA before loan approval.

§ 3565.54 Transferability of the guarantee.

A lender must receive the Agency’s

approval prior to any sale or transfer of

the loan guarantee.

§ 3565.55 Participation loans.

Loans involving multiple lenders are

eligible for a guarantee when one of the

lenders is an approved lender and

agrees to act as the lead lender with

responsibility for the loan under the

loan guarantee agreement.

§ 3565.56 Suspension or termination of

loan guarantee agreement.

A guarantee agreement will terminate

when one of the following actions

occurs: (In accordance with subpart H of

this part, use restrictions on the

property will remain if the following

actions take place prior to the term of

the loan and RHS determines the

restrictions apply.)

(a) Voluntary termination. A lender

and borrower voluntarily request the

termination of the loan guarantee.

(b) Agency withdrawal of guarantee.

The Agency withdraws the loan

guarantee in the event of fraud,

misrepresentation, abuse, negligence, or

failure to meet the program

requirements.

(c) Mortgage pay-off. The loan is paid.

(d) Settlement of claim. Final

settlement of the claim.

§ 3565.57 Modification, extension,

reinstatement of loan guarantee.

To protect its interest or further the

objectives of the program, the Agency

may, at its sole discretion, modify,

extend, or reinstate a loan guarantee. In

making this decision the Agency will

consider potential losses under the

program, impact on the tenants and the

public reaction that may be received

regarding the action. Further, the

Agency may authorize a guarantee on a

new loan that is originated as a part of

a workout agreement.

§§ 3565.58–3565.99 [Reserved]

§ 3565.100 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart C—Lender Requirements

§ 3565.101 Responsibility of lenders.

A participating lender must originate

and service a guaranteed loan in

accordance with the regulation and

program requirements throughout the

life of a loan or guarantee, whichever is

less. When it is in the best interests of

the Agency, the Agency may permit the

transfer of servicing from the originating

lender to a servicer.

§ 3565.102 Lender eligibility.

An eligible lender must be a licensed

business entity or HFA in good standing

in the state or states where it conducts

business; be approved by the Agency;

and meet at least one of the criteria

contained below. Lenders who are not

eligible may participate in the program

if they maintain a correspondent

relationship with a lender who is

eligible. An eligible lender must:

(a) Meet the qualifications of, and be

approved by, the Secretary of HUD to

make multifamily housing loans that are

to be insured under the National

Housing Act;

(b) Meet the qualifications and be

approved by Fannie Mae or Freddie Mac

to make multifamily housing loans that

are to be sold to such corporations;

(c) Be a state or local HFA, or a

member of the Federal Home Loan Bank

system, with a demonstrated ability to

underwrite, originate, process, close,
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39463

service, manage, and dispose of

multifamily housing loans in a prudent

manner;

(d) Be a lender who meets the

requirements for Agency approval

contained in this subpart and has a

demonstrated ability to underwrite,

originate, process, close, service,

manage, and dispose of multifamily

housing loans in a prudent manner; or

(e) Be a lender who meets the

following requirements in addition to

the other requirements of this subpart

and of subpart I of this part:

(1) Have qualified staff to perform

multifamily housing servicing and asset

management;

(2) Have facilities and systems that

support servicing and asset management

functions; and

(3) Have documented procedures for

carrying out servicing and asset

management responsibilities.

§ 3565.103 Approval requirements.

The Agency will establish and

maintain a ‘‘list of approved lenders’’.

To be an approved lender, eligible

lenders must meet the following

requirements and maintain them on a

continuing basis at a level consistent

with the nature and size of their

portfolio of guaranteed loans.

(a) Commitment. A lender must have

a commitment for a guaranteed loan or

an agreement to purchase a guaranteed

loan.

(b) Audited statement. A lender must

provide the Agency with an annual

audited financial statement conducted

in accordance with generally accepted

government auditing standards.

(c) Previous participation. A lender

may not be delinquent on a federal debt

or have an outstanding finding of

deficiency in a federal housing program.

(d) Ongoing requirements. A lender

must meet the following requirements at

initial application and on a continuing

basis thereafter:

(1) Overall financial strength,

including capital, liquidity, and loan

loss reserves, to have an acceptable level

of financial soundness as determined by

a lender rating service (such as

Sheshunoff, Inc.); or to be an approved

Fannie Mae, Freddie Mac or HUD

Federal Housing Administration

multifamily lender; or, if a state housing

finance agency, to have a top tier rating

by a rating agency (such as Standard

and Poor’s Corporation);

(2) Bonding and insurance to cover

business related losses, including

directors and officers insurance,

business income loss insurance, and

bonding to secure cash management

operations;

(3) A minimum of two years

experience in originating and servicing

multifamily loans;

(4) A positive record of past

performance when participating in RHS

or other federal loan programs;

(5) Adequate staffing and training to

perform the program obligations; the

head underwriter must have 3 years of

experience and all staff must receive

annual multifamily training;

(6) Demonstrated overall financial

stability of the business over the past

five years;

(7) Evidence of reasonable and

prudent business practices for

management of the program; and

(8) No negative information on Dunn

& Bradstreet or similar type report.

§ 3565.104 Application requirements.

Eligible lenders must submit a lender

approval application, in a format

prescribed by the Agency. The lender

approval application submission must

occur at the time the lender submits its

first application for a loan guarantee, or

its first application to purchase a

guaranteed loan. The application must

include documentation of lender

compliance with § 3565.103. A nonrefundable application fee will be

charged for each review of a lender’s

application. The amount of the fee will

be announced in NOFA.

§ 3565.105 Lender compliance.

A lender will remain an approved

lender unless terminated by the Agency.

To maintain approval, the lender must

comply with the following

requirements.

(a) Maintain eligibility in accordance

with § § 3565.102 and 3565.103;

(b) Comply with all applicable

statutes, regulations, and procedures;

(c) Inform the Agency of any material

change in the lender’s staffing, policies

and procedures, or corporate structure;

(d) Cooperate fully with all program

or Agency monitoring and auditing

policies and procedures, including the

Agency’s annual audit of approved

lenders; and

(e) Maintain active participation in

the multifamily guaranteed loan

program by initiating a new loan

guarantee or holding a loan guaranteed

under this program.

§ 3565.106 Construction lender

requirements.

A lender making a construction loan,

as part of a combination construction

and permanent loan, must demonstrate

an ability to originate and service

construction loans, in addition to

meeting the other requirements of this

subpart.

§ 3565.107 [Reserved].

§ 3565.108 Responsibility for actions of

agents and mortgage brokers.

An approved lender is responsible for

the actions of its agents and mortgage

brokers.

§ 3565.109 Minimum loan prohibition.

A lender must not establish a

minimum loan amount for loans under

this program.

§ 3565.110 Insolvency of lender.

The Agency may require a lender to

transfer a guaranteed loan or loans to

another approved lender prior to a

determination of insolvency by the

lender. If the lender fails to transfer a

loan when required, the guarantee will

be considered null and void.

§ 3565.111 Lobbying activities.

An approved lender must comply

with RD Instruction 1940-Q (available in

any Rural Development Office)

regarding lobbying activities.

§§ 3565.112–3565.149 [Reserved]

§ 3565.150 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart D—Borrower Eligibility

Requirements

§ 3565.151 Eligible borrowers.

Guaranteed loans must be made to an

eligible borrower whose intention is to

provide and maintain rural rental

housing. The ownership entity must be

a valid entity in good standing under

the laws of the jurisdiction in which it

is organized. Eligible borrowers shall

include individuals, corporations, state

or local public agencies or an

instrumentality thereof, partnerships,

limited liability companies, trusts,

Indian tribes, or any organization

deemed eligible by the Agency. Eligible

borrowers must be U.S. citizens or

permanent legal residents; a U.S. owned

corporation, or a limited liability

company, or partnership in which the

principals are U.S. citizens or

permanent legal residents.

§ 3565.152 Control of land.

At time of application, the lender

must have evidence of site control by

the borrower (option to purchase, lease,

deed or other evidence acceptable to the

Agency). At the time of loan closing, the

lender’s closing docket must provide

documentary evidence that the borrower
39464 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

owns or has a long-term lease on the

land on which the housing is or will be

located. The form of ownership or the

leasehold agreement must meet Agency

requirements. Notwithstanding any

investment in the site, the site may not

be accepted based on the Agency’s

environmental assessment.

§ 3565.153 Experience and capacity of

borrower.

At the time of application, the lender

must certify that the borrower:

(a) Has the ability and experience to

construct or rehabilitate multifamily

housing that meets the requirements

established by the Agency, the lender

and the loan agreement;

(b) Has the legal and financial

capacity to meet all of the obligations of

the loan; and

(c) Has the ability and experience to

meet the property management

requirements established by the Agency,

the lender, and the loan agreement.

§ 3565.154 Previous participation in state

and federal programs.

Loans to borrowers who are

delinquent on a federal debt may not be

guaranteed. Furthermore, borrowers or

principals thereof who have defaulted

on state or local government loans will

not be eligible for a guarantee unless the

Agency determines that the default was

beyond the borrower’s control, and that

the identifiable reasons for the default

no longer exist. At the time of

application, the lender must obtain from

the borrower a certification that the

borrower is not under any state or

federal order suspending or debarring

participation in state or federal loan

programs and that the borrower is not

delinquent on any non-tax obligation to

the United States.

§ 3565.155 Identity of interest.

At the time of application, the lender

must certify that it has disclosed any

and all identity of interest relationships

and preexisting conditions with respect

to its relationships and that of the

borrower, or that no identity of interest

relationships exists. Identity of interest

relationships include any financial or

other relationship that exists or will

exist between a lender, borrower,

management agent, supplier, or any

agent of any of these entities, that could

influence, give the appearance of

influencing or have the potential to

influence the actions of the parties in

carrying out their responsibilities under

the program. Disclosure will be in a

form and manner established by the

Agency.

§ 3565.156 Certification of compliance with

federal, state, and local laws and with

Agency requirements.

At the time of application, the lender

must obtain from the borrower a

certification of compliance with all

applicable federal, state, and local laws,

and with Agency requirements

regarding discrimination and equal

opportunity in housing, including title

VIII of the Civil Rights Act of 1968, and

the Fair Housing Amendments Act of

1988. The borrower must also certify

that it is not the subject of any federal,

state, or local sanction or punitive

action.

§§ 3565.157–3565.199 [Reserved]

§ 3565.200 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart E—Loan Requirements

§ 3565.201 General.

To be eligible for a guarantee, a loan

must comply with the provisions of this

subpart and be originated by an

approved lender.

§ 3565.202 Tenant eligibility.

(a) Limits on income of tenants. The

housing units subject to a guaranteed

loan must be available for occupancy

only by low or moderate-income

families or individuals whose incomes

at the time of initial occupancy do not

exceed 115 percent of the area median

income. After initial occupancy, a

tenant’s income may exceed these

limits.

(b) Citizenship status. A tenant must

be a United States citizen or a

noncitizen who is a qualified alien as

defined in § 3565.3.

§ 3565.203 Restrictions on rents.

The rent for any individual housing

unit, including any tenant-paid utilities,

must not exceed an amount equal to 30

percent of 115 percent of area median

income, adjusted for family size. In

addition, on an annual basis, the

average rent for a project, taking into

account all individual unit rents, must

not exceed 30 percent of 100 percent of

area median income, adjusted for family

size.

§ 3565.204 Maximum loan amount.

(a) Section 207(c) limits and

exceptions. For that part of the property

that is attributable to dwelling use, the

principal obligation of each guaranteed

loan must not exceed the applicable

maximum per-unit limitations under

section 207(c) of the National Housing

Act.

(b) Loan-to-value limits. (1) In the case

of a borrower that is a nonprofit

organization or an agency or body of any

State, local or tribal government, each

guaranteed loan must involve a

principal obligation that does not

exceed the lesser of 97 percent of:

(i) The development costs of the

housing and related facilities, or

(ii) The lender’s determination of

value not to exceed the appraised value

of the housing and facilities.

(2) In the case of a borrower that is a

for-profit entity or other entity not

referred to in paragraph (b)(1) of this

section, each guaranteed loan must

involve a principal obligation that does

not exceed the lesser of 90 percent of:

(i) The development costs of the

housing and related facilities, or

(ii) The lender’s determination of

value not to exceed the appraised value

of the housing and facilities.

(3) To protect the interest of the

Agency or to further the objectives of

the program, the Agency may establish

lower loan-to-value limits or further

restrict the statutory maximum limits

based upon its evaluation of the credit

quality of the loan.

(c) Necessary assistance review. (1) A

lender requesting a loan guarantee must

review all loans to determine the

appropriate amount of assistance

necessary to complete and maintain the

project. The lender shall recommend to

the Agency an adjustment in the loan

amount if appropriate as a result of this

review.

(2) Where the project financing

combines a guaranteed loan with LowIncome Housing Tax Credits or other

Federal assistance, the project must

conform to the policies regarding

necessary assistance in 7 CFR part 1944,

subpart E or successor provision.

§ 3565.205 Eligible uses of loan proceeds.

Eligible uses of loan proceeds must

conform with standards and conditions

for housing and facilities contained in 7

CFR part 1924, subpart A or successor

provision, except that the Agency, at its

sole discretion, may approve, in

advance, a higher level of amenities,

construction, and fees for projects

proposed for a guaranteed loan provided

the costs and features are reasonable

and customary for similar housing in

the market area.

(a) Use of loan proceeds. The

proceeds of a guaranteed loan may be

used for the following purposes relating

to the project.
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39465

(1) New construction costs of the

project;

(2) Moderate or substantial

rehabilitation of buildings and

acquisition costs when related to the

rehabilitation of a building as described

in paragraph (b) of this section;

(3) Acquisition of existing buildings,

when approved by the Agency, for

projects that serve a special housing

need;

(4) Acquisition and improvement of

land on which housing will be located;

(5) Development of on-site and off-site

improvements essential to the use of the

property;

(6) Development of related facilities

such as community space, recreation,

storage or maintenance structures,

except that any high cost recreational

facility, such as swimming pools and

exercise clubs or similar facilities, must

be specifically approved in advance by

the Agency;

(7) Construction of on-site

management or maintenance offices and

living quarters for operating personnel

for the property being financed;

(8) Purchase and installation of

appliances and certain approved

decorating items, such as window

blinds, shades, or wallpaper;

(9) Development of the surrounding

grounds, including parking, signs,

landscaping and fencing;

(10) Costs associated with commercial

space provided that:

(i) The project is designed primarily

for residential use;

(ii) The commercial use consists of

essential tenant service type facilities,

such as laundry rooms, that are not

otherwise conveniently available;

(iii) The commercial space does not

exceed 10 percent of the gross floor area

of the residential units and common

areas, unless a higher level is

specifically approved in writing by the

Agency; and

(iv) The commercial activity is

compatible with the use of the project

and that the income is not more than 10

percent of the total annual operating

income of the project.

(11) Costs for feasibility

determination, loan application fees,

appraisals, environmental

documentation, professional fees or

other fees determined by the Agency to

be necessary to the development of the

project;

(12) Technical assistance to and by

non-profit entities to assist in the

formation, development, and packaging

of a project, or formation or

incorporation of a borrower entity;

(13) Education programs for a board of

directors, both before and after

incorporation of a cooperative that will

serve as the borrower;

(14) Construction interest accrued on

the construction loan;

(15) Relocation assistance in the case

of rehabilitation projects;

(16) Developers’ fees; and

(17) Repaying applicant debts in the

following cases:

(i) When the Agency authorizes in

writing in advance the use of loan funds

to pay debts for work, materials, land

purchase, or other fees and charges

before the loan is closed; or

(ii) When the Agency concurs in

writing with a determination by the

lender that costs for work, fees and

charges incurred prior to loan

application are integral to development

of the guarantee application and project.

(b) Rehabilitation requirements.

Rehabilitation work must be classified

as either moderate or substantial as

defined in exhibit K of 7 CFR part 1924,

subpart A or a successor document. In

all cases, the building or project must be

structurally sound, and improvements

must be necessary to meet the

requirements of decent, safe, and

sanitary living units. Applications must

include a structural analysis, along with

plans and specifications describing the

type and amount of planned

rehabilitation. The project as

rehabilitated must meet the applicable

development standards contained in 7

CFR part 1924, subpart A or a successor

regulation, as well as any applicable

historic preservation requirements. All

proposed rehabilitation projects are

subject to an environmental review

completed in accordance with 7 CFR

part 1940, subpart G or a successor

regulation.

§ 3565.206 Ineligible uses of loan

proceeds.

Loan proceeds must not be used for

the following:

(a) Specialized equipment for training

and therapy;

(b) Housing in military impact areas;

(c) Housing that serves primarily

temporary and transient residents;

(d) Nursing homes, special care

facilities and institutional type homes

that require licensing as a medical care

facility;

(e) Operating capital for central dining

facilities or for any items not affixed to

the real estate, such as special portable

equipment, furnishings, kitchen ware,

dining ware, eating utensils, movable

tables and chairs, etc.;

(f) Payment of fees, salaries and

commissions or compensation to

borrowers (except developers’ fees); or

(g) Refinancing of an outstanding

debt, except in the case of an existing

guaranteed loan where the Agency

determines that the refinancing is in the

government’s interest or furthers the

objectives of the program. The term and

amount of any loan for refinancing must

not exceed the maximum loan amount

or term limits.

§ 3565.207 Form of lien.

The loan originated by the lender for

a guarantee must be secured by a first

lien against the property.

§ 3565.208 Maximum loan term.

(a) Statutory term limit. The lender

may set the term of the loan, but in no

instance may the term of a guaranteed

loan exceed the lesser of 40 years or the

remaining economic life of the project.

(b) Prepayment of loans. A guaranteed

loan may be prepaid in whole or in part

at the determination of the lender, and

upon the lender’s written notice to the

Agency at least 30 days prior to the

expected date of prepayment. The

Agency will not pay any lockout or

prepayment penalty assessed by the

lender. The lender must certify the

following in the notice of prepayment:

(1) The lease documents used by the

borrower or its agent prohibit the

abrogation of tenant leases in the event

of prepayment; and

(2) The borrower has notified tenants

of the request to prepay the loan,

including notice of the prohibition

against abrogation of the lease and the

policy and procedure for handling

complaints regarding compliance with

the long-term use restriction as

contained in subpart H of this part.

§ 3565.209 Loan amortization.

Each guaranteed loan must contain

provisions for the complete

amortization of the loan by periodic

payments. The Agency will not

guarantee a loan that comes due before

expiration of its full amortization

period, such as a balloon loan.

§ 3565.210 Maximum interest rate.

The interest rate for a guaranteed loan

must not exceed the maximum

allowable rate specified by the Agency

in NOFA. Such rate must be fixed over

the term of the loan.

§ 3565.211 Interest credit.

(a) Limitation. For at least 20 percent

of the loans made during each fiscal

year, the Agency will provide assistance

in the form of interest credit, to the

extent necessary to reduce the agreedupon rate of interest to the AFR as such

term is used in section 42(I)(2)(D) of the

Internal Revenue Code of 1986, 26

U.S.C. 7805, § 1.42–1T.

(b) Selection criteria. The Agency will

select projects to receive interest credits

using any of such criteria as the Agency
39466 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

may establish for priority projects as

contained in subpart A of this part.

§ 3565.212 Multiple guaranteed loans.

The Agency may guarantee more than

one loan on any project if all guaranteed

loans, in the aggregate, comply with

these regulations, including without

limitation:

(a) In the aggregate, loans do not

exceed the maximum guaranteed loan

amount and loan-to-value limits, as

contained in § 3565.204;

(b) In the aggregate, loans are all to be

secured equally by a first lien as the

Agency may, at its sole discretion,

determine necessary to ensure

repayment of the loans; and

(c) If different lenders originate the

loans, each lender has executed an

intercreditor agreement in form and

substance acceptable to the Agency; and

(d) The loans do no contain tax

exempt financing.

§ 3565.213 Geographic distribution.

The Agency may refuse to guarantee

a loan in an area where there is undue

risk due to a concentration in the market

of properties subject to a Agency

guaranteed loan. The Agency will

consider the credit quality of the loan

and overall market conditions in making

a determination of undue risk. If any of

the Agency guaranteed loans in the

market are experiencing vacancy rates

in excess of 15% and the vacancy is due

to market conditions, the Agency will

invoke this provision and not guarantee

the loan.

§ 3565.214 Release of liability.

Notwithstanding the transfer of the

property for which the loan was made,

borrowers may not be relieved of

liability for a guaranteed loan if any

portion of the principal or interest or

any protective advance made on behalf

of the borrower is outstanding.

§ 3565.215 Special conditions.

(a) Use of third party funds. As a

condition of receiving a guaranteed

loan, the Agency, or the lender if

designated by the Agency, must review

the terms and conditions of any

secondary financing or funding of

projects, including loans, capital grants

or rental assistance.

(b) Recourse. If required by the lender,

loans guaranteed under this program

may be made on a recourse or

nonrecourse basis, or with any personal

or special borrower guarantees on

collateralization.

§ § 3565.216–3565.249 [Reserved]

§ 3565.250 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart F—Property Requirements

§ 3565.251 Eligible property.

To be eligible for a guaranteed loan,

a property must be used primarily for

residential dwelling purposes and must

meet the following requirements or the

requirements of this subpart:

(a) Property location. All the property

must be located in a rural area.

(b) Minimum size of development.

The property must consist of at least

five rental dwelling units.

(c) Non-contiguous sites. For a loan

secured by two or more non-contiguous

parcels of land, all sites must meet each

of the following requirements:

(1) Located in one market area;

(2) Managed under one management

plan with one loan agreement or

resolution for all of the sites; and

(3) Consist of single asset ownership.

(d) Compliance with Statutes. All

properties must comply with the

applicable requirements in section 504

of the Rehabilitation Act of 1973, the

Fair Housing Act, the Americans with

Disabilities Act, and other applicable

statutes.

§ 3565.252 Housing types.

The property may include new

construction or substantially

rehabilitated existing structures. The

units may be attached, detached, semidetached, row houses, modular or

manufactured houses, or multifamily

structures. Manufactured housing must

meet Agency requirements contained in

7 CFR part 1924, subpart A or a

successor regulation. The Agency

proposes to guarantee proposals for new

construction or acquisition with

rehabilitation of at least $15,000 per

unit. The portion of the guaranteed

funds for acquisition with rehabilitation

is limited to 25 percent of the program

authority.

§ 3565.253 Form of ownership.

The property must be owned in fee

simple or be subject to a ground lease

or other legal right in land acceptable to

the Agency.

§ 3565.254 Property standards.

(a) Housing quality and site and

neighborhood standards. The property

must meet the site and neighborhood

requirements established by the state or

locality, and those standards contained

under 7 CFR part 1924, subparts A and

C or any successor regulations.

(b) Third party assessments. As part

of the application for a guaranteed loan,

the lender must provide documentation

of qualified third parties’ assessments of

the property’s physical condition and

any environmental conditions or

hazards which may have a bearing on

the market value of the property. These

assessments must include:

(1) An acceptable property appraisal.

(2) A Phase I Environmental Site

Assessment (American Society of

Testing and Materials).

(3) A Standard Flood Hazard

Determination.

(4) In the case of the purchase of an

existing structure, rehabilitation or

refinancing, a physical needs

assessment.

§ 3565.255 Environmental requirements.

Under the National Environmental

Policy Act, the Agency is required to

assess the potential impact of the

proposed actions on protected

environmental resources. Measures to

avoid or at least mitigate adverse

impacts to protected resources may

require a change in site or project

design. A site will not be approved until

the Agency has completed the

environmental review in accordance

with 7 CFR part 1940, subpart G or

successor regulation.

§ 3565.256 Architectural services.

Architectural services must be

provided for the project in accordance

with 7 CFR part 1924, subpart A or

successor regulation, including plan

certifications.

§ 3565.257 Procurement actions.

All construction procurement actions,

whether by sealed bid or by negotiation,

must be conducted in a manner that

provides maximum open and free

competition.

§§ 3565.258–3565.299 [Reserved]

§ 3565.300 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart G—Processing Requirements

§ 3565.301 Loan standards.

An approved lender must originate

and underwrite the loan and appraise

the subject property in accordance with

prudent lending practices and Agency

criteria addressing the following factors:

(a) Borrower qualifications and

creditworthiness;
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39467

(b) Property, vacancy, market vacancy

or collection loss;

(c) Rental concessions and rent levels;

(d) Tenant demand and housing

supply;

(e) Property operating and

maintenance expense;

(f) Property requirements as contained

in subpart F of this part;

(g) Debt coverage ratio;

(h) Operating and long-term capital

requirements;

(i) Loan-to-value ratio;

(j) Return on borrower equity; and

(k) Estimated long-term marketability

of the project.

§ 3565.302 Allowable fees.

(a) Lender fees. The lender is

authorized to charge reasonable and

necessary fees in connection with a

borrower’s application for a guaranteed

loan.

(b) Agency fees. The Agency will

charge one or more types of fees deemed

appropriate as reimbursement for

reasonable and necessary costs incurred

in connection with applications

received from lenders for monitoring or

annual renewal fees. These fees will be

published in NOFA. Agency fees may

include, but are not limited to the

following:

(1) Site Assessment and Market

Analysis or preliminary feasibility fee. A

fee for review of an application for a

determination of preliminary feasibility.

(2) Application fee. A fee submitted in

conjunction with the application for a

loan guarantee.

(3) Inspection fee. A fee for inspection

of the property in conjunction with a

loan guarantee.

(4) Transfer fee. A fee in connection

with a request for approval of a transfer

of physical assets or a change in the

composition of the ownership entity.

(5) Extension or reopening fees. A fee

to extend the guarantee commitment or

to reopen an application when a

commitment has expired.

§ 3565.303 Issuance of loan guarantee.

(a) Preliminary feasibility review.

During the initial processing of a loan,

the lender may request a preliminary

feasibility review by the Agency when

required loan documentation is

submitted.

(b) Conditional commitment to

guarantee a loan. The Agency will issue

a conditional commitment to guarantee

a loan. This commitment will be good

for such time frame as the Agency

deems appropriate based on project

requirements. The commitment to

guarantee a loan, will specify any

conditions necessary to obtain a

determination by the Agency that all

program requirements have been met. A

conditional commitment can be issued,

subject to the availability of funds, after:

(1) Completion by the Agency of an

environmental review in accordance

with 7 CFR part 1940, subpart G or

successor regulation, and the National

Environmental Policy Act; and

(2) Selection of the proposed project

for funding by the Agency in accordance

with ranking and selection criteria.

(c) Guarantee during construction. For

combination construction and

permanent loans, the Agency will issue

an initial guarantee to an approved

construction lender.

(1) This guarantee will be subject to

the limits contained in subpart B of this

part and in the loan closing

documentation.

(2) In all cases, the lender must obtain

a payment and performance bond

covering contract work or acceptable

credit enhancement as discussed in

§ 3565.52(a).

(3) The lender must verify amounts

expended prior to each payment for

completed work and certify that an

independent inspector has inspected the

property and found it to be in

conformance with Agency standards.

The lender must provide verification

that all subcontractors have been paid

and no liens have been filed against the

property.

(d) Permanent loan guarantee. The

guarantee on the permanent loan will be

issued once the following items have

been submitted to and approved by the

Agency.

(1) An updated appraisal of the

project as built;

(2) A certificate of substantial

completion;

(3) A certificate of occupancy or

similar evidence of local approval ;

(4) A final inspection conducted by a

qualified Agency representative;

(5) A final cost certification in a form

acceptable to the Agency;

(6) A submission to the Agency of the

complete closing docket;

(7) A certification by the lender that

the project has reached an acceptable

minimum level occupancy;

(8) A recordable, executed regulatory

agreement.

(9) The Lender certifies that it has

approved the borrower’s management

plan and assures that the borrower is in

compliance with Agency standards

regarding property management,

contained in subparts E and F of this

part;

(10) Necessary information to

complete an updated necessary

assistance review by the Agency; and

(11) Compliance with all conditions

contained in the conditional

commitment for guarantee.

(e) Modification of guarantee amount

after commitment. The Agency may

modify the guarantee amount or decline

to issue a loan guarantee when a lender

fails to honor obligations or to fulfill

representations made under the

guarantee commitment.

§ 3565.304 Lender loan processing

responsibilities.

(a) Application. The lender will be

responsible for submitting an

application for a loan guarantee in a

format prescribed by the Agency.

Lenders may submit an application at

the feasibility stage or when they

request a conditional commitment.

(b) Project servicing, management and

disposition. Unless otherwise permitted

by the Agency, the originating lender

must perform all loan functions during

the period of the guarantee. These

functions include servicing, asset

management, and, if necessary, property

disposition. The lender must maintain

and service the loan in accordance with

the provisions of subpart I of this part

and Agency servicing procedures.

§ 3565.305 Mortgage and closing

requirements.

It is the lender’s responsibility to

ensure that the loan closing statement

and required loan documents are in a

form acceptable to the Agency and

included in the closing docket. The

lender is responsible for resolving any

underwriting and loan closing

deficiencies that are found. The

Agency’s review of the lender’s loan

closing documentation does not

constitute a waiver of fraud,

misrepresentation, or failure of

judgment by the lender.

§ 3565.306–3565.349 [Reserved]

§ 3565.350 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart H—Project Management

§ 3565.351 Project management.

As a condition of the guarantee, the

lender must certify annually to the

Agency that the borrower is in

compliance with the regulatory

agreement and program requirements

with respect to all aspects of project

management.

(a) Regulatory agreement. A

regulatory agreement between the

borrower and lender which will be filed

in the real estate records of the
39468 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

appropriate jurisdiction must be

executed at the time of loan closing and

contain the following covenants:

(1) That it is binding upon the

borrower and any of its successors and

assigns, as well as upon the lender and

any of its successors and assigns, for the

duration of the guaranteed loan;

(2) That the borrower makes all

payments due under the note and to the

required escrow and reserve accounts;

(3) That the borrower maintains the

project as affordable housing in

accordance with the purposes and for

the duration defined in the statute;

(4) That the borrower maintains the

project in good physical and financial

condition at all times;

(5) That the borrower obtains and

maintains property insurance and any

other insurance coverage required to

protect the security;

(6) That the borrower maintains

complete project books and financial

records, and provides the Agency and

the lender with an annual audited

financial statement after the end of each

fiscal year;

(7) That the borrower makes project

books and records available for review

by the Office of Inspector General, Rural

Development staff, General Accounting

Office, and the Department of Justice, or

their representatives or successors upon

appropriate notification;

(8) That the borrower prepares and

complies with the Affirmative Fair

Housing Marketing Plan and all other

Fair Housing requirements;

(9) That the borrower operates as a

single asset ownership entity, unless

otherwise approved by the Agency;

(10) That the borrower complies with

applicable federal, state and local laws;

and

(11) That the borrower provides

management satisfactory to the lender

and to the Agency and complies with an

approved management plan for the

project.

(b) Management plan. The lender

must approve the borrower’s

management plan and assure that the

borrower is in compliance with Agency

standards regarding property

management, including the

requirements contained in subparts E

and F of this part.

(c) Tenant protection and grievance

procedures. Tenants in properties

subject to a guaranteed loan are entitled

to the grievance and appeal rights

contained in 7 CFR part 1944, subpart

L or successor regulation. The borrower

must inform tenants in writing of these

rights.

(d) Financial management—(1)

Borrower reporting requirements. At a

minimum, the lender must obtain, on an

annual basis, an audited annual

financial statement conducted in

accordance with generally accepted

government auditing standards.

(2) Lender reporting requirements.

The lender must review the financial

reports to assure that the property is in

sound fiscal condition and the borrower

is in compliance with financial

requirements. The lender must report

findings to the Agency as follows:

(i) Annual reports. The lender must

submit to the Agency a copy of the

annual financial audit of the project and

must report on the nature and status of

any findings. To the extent that

outstanding findings or issues remain,

the lender must submit to the Agency a

copy of a plan of action for any

unresolved findings.

(ii) Monthly reports. The lender must

submit monthly reports to the Agency

on all loans that are either in default,

delinquent, or not in compliance with

program requirements. This report must

provide information on the financial

condition of each loan, the physical

condition of the property, the amount of

delinquency, any other non-compliance

with program requirements and the

proposed actions and timetable to

resolve the delinquency, default or noncompliance.

(3) Reserve releases. The lender is

responsible for approving or

disapproving all borrower requests for

release of funds from the reserve and

escrow accounts. Security deposit

accounts will not be considered a

reserve or escrow account.

(4) Insurance requirements. At loan

closing, the borrower will provide the

lender with documentary evidence that

Agency insurance requirements have

been met. The borrower must maintain

insurance in accordance with Agency

requirements until the loan is repaid

and the lender must be named as the

insurance policy’s beneficiary. The

lender must obtain insurance on the

secured property if the borrower is

unable or unwilling to do so and charge

the cost as an advance.

(5) Distribution of surplus cash. Prior

to the distribution of surplus cash to the

owner, the lender must certify that the

property is in good financial and

physical condition and in compliance

with the regulatory agreement. Such

compliance includes payment of

outstanding obligations, debt service,

and required funding of reserve and

escrow accounts.

(e) Physical maintenance. The lender

must annually inspect the property to

ensure that it is in compliance with

state and local codes and program

requirements. The lender must certify to

the Agency that a property is in such

compliance, or report to the Agency on

any non-compliance items and

proposed actions and timetable for

resolution. Failure to provide

responsive corrective action can result

in reduction or cancellation of the

guarantee by the Agency.

§ 3565.352 Preservation of affordable

housing.

(a) Original purpose. During the

period of the guarantee, owners are

prohibited from using the housing or

related facilities for any purpose other

than an approved program purpose.

(b) Use restriction. For the original

term of the guaranteed loan, the housing

must remain available for occupancy by

low and moderate income households,

in accordance with subpart E of this

part. This requirement will be included

in a deed restriction or other instrument

acceptable to the Agency. The

restriction will apply unless the housing

is acquired by foreclosure or an

instrument in lieu of foreclosure, or the

Agency waives the applicability of this

requirement after determining that each

of the following three circumstances

exist.

(1) There is no longer a need for lowand moderate-income housing in the

market area in which the housing is

located;

(2) Housing opportunities for lowincome households and minorities will

not be reduced as a result of the waiver;

and

(3) Additional federal assistance will

not be necessary as a result of the

waiver.

§ 3565.353 Affirmative fair housing

marketing.

As a condition of the guarantee, the

lender must ensure that the lender and

borrower are in compliance with the

approved Affirmative Fair Housing

Marketing Plan. This plan must be

reviewed annually by the lender to

ensure that the borrower remains in

compliance and to recommend

modifications, as necessary.

§ 3565.354 Fair housing accommodations.

The lender must ensure that the

borrower is in compliance with the

applicable fair housing laws in the

development of the property, the

selection of applicants for housing, and

ongoing management. See subpart A of

this part.

§ 3565.355 Changes in ownership.

Any change in ownership, in whole or

in part, must be approved by the lender

and the

Agency before such change takes

effect.
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39469

§§ 3565.356–3565.399 [Reserved]

§ 3565.400 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart I—Servicing Requirements

§ 3565.401 Servicing objectives.

The participating lender is

responsible for servicing the guaranteed

loan throughout the term of the loan or

guarantee, whichever is less. In all

cases, the lender remains responsible for

liquidation of the property in

accordance with the Loan Note

Agreement, unless otherwise

determined by the Agency. A lenderservicing plan must be designed and

implemented to achieve the following

objectives.

(a) To preserve the value of the loan

and the real estate;

(b) To avoid a loss to the lender or the

Agency and to limit exposure to

potential loss;

(c) To protect the interests of the

tenants; and

(d) To further program objectives.

§ 3565.402 Servicing responsibilities.

The lender must service the loan in

accordance with this subpart and

perform the services contained in this

section in a reasonable and prudent

manner. The lender is responsible for

the actions of its agents and

representatives.

(a) Funds management. The lender

must have a funds management system

to receive and process borrower

payments, including the following.

(1) All principal and interest (P&I)

funds and guarantee fees collected and

deposited into the appropriate custodial

accounts.

(2) Payments to custodial escrow

accounts for taxes and insurance

premiums, assessments that might

impair the security (such as ground

rent), and reserve accounts for repair

and capital improvement of the

property.

(b) Asset management. The lender

must ensure that the property securing

the guaranteed loan remains in good

physical and financial condition, in

accordance with project management

requirements contained in subpart H of

this part.

(c) Management of delinquencies and

defaults. Each month the lender must

report to the Agency any delinquencies

and defaults in accordance with subpart

H of this part.

§ 3565.403 Special servicing.

Special servicing must be initiated

when regular servicing actions are

insufficient to resolve borrower default

or property deficiencies.

(a) Responsibility of lender. It is the

lender’s responsibility during special

servicing to make a special effort to

ensure that maintenance of the property

meets Agency requirements and the

tenants’ rights are protected, until such

time that the property is liquidated by

the lender, the loan is paid in full, or the

loan is assigned to the Agency. The

lender must update the Agency monthly

until the default is cured or a claim is

filed. The lender must maintain

adequate records of any and all efforts

to cure the default or to foreclose.

(b) Initiating special servicing. When

special servicing is initiated, the lender

must submit for Agency review a special

servicing plan that includes proposed

actions to cure the deficiencies and a

timeframe for completion. The special

servicing plan will specify the proposed

terms of any workout agreement

recommended by the lender. The lender

must obtain Agency approval of the

terms of any workout agreement with

the borrower. The workout agreement

may include a loan modification,

transfer of physical assets, or partial

payment of claim and reamortization of

the loan. Failure to comply with terms

contained in the executed workout

agreement will be considered a default

of the guaranteed loan.

(1) Loan modification. The borrower

and lender may agree to a loan

modification when such action will

improve the financial viability of the

project and its operations, and when a

circumstance exists that is beyond the

borrower’s control. The Agency must

approve in advance any loan

modification that extends the life of the

loan or requires an increase in the

amount of the guarantee. All changes

must be within the requirements of

section 538 of the Housing Act of 1949.

(2) Change in ownership and transfer

of physical assets. A default or

delinquency may be resolved by a

change of the ownership entity in whole

or in part. The Agency must approve all

changes in ownership prior to the

effective date of the transfer, and may

require additional resources from the

lender or borrower to resolve project

deficiencies. A change in the ownership

entity, including a transfer of physical

assets, will not relieve the original

borrower of liability for the loan,

pursuant to the provisions regarding

release of liability contained in subpart

E of this part.

(3) Partial payment of claims. The

lender may request a partial payment of

claim as a result of a loss experienced

by the lender as a means to work out a

troubled loan. The Agency will accept

such claim if it determines that it is in

the best interest of the government. In

applying the partial payment, the lender

must assign the obligation covered by

the partial payment to the Agency, and,

if required by the Agency, reamortize

the obligation using the amount of the

remaining obligation over an agreedupon term.

(c) Claims processing. In the event of

a loss, the lender must submit claims

under the guarantee in accordance with

subpart J of this part. Prior to submitting

a claim, the lender must exhaust all

possibilities of collection on the loan.

(d) Displacement prevention. The

actions of the lender must not harm the

property’s tenants through

displacement.

§ 3565.404 Transfer of mortgage servicing.

Transfer of servicing is prohibited

unless the Agency determines that

circumstances warrant such action, the

proposed lender is an eligible lender

approved by the Agency, and the

transfer of servicing is approved by the

Agency in advance.

§ § 3565.405–3565.449 [Reserved]

§ 3565.450 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Subpart J-Assignment, Conveyance,

and Claims

§ 3565.451 Preclaim requirements.

(a) Lender certifications. After

borrower default and before filing a

claim or assignment of the loan to the

Agency, the lender must make every

reasonable and prudent effort to resolve

the default. The lender must provide the

Agency with an accounting of all

proposed and actual actions taken to

cure the default. The lender must certify

that all reasonable efforts to cure the

default have been exhausted. Where the

lender fails to comply with the terms of

the loan guarantee agreement and the

corresponding regulations and guidance

with regard to liquidating the property,

the Agency, at its option, may take

possession of the security collateral and

dispose of the property.

(b) Due diligence by lender. For all

loan servicing actions where a market,

net recovery or liquidation value

determination is required, guaranteed

lenders shall perform due diligence in
39470 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

conjunction with the appraisal and

submit it to the Agency for review. The

Phase I Environmental Site Assessment

published by the American Society of

Testing and Materials is considered an

acceptable format for due diligence.

(c) Environmental review. The Agency

is required to complete an

environmental review under the

National Environmental Policy Act, in

accordance with 7 CFR part 1940,

subpart G or a successor regulation,

prior to disposition of inventory

property, if title is held by the Agency,

and prior to any authorization to the

guaranteed lender to foreclose and

dispose of property, and for any other

servicing action requiring Agency

approval or consent.

§ 3565.452 Decision to liquidate.

A decision to liquidate shall be made

when it is determined that the default

cannot be cured through actions

contained in § 3565.403 of subpart I or

it has been determined that it is in the

best interest of the Agency and the

lender to liquidate.

§ 3565.453 Disposition of the property.

(a) Liquidation plan. The lender will,

within 30 days after a decision to

liquidate, submit to the Agency in

writing its proposed detailed plan of

liquidation. Upon approval by the

Agency of the liquidation plan, the

lender will proceed to liquidate. At a

minimum, this plan must contain the

following information:

(1) Such proof as the Agency requires

to establish the lender’s ownership of

the guaranteed loan promissory note

and related security instruments and a

copy of the payment ledger if available

which reflects the current loan balance

and accrued interest to date and the

method of computing the interest.

(2) A full and complete list of all

collateral including any personal and

corporate guarantees.

(3) The recommended liquidation

methods for making the maximum

collection possible on the indebtedness

and the justification for such methods,

including recommended actions for:

(i) Acquiring and disposing of all

collateral;

(ii) Collecting from guarantors;

(iii) Obtaining an appraisal of the

collateral;

(iv) Setting the proposed date of

foreclosure; and

(v) Setting the proposed date of

liquidation.

(4) Necessary steps for protection of

the tenants and preservation of the

collateral.

(5) Copies of the borrower’s latest

available financial statements.

(6) Copies of the guarantor’s latest

available financial statements.

(7) An itemized list of estimated

liquidation expenses expected to be

incurred along with justification for

each expense.

(8) A schedule to periodically report

to the Agency on the progress of

liquidation.

(9) Estimated protective advance

amounts with justification.

(b) Filing an estimated loss claim.

Upon Agency concurrence in the

liquidation plan and when the lender

owns any or all of the guaranteed

portion of the loan, the Agency may, in

accordance with program guidance, pay

an estimated loss payment based on an

Agency determined percentage of the

approved estimate of the loss. The

estimated loss payment will be based in

the liquidation value of the collateral. If

such payment is made, it will be

applied to the outstanding principal

balance owed on the guaranteed debt.

The lender will discontinue interest

accrual on the defaulted loan in

accordance with Agency procedures.

(c) Property disposition. Once the

liquidation plan has Agency approval,

the lender must make every effort to

liquidate the property in a manner that

will yield the highest market value

consistent with the protections afforded

to tenants contained in 7 CFR part 1944,

subpart L or successor regulation. This

liquidation process must be completed

within 9 months from the lender’s

decision to liquidate, unless otherwise

approved by the Agency.

(d) Transmitting payments and

proceeds to the Agency. When the

Agency is the holder of a portion of the

guaranteed loan, the lender will

transmit to the Agency its pro rata share

of any payments received from the

borrower, liquidation, or other proceeds.

§ 3565.454 [Reserved].

§ 3565.455 Alternative disposition

methods.

The Agency, in its sole discretion,

may choose to obtain an assignment of

the loan from the lender or conveyance

of title obtained by the lender through

foreclosure or a deed-in-lieu of

foreclosure.

(a) Assignment. In the case of an

assignment of the loan, the assignment

of the security instruments or the

security must be in written and

recordable form. Completion of the

assignment will occur once the

following transactions are completed to

the Agency’s satisfaction.

(1) Conveyance to the Agency of all

the lender’s rights and interests arising

under the loan.

(2) Assignment to the Agency of all

claims against the borrower or others

arising out of the loan transactions,

including:

(i) All collateral agreements affecting

financing, construction, use or operation

of the property; and

(ii) All insurance or surety bonds, or

other guarantees, and all claims under

them.

(3) Certification that the collateral has

been evaluated for the presence of

contamination from the release of

hazardous substances, petroleum

products or other environmental

hazards which may adversely impact

the market value of the property and the

results of that evaluation.

(b) Conveyance of title. In the case of

a conveyance of title to the property, the

lender must inform the Agency in

advance of how it plans to acquire title

and a timetable for doing so. The

Agency will accept the conveyance

upon receipt of an assignment to the

Agency of all claims of the lender

against the property and assignment of

the lender’s rights to any operating

funds and any reserves or escrows

established for the maintenance of the

property or the payment of property

taxes and insurance.

§ 3565.456 Filing a claim.

Once the lender has disposed of the

property or the Agency has agreed to

accept an assignment of the loan or

conveyance of title to the property, the

lender may file a claim for the

guaranteed portion of allowable losses.

All claim amounts must be calculated in

accordance with this subpart and be

approved by the Agency.

§ 3565.457 Determination of claim amount.

(a) Maximum guarantee payment. The

maximum guarantee payment will not

exceed the amount of guarantee

percentage as contained in the guarantee

agreement (but in no event more than

90%) times the allowable loss amount.

(b) Date of loss. The date of loss is the

earliest of the date on which the

property is foreclosed or acquired or the

proposed date of foreclosure or

acquisition in the liquidation plan,

unless an alternative date is approved

by the Agency. Where the Agency

chooses to accept an assignment of the

loan or conveyance of title, the date of

loss will be the date on which the

Agency accepts assignment of the loan

or conveyance of title.

(c) Allowable claim amount. The

allowable claim amount must be

calculated by:

(1) Adding to the unpaid principal

and interest on the date of loss, an

amount approved by the Agency for
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39471

payments made by the lender for

amounts due and owing on the

property, including:

(i) Property taxes and other protective

advances as approved by the Agency;

(ii) Water and sewer charges and other

special assessments that are liens prior

to the guaranteed loan;

(iii) Insurance on the property;

(iv) Loan guarantee fees paid after

default; and

(v) Reasonable liquidation expenses.

(2) And by deducting the following

items:

(i) Any amount received by the lender

on the account of the guaranteed loan

after the date of default;

(ii) Any net income received by the

lender from the secured property after

the date of default; and

(iii) Any cash items retained by the

lender, except any amount representing

a balance of the guaranteed loan not

advanced to the borrower. Any loan

amount not advanced will be applied by

the lender to reduce the outstanding

principal on the loan.

(d) Lender certification. The lender

must certify that all possibilities of

collection have been exhausted and that

all of the items specified in paragraph

(c) of this section have been identified

and reported to the Agency as a

condition for payment of claim.

§ 3565.458 Withdrawal of claim.

If the lender provides timely written

notice to the Agency of withdrawal of

the claim, the guarantee will continue as

if the default had not occurred if the

borrower cures the default prior to

foreclosure or prior to acceptance of a

deed-in-lieu of foreclosure.

§ § 3565.459–3565.499 [Reserved]

§ 3565.500 OMB control number.

According to the Paperwork

Reduction Act of 1995, no party is

required to respond to a collection of

information unless it displays a valid

OMB control number. The valid OMB

control number for this information

collection is 0575–0174.

Dated: July 16, 1998.

Inga Smulkstys

Acting Under Secretary Rural Development.

[FR Doc. 98–19558 Filed 7–21–98; 8:45 am]

BILLING CODE 3410–XV–P