Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26979

employee to submit a written

application to have his or her leave

accounts adjusted. We believe this will

make it possible for all affected

employees to benefit from this

provision. Therefore, OPM has not

revised the regulation in this regard.

Miscellaneous Leave Administration

Amendments

On December 2, 1994, OPM issued

final sick leave regulations to permit

most Federal employees to use a total of

up to 104 hours of sick leave each leave

year to provide care for a family member

or to make arrangements for or attend

the funeral of a family member. An

employee may use up to 40 hours of his

or her accrued sick leave for these

purposes without regard to the amount

of leave remaining in his or her sick

leave account. An employee may use up

to 64 additional hours of sick leave if he

or she maintains a balance of at least 80

hours in his or her sick leave account.

OPM received many telephone

inquiries concerning whether agencies

may advance sick leave for the purpose

of satisfying the 80-hour sick leave

balance requirement. Although this

matter was addressed briefly in the

‘‘Supplementary Information’’

accompanying the final regulations, we

are using this opportunity to further

clarify the regulation at 5 CFR

630.401(c).

The 40 hours of sick leave that may

be used for family care or bereavement

purposes may be advanced. Agencies

may not advance sick leave so that an

employee may meet the requirement to

maintain a balance of 80 hours of sick

leave in his or her account or to use

additional sick leave for these purposes.

The intent of the statutory 80-hour

minimum sick leave balance

requirement is that an employee should

retain at least 80 hours of accrued sick

leave in his or her account for use in the

event of the employee’s own

incapacitation for duty—i.e., without

the necessity of requesting advanced

leave or shared leave. To advance an

additional amount of sick leave (beyond

the 40 hours every employee is entitled

to use for family care or bereavement

purposes) would circumvent the intent

of the law. Therefore, we are amending

section 630.401(c) to state that leave

may not be advanced for the purpose of

meeting the requirement to retain a

minimum sick leave balance or using

additional sick leave for family care or

bereavement purposes.

OPM is also using this opportunity to

make a technical correction in 5 CFR

630.201, Definitions. In the interim

regulations to incorporate certain

incentive awards and pay and leave

administration rules contained in the

provisionally retained Federal

Personnel Manual material published in

the Federal Register on December 28,

1994 (59 FR 66629), the numbering of

paragraphs (7) through (9) of 5 CFR

630.201(b) was incorrect. The

numbering of paragraphs (7) through (9)

has been corrected as follows: (7)

Medical certificate; (8) Uncommon tour

of duty; and (9) United States.

Regulatory FlexibilityAct

I certify that these regulations will not

have a significant economic impact on

a substantial number of small entities

because they will affect only Federal

employees and agencies.

List of Subjects in 5 CFR Part 630

Government employees.

U.S. Office of Personnel Management.

James B. King,

Director.

Accordingly, OPM is amending part

630 of title 5 of the Code of Federal

Regulations as follows:

PART 630—ABSENCE AND LEAVE

1. The authority citation for part 630

continues to read as follows:

Authority: 5 U.S.C. 6311; § 630.301 also

issued under Public Law 103–356 (108 Stat.

3410); § 630.303 also issued under 5 U.S.C.

6133(a); §§ 630.306 and 630.308 also issued

under 5 U.S.C. 6403(d)(3), Public Law 103–

337 (108 Stat. 2663); subpart D also issued

under Public Law 103–329 (108 Stat. 2423);

§ 630.501 and subpart F also issued under

E.O. 11228, 30 FR 7739, June 16, 1965, 3 CFR

1974 Comp., p. 163; subpart G also issued

under 5 U.S.C. 6305; subpart H issued under

5 U.S.C. 6326; subpart I also issued under 5

U.S.C. 6332 and Public Laws 100–566 (102

Stat. 2834) and 103–103 (107 Stat. 1022);

subpart J also issued under 5 U.S.C. 6362 and

Public Laws 100–566 and 103–103; subpart

K also issued under Public Law 102–25 (105

Stat. 92); and subpart L also issued under 5

U.S.C. 6387 and Public Laws 103–3 (107 Stat.

23).

Subpart D—Sick Leave

§ 630.201 [Amended]

2. Section 630.201 is amended by

redesignating the first paragraph (b)(8)

as paragraph (b)(9), paragraph (b)(7) as

new paragraph (b)(8), and the existing

second paragraph (b)(8) as paragraph

(b)(7).

3. In § 630.401, paragraph (c) is

revised to read as follows:

§ 630.401 Grant of sick leave.

* * * * *

(c) To be granted any sick leave for

the purposes described in paragraphs (a)

(3) or (4) of this section during any leave

year in an amount exceeding a total of

40 hours (or, in the case of a part-time

employee or an employee with an

uncommon tour of duty, the average

number of hours in the employee’s

scheduled tour of duty each week), the

employee concerned shall retain in his

or her sick leave account a balance of at

least 80 hours (or, in the case of a parttime employee or an employee with an

uncommon tour of duty, an amount

equal to twice the average number of

hours in the employee’s scheduled tour

of duty each week). No sick leave may

be advanced under 5 U.S.C. 6307(d) for

the purpose of meeting the requirement

to retain a minimum sick leave balance

or for using additional sick leave for the

purposes described in paragraphs (a) (3)

and (4) of this section when such use

would otherwise cause the employee’s

sick leave balance to fall below the

minimum required.

* * * * *

Subpart I—Voluntary Leave Transfer

Program

§ 630.907 [Amended]

3. In § 630.907 paragraph (c)

introductory text, remove the words ‘‘of

chapter I’’; in paragraph (d)(2), remove

the second occurrence of the word ‘‘by’’

and add in its place the word ‘‘to’’.

Subpart J—Voluntary Leave Bank

Program

§ 630.1101 [Amended]

4. In § 630.1011 paragraph (b)(2),

remove the word ‘‘affect’’ and add in its

place the word ‘‘effect’’.

5. In addition to the amendments set

forth above, in 5 CFR part 630, subparts

I and J, remove the words ‘‘or work’’ in

the following places:

§§ 630.905, 630.907, 630.1007, 630.1008

[Amended]

(a) Section 630.905 (b) and (c);

(b) Section 630.907(a)(1), (a)(2), and

(d)(1);

(c) Section 630.1007 (b) and (c); and

(d) Section 630.1008(a)(1), (a)(2), and

(d)(1).

[FR Doc. 95–12411 Filed 5–19–95; 8:45 am]

BILLING CODE 6325–01–M
26980 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

DEPARTMENT OF AGRICULTURE

Rural Housing and Community

Development Service

Rural Business and Cooperative

Development Service

Rural Utilities Service

Consolidated Farm Service Agency

7 CFR Part 1980

RIN 0575–AB15

Rural Housing Loans

AGENCIES: Rural Housing and

Community Development Service, Rural

Business and Cooperative Development

Service, Rural Utilities Service, and

Consolidated Farm Service Agency;

USDA.

ACTION: Final rule.

SUMMARY: The Rural Housing and

Community Development Service

(RHCDS) amends its Guaranteed Rural

Housing Loans regulation. This action is

taken to address issues which arose

during the implementation phase of the

program. The intended effect of this

action is to make the program more

acceptable to lenders and the secondary

market for mortgage loans, to remove

RHCDS internal administrative

procedures from the Federal Register,

and to make minor adjustments and

corrections as a result of the Agency’s

experience in implementing the

program.

EFFECTIVE DATE: June 21, 1995.

FOR FURTHER INFORMATION CONTACT:

Michael S. Feinberg, Senior Loan

Specialist, Rural Housing and

Community Development Service,

USDA, Room 5334–S, South Agriculture

Building, 14th and Independence SW.,

Washington, DC 20250, telephone (202)

720–1474.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be

significant/economically significant and

was reviewed by Office of Management

and Budget under Executive Order

12866.

Paperwork Reduction Act

The information collection and

recordkeeping requirements contained

in this regulation have been previously

approved by the Office of Management

and Budget (OMB), except for

§ 1980.351, which will not become

effective until approved by OMB, in

accordance with the Paperwork

Reduction Act of 1980 (44 U.S.C.

Chapter 35). The assigned OMB control

number is 0575–0078. Please send

written comments to the Office of

Information and Regulatory Affairs,

OMB, Attention: Desk Officer of USDA,

Washington, D.C. 20503. Please send a

copy of your comments to Jack Holston,

Agency Clearance Officer, USDA, RECD,

Ag Box 0743, Washington, DC 20250.

(OMB# 0575–0078)

Environmental Impact Statement

This document has been reviewed in

accordance with 7 CFR part 1940,

subpart G, ‘‘Environmental Program.’’ It

is the determination of RHCDS that this

action does not constitute a major

Federal action significantly affecting the

quality of the human environment, and

in accordance with the National

Environmental Policy Act of 1969, Pub.

L. 91–190, an Environmental Impact

Statement is not required.

Intergovernmental Consultation

For the reason set forth in the final

rule related Notice to 7 CFR part 3015,

subpart V, 48 FR 29115, June 24, 1983,

this program/activity is excluded from

the scope of Executive Order (EO) 12372

which requires intergovernmental

consultation with State and local

officials.

Civil Justice Reform

This final rule has been reviewed

under Executive Order 12778, Civil

Justice Reform. In accordance with this

rule: (1) all state and local laws and

regulations that are in conflict with this

rule will be preempted; (2) no

retroactive effect will be given to this

rule; and (3) administrative proceedings

in accordance with the regulations of

the agency at 7 CFR part 1900 subpart

B or those regulations published by the

Department of Agriculture to implement

the provisions of the National Appeals

Division as mandated by the

Department of Agriculture

Reorganization Act of 1994, whichever

is applicable, 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

This program is listed in the Catalog

of Federal Domestic Assistance under

10.410, Very Low to Moderate Income

Housing Loans.

Discussion

On September 3, 1993, Farmers Home

Administration (FmHA) published a

proposed rule with request for

comments for the Guaranteed Rural

Housing (GRH) program. We received

forty-two comments. Comments were

from Agency employees or employee

groups, lenders, secondary market

sources, and various interest groups.

The Federal Crop Insurance Reform

and Department of Agriculture Act of

1994, Public Law No. 103–354, signed

into law on October 13, 1994, resulted

in the restructuring of the Department of

Agriculture’s Rural Housing programs,

formerly carried out by FmHA, which

are now assigned to RHCDS. This

change is reflected in this regulation.

The Agency discussed the need to

make the program more compatible with

existing mortgage lending programs.

Many of the comments addressed this

issue. Some of the respondents felt that

the Agency should make the program

more like conventional loans. Others

advocated the use of other Federal

mortgage programs as a guide. We tried

to keep the better features of both

conventional and Government programs

to make the Guaranteed Rural Housing

Program as easy for lenders to use as

possible. RHCDS believes the easier it is

for lenders to participate, the more

borrowers can be served with the

program.

This regulation omits the detailed

internal agency administrative

instruction used by the field offices to

administer the program. In the past,

RHCDS program regulations and FmHA

Instructions have been the same.

Agency policy is to publish any

regulation which confers a benefit or

imposes an obligation on the public. It

is also agency policy to publish any

regulation which contains information

necessary for members of the public to

understand their responsibilities. The

Agency does not intend to publish a

regulation that omits or evades issues

which are subject to public comment or

would be of interest to the public. Any

substantive changes in the regulation

will continue to be published in the

Federal Register. Each RHCDS field

office has a copy of the FmHA

Instruction and a copy is available upon

written request to RHCDS.

Some respondents, mostly RHCDS

employees, focused on the lack of

detailed administrative instructions.

The Agency continues to publish its

FmHA Instruction, discussed above,

which contains information on carrying

out administrative details.

In previous publications of this

regulation, RHCDS incorporated the

forms used in the program into the

Federal Register. RHCDS no longer

publishes the forms. We incorporated

the substantive materials from the forms

into the regulation.

We discuss other significant changes

below in general order of appearance in
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26981

the regulation, not based on order of

importance.

RHCDS added several new definitions

based on the comments. New

definitions include: Agency, Coapplicant, Net proceeds, and Qualifying

income.

One respondent suggested a section

for abbreviations and acronyms which

we added. The preamble for the

Proposed Rule erroneously stated that

the definition for ‘‘Existing Dwelling’’

was deleted. The definition for

‘‘Existing Dwelling’’ provides that an

existing dwelling is one ‘‘which has

been occupied for one year as a primary

residence.’’ Several respondents

suggested that RHCDS revise the

standard. They proposed that an

existing dwelling is one that has been

completed for more than 12 months as

evidenced by a certificate of occupancy.

RHCDS agrees and adopts this change.

Several respondents pointed out that

the program does not provide for

dwellings under construction before the

lender receives an application for a

guaranteed housing loan. This includes

speculative dwellings as well as

dwellings built by builders not familiar

with the RHCDS program. This results

in a burden on builders and homebuyers who would have to wait until the

dwelling is more than 12 months old

before receiving a loan. RHCDS

addresses this in its direct program by

limiting the amount of the loan to 90

percent of the appraised value. Based on

the comments, we incorporated this

same provision into the Guaranteed

Rural Housing program.

One respondent indicated a need for

clarification of ‘‘first time homebuyer.’’

The authorizing legislation provides for

granting preference to first time

homebuyers. If there are two requests

for commitments ready for approval but

there is a shortage of funds, RHCDS

gives preference to the first time

homebuyer over another applicant.

One respondent noted that the

Proposed Rule omitted a provision that

allowed sale of the loan directly to

Fannie Mae and Freddie Mac. This has

been corrected.

One respondent encouraged RHCDS

to improve the accessibility of housing

counseling in rural areas. RHCDS has

solicited interested parties for

implementation of a demonstration

counseling program (see Federal

Register Vol. 59, No. 31, page 7240

dated February 15, 1994). Loan

applicants will be required to attend

and complete the housing counseling if

it is available in the area.

Several respondents indicated that the

various provisions for lender reviews

were confusing. RHCDS removed the

review requirements that were

duplicative.

RHCDS had revised the section on

loan purposes in the Proposed Rule.

Several respondents requested

restoration of certain specific items such

as storm cellars, energy saving

measures, etc. RHCDS did not intend to

exclude storm cellars, energy saving

measures, etc. as long as they are part

of the dwelling acquisition. This has

been clarified.

Several respondents complained

about the prohibition on refinancing in

section 1980.311(a). They argued

refinancing could assist some

homeowners in retaining their

dwellings. Some respondents suggested

guaranteed loans could help in the

graduation of direct loans. The

authorizing legislation limits the

program to assistance for housing

acquisition only. There is no authority

for refinancing. In addition, the demand

for guaranteed housing dollars exceeds

available funds.

RHCDS proposed a prohibition on

dwellings with in-ground swimming

pools. Several respondents argued that

some areas of the country have existing

housing stock that is modest in cost

even though there is a pool. The

respondents commented that the value

of the dwelling is often not significantly

affected by the pool. They argued

exclusion of pools would preclude

financing many otherwise eligible

dwellings. RHCDS continues to believe

that it is not appropriate to finance

dwellings with in-ground pools. No

change is made.

RHCDS has had a long standing

policy of financing in areas only where

the streets and roads are maintained by

a public entity. We proposed to permit

financing where the streets and roads

are maintained by a Homeowner

Association in projects which have been

approved or accepted by HUD, VA,

Fannie Mae, or Freddie Mac. One

respondent observed that the issue of

project acceptance is better placed in a

different paragraph. RHCDS agrees and

we revised and restructured this portion

of the regulation.

We received several comments on the

proposal to replace the provision that

limits the site to one acre. RHCDS

proposed that the value of the site

cannot exceed 30 percent of the total

value of the property. One respondent

felt the proposed change was not as

clear as the 1 acre rule. Some

respondents believed the 30 percent

rule may cause problems in high cost

areas. One respondent indicated that the

one acre rule is easier to explain and

understand. Another respondent

suggested the 30 percent rule is an

unnecessary regulatory burden. Most of

the comments, however, favored the

proposal. Many people felt that the one

acre rule was overly restrictive in many

areas of the country. RHCDS believes

the issue of high cost areas is adequately

addressed by the provision that the 30%

limitation does not apply when the site

cannot be subdivided into two or more

sites. The intent of the rule is to assure

financing is limited to rural residences

and to avoid financing income

producing properties. Other lenders use

a similar provision.

RHCDS required completion of all

development work before issuance of

the guarantee. Several respondents

observed that RHCDS has no provision

for issuance of the guarantee when there

is a delay in completion of required

development work due to inclement

weather. This requires lenders to delay

closing until completion of the

development work and places undue

burden on both the purchaser and the

seller. The respondents suggested

RHCDS adopt a provision allowing the

use of escrow accounts in situations

where necessary repair work is delayed

due to weather. RHCDS agrees that this

would reduce the regulatory burden for

its customers.

Many respondents expressed interest

in section 1980.317 which implements

Executive Order 11246. Respondents

took particular interest in the equal

opportunity and nondiscrimination

inspection and reporting requirements.

A number of the respondents argued

that these requirements should not

apply to guaranteed loans in as much as

there is no direct federal financing

involved. Some respondents argued that

since construction draws are not

allowed, RHCDS is not a party in the

construction process. While RHCDS is

not directly involved in the construction

financing, there likely would be no

construction contract without the

RHCDS guarantee. Executive Order

11246 applies when there is a

construction contract of more than

$10,000 between the borrower and the

builder.

Several comments addressed flood

zones. RHCDS has long had a policy of

not financing dwellings located within

a flood plain unless it could be

demonstrated that there was no

alternative. This policy is derived from

Executive Order 11988, Flood Plain

Management. Practical alternatives are

addressed through the environmental

review process. In addition, the Agency

requires that the first floor elevation to

be above the 100 year flood line. These

are not changes to RHCDS policy or to

the GRH program. This revision simply

incorporates the language from other
26982 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

Agency regulations into this regulation

for consistency.

RHCDS had proposed to amend

section 1980.324(b) on late charges to

make the maximum fee a lender could

charge for late payments an

unpublished administrative provision.

One respondent indicated that the

maximum late charge should be

available for public comment. This

section is revised to provide that the late

charge cannot exceed the late charge as

prescribed by either HUD or by Fannie

Mae. This will allow both HUD and

conventional lenders to participate in

the program making it available to as

many borrowers as possible.

RHCDS proposed to limit the age of

the appraisal to not more than 3 months

from the date of submission to RHCDS.

Several respondents felt this did not

allow enough time in some

circumstances and proposed a 6 month

time frame. RHCDS agrees and the

change is adopted.

RHCDS had proposed to implement

an environmental checklist intended to

help the Agency determine the need for

a site visit for environmental reasons.

The checklist was to be similar to HUD

Form 54891, ‘‘Appraiser/Review

Appraiser Checklist.’’ Of the seven

comments on this subject, only two

were favorable. Two respondents

advised that HUD no longer uses the

form in most circumstances (See 58 Fed.

Reg. 41328–41339, August 3, 1993). One

respondent reported that they had

difficulty locating appraisers who were

familiar with the form. Another

respondent had little problem locating

several appraisers familiar with it. One

of the respondents represented an

organization of professional real estate

appraisers. This respondent indicated

the proposed form would require

appraisers to respond to questions

which they were not trained or qualified

to identify. RHCDS has determined it

will not adopt the use of the HUD form

at this time. The Agency plans to review

this issue further for possible future

implementation.

RHCDS proposed discontinuing the

use of replacement cost in appraisals of

dwellings which are more than a year

old. One respondent felt that the

appraisers should provide the

depreciated value of the dwelling and

the value of the site for determining

insurance and site values. RHCDS

believes that these are loan

underwriting issues which should be

left to the lender. The revisions are

adopted as originally proposed.

Several comments were received

regarding RHCDS appraisal reviews.

Since the performance of the appraisal

review is an internal matter, RHCDS is

removing the language from the Federal

Register regarding appraisal reviews.

Section 1980.340(c) provides that the

‘‘Lender and borrower are responsible

for seeing that loan purposes are

accomplished and loan funds are

properly utilized.’’ One respondent felt

that the Agency is holding the borrower

responsible for matters that require a

high degree of technical expertise.

RHCDS disagrees. The Government does

not perform these functions on behalf of

the borrower or the lender. Lenders and

borrowers must take the necessary

actions to protect their interest.

One respondent took exception with

RHCDS’s inspection requirements for

new and existing dwellings. The

respondent indicated that it was not

typical to obtain inspections beyond

that done by or recommended by the

appraiser. The respondent also

complained that RHCDS did not provide

guidance on minimum qualifications a

qualified inspector must meet. Some

respondents suggested that only a final

inspection need be obtained for new

dwellings along with a certification that

the dwelling was built according to the

plans and specifications and that the

appraiser address the inspection issue

for existing dwellings. RHCDS

continues to believe it is important to

have the dwelling inspected. In many

instances, the inspection can be

performed by the appraiser. The Agency

expects that lenders will use the same

standards that any reasonable person

would use to obtain an inspection of

their own dwelling. The regulation is

clarified on this point.

Several respondents expressed

interest in the requirements for existing

dwellings. Section 1980.341(b) made

reference to the general requirements of

the Agency’s Guide 2 to subpart A of

part 1924. The respondents indicated a

need for clearer guidance. RHCDS

agrees and we have revised this section

to incorporate the HUD guidelines for

existing properties. Many residential

appraisers and inspectors are familiar

with the HUD guidelines and this will

make it easier for lenders to use the

program.

Section 1980.345 provides the

eligibility requirements an applicant

must meet at the time of ‘‘loan

approval.’’ Program eligibility is limited

to moderate income households. One

respondent questioned whether loan

approval referred to approval by the

lender or RHCDS. This is pertinent

because an applicant that exceeds the

moderate income limits is not eligible

for the program. The point in time at

which income is determined could

result in different decisions. Another

respondent suggested using loan closing

as a point of reference instead of loan

approval. RHCDS believes this would

cause undue burden to borrowers,

sellers, and lenders by rendering

ineligible loans in which considerable

processing time and expense has been

incurred. It is important to note the

distinction between RHCDS approval

and lender approval. The lender

approves the loan. RHCDS approves

issuance of a loan guarantee. The

regulation is revised to bring out this

distinction and approval will clearly

reference issuance of the commitment

for a loan guarantee.

One respondent suggested that

RHCDS adopt the income limits used in

the Fannie Mae Community Home

Buyers Program. The respondent

complained that it is burdensome to

work with income limits that vary by

family size. Fannie Mae limits are

simpler to work with, however, many

families otherwise eligible would be

excluded since the current method

provides higher limits for larger family

sizes. This provision remains

unchanged.

One respondent recommended that

RHCDS change the ratio term ‘‘Monthly

Obligation to Income (MOTI)’’ to ‘‘Total

Debt Ratio.’’ ‘‘Total Debt’’ is the

terminology used in the industry.

RHCDS agrees.

The proposal to consider the cost of

job related expenses in the total debt

ratio generated nine comments. Three

respondents opposed the addition of

this provision. One clearly favored

including child care as an expense.

There were two suggestions for

clarification and one recommendation

for further study of the issue. RHCDS

had proposed this revision in order to

make its program more consistent with

other Federal program. It has been

learned that other agencies are

reviewing this requirement. Based on its

experience with this program to date,

RHCDS has not had cause to believe its

current handling of job related expenses

has led to losses that otherwise would

not have occurred. The Agency has

opted for further study of the issue.

Several respondents suggested adding

two percent to the qualifying ratios for

dwellings that meet the 1992 Model

Energy Code (CABO 92 MEC). After

careful consideration, the Agency is not

adopting this change. The reason is that

the Agency’s thermal standards which

were already in place meet or exceed

the Model Energy Code. Adoption of the

Model Code standards will not enhance

the repayment ability of an RHCDS

borrower.

Three respondents suggested the

Agency provide guidance on the

consideration of contingent liabilities.
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26983

Contingent liabilities include debts from

a previous marriage and debts assigned

to the former spouse in a divorce decree.

The lack of guidance is burdensome and

inefficient for borrowers and lenders.

RHCDS added this guidance.

Another respondent expressed

concern about the difference between

eligible income and qualifying income.

Authorizing legislation limits program

eligibility to those borrowers with a

moderate income. In making this

determination, RHCDS looks at income

that many lenders typically would not

rely on for repayment ability. We

clarified the difference between

‘‘eligible’’ and ‘‘qualifying’’ income.

RHCDS uses ‘‘eligible’’ income to

determine the borrower’s eligibility for

the program. Eligibility is based on

current income. The lender uses

‘‘qualifying’’ income in loan

underwriting. ‘‘Qualifying’’ income

provides the basis for repayment ability.

For example, income from a part time

job the applicant has held for less than

6 months is eligible income. Unless the

applicant has a history of similar

income, it may not be dependable

enough to consider for repayment

ability.

RHCDS had proposed allowing the

lender to waive the qualifying ratios

when there are compensating factors.

One respondent suggested that this

approach could be workable but would

require considerable RHCDS training

and oversight. Another respondent

suggested the Agency have the lender

request an Agency determination for the

waiver. Another respondent suggested

that ‘‘waiver’’ of the ratios implies that

lenders may not have to consider

income adequacy. RHCDS agrees with

all of these comments. We made

revisions so the lender may request

RHCDS concurrence in allowing a

higher ratio.

Several respondents discussed loan

underwriting standards for credit

history. Two respondents disagreed

with the RHCDS standard which

provides that any debt written off by the

creditor within the last 36 months is

adverse credit. They argued that

sometimes a debt is written off by the

creditor but the borrower continues to

pay. The respondents stated this is not

adverse credit. RHCDS considers any

credit history blemish to be adverse

credit. There are, however,

circumstances in which the borrower

can reasonably explain adverse credit.

When adverse credit is beyond the

applicant’s control, the lender may

consider this in making a final

determination.

Several respondents alluded to a 36-

month ‘‘waiting period’’ in the case of

a bankruptcy. There is no ‘‘waiting

period’’ in the regulations. In fact,

RHCDS regulations do not directly

address bankruptcy as being adverse

credit. There is a provision that

bankruptcy older than 36 months

should not be considered in evaluating

credit history.

One respondent commented on the

eligibility issue of home ownership. An

applicant that already owns an adequate

dwelling is not eligible. Sometimes a

family moves from one area to another

and they are unable to sell their former

residence. The respondent suggested a

provision that the applicant could meet

the ownership requirement as long as he

or she does not own a dwelling in the

local commuting area. We have revised

the regulation to incorporate the

clarification requested.

Another respondent suggested a

revision on the provision for other

credit. The issue is whether the

qualification for another Federal or state

program would preclude eligibility for

the program or not. We have revised the

regulation to incorporate the

clarification requested.

Several respondents suggested

changing the determination of annual

income to include a 24 month history

instead of a 12 month history and

including straight line depreciation in

determining income. Annual and

adjusted income, by law, have the same

meanings given by section 3(b)(4) and

3(b)(5) of the United States Housing Act

of 1937. The regulation already provides

for the consideration of depreciation as

allowed by the Internal Revenue

Service.

One respondent pointed out that

income from the employment of minors

is not included in annual income but

the regulation calls for its use in

determining repayment ability. The

respondent suggested elimination of the

provision for counting a minor’s

income. Although the minor cannot be

a party to the note, the lender may

consider this additional household

income as a possible compensating

factor.

RHCDS had proposed to reserve the

authority to issue commitments subject

to the availability of funds. RHCDS

recognizes the loan making process can

range from several weeks to several

months. RHCDS receives no notification

of a pending application until the

Lender submits a request for a loan

guarantee. Since RHCDS’s funding

authority is based on annual

appropriations, there could be loans in

process which the Agency cannot fund.

RHCDS received eight comments on the

proposal to issue commitments subject

to funding. Seven of these opposed the

proposal. Several respondents argued

that the proposal would represent an

unacceptable risk to the secondary

market and to lenders. One respondent

stated that commitments without

funding would weaken the validity of

the conditional commitment. Most of

the respondents suggested an alternative

method such as the creation of a register

for loan applications. This would enable

the Agency to track the application

pipeline and assure lenders of the

availability of funds. Section 1980.351

implements a funding reservation

system.

Section 1980.353(c) clarifies that the

loan must be underwritten by the lender

before it is submitted to RHCDS.

Previous language called for lender

submission of a feasibility analysis. This

change in terminology was made based

on comments received both from

RHCDS employees and lenders.

One respondent suggested that the

request for a conditional commitment

should include copies of the income

verifications and the purchase

agreement or construction contract. We

added these to the list of required

documentation.

Several respondents made suggestions

regarding requirements for verification

of the borrower’s income. One

suggestion was to clarify that the

verification must be valid at that time of

issuance of the Conditional

Commitment. Several respondents

suggested that RHCDS permit the use of

an authorization for release of

information instead of the borrower

signing the verification form directly.

This would allow the lender to increase

their efficiency. Another suggestion

encourages the use of secondary means

of income verification. For example,

many lenders obtain a copy of the 3

most recent paycheck stubs for

employed borrowers to compare with

the information in the employer

verification. These suggestions have

been adopted.

There were four comments on lender

submission of a copy of the loan docket.

Each of the respondents asked for an

explanation of what a ‘‘loan docket’’

consists of. Two of the respondents

suggested that RHCDS should already

have copies of the information it needs

and that the requirement may be

redundant. One respondent suggested

that RHCDS should ask only for items

which are necessary to determine that

the closing conditions were met. RHCDS

agrees and so revised the regulation.

Two respondents asked that the

provision regarding additional loans be

removed or revised. One respondent

stated the prohibition prevents the

lender from making a home
26984 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

improvement loan but leaves other

lenders free to make the same loan.

RHCDS agrees with the respondents and

deleted this provision.

Two comments addressed

assumptions and transfers. One

respondent was concerned that since

transfers were permitted but not

required, a lender might unfairly place

a borrower in jeopardy by refusing to

permit a transfer. The other respondent

felt transfers should be allowed at

market value or for the outstanding

debt, whichever is less. The same

respondent proposed release of liability

for the transferor. The Housing Act of

1949, as amended, prohibits the release

of liability. For this reason, RHCDS

determined that the loan transfers

cannot be for less than outstanding debt.

Sale of the dwelling without assumption

of the loan is not prohibited. RHCDS

wanted to permit the lender the

flexibility to use the transfer as a

servicing tool if the lender determined

that was the best course of action. No

change is made to this section.

One respondent noted there is

nothing in the regulation addressing an

unapproved transfer. A provision has

been added to clarify this.

One respondent challenged RHCDS

because moratoria are not included. The

respondent referenced section 505 of the

Housing Act of 1949, as amended.

RHCDS notes that the Act authorizes the

use of this servicing tool but does not

require it. RHCDS encourages lenders to

‘‘make every effort to assist borrowers

who are cooperative and willing to

make a good faith effort * * *.’’ The

lender is authorized to make temporary

revisions to the repayment schedule.

There were two comments on

protective advances. One respondent

suggested that the $500 threshold was

too low. The other respondent argued

that prior approval may not be

appropriate since protective advances

are by definition of an emergency

nature. The respondent suggested that

RHCDS encourage lenders to obtain

prior approval to assure the expense is

included in the loss claim. This protects

RHCDS while providing flexibility to

the lender.

One respondent suggested that

RHCDS approval of a plan to continue

with a delinquent borrower may result

in delays. These delays could forestall

successful implementation of the plan.

RHCDS agrees with the comment and

section 1980.374(d)(1) is so revised.

However, the Agency may reject any

plan that does not protect the

Government’s interest.

One respondent indicated that it was

almost always cost effective to accept a

Deed-in-lieu rather than foreclose. The

respondent suggested that RHCDS

permit the lender discretion to accept a

Deed-in-Lieu of foreclosure without

prior approval. RHCDS agrees and this

change is adopted.

Several comments were received on

the revised loss payment provisions.

Three respondents indicated that the

time frame for filing the loss claim was

not long enough. Two respondents

suggested 45 working days is more

consistent with industry practice.

RHCDS finds a 45-working day time

frame is awkward to work with and

allows 9 weeks or longer for the lender

to process the claim. The other

respondent indicated that Fannie Mae

allows its servicers 30 calendar days to

file claims for private mortgage

insurance. RHCDS believes that 30

calendar days is reasonable time to file

a claim and this revision is adopted.

There were two favorable comments

on the proposal to allow a 6 month

period for the lender to liquidate

acquired property. One respondent

indicated that the 6 month period was

not long enough and might encourage a

‘‘fire’’ sale to liquidate the property. The

respondent suggested a 12 month period

with a minimum established upset sale

price. Another respondent questioned

the need for a plan for disposition of the

property. The respondent indicated that

the preparation of the plan is a burden

for both the lender and RHCDS without

financial benefit. The purpose of the

plan is to protect the Agency against the

possibility of a ‘‘fire’’ sale. The

respondent stated that the regulation is

very general as to the content of the plan

and contains no financial guidance with

respect to how much RHCDS will allow

for various cost items. The respondent

also complained that there is no

indication whether RHCDS will accept

aggregate costs in excess of the

percentage formula allowance currently

used. The same respondent felt it is not

clear when the plan is to be filed. The

intent of the Agency is to protect itself

from unreasonable losses. RHCDS does

not impose specific cost allowances for

various liquidation expenses. The

Agency looks to see whether the costs

claimed by the lender are legitimate,

necessary, and reasonable for the area.

There are no allowances for aggregate

costs over the percentage formula.

Examples and details will be available

through the lender handbook.

Two comments related to the date of

the RHCDS interest assistance payment.

The language was adjusted to clarify

when the interest assistance payment

would be made. A proposal to provide

for the payment on the first of the

month instead of the fifteenth was not

adopted.

One respondent suggested that

interest assistance should be made

available as a loss mitigation strategy.

We believe the commenter intended this

as a loan servicing tool to grant interest

assistance to borrowers who experience

decreases in income. Interest assistance

funds are subject to appropriations. This

means that interest assistance can be

made available only for loans

guaranteed from funds with an interest

assistance appropriation. This comment

is not implemented.

Four comments dealt with Mortgage

Credit Certificates and funded buydown accounts. Two respondents

suggested the value of a Mortgage Credit

Certificate should be subtracted from

the borrowers obligations rather than

added to income. The respondents

mentioned this is consistent with the

method used by ‘‘the general lending

community.’’ They argued this would

remove a source of confusion for

borrowers and lenders. RHCDS

acknowledges that some conventional

lenders have adopted this approach.

However, the method proposed by

RHCDS is consistent with other Federal

mortgage lending agencies. The income

tax credit increases disposable income.

The tax credit does not reduce the

borrower’s liabilities. No change is

made on Mortgage Credit Certificates.

However, after consideration, RHCDS

determined that funded buy-down

accounts would be implemented;

however, RHCDS concurrence would be

required similar to that concurrence

required for higher ratios.

We received two comments on

appeals. Both respondents suggested a

revision to the language so borrowers

and lenders could appeal separately.

One respondent expressed concern that

the lender is not likely to join the

borrower in an appeal. RHCDS’s

position is that the loans are the lender’s

loans. There is no point in the borrower

appealing a decision without the

lender’s willingness to make the loan

after the appeal. It is not necessary that

the lender and borrower each fully

participate in the appeal process. Only

that both parties join in requesting the

appeal. One respondent implied that the

appeal process should allow the

applicant/borrower to appeal lender

decisions. This is not consistent with

the Agency’s position.

List of Subjects in 7 CFR Part 1980

Home improvement, Loan programs—

Housing and community development,

Mortgage insurance, Mortgages, Rural

areas.

Therefore, Chapter XVIII, Title 7,

Code of Federal Regulations is amended

as follows:
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26985

PART 1980—GENERAL

1. The authority citation for part 1980

continues to read as follows:

Authority: 7 U.S.C. 1989, 42 U.S.C. 1480,

5 U.S.C. 301, 7 CFR 2.23, 7 CFR 2.70.

2. Subpart D of part 1980 is revised to

read as follows:

Subpart D—Rural Housing Loans

Sec.

1980.301 Introduction.

1980.302 Definitions and abbreviations.

1980.303–1980.307 [Reserved]

1980.308 Full faith and credit.

1980.309 Lender participation in

guaranteed RH loans.

1980.310 Loan purposes.

1980.311 Loan limitations and special

provisions.

1980.312 Rural area designation.

1980.313 Site and building requirements.

1980.314 Loans on leasehold interests.

1980.315 Escrow accounts for exterior

development

1980.316 Environmental requirements.

1980.317 Equal opportunity and

nondiscrimination requirements in use,

occupancy, rental, or sale of housing.

1980.318 Flood and mudslide hazard area

precautions.

1980.319 Other Federal, State, and local

requirements.

1980.320 Interest rate.

1980.321 Terms of loan repayment.

1980.322 Loan guarantee limits.

1980.323 Guarantee fee.

1980.324 Charges and fees by Lender.

1980.325 Transactions which will not be

guaranteed.

1980.326–1980.329 [Reserved]

1980.330 Applicant equity requirements.

1980.331 Collateral.

1980.332 [Reserved]

1980.333 Promissory notes and security

instruments.

1980.334 Appraisal of property serving as

collateral.

1980.335–1980.339 [Reserved]

1980.340 Acquisition, construction, and

development.

1980.341 Inspections of construction and

compliance reviews.

1980.342–1980.344 [Reserved]

1980.345 Applicant eligibility requirements

for a guaranteed loan.

1980.346 Other eligibility criteria.

1980.347 Annual income.

1980.348 Adjusted annual income.

1980.349–1980.350 [Reserved]

1980.351 Requests for reservation of funds.

1980.352 [Reserved]

1980.353 Filing and processing

applications.

1980.354 [Reserved]

1980.355 Review of requirements.

1980.356–1980.359 [Reserved]

1980.360 Conditions precedent to issuance

of the loan note guarantee.

1980.361 Issuance of loan note guarantee.

1980.362 [Reserved]

1980.363 Review of loan closing.

1980.364–1980.365 [Reserved]

1980.366 Transfer and assumption.

1980.367 Unauthorized sale or transfer of

the property.

1980.368–1980.369 [Reserved]

1980.370 Loan servicing.

1980.371 Defaults by the borrower.

1980.372 Protective advances.

1980.373 [Reserved]

1980.374 Liquidation.

1980.375 Reinstatement of the borrower’s

account.

1980.376 Loss payments.

1980.377 Future recovery.

1980.378–1980.389 [Reserved]

1980.390 Interest assistance.

1980.391 Equity sharing.

1980.392 Mortgage Credit Certificates

(MCCs) and Funded Buydown Accounts.

1980.393–1980.396 [Reserved]

1980.397 Exception authority.

1980.398 Unauthorized assistance and

other deficiencies.

1980.399 Appeals.

1980.400 [Reserved]

Subpart D—Rural Housing Loans

§ 1980.301 Introduction.

(a) Policy. This subpart contains

regulations for single family Rural

Housing (RH) loan guarantees by the

Rural Housing and Community

Development Service (RHCDS) and

applies to lenders, borrowers, and other

parties involved in making,

guaranteeing, servicing, holding or

liquidating such loans. Any processing

or servicing activity conducted pursuant

to this subpart involving authorized

assistance to RHCDS employees,

members of their families, known close

relatives, or business or close personal

associates is subject to the provisions of

subpart D of part 1900. Applicants for

this assistance are required to identify

any known relationship or association

with an RHCDS employee.

(b) Program objective. The basic

objective of the guaranteed RH loan

program is to assist eligible households

in obtaining adequate but modest,

decent, safe, and sanitary dwellings and

related facilities for their own use in

rural areas by guaranteeing sound RH

loans which otherwise would not be

made without a guarantee. Guarantees

issued under this subpart are limited to

loans to applicants with incomes that do

not exceed income limits as provided in

exhibit C of FmHA Instruction 1980–D

(available in any RHCDS office).

(c) [Reserved]

(d) Nondiscrimination. Loan

guarantees and services provided under

this subpart are subject to various civil

rights statutes. Assistance shall not be

denied to any person or applicant based

on race, sex, national origin, color,

familial status, religion, age, or physical

or mental disability (the applicant must

possess the capacity to enter into a legal

contract for services). The Consumer

Protection Act provides that the

applicant may not be denied assistance

based on receipt of income from public

assistance or because the applicant has,

in good faith, exercised any right

provided under the Act.

§ 1980.302 Definitions and abbreviations.

(a) The following definitions are

applicable to RH loans:

Agency: Rural Housing and

Community Development Service

(RHCDS).

Applicant. The party applying to a

Lender for a loan.

Approval official. An RHCDS

employee with delegated loan approval

authority under subpart A of part 1901

consistent with the amount and type of

loan considered.

Borrower. Collectively, all parties who

applied for and received a specific

guaranteed loan from an eligible Lender.

Coapplicant. An adult member of the

household who joins the applicant in

applying to a lender for a loan.

Conditional commitment. RHCDS’s

notice to the Lender that the material it

has submitted is approved subject to the

completion of all conditions and

requirements set forth in the notice.

Development standard. The current

edition of any of the model building,

plumbing, mechanical, and electrical

codes listed in exhibit E to subpart A of

part 1924 applicable to single family

residential construction or other similar

codes adopted by RHCDS for use in the

state.

Disabled person. A person who is

unable to engage in any substantially

gainful activity by reason of any

medically determinable physical or

mental impairment expected to result in

death or which has lasted or is expected

to last for a continuous period of not

less than 12 months. The disability is

expected to be of long or indefinite

duration; substantially impede the

person’s ability to live independently;

and is of such a nature that the person’s

ability to live independently could be

improved by more suitable housing

conditions. In the case of an individual

who has attained the age of 55 and is

blind, disability is defined as inability

by reason of such blindness to engage in

substantially gainful activity requiring

skills or abilities comparable to those of

any gainful activity in which the

individual has previously engaged with

some regularity over a substantial

period of time. Receipt of veteran’s

benefits for disability, whether serviceoriented or otherwise, does not

automatically establish disability. A

disabled person also includes a person

with a developmental disability. A

developmental disability means a

severe, chronic disability of a person

which:
26986 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

(1) Is attributable to a mental or

physical impairment or a combination

of mental and physical impairments;

(2) Is manifested before the person

attains age 22;

(3) Is likely to continue indefinitely;

(4) Results in substantial functional

limitations in one or more of the

following areas of major life activity:

(i) Self-care,

(ii) Receptive and expressive

language,

(iii) Learning,

(iv) Mobility,

(v) Self-direction,

(vi) Capacity for independent living,

and

(vii) Economic self-sufficiency; and

(5) Reflects the person’s need for a

combination and sequence of special

care, treatment, or other services which

are of lifelong or extended duration and

are individually planned and

coordinated.

Displaced homemaker. An individual

who is an adult; has not worked fulltime full-year (2,080 hours) in the labor

force for a number of years but has

during such years worked primarily

without remuneration to care for the

home and family; and is unemployed or

underemployed and is experiencing

difficulty in obtaining or upgrading

employment.

Elderly family. An elderly family

consists of one of the following:

(1) A person who is the head, spouse,

or sole member of a household and who

is 62 years of age or older, or who is

disabled and is the applicant/borrower

or the coapplicant/coborrower; or

(2) Two or more unrelated elderly (age

62 or older), disabled persons who are

living together, at least one of whom is

the applicant/borrower or coapplicant/

coborrower; or

(3) In the case of a family where a

deceased borrower/coborrower or

spouse was at least 62 years old or

disabled, the surviving household

members shall continue to be classified

as an ‘‘elderly family’’ for the purpose

of determining adjusted income even

though the surviving members may not

meet the definition of elderly family on

their own, provided:

(i) They occupied the dwelling with

the deceased family member at the time

of his/her death; and

(ii) If one of the surviving members is

the spouse of the deceased family

member, the surviving family shall be

classified as an elderly family only until

the remarriage of the surviving spouse;

and

(iii) At the time of death, the dwelling

of the deceased family member was

financed under title V of the Housing

Act of 1949, as amended.

Eligible lender. A Lender meeting the

criteria outlined in § 1980.309 who has

requested and received RHCDS approval

for participation in the program.

Existing dwelling. A dwelling which

has been completed for more than 1 year

as evidenced by an occupancy permit or

a similar document.

Extended family. A family unit

comprised of adult relatives who live

together with the other members of the

household, for reasons of physical

dependency, economics, and/or social

custom, who, under other

circumstances, could maintain separate

households. A typical example is

parents living with their adult children.

Federal National Mortgage

Association (Fannie Mae) rate. The rate

authorized in exhibit B of FmHA

Instruction 440.1 (available in any

RHCDS office).

Finance Office. The office which

maintains RHCDS’s financial records.

First-time homebuyer. Any individual

who (and whose spouse) has had no

present ownership in a principal

residence during the 3 year period

ending on the date of purchase of the

property acquired with a guaranteed

loan under this subpart. A first-time

homebuyer includes displaced

homemakers and single parents even

though they might have owned, or

resided in, a dwelling with a spouse.

This definition is used to determine

RHCDS processing priority in

accordance with § 1980.353.

Guaranteed loan. A loan made, held,

and serviced by a Lender for which

RHCDS has entered into an agreement

with the Lender in accordance with this

subpart.

Household or family. The applicant,

coapplicant, and all other persons who

will make the applicant’s dwelling their

primary residence for all or part of the

next 12 months. The temporary absence

of a child from the home due to

placement in foster care shall not be

taken into account in considering family

composition and size. Foster children

placed in the borrower’s home and livein aides shall not be counted as

members of the household.

Interest assistance. Loan assistance

payments made by RHCDS to the

Lender on behalf of the borrower.

Lender. The organization making,

holding, and/or servicing the loan

which is guaranteed under the

provisions of this subpart. The Lender is

also the party requesting the guarantee.

The Lender includes an entity

purchasing an RHCDS guaranteed loan.

A purchasing Lender acquires all the

privileges, duties, and responsibilities of

the originating Lender. The Lender is

primarily responsible for originating,

underwriting, servicing, and, where

necessary, liquidating the loan and

disposing of the property in a manner

consistent with maximizing the

Government’s interest.

Lender agreement. The signed master

agreement between RHCDS and the

Lender setting forth the Lender’s loan

responsibilities for loan processing and

servicing guaranteed RH loans.

Lender record change. The Lender’s

notice to RHCDS of a change of Lender

or a change of servicer.

Liquidation. Liquidation of the loan

occurs when the Lender acquires title to

the security, a third party buys the

property at the foreclosure sale, or the

borrower sells the property to a third

party in order to avoid or cure a default

situation with the prior approval of the

Lender and RHCDS. In states providing

a redemption period, the Lender does

not typically acquire title until after

expiration of the redemption period.

Liquidation expense. The Lender’s

cost of liquidation including those costs

that do not qualify as a protective

advance.

Loan note guarantee. The signed

commitment issued by RHCDS setting

forth the terms and conditions of the

guarantee.

Manufactured home. A structure built

to the Federal Manufactured Home

Construction and Safety Standards and

RHCDS thermal requirements.

Master interest assistance agreement.

The agreement among RHCDS, the

borrower, and the Lender which

provides the basis for payment of

interest assistance and shared equity.

Minor. A person under 18 years of

age. Neither the applicant, coapplicant,

or spouse may be counted as a minor.

Foster children placed in the borrower’s

home are not counted as minors for the

purpose of determination of annual or

adjusted income.

Net family assets. Include:

(1) The value of equity in real

property, savings, individual retirement

accounts (IRA), demand deposits, and

the market value of stocks, bonds, and

other forms of capital investments, but

exclude:

(i) Interests in Indian Trust land,

(ii) The value of the dwelling and a

minimum adequate site,

(iii) Cash on hand which will be used

to reduce the amount of the loan,

(iv) The value of necessary items of

personal property such as furniture and

automobiles and the debts against them,

(v) The assets that are a part of the

business, trade, or farming operation in

the case of any member of the

household who is actively engaged in

such operation, and

(vi) The value of a trust fund that has

been established and the trust is not
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26987

revocable by, or under the control of,

any member of the household, so long

as the funds continue to be held in trust.

(2) The value of any business or

household assets disposed of by a

member of the household for less than

fair market value (including disposition

in trust, but not in a foreclosure or

bankruptcy sale) during the 2 years

preceding the date of application, in

excess of the consideration received

therefore. In the case of a disposition as

part of a separation or divorce

settlement, the disposition shall not be

considered to be less than fair market

value if the household member receives

important consideration not measurable

in dollar terms.

Net proceeds. The proceeds remaining

from the property after it is sold or its

net value as determined in accordance

with this subpart. The determination of

net proceeds depends upon whether the

property is sold or acquired by the

Lender. Net proceeds may be

determined using the appraised value

and subtracting authorized deductions

when the Lender acquires the property.

Protective advance. Advances made

by the Lender when the borrower is in

liquidation or otherwise in default to

protect or preserve the security from

loss or destruction.

Qualifying income. The amount of the

applicant’s income which the lender

determines is adequate and dependable

enough to consider for repayment

ability. This figure may be different

from the adjusted income which is used

for RHCDS program eligibility.

Qualifying income is typically less than

adjusted income unless the applicant

has income from the sources listed in

§ 1980.347(e).

Rural area. An area meeting the

requirements of § 1980.312. Rural areas

are designated on maps available in the

RHCDS office servicing that area.

Single parent. An individual who is

unmarried or legally separated from a

spouse and has custody or joint custody

of one or more minor children or is

pregnant.

State Director. Director of RHCDS

programs within a state office area.

Veteran. A veteran is a person who

has been discharged or released from

the active forces of the United States

Army, Navy, Air Force, Marine Corps,

or Coast Guard under conditions other

than dishonorable discharge including

‘‘clemency discharges’’ and who served

on active duty in such forces:

(1) From April 6, 1917, through March

31, 1921;

(2) From December 7, 1941, through

December 31, 1946;

(3) From June 27, 1950, through

January 31, 1955; or

(4) For more than 180 days, any part

of which occurred after January 31,

1955, but on or before May 7, 1975.

(b) The following abbreviations are

applicable to this subpart:

Fannie Mae—Federal National

Mortgage Association.

FCS—Farm Credit Service.

FHA—Federal Housing

Administration.

Freddie Mac—Federal Home Loan

Mortgage Corporation.

Ginnie Mae—Government National

Mortgage Association.

HUD—Department of Housing and

Urban Development.

IRS—Internal Revenue Service.

MCCs—Mortgage Credit Certificates.

PITI—Principal, Interest, Taxes, and

Insurance.

RHCDS—Rural Housing and

Community Development Service.

URAR—Uniform Residential

Appraisal Report.

VA—Department of Veterans Affairs.

§§ 1980.303–1980.307 [Reserved]

§ 1980.308 Full faith and credit.

The loan note guarantee constitutes

an obligation supported by the full faith

and credit of the United States and is

incontestable except for fraud or

misrepresentation of which the Lender

has actual knowledge at the time it

becomes such Lender or which the

Lender participates in or condones.

Misrepresentation includes negligent

misrepresentation. A note which

provides for the payment of interest on

interest shall not be guaranteed. Any

guarantee or assignment of a guarantee

attached to or relating to a note which

provides for the payment of interest on

interest is void. Notwithstanding the

prohibition of interest on interest,

interest may be capitalized in

connection with reamortization over the

remaining term with written

concurrence of RHCDS. The loan note

guarantee will be unenforceable to the

extent any loss is occasioned by

violation of usury laws, negligent

servicing, or failure to obtain the

required security regardless of the time

at which RHCDS acquires knowledge of

the foregoing. Negligent servicing is

defined as servicing that is inconsistent

with this subpart and includes the

failure to perform those services which

a reasonably prudent Lender would

perform in servicing its own loan

portfolio of loans that are not

guaranteed. The term includes not only

the concept of a failure to act, but also

not acting in a timely manner or acting

contrary to the manner in which a

reasonably prudent Lender would act

up to the time of loan maturity or until

a final loss is paid. Any losses

occasioned will be unenforceable to the

extent that loan funds are used for

purposes other than those authorized in

this subpart. When the Lender conducts

liquidation in an expeditious manner, in

accordance with the provisions of

§ 1980.374, the loan note guarantee shall

cover interest until the claim is paid

within the limit of the guarantee.

§ 1980.309 Lender participation in

guaranteed RH loans.

(a) Qualification. The following

Lenders are eligible to participate in the

RHCDS guaranteed RH loan program

upon presentation of evidence of said

approval and execution of the RHCDS

Lender Agreement.

(1) Any state housing agency;

(2) Any Lender approved by HUD as

a supervised or nonsupervised

mortgagee for submission of one to four

family housing applications for Federal

Housing Mortgage Insurance or as an

issuer of Ginnie Mae mortgage backed

securities;

(3) Any Lender approved as a

supervised or nonsupervised mortgagee

for the VA;

(4) Any Lender approved by Fannie

Mae for participation in one to four

family mortgage loans;

(5) Any Lender approved by Freddie

Mac for participation in one to four

family mortgage loans;

(6) An FCS institution with direct

lending authority; and

(7) Any Lender participating in other

RHCDS, Rural Business and Cooperative

Development Service, Rural Utilities

Service, and/or Consolidated Farm

Service Agency guaranteed loan

programs.

(b) Lender approval. A Lender listed

in paragraph (a) of this section must

request a determination of eligibility in

order to participate as an originating

Lender in the program. Requests may be

made to the state office serving the state

jurisdiction or to the National office

when multiple state jurisdictions are

involved.

(1) The Lender must provide the

following information to RHCDS:

(i) Evidence of approval, as

appropriate, for the criteria under

paragraph (a) of this section, which the

Lender meets.

(ii) The Lender’s Tax Identification

Number.

(iii) The name of an official of the

Lender who will serve as a contact for

RHCDS regarding the Lender’s

guaranteed loans.

(iv) A list of names, titles, and

responsibilities of the Lender’s principal

officers.

(v) An outline of the Lender’s internal

loan criteria for issues of credit history
26988 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

and repayment ability and a copy of the

Lender’s quality control plan for

monitoring production and servicing

activities.

(vi) An executed certification

regarding debarment, suspension, or

other matters—primary covered

transactions. The certification will be

obtained using a form prescribed by

RHCDS.

(2) The Lender must agree to:

(i) Obtain and keep itself informed of

all program regulations and guidelines

including all amendments and revisions

of program requirements and policies.

(ii) Process and service RHCDS

guaranteed loans in accordance with

Agency regulations.

(iii) Permit RHCDS employees or its

designated representatives to examine

or audit all records and accounts related

to any RHCDS loan guarantee.

(iv) Be responsible for the servicing of

the loan, or if the loan is to be sold, sell

only to an entity which meets the

provisions of paragraph (a) of this

section.

(v) Use forms which have been

approved by FHA, Fannie Mae, Freddie

Mac, or, for FCS Lenders, use the

appropriate FCS forms.

(vi) Maintain its approval if

qualification as an RHCDS Lender was

based on approval by HUD, VA, Fannie

Mae, or Freddie Mac including

maintaining the minimum allowable net

capital, acceptable levels of liquidity,

and any required fidelity bonding and/

or mortgage servicing errors and

omissions policies required by HUD,

VA, Fannie Mae, or Freddie Mac, as

appropriate.

(vii) Operate its facilities in a prudent

and business-like manner.

(viii) Assure that its staff is well

trained and experienced in loan

origination and/or loan servicing

functions, as necessary, to assure the

capability of performing all of the

necessary origination and servicing

functions.

(ix) Notify RHCDS in writing if the

Lender:

(A) Ceases to meet any financial

requirements of the entity under which

the Lender qualified for RHCDS

eligibility;

(B) Becomes insolvent;

(C) Has filed for bankruptcy

protection, has been forced into

involuntary bankruptcy, or has

requested an assignment for the benefit

of creditors;

(D) Has taken any action to cease

operations or discontinue servicing or

liquidating any or all of its portfolio of

RHCDS guaranteed loans;

(E) Has any change in the Lender

name, location, address, or corporate

structure;

(F) Has become delinquent on any

Federal debt or has been debarred,

suspended, or sanctioned by any

Federal agency or in accordance with

any applicable state licensing or

certification requirements.

(c) [Reserved]

(d) Handling applications for Lender

eligibility. Upon determination of a

Lender’s eligibility to originate loans,

RHCDS and the Lender will execute the

RHCDS Lender Agreement. The Lender

Agreement establishes the Lender’s

authorization for participation in the

program as an originator, servicer, or

holder of RHCDS single family mortgage

loans. The Lender Agreement shall be in

effect until terminated by either the

Agency or the Lender in accordance

with the terms of the Lender Agreement

and this subpart.

(e) Lender sale of guaranteed loans.

Loans guaranteed under this subpart

may be sold only to entities which meet

the qualifications in paragraphs (a) and

(b) of this section or directly to Fannie

Mae or Freddie Mac. Such entities are

referred to as a Lender and are to be

treated as a Lender for all purposes

under this subpart. The selling Lender

shall provide the original loan note

guarantee to the purchasing Lender. The

selling Lender is responsible for

reporting the sale of any loan to RHCDS

within 30 days using a reporting form

provided by RHCDS. The purchasing

Lender must execute a Lender

Agreement or have a valid Lender

Agreement on file with RHCDS. The

purchasing Lender shall succeed to all

rights, title, and interest of the Lender

under the loan note guarantee. Any

necessary or convenient assignments or

other instruments relating to the loan

and any other actions necessary or

convenient to perfect or record such

transaction are the responsibility of the

purchasing Lender. The purchasing

Lender assumes the obligations of, and

will be bound by and will comply with,

all covenants, agreements, terms, and

conditions contained in any note,

security instrument, loan note

guarantee, and of any outstanding

agreements in connection with such

loan purchased. The purchasing Lender

shall be subject to any defenses, claims,

or setoffs that RHCDS would have

against the Lender if the Lender had

continued to hold the loan.

(f) Lender responsibility. The Lender

will be responsible for the processing,

servicing, and liquidation (if necessary)

of the loan. The Lender may use agents,

correspondents, branches, financial

experts, or other institutions in carrying

out its responsibilities. Lenders are fully

responsible for their own actions and

the actions of those acting on the

Lender’s behalf.

(1) Processing. The Lender must abide

by limitations on loan purposes, loan

limitations, interest rates, and terms set

forth in this subpart. The Lender will

obtain, complete, and submit to RHCDS

the items required in § 1980.353(c). The

Lender may utilize the services of a nonRHCDS approved lender for originating

residential loans. The RHCDS approved

lender is responsible for the loan

underwriting and for obtaining the

RHCDS conditional commitment. The

agent may close the loan in its name

provided the loan is immediately

transferred to the approved lender to

whom the guarantee will be issued.

(2) Servicing. Lenders are fully

responsible for servicing and protecting

the security for all guaranteed loans.

When servicing is carried out by a third

party, the Lender will inform RHCDS of

the name and address of the servicer.

(3) Liquidation. The Lender will

complete any liquidation of loans

guaranteed under the provisions of the

Lender Agreement. Loss claims will be

submitted on the RHCDS Loss Report

form. The loss report will be

accompanied by supporting information

to outline disposition of all security

pledged to secure the loan. The Lender

shall also effect collection of the debt

from other assets of the borrower to the

extent practicable.

(4) Counseling. Lenders are

encouraged to offer or provide for home

ownership counseling. Lenders may

require first-time homebuyers to

undergo such counseling if it is

reasonably available in the local area.

When home ownership counseling is

provided or sponsored by RHCDS or

another Federal agency in the local area,

the Lender must require the borrower to

successfully complete the course.

(g) Monitoring a Lender’s processing

and servicing of loans. If RHCDS

determines that the Lender is not

fulfilling the obligations of the Lender

Agreement or that the Lender fails to

maintain the required criteria, the

Lender will be notified in writing of the

deficiencies and allowed a maximum of

30 days to correct them. If the Lender

fails to make the required corrections,

RHCDS will proceed as provided in

paragraph (h) of this section.

(1) Loan processing review for new

Lenders. RHCDS may review loans

developed by an eligible Lender to

assure compliance with, and

understanding of, Agency regulations.

(2) [Reserved]

(3) [Reserved]

(h) Termination of Lender eligibility.

The Lender remains eligible as long as

the Lender meets the criteria in
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26989

paragraph (a) of this section unless that

Lender’s status is revoked by RHCDS or

by another Federal agency. RHCDS shall

revoke the eligible Lender status of any

Lender who fails to comply with

requirements of paragraph (b) or (e) of

this section. Status may also be revoked

if the Lender violates the terms of the

Lender Agreement, fails to properly

service any guaranteed loan, or fails to

adequately protect the interests of the

Lender and the Government. If the

Lender is determined to be no longer

eligible, the Lender will continue to

service any outstanding loans

guaranteed under this subpart which are

held by the Lender or RHCDS may

require the Lender to transfer the

servicing of the loan. In addition to

revocation of eligible Lender status, the

Lender may be debarred by RHCDS.

§ 1980.310 Loan purposes.

The purpose of a loan guaranteed

under this subpart must be to acquire a

completed dwelling and related

facilities to be used by the applicant as

a primary residence. The loan may be to

purchase a new dwelling or an existing

dwelling. The guaranteed loan may be

for ‘‘take out’’ financing for a loan to

construct a new dwelling or improve an

existing dwelling when the construction

financing is arranged in connection with

the loan package. The loan may include

funds for the purchase and installation

of necessary appliances, energy saving

measures, and storm cellars. Incidental

expenses for tax monitoring services,

architectural, appraisal, survey,

environmental, and other technical

services may be included. Subject to

§ 1980.311, eligible loan purposes also

include:

(a) Necessary related facilities such as

a garage, storage shed, walks, driveway,

and water and/or sewage facilities

including reasonable connection fees for

utilities which the buyer is required to

pay.

(b) Special design features or

equipment necessary to accommodate a

physically disabled member of the

household.

(c) The cost of establishing an escrow

account for real estate taxes and/or

insurance premiums.

(d) Title clearance, title insurance,

and loan closing; stock in a cooperative

lending agency necessary to obtain the

loan; and, for low-income applicants

only, loan discount points to reduce the

note interest rate from the rate

authorized in § 1980.320 not exceeding

the amount typical for the area.

(e) Provide funds for seller equity

and/or essential repairs when an

existing guaranteed loan is to be

assumed simultaneously.

§ 1980.311 Loan limitations and special

provisions.

(a) Prohibited loan purposes.

Conditional commitments will not be

issued if loan funds are to be used for:

(1) Payment of construction draws.

(2) The purchase of furniture or other

personal property except for essential

equipment and materials authorized in

accordance with § 1980.310.

(3) Refinancing RHCDS debts, debts

owed the Lender (other than

construction/development, financing

incurred in conjunction with the

proposed loan), or debts on a

manufactured home.

(4) Purchase or improvement of

income-producing land, or buildings to

be used principally for incomeproducing purposes, or buildings not

essential for RH purposes, or to buy or

build buildings which are largely or in

part specifically designed to

accommodate a business or incomeproducing enterprise.

(5) Payment of fees, charges, or

commissions, such as finder’s fees for

packaging the applications or placement

fees for the referral of a prospective

applicant to RHCDS.

(6) Improving the entry of a

homestead entryman or desert entryman

prior to receipt of patent.

(7) Purchase a dwelling with an inground swimming pool.

(b) Limitations. The principal purpose

of the loan, except for a subsequent loan

to an existing borrower, must be to buy

or build a dwelling. The loan may

include additional funds in accordance

with § 1980.310. The amount of the loan

may not exceed the maximum dollar

limitation of section 203(b)(2) of the

National Housing Act (12 U.S.C. 1702).

(1) A loan for the acquisition of a

newly constructed dwelling that meets

the requirements of § 1980.341(b) of this

subpart may be made for up to 100

percent of the appraised value or the

cost of acquisition and any necessary

development including those purposes

in § 1980.310, whichever is less.

(2) A loan for the acquisition of an

existing dwelling and development, if

any, in conjunction with the acquisition

of an existing dwelling may be made for

up to 100 percent of the appraised value

or the cost of acquisition and necessary

development including those purposes

in § 1980.310, whichever is less.

(3) A loan for the acquisition of a

newly constructed dwelling (a dwelling

that does not meet the definition for an

existing dwelling) that does not meet

the requirements of § 1980.341(b) is

limited to 90 percent of the present

market value.

(c) Subdivisions. Housing units may

be financed in existing subdivisions

approved by local, regional, state, or

Federal government agencies before

issuance of a conditional commitment.

The subdivision must meet the

requirements of § 1901.203. An existing

subdivision is one in which the local

government has accepted the

subdivision plan, its principal

developments and right-of-ways, the

construction of streets, water and water/

waste disposal systems, and utilities; is

at a point which precludes any major

changes; and provisions are in place for

continuous maintenance of the streets

and the water and water/waste disposal

systems. A dwelling served by a

homeowners association (HOA) may be

accepted when the project has been

approved or accepted by HUD, VA,

Fannie Mae, or Freddie Mac.

§ 1980.312 Rural area designation.

A rural area is an area which is

identified as rural by RHCDS in

accordance with § 1944.10. Current

county maps showing ineligible areas

are available in RHCDS field offices.

§ 1980.313 Site and building requirements.

(a) Rural area. The property on which

the loan is made must be located in a

designated rural area as identified in

§ 1980.312. A nonfarm tract to be

purchased or improved with loan funds

must not be closely associated with farm

service buildings.

(b) Access. The property must be

contiguous to and have direct access

from a street, road, or driveway. Streets

and roads must be hard surface or allweather surface.

(c) Water and water/waste disposal

system. A nonfarm tract on which a loan

is to be made must have an adequate

water and water/waste disposal system

and other related facilities. Water and

water/waste disposal systems serving

the site must be approved by a state or

local government agency. When the site

is served by a privately owned and

centrally operated water and water/

waste disposal system, the system must

meet the design requirements of the

State Department of Health or

comparable reviewing and regulatory

agency. Written verification must be

obtained from the regulatory agency that

the private water and water/waste

system complies with the Safe Drinking

Water Act (42 U.S.C. 300F et seq.), and

the Clean Water Act (33 U.S.C. 1251 et

seq.), respectively. A system owned

and/or operated by a private party must

have a binding agreement which allows

interested third parties, such as the

Lender, to enforce the obligation of the

operator to provide satisfactory service

at reasonable rates.

(d) [Reserved]
26990 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

(e) Modest house. Dwellings financed

must provide decent, safe, and sanitary

housing and be modest in cost. A

dwelling that can be purchased with a

loan not exceeding the maximum dollar

limitation of section 203(b)(2) of the

National Housing Act (12 U.S.C. 1702)

is considered modest. Generally, the

value of the site must not exceed 30

percent of the total value of the

property. When the value of the site is

typical for the area, as evidenced by the

appraisal, and the site cannot be

subdivided into two or more sites, the

30 percent limitation may be exceeded.

(f) Thermal standards. Dwellings

financed shall meet the standards

outlined in exhibit D of subpart A of

part 1924 except for an existing

dwelling, if documentation is provided

to establish that the actual cost of

heating and cooling is not significantly

greater than those costs for a dwelling

that meets RHCDS’s thermal standards.

If the dwelling is excepted, only the

perimeter of the house at the band beam

and the heat ducts in unheated

basements or crawlspace must be

insulated.

(g) Existing dwelling. An existing

dwelling financed must be cost effective

to the applicant including reasonable

costs of utilities and maintenance for

the area. Loan guarantees may be made

on an existing manufactured home

when it meets the provisions of

paragraph (i)(2)(i) of this section.

(h) Repairs. Any dwelling financed

with an RHCDS guarantee must be

structurally sound, functionally

adequate, and placed in good repair

prior to issuance of the Loan Note

Guarantee except as provided in

§ 1980.315.

(i) Manufactured homes. New units

that meet the requirements of exhibit J

of subpart A of part 1924 and purchased

through RHCDS approved dealercontractors may be considered for a

guaranteed loan under this subpart. The

Lender may obtain a list of RHCDS

approved models and dealer-contractors

from any RHCDS office in the area

served.

(1) Loans may be guaranteed for the

following purposes when the security

covers both the unit and the lot:

(i) A new unit and related site

development work on a site owned or

purchased by the applicant which meets

the requirements and limitations of this

section or a leasehold meeting the

provisions of § 1980.314.

(ii) Transportation and set-up costs for

a new unit.

(2) Loans may not be guaranteed for:

(i) An existing unit and site unless it

is already financed with a Section 502

RH direct or guaranteed loan, is being

sold from RHCDS inventory, or is being

sold from the Lender’s inventory

provided the Lender acquired

possession of the unit through a loan

guaranteed under this subpart.

(ii) The purchase of a site without also

financing the unit.

(iii) Existing debts owed by the

applicant/borrower.

(iv) A unit without an affixed

certification label indicating the unit

was constructed in accordance with the

Federal Manufactured Home

Construction and Safety Standards.

(v) Alteration or remodeling of the

unit when the initial loan is made.

(vi) Furniture, including movable

articles of personal property such as

drapes, beds, bedding, chairs, sofas,

lamps, tables, televisions, radios, stereo

sets, and similar items. Items such as

wall-to-wall carpeting, refrigerators,

ovens, ranges, clothes washers or dryers,

heating or cooling equipment, or similar

items may be financed.

(vii) Any unit not constructed to the

RHCDS thermal standards as identified

by an affixed label for the winter degree

day zone where the unit will be located.

§ 1980.314 Loans on leasehold interests.

A loan may be guaranteed if made on

a leasehold owned or being acquired by

the applicant when the Lender

determines that long-term leasing of

homesites is a well established practice

and such leaseholds are freely

marketable in the area provided the

Lender determines and certifies to

RHCDS that:

(a) Unable to obtain fee title. The

applicant is unable to obtain fee title to

the property.

(b) Unexpired term. The lease has an

unexpired term (term plus option to

renew) of at least 40 years from the date

of approval.

§ 1980.315 Escrow accounts for exterior

development.

When proposed exterior development

work cannot be completed because of

weather and the work remaining to be

done does not affect the livability of the

dwelling, an escrow account for exterior

development only may be established by

the originating lender if the following

conditions are met:

(a) A signed contract and bid schedule

is in effect for the proposed exterior

development work.

(b) The contract for development

work must provide for completion

within 120 days.

(c) The Lender agrees to obtain a final

inspection report and advise RHCDS

when the work has been completed.

(d) The escrow account must be

funded in an amount sufficient to assure

the completion of the remaining work.

This figure should be 150 percent of the

cost of completion but may be higher if

the Lender determines a higher amount

is needed.

§ 1980.316 Environmental requirements.

The requirements of subpart G of part

1940 apply to loan guarantees made

under this subpart. Lenders and

applicants must cooperate with RHCDS

in the completion of these requirements.

Lenders must become familiar with

these requirements so that they can

advise applicants and reduce the

probability of unacceptable applications

being submitted to RHCDS. RHCDS may

require that Lenders and/or applicants

obtain information for completing

environmental assessments when

necessary. The RHCDS approval official

will utilize adequate, reliable

information in completion of

environmental review. Sources of

information include, but are not limited

to, the State Natural Resource

Management Guide (available in any

RHCDS office) and, as necessary, the

technical expertise available within the

Agency as well as other agencies and

organizations to assist in the completion

of the environmental review.

§ 1980.317 Equal opportunity and

nondiscrimination requirements in use,

occupancy, rental, or sale of housing.

(a) Compliance. Loans guaranteed

under this subpart are subject to the

provisions of various civil rights

statutes. RHCDS and the Lender may

not discriminate against any person in

making guaranteed housing loans

available, or impose different terms and

conditions for the availability of these

loans based on a person’s race, color,

familial status, religion, sex, age,

physical or mental disability, or

national origin, provided the applicant

possesses the capacity to enter into a

legal contract for services. These

requirements will be discussed with the

applicant, builder, developer, and other

parties involved as early in the

negotiations as possible.

(b) Reporting. If there is indication of

noncompliance with these

requirements, the matter will be

reported by the borrower, Lender, or

RHCDS personnel to the Administrator

or the Director, Equal Opportunity Staff.

Complaints and compliance will be

handled by RHCDS in accordance with

subpart E of part 1901.

(c) Forms and requirements. In

accordance with Executive Order 11246,

the following equal opportunity and

nondiscrimination forms and

requirements are applicable when the

loan guarantee involves a construction
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26991

contract between the borrower and the

contractor that is more than $10,000.

The Lender is responsible for seeing that

the requirements of paragraphs (c)(1)

through (c)(5) of this section are met:

(1) Equal Opportunity Agreement.

Before loan closing, each borrower

whose loan involves a construction

contract of more than $10,000 must

execute the RHCDS Equal Opportunity

Agreement or the equivalent HUD form.

(2) Construction contract or

subcontract in excess of $10,000. If the

contract or a subcontract exceeds

$10,000:

(i) The contractor or subcontractor

must submit the Agency Compliance

Statement before or as a part of the bid

or negotiation.

(ii) An Equal Opportunity Clause

must be part of each contract and

subcontract.

(iii) With notification of the contract

award, the contractor must receive the

Agency Notice to Contractors and

Applicants signed by RHCDS, with an

attached Equal Employment

Opportunity poster. Posters in Spanish

must be provided and displayed where

a significant portion of the population is

Spanish speaking.

(iv) Under Executive Order 11246 and

Executive Order 11375, the contractor or

subcontractor, subject to the

requirements of paragraph (c)(5) of this

section, is prohibited from

discriminating because of race, color,

religion, sex, or national origin to ensure

equality of opportunity in all aspects of

employment.

(3) One hundred or more employees

and construction contract or

subcontract exceeds $10,000. If the

contractor or subcontractor has 100 or

more employees and the contract or

subcontract is for more than $10,000, in

addition to the requirements of

paragraph (c)(2) of this section, a report

must be filed annually on or before

March 31. Failure to file timely,

complete, and accurate reports

constitutes noncompliance with the

Equal Opportunity Clause. Report forms

are distributed by the Joint Reporting

Committee and any questions on this

form should be addressed by the

contractor or subcontractor to the Joint

Reporting Committee, 1800 G Street,

NW., Washington, D.C. 20006.

(4) Fifty or more employees and

construction contract or subcontract

exceeds $50,000. If the contract or

subcontract is more than $50,000 and

the contractor or subcontractor has 50 or

more employees, in addition to the

requirements of paragraph (c)(2) of this

section, each such contractor or

subcontractor must be informed that the

contractor or subcontractor must

develop a written affirmative action

compliance program for each of the

contractor’s or subcontractor’s

establishments and put it on file in each

of the personnel offices within 120 days

of the commencement of the contract or

subcontract.

(5) [Reserved]

(6) Employee complaints. Any

employee of or applicant for

employment with such contractors or

subcontractors may file a written

complaint of discrimination with

RHCDS.

(i) A written complaint of alleged

discrimination must be signed by the

complainant and should include the

following information:

(A) The name and address (including

telephone number, if any) of the

complainant.

(B) The name and address of the

person committing the alleged

discrimination.

(C) A description of the acts

considered to be discriminatory.

(D) Any other pertinent information

that will assist in the investigation and

resolution of the complaint.

(ii) Such complaint must be filed not

later than 180 days from the date of the

alleged discrimination, unless the time

for filing is extended by RHCDS for

good cause shown by the complainant.

§ 1980.318 Flood or mudslide hazard area

precautions.

RHCDS policy is to discourage

lending in designated flood and

mudslide hazard areas. Loan guarantees

shall not be issued in designated flood/

mudslide hazard areas unless there is no

practical alternative.

(a) Dwelling location. Dwellings and

building improvements located in

special flood or mudslide hazard areas,

as designated by the Federal Emergency

Management Agency (FEMA) may be

financed under this subpart only if:

(1) The community, as a result of such

designation by FEMA as a special flood

or mudslide prone area, has an

approved flood plain area management

plan.

(2) The dwelling location and

construction plans and specifications

for new buildings or improvements to

existing buildings comply with an

approved flood plain area management

plan (see paragraph (a)(1) of this

section).

(3) Potential environmental impacts

and feasible alternatives have been fully

considered by RHCDS in accordance

with the requirements of subpart G of

part 1940.

(4) The first floor elevation is above

the 100 year flood zone elevation.

(b) Flood insurance. If the dwelling is

located in a special flood or mudslide

hazard area, flood insurance must be

purchased by the borrower prior to loan

closing and maintained thereafter. See

subpart B of part 1806 (FmHA

Instruction 426.2).

§ 1980.319 Other Federal, State, and local

requirements.

In addition to the specific

requirements of this subpart, on all

proposals financed with an RHCDS

guarantee, Lenders and/or applicants

must coordinate with all appropriate

Federal, state, and local agencies.

Applicants and/or Lenders will be

required to comply with any Federal,

state, or local laws, regulatory

commission rules, ordinances, and

regulations which exist at the time the

loan guarantee is issued which affect the

dwelling including, but not limited to:

(a) Borrowing money and giving

security therefore;

(b) Land use zoning;

(c) Health, safety, and sanitation

standards; and

(d) Protection of the environment and

consumer affairs.

§ 1980.320 Interest rate.

The interest rate must not exceed the

established applicable usury rate. Loans

guaranteed under this subpart must bear

a fixed interest rate over the life of the

loan. The rate shall be agreed upon by

the borrower and the Lender and must

not be more than the lender’s published

rate for VA first mortgage loans with no

discount points or the current Fannie

Mae rate as defined in § 1980.302(a),

whichever is higher. The lender must

document the rate and the date it was

determined.

§ 1980.321 Terms of loan repayment.

(a) Note. Principal and interest shall

be due and payable monthly.

(b) Term. The term for final maturity

shall be not less than 30 years from the

date of the note and not more than 30

years from the date of the first

scheduled payment.

§ 1980.322 Loan guarantee limits.

The amount of the loan guarantee is

90 percent of the principal amount of

the loan.

(a) The maximum loss payment under

the guarantee of Single Family Housing

loans is the lesser of:

(1) Any loss of an amount equal to 90

percent of the principal amount actually

advanced to the borrower, or

(2) Any loss sustained by the Lender

of an amount up to 35 percent of the

principal amount actually advanced to

the borrower, plus 85 percent of any

additional loss sustained by the Lender

of an amount up to the remaining 65
26992 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

percent of the principal amount actually

advanced to the borrower.

(b) Loss includes only:

(1) Principal and interest evidenced

by the guaranteed loan note;

(2) Any loan subsidy due and owing;

and

(3) Any principal and interest

indebtedness on RHCDS approved

protective advances for protection and

preservation of security.

(c) Interest (including any subsidy)

shall be covered by the loan note

guarantee to the date of the final loss

settlement when the Lender conducts

liquidation in an expeditious manner in

accordance with the provisions of

§ 1980.376.

§ 1980.323 Guarantee fee.

The Lender will pay a nonrefundable

fee which may be passed on to the

borrower. The amount of the fee is

determined by multiplying the figure in

exhibit K of FmHA Instruction 440.1

(available in any RHCDS office) times 90

percent of the principal amount of the

loan.

§ 1980.324 Charges and fees by Lender.

(a) Routine charges and fees. The

Lender may establish the charges and

fees for the loan, provided they are the

same as those charged other applicants

for similar types of transactions.

(b) Late payment charges. Late

payment charges will not be covered by

the guarantee. Such charges may not be

added to the principal and interest due

under any guaranteed note. Late charges

may be made only if:

(1) Maximum amount. The maximum

amount does not exceed the percentage

of the payment due as prescribed by

HUD or Fannie Mae or Freddie Mac.

(2) Routine. They are routinely made

by the Lender in similar types of loan

transactions.

(3) Payments received. Payments have

not been received within the customary

time frame allowed by the Lender. The

term ‘‘payment received’’ means that the

payment in cash, check, money order, or

similar medium has been received by

the Lender at its main office, branch

office, or other designated place of

payment.

(4) Calculating charges. The Lender

does not change the rate or method of

calculating the late payment charges to

increase charges while the loan note

guarantee is in effect.

(5) Interest-assisted loans. The Lender

will not penalize or charge any fee to

the borrower when the only

delinquency is a loan subsidy payment,

which the Lender is entitled to but has

not received.

§ 1980.325 Transactions which will not be

guaranteed.

(a) Lease payments. Payments made

on a lease will not be guaranteed.

(b) Loans made by other Federal

agencies. Loans made by other Federal

agencies will not be guaranteed. This

does not preclude guarantees of loans

made by an FCS institution with direct

lending authority. This also does not

preclude loans made by state or local

government agencies assisted by a

Federal agency.

§§ 1980.326–1980.329 [Reserved]

§ 1980.330 Applicant equity requirements.

A loan to purchase a new or existing

dwelling may be made up to the

appraised market value of the security.

§ 1980.331 Collateral.

(a) General. The entire loan must be

secured by a first lien on the property

being financed (second lien when the

loan is for a subsequent loan to an

existing borrower or there is a transfer

and assumption of an existing loan) and

the Lender will maintain this lien

priority. The Lender is responsible for

assurance that proper and adequate

security interest is obtained, maintained

in existence, and of record to protect the

interests of the Lender and RHCDS.

(b) Third party liens, suits pending,

etc. Among other things in obtaining the

required security, it is necessary to

ascertain that there are no adverse

claims or liens against the property or

the borrower, and that there are no suits

pending or anticipated that would affect

the property or the borrower.

(c) All collateral must secure the

entire loan. The Lender will not take

separate collateral, including but not

limited to mortgage insurance, to secure

that portion of the loss not covered by

the guarantee.

§ 1980.332 [Reserved]

§ 1980.333 Promissory notes and security

instruments.

(a) Loan instruments. The Lender may

use its own forms for promissory notes,

real estate mortgages, including deeds of

trust and similar instruments, and

security agreements provided there are

no provisions that are in conflict or

otherwise inconsistent with the

provisions of § 1980.309(b)(2)(v). The

Lender is responsible for determining

that the security instruments are

adequate and are properly maintained of

record.

(b) Interest assistance instruments.

When the loan guarantee is authorized

from interest assisted funds, RHCDS

will provide the Lender with the

necessary forms and security

instruments related to the interest

assistance. The Lender will complete

the Master Interest Assistance

Agreement, assure that the closing agent

properly records a junior mortgage or

deed of trust which grants RHCDS a lien

on the property in order to protect

RHCDS’s equity share subject only to

the first mortgage or deed of trust to the

Lender or other authorized prior lien,

and forward the agreements and

recorded instruments to RHCDS.

§ 1980.334 Appraisal of property serving

as collateral.

An appraisal of all property serving as

security for the proposed loan will be

completed and submitted to RHCDS for

review with the request for loan

guarantee. The Lender may pass the cost

of the appraisal on to the borrower. The

appraisal must have been completed

within 6 months of the date the request

for a conditional commitment is

submitted to RHCDS.

(a) Qualified appraiser. The Lender

will use an appraiser that is properly

licensed or certified, as appropriate, to

make residential real estate appraisals in

accordance with the criteria set forth by

the Appraiser Qualification Board

(AQB) of the Appraisal Foundation

regardless of the amount of the loan.

Appraisers may not discriminate against

any person in making or performing

appraisal services because of race, color,

familial status, religion, sex, age,

disability, or national origin.

(b) Appraisal report. Residential

appraisals will be completed using the

sales comparison (market) and cost

approach to market value.

(1) URAR. The appraiser will use the

most recent revision of the URAR.

(i) The ‘‘Estimated Reproduction CostNew of Improvements’’ section of the

form must be completed when the

dwelling is less than 1 year old.

(ii) Not less than three comparable

sales, which are not more than 12

months old, will be used unless the

appraiser provides documentation that

such comparables are not available in

the area. Comparable sales should be

located as close as possible to the

subject dwelling. When the need arises

to use a comparable sale that is a

considerable distance from the subject,

the appraiser must use his or her

knowledge of the area and apply good

judgment in selecting comparable sales

that are the best indicators of value for

the subject property.

(2) Supporting documentation. A

narrative explanation supporting

unusual adjustments must be attached

to the appraisal.

(3) Photographs. The appraisal report

must include photographs which clearly
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26993

provide front, rear, and street scene

views of the subject property, and a

front view for each comparable sale

used in the completion of the appraisal.

(c) RHCDS acceptance. The Lender

will be required to correct or complete

any appraisal returned by RHCDS for

corrective action.

§§ 1980.335–1980.339 [Reserved]

§ 1980.340 Acquisition, construction, and

development.

(a) Acquisition of property. The

Lender is responsible for seeing that the

property to be acquired with loan funds

is acquired as planned and that the

required security interest is obtained.

(b) New construction. A new dwelling

financed with a guaranteed loan must:

(1) Have been built in accordance

with building plans and specifications

that contain approved building code

certifications (eligible certifiers are

listed in § 1924.5(f)(1)(iii)).

(2) Conform to RHCDS thermal

standards (exhibit D of subpart A of part

1924).

(i) The builder may certify

conformance with RHCDS thermal

standards contained in paragraph IV A

of exhibit D of subpart A of part 1924.

(ii) A qualified, registered architect or

a qualified, registered engineer must

certify conformance with RHCDS

thermal standards contained in

paragraph IV C of exhibit D of subpart

A of part 1924.

(c) Development. The Lender and

borrower are responsible for seeing that

the loan purposes are accomplished and

loan funds are properly utilized. This

includes, but is not limited to, seeing

that:

(1) The applicable development

standards are adhered to;

(2) Drawings and specifications are

certified and complied with;

(3) Adequate water, electric, heating,

waste disposal, and other necessary

utilities and facilities are obtained;

(4) Equal opportunity and

nondiscrimination requirements are

met, (see § 1980.317); and

(5) A builder’s warranty is issued

when new construction, repair, or

rehabilitation is involved, which

provides for at least 1 year’s warranty

from the date of completion or

acceptance of the work.

§ 1980.341 Inspections of construction

and compliance reviews.

(a) Qualified inspectors. Inspections

will be made during construction by a

construction inspector deemed qualified

and approved by the Lender. A qualified

inspector is one that a reasonable person

would hire to perform an inspection of

his/her own dwelling.

(b) Inspections. Inspections shall be

done by a party the Lender determines

to be qualified, such as a HUD approved

fee inspector. The sale agreement shall

identify which party (i.e., purchaser or

seller) is responsible to obtain and pay

for required inspections and

certifications. In connection with

inspections involving construction

contracts, equal opportunity and

nondiscrimination compliance reviews

must be made as required by § 1980.317.

(1) For existing dwellings, inspections

must be made to determine that the

dwelling:

(i) Meets the current requirements of

HUD Handbooks 4150.1 and 4905.1

(available from the HUD Ordering Desk

1–800–767–7468).

(ii) Meets the thermal standards per

§ 1980.313(f).

(2) For a newly constructed dwelling,

when construction is planned, the

Lender must see that the following

inspections are made in addition to any

additional inspections the Lender

deems appropriate:

(i) When footings and foundations are

ready to be poured but prior to backfilling.

(ii) When shell is closed in but

plumbing, electrical, and mechanical

work are still exposed.

(iii) When construction is completed

prior to occupancy.

(iv) Inspections under paragraphs

(b)(2) (i) and (ii) of this section are not

required when the builder supplies an

insured 10 year warranty plan

acceptable under the requirements of

exhibit L of subpart A of part 1924.

(c) Water and water/waste disposal.

The Lender will see that the water and

water/waste disposal systems have been

approved by a state or local government

agency.

§§ 1980.342–1980.344 [Reserved]

§ 1980.345 Applicant eligibility

requirements for a guaranteed loan.

Applicants who meet the

requirements of this section are eligible

for a loan guaranteed under this subpart.

Applicants desiring loan assistance as

provided in this subpart must file loan

applications with a Lender that meets

the requirements set forth in § 1980.309.

The Lender may accept applications

filed through its agents, correspondents,

branches, or other institutions. The

Lender must have at least one personal

interview with the applicant to verify

the information on the application and

to obtain a complete picture of the

applicant’s financial situation.

(a) Eligible income. The applicant’s

adjusted annual income determined in

accordance with § 1980.348 may not

exceed the applicable income limit

contained in exhibit C of FmHA

Instruction 1980–D (available in any

RHCDS office) at the time of issuance of

the conditional commitment. Adjusted

annual income is used to determine

eligibility for the RHCDS loan

guarantee.

(b) Adequate and dependable income.

The applicant (and coapplicant, if

applicable) has adequate and

dependably available income. The

applicant’s history of income and the

history of the typical annual income of

others in the area with similar types of

employment will be considered in

determining whether the applicant’s

income is adequate and dependable.

(1) A farm or nonfarm business loss

must be considered in determining

repayment ability.

(2) A loss may not be used to offset

other income in order to qualify for or

increase the amount of RHCDS

assistance.

(c) Determining repayment ability. In

considering whether the applicant has

adequate repayment ability, the Lender

must calculate a total debt ratio. The

applicant’s total debt ratio is calculated

by dividing the applicant’s monthly

obligations by gross monthly income.

(1) Monthly obligation consists of the

principal, interest, taxes, and insurance

(PITI) for the proposed loan (less any

interest assistance under this program or

any other assistance from a state or

county sponsored program when such

payments are made directly to the

Lender on the applicant’s behalf),

homeowner and other assessments, and

the applicant’s long term obligations.

Long term obligations include those

obligations such as alimony, child

support, and other obligations with a

remaining repayment period of more

than 6 months and other shorter term

debts that are considered to have a

significant impact on repayment ability.

(i) Cosigned obligations. Debts which

have been cosigned by the applicant for

another party must be considered unless

the applicant provides evidence

(usually canceled checks of the coobligor or other third party) that it has

not been necessary for the applicant to

make any payments over the past 12

months.

(ii) Liability on a previous mortgage.

When the applicant has disposed of a

property through a sale, trade, or

transfer without a release of liability, the

debt must be considered unless the

applicant provides evidence (usually

canceled checks of the new owners) that

the new owners have successfully made

all payments over the past 12 months.

(2) Income, for the purpose of

determining the total debt ratio,
26994 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

includes the total qualifying income of

the applicant, coapplicant, and any

other member of the household who

will be a party to the note.

(i) An applicant’s qualifying income

may be different than the ‘‘adjusted

annual income’’ which is used to

determine program eligibility. In

considering qualifying income, the

Lender must determine whether there is

a historical basis to conclude that the

income is likely to continue. Typically,

income of less than 24 months duration

should not be included in qualifying

income. If the applicant is obligated to

pay child care costs, the amount of any

Federal tax credit for which the

applicant is eligible may be added to the

applicant’s qualifying income.

(ii) In considering income that is not

subject to Federal income tax, the

amount of tax savings attributable to the

nontaxable income may be added for

use with the repayment ratios.

Adjustments for other than the

applicable tax rate are not authorized.

The Lender must verify that the income

is not subject to Federal income tax and

that the income (and its nontax status)

is likely to continue. The Lender must

fully document and support any

adjustment made.

(3) The applicant meets RHCDS

requirements for repayment ability

when the applicant’s total debt ratio is

less than or equal to 41 percent and the

ratio of the proposed PITI to income

does not exceed 29 percent.

(4) Applicants who do not meet the

requirements of this section will be

considered ineligible unless another

adult in the household has adequate

income and wishes to join in the

application as a coapplicant. The

combined incomes and debts then may

be considered in determining repayment

ability.

(5) If the applicant’s total debt ratio

and/or PITI ratio exceed the maximum

authorized ratio, the Lender may request

RHCDS concurrence in allowing a

higher ratio based on compensating

factors. Acceptable compensating

factors include but are not limited to the

applicant having a history over the

previous 12 month period of devoting a

similar percentage of income to housing

expense to that of the proposed loan, or

accumulating savings which, when

added to the applicant’s housing

expense and shows a capacity to make

payments on the proposed loan. A low

total debt ratio, by itself, does not

compensate for a high PITI.

(d) Credit history. The applicant must

have a credit history which indicates a

reasonable ability and willingness to

meet obligations as they become due.

(1) Any or all of the following are

indicators of an unacceptable credit

history unless the cause of the problem

was beyond the applicant’s control and

the criteria in paragraph (d)(3) of this

section are met:

(i) Incidents of more than one debt

payment being more than 30 days late

if the incidents have occurred within

the last 12 months. This includes more

than one late payment on a single

account.

(ii) Loss of security due to a

foreclosure if the foreclosure has

occurred within the last 36 months.

(iii) Outstanding tax liens or

delinquent Government debts with no

satisfactory arrangements for payments,

no matter what their age as long as they

are currently delinquent and/or due and

payable.

(iv) A court-created or affirmed

obligation (judgment) caused by nonpayment that is currently outstanding or

has been outstanding within the last 12

months.

(v) Two or more rent payments paid

30 days or more past due within the last

3 years.

(vi) Accounts which have been

converted to collections within the last

12 months (utility bills, hospital bills,

etc.).

(vii) Collection accounts outstanding,

with no satisfactory arrangements for

payments, no matter what their age as

long as they are currently delinquent

and/or due and payable.

(viii) Any debts written off within the

last 36 months.

(2) The following will not indicate an

unacceptable credit history:

(i) ‘‘No history’’ of credit transactions

by the applicant.

(ii) A bankruptcy in which applicant

was discharged more than 36 months

before application.

(iii) A satisfied judgment or

foreclosure with no loss of security

which was completed more than 12

months before the date of application.

(3) The Lender may consider

mitigating circumstances to establish

the borrower’s intent for good credit

when the applicant provides

documentation that:

(i) The circumstances were of a

temporary nature, were beyond the

applicant’s control, and have been

removed (e.g., loss of job; delay or

reduction in government benefits or

other loss of income; increased expenses

due to illness, death, etc.); or

(ii) The adverse action or delinquency

was the result of a refusal to make full

payment because of defective goods or

services or as a result of some other

justifiable dispute relating to the goods

or services purchased or contracted for.

(e) Previous RHCDS loan. RHCDS

shall determine whether the applicant

has had a previous RHCDS debt which

was settled, or is subject to settlement,

or whether RHCDS otherwise suffered a

loss on a loan to the applicant. If

RHCDS suffered any loss related to a

previous loan, a loan guarantee shall not

be issued unless RHCDS determines the

RHCDS loss was beyond the applicant’s

control, and any identifiable reasons for

the loss no longer exist.

(f) Other Federal debts. The loan

approval official will check HUD’s

Credit Alert Interactive Voice Response

System (CAIVRS) to determine if the

applicant is delinquent on a Federal

debt. The Lender will clearly document

both its CAIVRS identifying number and

the borrower and coborrower’s CAIVRS

access code near the signature line on

the mortgage application form. No

decision to deny credit can be based

solely on the results of the CAIVRS

inquiry. If CAIVRS identifies a

delinquent Federal debt, the Lender will

immediately suspend processing of the

application. The applicant will be

notified that processing has been

suspended and will be asked to contact

the appropriate Federal agency, at the

telephone number provided by CAIVRS,

to resolve the delinquency. When the

applicant provides the Lender with

official documentation that the

delinquency has been paid in full or

otherwise resolved, processing of the

application will be continued. An

outstanding judgment obtained by the

United States in a Federal court (other

than the United States Tax Court),

which has been recorded, shall cause

the applicant to be ineligible to receive

a loan guarantee until the judgment is

paid in full or otherwise satisfied.

RHCDS loan guarantee funds may not be

used to satisfy the judgment. If the

judgment remains unsatisfied or if the

applicant is delinquent on a Federal

debt and is unable to resolve the

delinquency, the Lender will reject the

applicant.

§ 1980.346 Other eligibility criteria.

The applicant must:

(a) Be a person who does not own a

dwelling in the local commuting area or

owns a dwelling which is not

structurally sound, functionally

adequate;

(b) Be without sufficient resources to

provide the necessary housing and be

unable to secure the necessary

conventional credit without an RHCDS

guarantee upon terms and conditions

which the applicant could reasonably be

expected to fulfill.

(c) Be a natural person (individual)

who resides as a citizen in any of the 50
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26995

States, the Commonwealth of Puerto

Rico, the U.S. Virgin Islands, Guam,

American Samoa, the Commonwealth of

the Northern Marianas, Federated States

of Micronesia, and the Republics of the

Marshall Islands and Palau, or a

noncitizen who resides in one of the

foregoing areas after being legally

admitted to the U.S. for permanent

residence or on indefinite parole.

(d) Possess legal capacity to incur the

loan obligation and have reached the

legal age of majority in the state or have

had the disability of minority removed

by court action.

(e) Have the potential ability to

personally occupy the home on a

permanent basis. Because of the

probability of their moving after

graduation, full-time students will not

be granted loans unless:

(1) The applicant intends to make the

home his or her permanent residence

and there are reasonable prospects that

employment will be available in the

area after graduation, and

(2) An adult member of the household

will be available to make inspections if

the home is being constructed.

§ 1980.347 Annual income.

Annual income determinations will

be thoroughly documented in the

Lender’s casefile. Historical data based

on the past 12 months or previous fiscal

year may be used if a determination

cannot logically be made. Annual

income to be considered includes:

(a) Current verified income, either

part-time or full-time, received by any

applicant/borrower and all adult

members of the household, including

any coapplicant/coborrower.

(b) If any other adult member of the

household is not presently employed

but there is a recent history of such

employment, that person’s income will

be considered unless the applicant/

borrower and the person involved sign

a statement that the person is not

presently employed and does not intend

to resume employment in the

foreseeable future, or if interest

assistance is involved, during the term

of the Interest Assistance Agreement.

(c) Income from such sources as

seasonal type work of less than 12

months duration, commissions,

overtime, bonuses, and unemployment

compensation must be computed as the

estimated annual amount of such

income for the upcoming 12 months.

Consideration should be given to

whether the income is dependable

based on verification by the employer

and the applicant’s history of such

income over the previous 24 months.

(d) The following are included in

annual income:

(1) The gross amount, before any

payroll deductions, of wages and

salaries, overtime pay, commissions,

fees, tips, bonuses, and other

compensation for personal services of

all adult members of the household.

(2) The net income from operation of

a farm, business, or profession. Consider

the following:

(i) Expenditures for business or farm

expansion and payments of principal on

capital indebtedness shall not be used

as deductions in determining income. A

deduction is allowed in the manner

prescribed by IRS regulations only for

interest paid in amortizing capital

indebtedness.

(ii) Farm and nonfarm business losses

are considered ‘‘zero’’ in determining

annual income.

(iii) A deduction, based on straight

line depreciation, is allowed in the

manner prescribed by IRS regulations

for the exhaustion, wear and tear, and

obsolescence of depreciable property

used in the operation of a trade, farm,

or business by a member of the

household. The deduction must be

based on an itemized schedule showing

the amount of straight line depreciation

that could be claimed for Federal

income tax purposes.

(iv) Any withdrawal of cash or assets

from the operation of a farm, business,

or profession will be included in

income, except to the extent the

withdrawal is reimbursement of cash or

assets invested in the operation by a

member of the household.

(v) A deduction for verified business

expenses, such as for lodging, meals, or

fuel, for overnight business trips made

by salaried employees, such as longdistance truck drivers, who must meet

these expenses without reimbursement.

(3) Interest, dividends, and other net

income of any kind from real or

personal property, including:

(i) The share received by adult

members of the household from income

distributed from a trust fund.

(ii) Any withdrawal of cash or assets

from an investment except to the extent

the withdrawal is reimbursement of

cash or assets invested by a member of

the household.

(iii) Where the household has net

family assets, as defined in

§ 1980.302(a), in excess of $5,000, the

greater of the actual income derived

from all net family assets or a

percentage of the value of such assets

based on the current passbook savings

rate.

(4) The full amount of periodic

payments received from social security

(including social security received by

adults on behalf of minors or by minors

intended for their own support),

annuities, insurance policies, retirement

funds, pensions, disability or death

benefits, and other similar types of

periodic receipts.

(5) Payments in lieu of earnings; such

as unemployment, disability and

worker’s compensation, and severance

pay.

(6) Public assistance except as

indicated in paragraph (e)(2) of this

section.

(7) Periodic allowances, such as:

(i) Alimony and/or child support

awarded in a divorce decree or

separation agreement, unless the

payments are not received and a

reasonable effort has been made to

collect them through the official entity

responsible for enforcing such payments

and they are not received as ordered; or

(ii) Recurring monetary gifts or

contributions from someone who is not

a member of the household.

(8) Any amount of educational grants

or scholarships or VA benefits available

for subsistence after deducting expenses

for tuition, fees, books, and equipment.

(9) All regular pay, special pay

(except for persons exposed to hostile

fire), and allowances of a member of the

armed forces who is the applicant/

borrower or coapplicant/coborrower,

whether or not that family member lives

in the unit.

(10) The income of an applicant’s

spouse, unless the spouse has been

living apart from the applicant for at

least 3 months (for reasons other than

military or work assignment), or court

proceedings for divorce or legal

separation have been commenced.

(e) The following are not included in

annual income but may be considered

in determining repayment ability:

(1) Income from employment of

minors (including foster children) under

18 years of age. The applicant and

spouse are not considered minors.

(2) The value of the allotment

provided to an eligible household under

the Food Stamp Act of 1977.

(3) Payments received for the care of

foster children.

(4) Casual, sporadic, or irregular cash

gifts.

(5) Lump-sum additions to family

assets such as inheritances; capital

gains; insurance payments from health,

accident, hazard, or worker’s

compensation policies; and settlements

for personal or property losses (except

as provided in paragraph (d)(5) of this

section).

(6) Amounts which are granted

specifically for, or in reimbursement of,

the cost of medical expenses.

(7) Amounts of education

scholarships paid directly to the student

or to the educational institution and
26996 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

amounts paid by the Government to a

veteran for use in meeting the costs of

tuition, fees, books, and equipment. Any

amounts of such scholarships or

veteran’s payments, which are not used

for the aforementioned purposes and are

available for subsistence, are considered

to be income. Student loans are not

considered income.

(8) The hazardous duty pay to a

service person applicant/borrower or

spouse away from home and exposed to

hostile fire.

(9) Any funds that a Federal statute

specifies must not be used as the basis

for denying or reducing Federal

financial assistance or benefits. (Listed

in exhibit F of FmHA Instruction 1980–

D, available in any RHCDS office.)

(f) Income of live-in aides who are not

relatives of the applicant or members of

the household will not be counted in

calculating annual income and will not

be considered in determination of

repayment ability.

§ 1980.348 Adjusted annual income.

Adjusted annual income is annual

income as determined in § 1980.347 less

the following:

(a) A deduction of $480 for each

member of the family residing in the

household, other than the applicant,

spouse, or coapplicant, who is:

(1) Under 18 years of age;

(2) Eighteen years of age or older and

is disabled as defined in § 1980.302(a);

or

(3) A full-time student aged 18 or

older.

(b) A deduction of $400 for any

elderly family as defined in

§ 1980.302(a).

(c) A deduction for the care of minors

12 years of age or under, to the extent

necessary to enable a member of the

applicant/borrower’s family to be

gainfully employed or to further his or

her education. The deduction will be

based only on monies reasonably

anticipated to be paid for care services

and, if caused by employment, must not

exceed the amount of income received

from such employment. Payments for

these services may not be made to

persons whom the applicant/borrower is

entitled to claim as dependents for

income tax purposes. Full justification

for such deduction must be recorded in

detail in the loan docket.

(d) A deduction of the amount by

which the aggregate of the following

expenses of the household exceeds 3

percent of gross annual income:

(1) Medical expenses for any elderly

family (as defined in § 1980.302(a)).

This includes medical expenses for any

household member the applicant/

borrower anticipates incurring over the

ensuing 12 months and which are not

covered by insurance (e.g., dental

expenses, prescription medicines,

medical insurance premiums,

eyeglasses, hearing aids and batteries,

home nursing care, monthly payments

on accumulated major medical bills,

and full-time nursing or institutional

care which cannot be provided in the

home for a member of the household);

and

(2) Reasonable attendant care and

auxiliary apparatus expenses for each

disabled member of any household to

the extent necessary to enable any

member of such household (including

such disabled member) to be employed.

§§ 1980.349—1980.350 [Reserved]

§ 1980.351 Requests for reservation of

funds.

Upon receipt of a viable loan

application and prior to loan

underwriting, the Lender may request a

reservation of loan guarantee funds for

the loan application. The request should

be made as follows:

(a) The Lender must have a complete

application on file that clearly indicates

the borrower has sufficient qualifying

income and an adequate credit history.

(b) The reservation shall be valid for

60 days. The Lender must submit a

request for a loan guarantee on or before

the expiration date of the reservation.

Substitutions of borrowers or dwellings

are not authorized.

(c) Reservations may be granted only

when adequate funding authority is

available. Reservations are subject to the

availability of funds. Reservations will

not exceed 90 percent of the funds

available during that quarter.

(d) [Reserved]

(e) All reservations will expire at the

end of 60 days or no later than the

pooling date published in subpart L of

part 1940 whichever occurs first.

(f) [Reserved]

§ 1980.352 [Reserved]

§ 1980.353 Filing and processing

applications.

(a) Loan priorities. Complete

applications will be considered by

RHCDS in the order received from

Lenders authorized to participate in the

program except as provided in

paragraph (b) of this section.

(b) Preference. Preference is

considered when there is a shortage of

funds and there is more than one

request for a conditional commitment or

reservation of funds ready for approval.

Applications for guarantees on loans to

first-time homebuyers or veterans, their

spouses, or children of deceased

servicemen who died during one of the

periods described in the definition of

‘‘Veteran’’ in § 1980.302(a) will be given

preference by RHCDS. Displaced

homemakers and single parents are firsttime homebuyers even though they

previously owned or resided in a

dwelling with a spouse.

(c) Applications. If, upon completion

of the loan underwriting process of an

application, the Lender concludes that

the application can be considered for an

RHCDS guarantee, the Lender will

provide written documentation

addressing each of the loan eligibility

requirements of this subpart and the

basis for the conclusion in the

applicant’s file. The Lender will submit

a request for the guarantee using a Form

FmHA 1980–21, ‘‘Request for Single

Family Housing Loan Guarantee.’’ The

form should contain or be

supplemented with all of the following

information:

(1) Name, address, telephone number,

social security number, age, citizenship

status of the applicant, and number of

persons in the household.

(2) Amount of loan request and

proposed use of loan funds.

(3) Name, address, contact person,

and telephone number of the proposed

Lender.

(4) Anticipated loan rates and terms,

the date and amount of the Fannie Mae

or VA rate used to determine the

interest rate, and the Lender’s

certification that the proposed rate is in

compliance with § 1980.320.

(5) Statement from the Lender that it

will not make the loan as requested by

the applicant without the proposed

guarantee and that the applicant has

been advised in writing that the

applicant is subject to criminal action if

he or she knowingly and willfully gives

false information to obtain a federally

guaranteed loan.

(6) If the applicant is not a United

States citizen, evidence of being legally

admitted for permanent residence or

indefinite parole.

(7) The applicant’s sex, race, and

veteran status and whether applicant is

a first-time homebuyer.

(8) An appraisal report including

information about the dwelling location

with respect to neighborhood and

community services and facilities,

business and industrial enterprises, and

streets or roads serving the housing.

(9) Credit report obtained by the

Lender.

(10) An equal opportunity agreement

supplied by RHCDS for construction

contracts costing more than $10,000.

(11) Evidence of compliance with the

Privacy Act of 1974.
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26997

(12) Lender’s loan underwriting

(repayment ability, creditworthiness,

and security value).

(13) A certification from the borrower

regarding debarment, suspension,

ineligibility, and voluntary exclusion

from Federal programs using a form

supplied by RHCDS.

(14) A statement signed by the

borrower acknowledging that the

borrower understands that RHCDS

approval of the guarantee is required

and is subject to the availability of

funds.

(15) A copy of a valid verification of

income for each adult member of the

household.

(16) A copy of the purchase agreement

or bid for construction contract.

(d) [Reserved]

(e) Verifying information provided.

Written documentation from third

parties is the preferred method of

verifying information. Verifications

must pass directly from the source of

information to the Lender and shall not

pass through the hands of a third party

or applicant.

(1) Income verification. Employment

verifications and other income

verifications obtained in accordance

with this paragraph are valid for 120

days (180 days for proposed new

construction). Income verifications must

be valid at the time the conditional

commitment is issued.

(i) An RHCDS approved form or the

equivalent HUD/FHA/VA or Fannie

Mae form will be used to verify

employment income of the loan

applicant except when the applicant is

self-employed. The form will be signed

by the applicant or borrower or

accompanied by an authorization for a

release of information form signed by

the applicant or borrower and sent

directly to the employer by the Lender.

The Lender should also obtain copies of

the three most recent paycheck stubs.

The information in the employer

verification should be compared to the

information in the paycheck stubs for

consistency.

(ii) Income information that cannot be

obtained by use of this form will be

obtained in writing from third parties to

the extent possible.

(iii) Alimony and/or child support

payments will be verified by obtaining

a copy of the divorce decree or other

legal document indicating the amount of

the payments. When the applicant states

that less than the amount awarded is

received, the Lender will request

documentation from the official entity

through which payments are received or

other third party able to provide the

verification when payment is not made

through an official entity indicating the

amounts and dates of payments to the

applicant during the previous 12

months.

(iv) When it is not feasible to verify

income in paragraph (e)(1)(iii) of this

section through third parties, the Lender

is authorized to accept an affidavit from

the applicant stating the effort made to

collect the amount awarded and the

amounts and dates of payments received

during the previous 12 months.

(v) Applicants and borrowers deriving

their income from a farming or business

enterprise will provide current

documentation of the income and

expenses of the operation. In addition,

historic information from the previous

fiscal year must be presented.

(vi) Social Security, pension, and

disability income may be verified by

obtaining a copy of the most recent

award or benefit letter prepared and

signed by the authorizing agency. This

verification will be considered valid

only for 1 year from the date of the

award or benefit letter.

(2) Verification of disability. An

RHCDS supplied form will be used to

verify disability in cases where State

Review Board or Social Security records

are not available. Receipt of veteran’s

benefits for disability, whether serviceoriented or otherwise, does not

automatically establish disability.

(3) Verification of alien status. Aliens

are required to present documentation

of their status. Section 1944.9 outlines

the acceptable forms of documentation.

(4) Verification of credit history and

current debt. The Lender shall

determine all liabilities of all parties

responsible for repayment of the

proposed loan. Credit reporting

information must pass directly between

the Lender and the credit reporting

agency or source.

(i) Mortgage credit reports shall be

used to determine creditworthiness

unless the applicant resides in a remote

rural area and conclusive or sufficient

information would not be available.

Information relative to judgments,

garnishments, foreclosures, and

bankruptcies must be obtained when a

credit report is not obtained.

(ii) The credit report must be the most

recent revision of the Residential

Mortgage Credit Report form and meet

the standards prescribed by Fannie Mae,

Freddie Mac, HUD, VA, or RHCDS.

§ 1980.354 [Reserved]

§ 1980.355 Review of requirements.

Upon the Lender’s review of the

conditional commitment, the Lender

may determine whether to accept the

conditions outlined in it.

(a) Accepting conditions. Immediately

after reviewing the conditions and

requirements in the conditional

commitment and the options listed on

the back of the form, the Lender may

proceed with loan closing. If the

conditions cannot be met, the Lender

and borrower may propose alternate

conditions to RHCDS.

(b) Canceling commitment. If the

Lender indicates in the acceptance or

rejection of conditions that it desires to

obtain a loan note guarantee and

subsequently decides prior to loan

closing that it no longer wants a loan

note guarantee, the Lender should

immediately advise the RHCDS

approval official.

§§ 1980.356—1980.359 [Reserved]

§ 1980.360 Conditions precedent to

issuance of the loan note guarantee.

(a) Lender certification. The Lender

must certify to RHCDS that:

(1) No major changes have been made

in the Lender’s loan conditions and

requirements since the issuance of the

conditional commitment, except those

approved in writing by RHCDS. In the

event the interest rate has not been fixed

at the time the conditional commitment

is issued, and the interest rate increases

between the time of issuance of the

conditional commitment and loan

closing, the Lender should note the

change when submitting the package to

RHCDS for loan guarantee. If either or

both of the underwriting ratios are

exceeded as a result of the interest rate

increase, the Lender should list the

compensating factors that demonstrate

that sufficient repayment ability still

exists.

(2) All planned property acquisition

has been completed and:

(i) All development has been

completed; or

(ii) An escrow account has been

established in accordance with

§ 1980.315.

(3) Required insurance coverage is in

effect and an escrow account has been

established for the payment of taxes and

insurance.

(4) Truth-in-lending requirements

have been met.

(5) All equal employment opportunity

and nondiscrimination requirements

have been met.

(6) The loan has been properly closed

by a party skilled and experienced in

conducting loan closings and the

required security instruments, including

any required shared equity instruments,

have been obtained and recorded in the

appropriate office in a timely and

accurate manner.

(7) The borrower has a marketable

(clean and defensible) title to the

property then owned by the borrower,
26998 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

subject to the instrument securing the

loan to be guaranteed, and any other

exceptions approved in writing by

RHCDS.

(8) Lien priorities are consistent with

the requirements of the conditional

commitment.

(9) The loan proceeds have been

disbursed for purposes and in amounts

consistent with the conditional

commitment.

(10) There has been no adverse

change in the borrower’s situation since

the conditional commitment was issued

by RHCDS.

(11) All other requirements of the

conditional commitment have been met.

(b) Inspections. The Lender will

certify to RHCDS that inspections in

accordance with § 1980.341 have been

completed.

(c) Lender agreement. There must be

a valid lender agreement on file.

(d) Lender file. The Lender will

maintain a file for each guaranteed RH

loan containing originals or copies, as

appropriate, of all documents pertaining

to that loan.

§ 1980.361 Issuance of loan note

guarantee.

(a) When the Lender has certified that

all requirements have been met,

delivered a completed Loan Closing

Report, and paid the guarantee fee, the

RHCDS approval official will

concurrently execute the loan note

guarantee. The original will be provided

to the Lender and be attached to the

note.

(b) [Reserved]

(c) [Reserved]

§ 1980.362 [Reserved]

§ 1980.363 Review of loan closing.

The Lender must provide RHCDS

with documentation that all of the

closing conditions have been met within

10 days of issuance of the loan note

guarantee. The Lender is responsible for

deficiencies regardless of whether

RHCDS discovers them in the loan

closing review and/or notifies the

Lender at that time. RHCDS reviews do

not constitute any waiver of fraud,

misrepresentation, or failure of

judgment by the Lender.

§§ 1980.364–1980.365 [Reserved]

§ 1980.366 Transfer and assumption.

(a) General. Lenders may, but are not

required to, permit a transfer to an

eligible applicant. A transfer and

assumption must be approved by

RHCDS in writing. Transfers without

assumption are not authorized.

Transfers and assumptions under this

subpart are subject to the RHCDS

guarantee fee.

(b) Eligible transferee. An eligible

transferee is one who meets the

eligibility requirements of this subpart

and includes situations involving

transfers of housing in an area that has

ceased to be rural. Loans made and

guaranteed under this subpart prior to

March 29, 1989, may be transferred to

an applicant meeting all eligibility

requirements of this subpart except the

applicant’s adjusted annual income may

exceed the maximum income for the

area by not more than 10 percent.

(c) Determinations by the Lender.

Before the transfer and assumption can

be approved with the guarantee

remaining in force, the Lender must

determine that all of the following

conditions can be met:

(1) The transferee is an eligible

applicant.

(2) The transferee will assume the

total remaining debt and acquire all of

the property securing the guaranteed

loan balance.

(3) The transfer and assumption

would not be made without the

continuation of the loan guarantee.

(4) The market value of the security

being acquired by the transferee is at

least equal to the secured indebtedness

against it.

(5) The priority of the existing lien

securing the guaranteed loan will be

maintained or improved.

(6) Proper hazard insurance will be

obtained.

(7) The transfer and assumption can

be properly closed and the conveyance

instruments will be filed, registered, or

recorded, as appropriate.

(8) The transferor acknowledges

continued liability for the debt in

writing.

(d) Changes in the promissory note or

security instrument. If the assumption

will result in changes in the repayment

schedule or the interest rate, the

changes must be approved by the

present debtors since they will remain

liable for the debt. Any changes in rates

and terms must not exceed rates and

terms allowed for new loans under this

subpart and cannot exceed the interest

rate on the initial loan. The debt must

not exceed the amount remaining due

on the original loan. The term of the

loan may cover a period of up to 30

years from the date of transfer and

assumption. The Lender’s request for

approval to RHCDS will be

accompanied by:

(1) An explanation of the reasons for

the proposed change in the rates and

terms.

(2) A statement that the Lender’s

determinations required by paragraph

(c) of this section can be made.

(e) Release of liability. The Lender

may not release the transferor of

liability.

(f) Forms and case numbers. The

assumption may be made on the

Lender’s assumption agreement form.

The assumption agreement must contain

the RHCDS case numbers of the

transferor and the transferee.

(g) Lender’s application to RHCDS.

The Lender must submit the items

outlined in § 1980.353(e) of this subpart

to RHCDS, in addition to items required

in this section.

(h) Notations and notices. The Lender

must notify RHCDS whether the loan

and security can be properly assumed

and transferred. The Lender shall assure

that the conveyance instruments are

properly filed, registered, or recorded,

as appropriate. Upon completion of the

transfer and assumption, the Lender

must provide RHCDS a copy of the

transfer and assumption agreement. The

Lender may present the loan note

guarantee to RHCDS if it desires RHCDS

to note the transfer and assumption on

the loan note guarantee. If a new note

is obtained, it will also be attached to

the loan note guarantee.

(i) Interest assistance. The original

borrower’s Master Interest Assistance

Agreement may be transferred to an

eligible transferee. Equity sharing, if

any, owed by the transferor must be

determined and collected at the time the

loan is assumed and title to the property

is transferred. See § 1980.391.

(j) Closing the transfer and

assumption. As soon as the Lender has

obtained RHCDS approval, the Lender

may proceed with closing the

transaction. The closing must include,

but need not be limited to, the proper

execution and delivery of the

conveyance and assumption documents,

compliance with any legal

requirements, and actions necessary to

perfect the transfer and the required lien

priority.

(k) Loan note guarantee. The existing

loan note guarantee will continue to be

in effect. RHCDS will note the transfer

and assumption on the original loan

note guarantee by completing the

Assumption Agreement block by

inserting the name of the assuming

party.

(l) Material furnished to RHCDS after

closing. Immediately after closing, the

Lender must furnish to RHCDS:

(1) A conformed copy of the executed

assumption agreement.

(2) A statement showing:

(i) Any changes made in the

provisions of the promissory note or

security instruments.
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 26999

(ii) That all conditions and

requirements of paragraph (b) of this

section have been met.

(iii) That the required insertions have

been made per paragraph (h) of this

section.

(m) Notification of Lender. The

RHCDS approval official will review the

proposed transfer and assumption and

notify the Lender of the decision in

writing. The request for transfer and

assumption will be treated as an

application for guaranteed loan

assistance and will be handled in

accordance with § 1980.353. The Lender

may proceed with the transfer and

assumption upon obtaining RHCDS

approval.

§ 1980.367 Unauthorized sale or transfer of

the property.

RHCDS consent is required to

continue with the RHCDS guarantee in

the event of a sale or transfer of the

property in accordance with § 1980.366.

If the property is transferred without

RHCDS consent, the Lender must take

one of the following actions:

(a) Obtain RHCDS consent if the

conditions of § 1980.366 can be met;

(b) Satisfy the RHCDS guarantee and

continue with the loan without the loan

note guarantee; or

(c) Notify the borrower and the

transferee of the default and service the

loan in accordance with § 1980.371.

§§ 1980.368–1980.369 [Reserved]

§ 1980.370 Loan servicing.

RHCDS encourages Lenders to

provide borrowers with the maximum

opportunity to become successful

homeowners. Lenders should provide

sufficient servicing and counseling to

meet the objectives of the loan. Loan

servicing should be approached as a

preventive action rather than a curative

action. Prompt followup by the Lender

on delinquent payments and early

recognition and solution of problems are

keys to resolving many delinquent loan

cases. The Lender shall perform those

services which a reasonable and

prudent Lender would perform in

servicing its own portfolio of loans that

are not guaranteed.

(a) Normal loan servicing. The Lender

is responsible for servicing the loan

under the Lender Agreement and this

subpart even if the Lender has engaged

a third party to service the loan on its

behalf. Normal servicing includes:

(1) Receiving all payments as they fall

due and proper application of payments

to principal and interest and escrow

accounts for taxes (including special

assessments) and insurance.

(2) Establishment and maintenance of

an escrow account to pay real estate

taxes and assessments and required

hazard and flood insurance on the

security. All escrow accounts must be

fully insured by the Federal Deposit

Insurance Corporation (FDIC). The

Lender is responsible for maintaining

escrow funds in a reasonable and

prudent manner and for assuring that

real estate taxes and assessments and

required hazard and flood insurance are

paid in a timely manner even if it

requires advancing the Lender’s own

funds. The monthly payment may be

adjusted when it is not adequate to meet

established charges of the escrow

account for the coming year. Escrow

funds may be used only for the purpose

for which they were collected.

(3) Obtaining compliance with the

covenants, loan agreement (if any),

security instruments, and any

supplemental agreements and notifying

the borrower in writing of any

violations.

(b) Other servicing requirements.

Other servicing requirements include

taking actions to offset the effects of

liens, probate proceedings, and other

legal actions. The Lender’s

responsibility includes assuring that:

(1) Insurance loss payments,

condemnation awards, or similar

proceeds are applied on debts in

accordance with lien priorities on

which the guarantee was based, or to

rebuild or otherwise acquire needed

replacement collateral.

(2) The borrower complies with laws

and ordinances applicable to the loan

and the collateral.

(3) The borrower is not released of

liability for the loan except as provided

in Agency regulations.

(c) Servicing options. The Lender

should make every effort to assist

borrowers who are cooperative and

willing to make a good faith effort to

cure the delinquency. The Lender

should consider the borrower’s financial

condition in attempting to work out

repayment agreements. The Lender may

revise the payment schedule of the loan

on a temporary basis with the written

concurrence of the borrower. Changes in

the loan repayment such as

reamortization of the unpaid balance

within the remaining term of the loan

may be done with prior written RHCDS

concurrence. Reamortization shall not

change the amount of the loan

guarantee.

(d) Lender reporting to RHCDS.

Reports on Lender servicing case loads

and performance are required as

follows:

(1) Monthly report. The Lender must

prepare and submit a report in a manner

prescribed by RHCDS identifying each

borrower with a loan that is more than

30 days delinquent.

(2) Annual report. The Lender will

submit an annual report indicating the

status of each borrower account as of

December 31 using the format

prescribed by RHCDS.

(e) [Reserved]

§ 1980.371 Defaults by the borrower.

Default occurs when the borrower

fails to perform under any covenant of

the mortgage or Deed of Trust and the

failure continues for 30 days. The

Lender will negotiate in good faith in an

attempt to resolve any problem. The

borrower must be given a reasonable

opportunity to bring the account current

before any foreclosure proceedings are

started.

(a) The Lender must make a

reasonable attempt to contact the

borrower if the payment is not received

by the 20th day after it is due.

(b) The Lender must make a

reasonable attempt to arrange and hold

an interview with the borrower for the

purpose of resolving the delinquent

account before the loan becomes 60

days delinquent. Reasonable effort

consists of not less than one letter sent

to the borrower at the property address

via certified mail or similar method

which the borrower refuses to accept or

fails to respond.

(c) If the Lender is unable to make

contact with the borrower, the Lender

must determine whether the property

has been abandoned and the value of

the security is in jeopardy before the

account becomes two payments

delinquent.

(d) When the loan becomes three

payments delinquent, the Lender must

report borrower delinquencies to credit

repositories and make a decision with

regard to liquidation of the account. The

Lender may proceed with liquidation of

the account unless there are extenuating

circumstances.

§ 1980.372 Protective advances.

Protective advances must constitute

an indebtedness of the borrower to the

Lender and be secured by the security

instrument. Protective advances are

advances made for expenses of an

emergency nature necessary to preserve

or protect the physical security.

Attorney fees are not a protective

advance. The Lender will not make

protective advances in lieu of an

additional loan. In order to assure that

a protective advance over $500 will be

included in the loss payment, Lenders

are encouraged to obtain prior RHCDS

approval.
27000 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

§ 1980.373 [Reserved]

§ 1980.374 Liquidation.

If the Lender concludes the

liquidation of a guaranteed loan account

is necessary because of one or more

defaults or third party actions that the

borrower cannot or will not cure or

eliminate within a reasonable period of

time, the Lender will notify RHCDS of

the decision to liquidate. Initiation of

foreclosure begins with the first public

action required by law such as filing a

complaint or petition, recording a notice

of default, or publication of a notice of

sale. Foreclosure must be initiated

within 90 days of the date the decision

to liquidate is made unless the

foreclosure has been delayed by law.

When there is a legal delay (such as

bankruptcy), foreclosure must be started

within 60 days after it becomes possible

to do so.

(a) Expeditious liquidation. Once the

decision to liquidate has been made, the

Lender must proceed in an expeditious

manner. Lenders must exercise due

diligence in completing the foreclosure

process. Lenders are expected to

complete foreclosure within the time

frames that are reasonable for the state

in which the property is located.

(b) Maximum collection. The Lender

is expected to make the maximum

collection possible on the indebtedness.

The Lender will consider the possibility

of recovery of any deficiency apart from

the acquisition or sale of collateral. The

Lender will submit a recommendation

on such recovery considering the

borrower’s assets and ability to pay,

prospects of future recovery, the costs of

pursuing such recovery,

recommendation for obtaining a

judgment, and the collectability of a

judgment in view of the borrower’s

assets.

(c) Allowable liquidation costs.

Certain reasonable liquidation costs

(costs similar to those charged for like

services in the area) will be allowed

during the liquidation process. No inhouse expenses of the Lender will be

allowed including, but not limited to,

employee salaries, staff lawyers, travel,

and overhead. Liquidation costs are

deducted from the gross sales proceeds

of the collateral when the Lender has

conducted the liquidation.

(d) Servicing plan. The Lender must

submit a servicing plan to RHCDS when

the account is 90 days delinquent and

a method other than foreclosure is

recommended to resolve delinquency.

RHCDS encourages Lenders and

delinquent borrowers to explore an

acceptable alternative to foreclosure to

reduce loss and expenses of foreclosure.

Although prior approval is not required

in all cases, the Agency may reject a

plan that does not protect the

Government’s interest.

(1) Continuation with the borrower.

The Lender may continue with the

borrower when a clear and realistic plan

to eliminate the delinquency is

presented. The Lender must fully

document the borrower’s prospects of

success and make this information

available to RHCDS upon request.

(2) Voluntary liquidation. RHCDS

may accept the Lender’s plan to use

voluntary liquidation when the plan

clearly addresses the responsibilities of

the parties, the Lender maintains

oversight of the progress of the sale, the

property is listed for sale at a price in

line with its market value (if there is not

already a bona fide purchaser for the

dwelling), and the expected cost to the

Government is the same as or less than

the cost of foreclosure.

(3) Deed-in-lieu of foreclosure. The

Lender may take a deed-in-lieu of

foreclosure from the borrower when it

will not result in a cost to the

Government in excess of that expected

for foreclosure.

(4) Other methods. RHCDS may

accept a proposal submitted by the

Lender that is not specifically addressed

in but is consistent with the provisions

of this subpart if the Lender fully

documents how the proposal will result

in a savings to the Government.

(e) Handling shared equity. Interest

assistance payments made under

§ 1980.390 of this subpart will not be

subject to shared equity if the loan is

liquidated in accordance with the

Lender Agreement unless:

(1) The property is sold at or prior to

foreclosure for an amount exceeding the

Lender’s unpaid balance and costs of

foreclosure, or

(2) A junior lienholder takes over the

Lender’s loan.

§ 1980.375 Reinstatement of the

borrower’s account.

The Lender may reinstate an account

when all delinquent payments and any

funds that were advanced to pay

authorized expenses are paid or as

required under state law. When the

Lender wishes to consider other offers

by the borrower to bring the account

current, the Lender must obtain RHCDS

concurrence.

§ 1980.376 Loss payments.

Settlement of the guarantee will be

processed in accordance with this

section.

(a) Loss payment. Loss payments will

be made within 60 days of the Lender’s

properly filed claim. The Lender must

submit its loss claim within 30 calendar

days of loan liquidation. The claim may

include interest on the unpaid principal

accrued to final loss settlement. RHCDS

will pay interest within the limits of the

guarantee to the date the claim is paid

when the Lender promptly and properly

files the claim.

(1) Determination of loss payment. To

calculate the loss payment, first

determine the unpaid debt by adding

the unpaid principal and interest on the

loan and the unpaid balance for

principal and interest on authorized

protective advances. The net proceeds

from the property will be first applied

to the unpaid debt. Any other proceeds

recovered by the Lender from other

sources shall also be applied to the total

unpaid debt. Determination of net

proceeds will be different depending on

which of the following circumstances

are involved.

(i) If, at liquidation, title to the

property is conveyed to a bona fide

third-party purchaser, then final loss

payment will be based on the net sales

proceeds received for the property.

(ii) If, at liquidation, title to the

property is conveyed to the Lender, then

the Lender must prepare and submit a

property disposition plan to RHCDS for

RHCDS concurrence. The plan will

address the Lender’s proposed method

for sale of the property, the estimated

value and minimum sale price, itemized

estimated costs of the sale, and any

other information that could impact the

amount of loss on the loan. The Lender

is allowed up to 6 months from the date

the property is acquired to sell the

property. Upon the Lender’s written

request, RHCDS will authorize one

extension not to exceed 30 days to close

the sale of a purchase offer accepted

near the end of the 6-month period. Net

proceeds will be based on the net

proceeds received for the property when

the sale is conducted in accordance

with the plan as approved by RHCDS.

If no sale offer is accepted within the 6-

month period, then the RHCDS approval

official will obtain and use a liquidation

value appraisal of the property. When

an appraisal is obtained, the amount of

the net proceeds from the security is

then determined by subtracting a cost

factor, which is found in exhibit D of

FmHA Instruction 1980–D (available in

any RHCDS office), from the current

market value.

(iii) If a deficiency judgment is

obtained, the Lender must enforce the

judgment against the borrower before

loss settlement if the current situation

provides a reasonable prospect of

recovery. A loss payment will be made

when the Lender holds a deficiency

judgment but there are not current
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 27001

prospects of collection, even if there

may be in the future.

(2) Payment procedure. RHCDS will

pay losses on the loan according to the

terms of the loan note guarantee unless

RHCDS has determined there is cause

for reduction of the loss amount. See

§ 1980.377 for future recovery by the

Lender.

(i) If there is no dispute between

RHCDS and the Lender regarding the

amount of the loss and the Lender’s

eligibility for payment of loss, RHCDS

will pay the loss within the limits of the

guarantee.

(ii) If RHCDS and the Lender do not

agree on the amount of the loss, or

RHCDS has determined that part of the

loss is not payable to the Lender under

the terms of the loan note guarantee,

RHCDS will pay the undisputed

portion. The disputed portion of the

claim will be treated as an adverse

decision and the Lender may appeal.

(iii) When RHCDS has cause to

believe that Lender fraud or other lender

actions negating the guarantee exist, no

loss payment may be made unless the

situation is resolved.

(3) The RHCDS approval official will

conduct an audit of the account and

review the loan in its entirety to

determine why the loan failed and

whether any reason exists for reducing

or denying the loss claim. This

information will be documented in the

RHCDS casefile.

(4) If a Lender’s loss claim is denied

or reduced, the RHCDS approval official

will notify the Lender of all of the

reasons for the action within 10 days of

the decision and the Lender may appeal

in accordance with § 1980.399 and

subpart B of part 1900.

(5) The RHCDS approval official is

authorized to approve loss payments in

amounts of up to 50 percent of his/her

delegated loan approval authority in

accordance with exhibit D of FmHA

Instruction 1901–A (available in any

RHCDS office).

(b) Denial or reduction of loss claims.

The RHCDS approval official will fully

document any loss claim which is

denied or reduced including an analysis

of how the amount of the reduction was

determined. A connection must be made

between the Lender’s action or failure to

act and the loss amount on the loan. The

amount of loss occasioned by such

action will be established. This

information will be made available to

the Lender upon request. A Lender’s

loss claim may be denied or reduced by

RHCDS when:

(1) The Lender has committed fraud.

(Denial of claim.)

(2) The Lender claims items not

authorized under RHCDS regulations.

(Reduced by amount of unauthorized

claim.)

(3) The Lender violated usury laws.

(Reduction for amount of loss caused by

the violation.)

(4) The Lender failed to obtain

required security or maintain the

security position. (Reduction for loss

attributed to failure.)

(5) Loan funds were used for

unauthorized purposes. (Reduction by

unauthorized amount.)

(6) The Lender was negligent in loan

servicing. Negligent servicing is a failure

to perform those services which a

reasonably prudent Lender would

perform in servicing its own portfolio of

loans that are not guaranteed. The term

includes a failure to act, a failure to act

in a timely manner, or acting in a

manner contrary to that in which a

reasonably prudent Lender would act.

(Reduction for loss amount attributable

to Lender negligence.) Examples of

negligent servicing include:

(i) A failure to contact the borrower in

a timely manner when the borrower’s

account goes into default.

(ii) A failure to pay real estate taxes

or hazard insurance when due.

(iii) A failure to notify RHCDS within

required time limits when the borrower

defaults on the loan.

(iv) A failure to request loan subsidy

when the borrower was eligible for loan

subsidy and loan subsidy was available

(subsidized loans only).

(v) A failure to protect security during

the liquidation phase.

(7) The Lender delayed filing the loss

claim. (Reduction in claim for interest

accrued because the claim was not

filed.)

§ 1980.377 Future recovery.

The proceeds of any amounts

recovered shall be shared in proportion

to the amount of loss borne between

RHCDS and the Lender. Although the

Lender’s actual loss may be different

than the amount on which loss

settlement was based, the proportion of

recovery sharing must be based on the

loss percentage upon which the loss

payment calculation was based.

§§ 1980.378–1980.389 [Reserved]

§ 1980.390 Interest assistance.

In order to assist low-income

borrowers in the repayment of the loan,

RHCDS is authorized to provide interest

assistance payments subject to the

availability of funds. Regardless of what

date a borrower’s loan payment is due

each month, interest assistance

payments will be made by RHCDS

directly to the Lender on or before the

15th day of the month in which the

borrower’s payment is due.

(a) Policy. It is the policy of RHCDS

to grant interest assistance on

guaranteed loans to low-income

borrowers to assist them in obtaining

and retaining decent, safe, and sanitary

dwellings and related facilities as long

as the borrower remains eligible for

payments when funds are available for

interest assistance. Interest assistance

must be established for the borrower at

the time the loan guarantee is

authorized.

(b) Processing interest assistance

agreements. The Lender will process the

interest assistance agreement and

submit it to RHCDS for approval.

(1) RHCDS will reimburse the Lender

in the amounts authorized in exhibit D

of FmHA Instruction 1980–D (available

in any RHCDS office) for the cost of

processing the agreement. The fee will

be paid upon receipt of a valid

agreement which has been coded as

requiring a processing fee payment. The

processing fee is payable when:

(i) A new agreement is made with the

borrower except at the time of loan

closing.

(ii) The borrower had an agreement

for the previous year and a new

agreement is made for the current year.

(iii) The borrower is eligible for but

not presently on interest assistance and

enters into a new interest assistance

agreement.

(iv) The borrower has a change in

circumstances which requires a revision

to the current agreement. When the

change in circumstances results in an

agreement with less than 90 days

remaining, the agreement for the

subsequent year will be prepared at the

same time. This action is considered

one agreement.

(2) A processing fee will not be paid

when the revision to an existing

agreement is required due to an error on

the part of the Lender or the borrower.

(c) Amount of interest assistance. (1)

The amount of interest assistance

granted will be the difference between

the monthly installment due on the

promissory note eligible for interest

assistance and the amount the borrower

would pay if the note were amortized at

the rate corresponding to the borrower’s

income range as outlined in the master

interest assistance agreement.

(2) The basis for the amount of

interest assistance for each loan is

determined by the amount of interest

assistance authorized to the Agency as

shown in exhibit D of FmHA Instruction

1980–D (available in any RHCDS office)

and the note interest rate.

(3) A borrower receiving a loan in a

high cost area will be granted an

additional 1 percent interest assistance

in order to assist the borrower up to the
27002 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

maximum rate in exhibit D of FmHA

Instruction 1980–D (available in any

RHCDS office).

(i) The Administrator may designate

an area as a high cost area for interest

assistance purposes. Such designation

may be granted when the State Director

makes a written request for it and

provides documentation that lowincome borrowers in the area could not

afford to purchase a dwelling under the

interest assistance table in exhibit D of

FmHA Instruction 1980–D (available in

any RHCDS office). The area must also

be designated by HUD as a high cost

area. The amount of additional interest

assistance for high cost areas is 1

percent; however, in no case will more

interest assistance be granted than the

amount necessary to reach the lowest

floor rate in exhibit D of FmHA

Instruction 1980–D (available in any

RHCDS office).

(ii) The change in a designation to (or

from) a high cost area will not affect

existing loans. An individual’s loan

eligibility for high cost designation is

determined at the time of issuance of

the conditional commitment for loan

guarantee.

(d) Shared equity. Prior to loan

closing, the Lender will advise the

applicant that interest assistance is

subject to equity sharing.

(e) Eligibility. To be eligible for

interest assistance, a borrower must

personally occupy the dwelling and

must meet the following additional

requirements:

(1) Initial loans. Interest assistance

may be granted at the time the loan note

guarantee is issued, or an assumption is

processed in accordance with

§ 1980.366, when:

(i) The borrower’s adjusted income at

the time of loan guarantee approval did

not exceed the applicable low-income

limit, the loan guarantee was funded

from interest assisted guaranteed loan

funds, and a master interest assistance

agreement was completed at closing if

the borrower is ever to receive interest

assistance.

(ii) The borrower’s net family assets

do not exceed the maximum allowable

amount as per exhibit D of FmHA

Instruction 1980–D (available in any

RHCDS office) unless an exception is

authorized. The calculation of net

family assets will exclude the value of

the dwelling and a minimum adequate

dwelling site, cash on hand which will

be used to reduce the amount of the

loan, and household goods and personal

automobiles and the debts against them.

The Lender may request an exception at

the time the initial application is

submitted to RHCDS for a loan

guarantee. For the purpose of

determining whether an exception is

justified, consideration will be given to

the nature of the assets upon which a

borrower is currently dependent for a

livelihood or which could be used to

reduce or eliminate the need for interest

assistance.

(iii) The loan was approved as a

subsidized guaranteed loan on or after

April 17, 1991.

(iv) The amount of interest assistance

will be $20 or more per month in

accordance with the provisions of

paragraph (c)(1) of this section. Interest

assistance in amounts of less than $20

per month will not be granted.

(2) Existing loans. Interest assistance

may be granted at any time after loan

closing if:

(i) The requirements of paragraphs

(e)(1)(i), (e)(1)(iii), and (e)(1)(iv) of this

section are met.

(ii) The borrower’s adjusted annual

income does not exceed the low-income

limit.

(iii) The borrower requests interest

assistance through the Lender or the

Lender determines that interest

assistance is needed to enable the

borrower to repay the loan.

(iv) The Lender processes the interest

assistance agreement and submits it to

RHCDS for approval.

(f) Processing interest assistance. The

Lender will process interest assistance

agreements in accordance with this

section. The interest assistance

agreement will be executed by the

Lender and borrower and forwarded to

RHCDS for approval.

(1) Amount of interest assistance. The

amount of interest assistance for which

a borrower is eligible will be determined

by use of the interest assistance

agreement as outlined in paragraph (c)

of this section.

(i) Determination of income. The

Lender is responsible for determining

the borrower’s annual and adjusted

annual income as outlined in

§§ 1980.347 and 1980.348 of this

subpart. Income of all persons

occupying the dwelling will be verified

in accordance with § 1980.347 of this

subpart.

(ii) Effective period. Annual interest

assistance agreements will be for a 12-

month period.

(2) Interest assistance agreements.

The master interest assistance

agreement will be executed for each

qualifying loan at loan closing provided

funds are available for interest

assistance at the time the guarantee is

issued. This agreement establishes the

conditions and maximum amounts of

interest assistance for the life of the

loan. Each year, an annual interest

assistance agreement will be used to

determine the amount of interest

assistance for the coming 12 months.

(i) The Lender will determine the

borrower’s adjusted annual income,

document the calculations, and

complete the interest assistance

agreement form.

(ii) The borrower will review the

interest assistance agreement form and

sign the form signifying that all

information is correct as shown.

(iii) If the information contained on

the interest assistance agreement

appears correct, RHCDS will approve

the agreement and make monthly

payments to the Lender on behalf of the

borrower.

(iv) When the borrower’s income is

within the low-income limits but the

provisions of paragraphs (e)(1)(ii) or

(e)(1)(iv) of this section preclude

granting interest assistance, the master

interest assistance agreement must be

executed if the borrower desires to be

considered for interest assistance at a

later date due to a change in

circumstances.

(g) Interest assistance modification. A

change in the borrower’s circumstances

after the effective date of the Annual

Interest Assistance Agreement will be

handled as follows:

(1) RHCDS required modifications

before expiration. The borrower is

responsible for reporting any increases

in income exceeding $100 per month to

the Lender. The Lender is not

responsible for monitoring the

borrower’s income. The Lender must

process a revised interest assistance

agreement when a reported increase in

the borrower’s income results in the

need for less interest assistance in

accordance with paragraph (c) of this

section.

(2) Additional interest assistance

before expiration. The borrower may

request and the Lender may process a

modification of the interest assistance

agreement and submit the modified

agreement to RHCDS when:

(i) The borrower’s adjusted annual

income decreases by more than $100 per

month;

(ii) The interest assistance calculation

per paragraph (c) of this section

indicates that the borrower is eligible for

an additional $20 interest assistance per

month; and

(iii) There are interest assistance

funds available if the amount needed by

the borrower exceeds the initial floor

rate established at the time the loan was

closed per paragraph (c) of this section.

(3) Other changes in the borrower’s

circumstances. When one coborrower

has left the dwelling, interest assistance

based on the remaining coborrower’s

income may be extended if:
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 27003

(i) The remaining coborrower is

occupying the dwelling, owns a legal

interest in the property, and is liable for

the debt;

(ii) The remaining coborrower

certifies as to who lives in the house;

(iii) Separation is not due only to

work assignment or military orders; and

(iv) The remaining coborrower is

informed and agrees that should the

coborrower begin to live in the

dwelling, that coborrower’s income will

then be counted toward annual income

and interest assistance may be reduced

or canceled.

(4) Effect of modification. An interest

assistance agreement modified as per

paragraph (g)(1), (g)(2), or (g)(3) of this

section is valid for the remainder of the

agreement period.

(5) Correction of interest assistance

agreement. When an error by RHCDS or

the Lender resulted in too little interest

assistance being granted, a corrected

agreement will be prepared effective the

date of the error if the error results in

granting $20 or more per month less

interest assistance than the borrower

was eligible to receive. The Lender must

return any overpayment made by the

borrower unless an agreement is

reached to apply the funds to the loan

as an extra payment.

(h) Eligibility review. Borrowers

receiving interest assistance will be

reviewed annually within 30 to 60 days

prior to the anniversary date of the loan.

All existing agreements must be

reviewed and processed for the

upcoming 12 months during the review

period. Interest assistance will not be

renewed if the amount that the borrower

qualifies for is less than $20 per month.

(1) The Lender will obtain written

verification of the income of each

borrower and all adult members of the

borrower’s household and conduct the

review.

(i) Borrower responsibility. The

borrower will:

(A) Report the income of each adult

member of the household to the Lender;

(B) Assure that each household

member has provided sufficient

information on that person’s income for

the Lender to conduct the review; and

(C) Cooperate in the Lender’s efforts

to verify income.

(ii) [Reserved]

(2) Processing interest assistance

renewals not reviewed during the review

period. The Lender may process interest

assistance renewals not completed

during the review period as follows:

(i) The amount of interest assistance

will be based on the borrower’s current

annual income.

(ii) The effective date will be:

(A) The expiration period of the

previous interest assistance agreement if

the RHCDS approval official determines

failure to renew was the fault of RHCDS

or the Lender.

(B) The next payment due date

following approval in all other cases.

(3) Interest assistance form. Interest

assistance payments will not be made

after the expiration date unless RHCDS

receives and approves a new interest

assistance agreement form.

(i) Cancellation of interest assistance.

(1) An existing interest assistance

agreement will be canceled under the

following circumstances:

(i) When the borrower has never

occupied the dwelling, the interest

assistance will be canceled as of the

date of issuance of the guarantee. The

Lender will refund all interest

assistance payments to RHCDS.

(ii) The cancellation will be effective

on the date on which the earliest action

occurs which causes the cancellation or

the date the Lender became aware of the

situation if the date cannot be

determined when:

(A) The borrower ceases to occupy,

sells, or conveys title to the dwelling.

(B) The borrower has received

improper interest assistance and a

corrected agreement will not be

submitted.

(C) The borrower has had an increase

in income and is no longer eligible for

interest assistance.

(D) The security is acquired by the

Lender.

(E) The Lender formally declares the

loan to be in default and accelerates the

loan.

(2) [Reserved]

(j) Overpayment. When the Lender

becomes aware of circumstances that

have resulted in an overpayment of

interest assistance for any reason, except

as provided in paragraph (k) of this

section, the following actions will be

taken:

(1) The Lender will immediately

notify RHCDS.

(2) The borrower will be notified and

the interest assistance agreement will be

corrected.

(3) A repayment agreement acceptable

to RHCDS will be reached.

(k) Unauthorized use of loan funds.

When RHCDS becomes aware that the

Lender allowed loan funds to be used

for unauthorized purposes, interest

assistance paid on said amounts will be

promptly repaid by the Lender. The

Lender may work out a repayment

agreement with the borrower but is

expected to make every effort to

minimize the adverse impact on the

borrower’s repayment ability.

(l) Appeals. All applicants/borrowers

and Lenders may appeal adverse

determinations in accordance with

§ 1980.399 when RHCDS denies,

reduces, cancels, or refuses to renew

interest assistance.

(m) Reinstatement of interest

assistance. The RHCDS approval official

may authorize reinstatement of the

borrower’s interest assistance if it was

canceled because the loan was

accelerated and if the acceleration was

withdrawn with RHCDS approval.

§ 1980.391 Equity sharing.

The policy of RHCDS is to collect all

or a portion of interest assistance

granted on a guaranteed RH loan when

any of the events described in paragraph

(a) of this section occur, if any equity

exists in the security.

(a) Determining the amount of shared

equity. The RHCDS approval official

will calculate shared equity when a

borrower’s account is settled by

payment-in-full (including refinancing)

of the outstanding indebtedness, the

transfer of title, or when the borrower

ceases to occupy the property. The

calculation of shared equity when the

account is in liquidation will be

handled in accordance with

§ 1980.374(e).

(1) How to calculate. The amount of

shared equity will be based on the

amount of interest assistance granted on

the loan, the appreciation in property

value between the closing date of the

loan and the date the account is

satisfied or acquired by the Lender via

liquidation action, the period of time

the loan is outstanding, the amount of

original equity the borrower has in the

property, and the value of capital

improvements to the property. Shared

equity will be the lesser of the interest

assistance granted or the amount of

value appreciation available for shared

equity. Value appreciation available for

shared equity means the market value of

the property less all debts secured by

prior liens, sales expenses, any original

borrower equity, principal reduction,

and value added by any capital

improvements.

(i) Market value. Market value of the

property as of the date the loan is to be

paid in full or the date the borrower

ceases to occupy and will be

documented by one of the following:

(A) A sales contract which reasonably

represents the fair market value based

on the Lender’s and RHCDS approval

official’s knowledge of the property and

the area.

(B) Lender’s appraisal when the loan

will be refinanced provided the

appraisal reasonably represents the fair

market value.

(C) If the items listed in either

paragraph (a)(l)(i)(A) or (a)(1)(i)(B) of

this section are not available, another
27004 Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations

current appraisal, if readily available,

when the appraiser meets the

qualifications of § 1980.334.

(D) When the account is being paid off

from insurance proceeds, the most

recent appraisal available if the Lender

or RHCDS can document that it

represents an accurate indication of the

value at the time the dwelling was

damaged or destroyed. If not, the best

information available will be used to

determine the market value. The RHCDS

approval official will interview the

borrower to determine the extent of

improvements, if any, and the general

condition of the property at the time of

loss. The amount of the insurance

payment is generally a good indication

of value; however, tax records or

comparable sales will be considered.

(E) RHCDS appraisal, with prior

approval of the State Director.

(ii) Prior liens. Prior liens refers to the

amount of liens that are prior to the

Lender’s liens and include, but may not

be limited to, prior mortgages, and real

estate taxes and assessments levied

against the property.

(iii) Sale/refinancing expenses. Sale/

refinancing expenses include, but are

not limited to, expenses commonly

associated with the sale or refinancing

of real estate that are not reimbursed,

such as sales commissions, advertising

costs, recording fees, pro rata taxes,

points based on the current interest rate,

appraisal fees, transfer tax, deed

preparation fee, loan origination fee, etc.

In refinancing situations, only those

expenses necessary to finance the

amount of the current RHCDS debt are

allowed. Shared equity may be

calculated using estimated expenses if

actual expenses cannot be obtained and

the RHCDS approval official is satisfied

with the estimated amount and the

prorating of the expenses are accurate

for this transaction.

(iv) Original borrower equity. Original

equity consists of a contribution by the

borrower that reduces the amount of the

loan below the market value. The

contribution may be in the form of cash

and/or value of the lot if the home was

constructed on the borrower’s property.

(v) Capital improvements. Capital

improvements will be considered to the

extent that they do not exceed market

value contribution as indicated by a

sales comparison analysis. Generally,

the value added by improvements will

be the difference in market value at the

time of sale and market value without

capital improvements. Cost of the

improvement will not be considered,

only contribution to value. Maintenance

cost and replacement of short-lived

depreciable items are normal expenses

associated with home ownership and

are not considered capital

improvements.

(2) Other considerations. (i)

Overpayments of interest assistance.

When RHCDS has overpaid interest

assistance and the overpaid amounts

remain uncollected at the time shared

equity is calculated, the overpaid

amount will be added to shared equity.

(ii) Multiple loans. When a borrower

has more than one loan and elects to

pay only some of the loans, shared

equity will not be calculated unless the

remaining loan is not subject to shared

equity. Shared equity will be calculated

when the account is paid in full taking

into consideration all of the interest

assistance granted on the account.

(b) Miscellaneous provisions—(1)

Changes in terms. Shared equity will

not be calculated when an account is

reamortized.

(2) Junior liens. Junior liens are not

considered in the shared equity

calculation. In the event a junior

lienholder forecloses, the RHCDS

approval official will calculate shared

equity before providing the lienholder

with a pay-off figure, which is in

addition to any amounts still due the

Lender on the loan in the same manner

as paragraph (a) of this section.

(c) Affordable housing proposals.

Shared equity under an affordable

housing innovation (such as limited

equity or a state or county sponsored

shared equity) will be calculated in

accordance with this subpart unless

prior written approval is obtained from

RHCDS. Proposals that deviate from this

subpart must be reviewed and approved

in the National office prior to issuance

of the loan note guarantee.

§1980.392 Mortgage Credit Certificates

(MCCs) and Funded Buydown Accounts.

(a) MCCs. MCCs are authorized under

the Tax Reform Act of 1986 and allow

the borrower to receive a Federal tax

credit for a percentage of their mortgage

interest payment. They may be used by

RHCDS guaranteed RH borrowers to

improve their repayment ability for the

loan. MCCs impact on the borrower’s

tax liability. MCCs may be used with

interest assisted loans when the amount

of the tax credit is based on the amount

of interest actually paid by the

borrower. MCCs are subject to shared

equity of a portion of any ‘‘gain’’

realized on the property when sold

within 10 years after purchase. If the

loan is also an RHCDS interest assisted

loan, RHCDS shall receive priority for

shared equity repayment. Income taxes

are complex issues; RHCDS employees

and Lenders are not expected to be able

to identify all issues impacting the

borrower’s taxes. Lenders should

encourage borrowers to consult with a

tax advisor.

(1) When the Lender is participating

in an MCC program the amount of the

tax credit is considered as an additional

resource available for repayment of the

loan when the credit is taken on a

monthly basis from withholding.

(2) The Lender will submit a copy of

the MCC and a copy of the applicant’s

Form IRS W–4, ‘‘Employee’s

Withholding Allowance Certificate,’’

along with the other materials for the

loan guarantee request. The amount of

tax credit is limited to the applicant’s

maximum tax liability.

(i) The MCC must show the rate of

credit allowed.

(ii) The Form IRS W–4 must reflect

that the borrower is taking the tax credit

on a monthly basis.

(iii) The Lender will certify that the

borrower has completed and processed

all of the necessary documents to obtain

the tax credit in accordance with this

section.

(b) Funded buydown accounts. A

funded buydown account is a prepaid

arrangement between a builder or a

seller and a Lender that is designed to

improve applicant’s repayment ability.

Funded buydown accounts are

permitted when the Lender obtains

prior RHCDS concurrence. RHCDS will

consider buydown accounts when there

are compensating factors which indicate

the borrower’s ability to meet the

expected increases in loan payment.

The seller, Lender or other third party

must place funds in an escrow account

with monthly releases scheduled

directly to the Lender to reduce the

borrower’s monthly payment during the

early years of the loan. The maximum

reduction which may be considered is 2

percent below the note rate, even

though the actual buydown may be for

more. Reductions in buydown

assistance may not result in an increase

in the interest rate paid by the borrower

of more than 1 percent per year. The

borrower shall not be required to repay

escrowed buydown funds. Funds must

be escrowed with a state or federally

supervised Lender. Funded buydown

accounts must be fully funded for the

buydown period. Buydown periods

must be at least 12 months for each 1

percent of the buydown.

§§ 1980.393–1980.396 [Reserved]

§ 1980.397 Exception authority.

The Administrator may, in individual

cases, make an exception to any

requirement or provision of this subpart

or address any omission of this subpart

which is not inconsistent with the

authorizing statute or other applicable
Federal Register / Vol. 60, No. 98 / Monday, May 22, 1995 / Rules and Regulations 27005

law if the Administrator determines that

application of the requirement, or

provision, or failure to take action in the

case of an omission would adversely

affect the Government’s financial

interest. The Administrator will exercise

this authority upon request of the State

Director with the recommendation of

the Assistant Administrator for Housing.

Requests for exception must be made in

writing accompanied by the borrower’s

casefile in cases involving specific

borrowers and supported with

documentation to explain the adverse

effect, propose alternative courses of

action, and to show how the adverse

effect will be eliminated or minimized

if the exception is granted.

§ 1980.398 Unauthorized assistance and

other deficiencies.

(a) Unauthorized assistance.

Unauthorized assistance includes, but is

not limited to, issuance of a loan note

guarantee when the borrower was not

eligible for the loan or the borrower was

eligible but the loan was not made for

authorized purposes. Unauthorized

assistance in the form of interest

assistance is discussed in § 1980.390.

(b) Initial determination of

unauthorized assistance. The reasons

for unauthorized assistance being

received by the Lender may include:

(1) Submission of false or inaccurate

information by the Lender;

(2) Submission of false or inaccurate

information by the borrower;

(3) Error by RHCDS personnel; or

(4) Error by the Lender.

(c) [Reserved]

(d) [Reserved]

(e) Categories of unauthorized

assistance.

(1) Minor deficiency. A minor

deficiency is one that does not change

the eligibility of the borrower, the

eligibility of the property, or amount of

the loan. Such incidents will be brought

to the Lender’s attention in writing.

Examples of minor deficiencies include

improperly completed builder

certifications, use of an outdated credit

report, or use of an outdated income

verification. Minor deficiencies also

include those significant deficiencies

when the Lender is willing and able to

correct the problem such as obtaining

flood insurance for a dwelling located in

a flood hazard area and assuring the

escrow amount is sufficient.

(2) Significant deficiency. A

significant deficiency is one that creates

a significant risk of loss to the

Government, or involves acceptance of

a borrower or property not permitted by

Agency regulations. Such cases may

result in probation or withdrawal of the

Lender’s approval for program

participation. Examples of significant

deficiencies include gross

miscalculation of income, acceptance of

property that is severely deficient of the

required standards, missing builder

certifications, and construction changes

that materially affect value without

proper change orders.

(3) Fraud or misrepresentation. A

deficiency that involves an action by the

Lender to misrepresent either the

financial capacity of the borrower or the

condition of the property being financed

may, in addition to any criminal and

civil penalties, result in a withdrawal of

RHCDS approval, or debarment.

Examples of this type of deficiency

include falsified Verifications of

Employment, false certifications,

reporting a delinquent loan as being

current, and omitting conditions

relating to the health and safety of a

property.

(f) Borrower noncompliance. When

the borrower receives unauthorized

assistance due to an error or oversight,

the Lender may continue with the

guaranteed loan. More serious violations

will be viewed on a case-by-case basis

by the National office.

(g) RHCDS error oversight. When the

borrower receives unauthorized

assistance solely due to an error or

oversight by RHCDS, the Lender may

continue with the guaranteed loan.

§ 1980.399 Appeals.

The borrower and the Lender

respectively can appeal an RHCDS

administrative decision that directly

and adversely impacts them. Decisions

made by the Lender are not covered by

this paragraph even if RHCDS

concurrence is required before the

Lender can proceed. Appeals will be

conducted in accordance with the rules

of the National Appeals Division,

USDA.

(a) Appealable decisions. (1) The

borrower and the Lender must jointly

execute the written request for an

alleged adverse decision made by

RHCDS. The Lender need not be an

active participant in the appeal process.

(2) The Lender only may appeal cases

where RHCDS has denied or reduced

the amount of a loss payment to the

Lender.

(b) Nonappealable decisions. (1) The

Lender’s decision as to whether to make

a loan is not subject to appeal.

(2) The Lender’s decision to deny

servicing relief is not subject to appeal.

(3) The Lender’s decision to accelerate

the account is not subject to appeal.

§ 1980.400 [Reserved]

Dated: March 22, 1995.

Michael V. Dunn,

Acting Under Secretary for Rural Economic

and Community Development.

[FR Doc. 95–11943 Filed 5–19–95; 8:45 am]

BILLING CODE 3410–07–U

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 94–NM–193–AD; Amendment

39–9231; AD 95–10–14]

Airworthiness Directives; Airbus Model

A300, A310, and A300–600 Series

Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule.

SUMMARY: This amendment adopts a

new airworthiness directive (AD),

applicable to all Airbus Model A300,

A310, and A300–600 series airplanes,

that requires repetitive mechanical and

electrical inspections to detect chafing

of electrical wiring; and repair or

replacement of discrepant parts, and

repositioning the looms. This

amendment is prompted by reports of

wire chafing in the forward avionic

compartment. The actions specified by

this AD are intended to prevent such

chafing, which may lead to a short in

the electrical circuits at the 104VU

panel; this condition could result in

unwanted depressurization, loss of wing

de-icing, and loss of in-flight engine

restart capability.

DATES: Effective June 21, 1995.

The incorporation by reference of

certain publications listed in the

regulations is approved by the Director

of the Federal Register as of June 21,

1995.

ADDRESSES: The service information

referenced in this AD may be obtained

from Airbus Industrie, 1 Rond Point

Maurice Bellonte, 31707 Blagnac Cedex,

France. This information may be

examined at the Federal Aviation

Administration (FAA), Transport

Airplane Directorate, Rules Docket,

1601 Lind Avenue, SW., Renton,

Washington; or at the Office of the

Federal Register, 800 North Capitol

Street, NW., suite 700, Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Stephen Slotte, Aerospace Engineer,

Standardization Branch, ANM–113,

FAA, Transport Airplane Directorate,

1601 Lind Avenue, SW., Renton,

Washington 98055–4056; telephone

(206) 227–2797; fax (206) 227–1320.