The Housing Act of 1949 authorized new rural lending programs to farmers, which were administered by RHS’s predecessor, the Farmers Home Administration, within the U.S. Department of Agriculture (USDA). RHS now facilitates homeownership, develops rental housing, and promotes community development through loan and grant programs in rural communities. Over the decades, Congress changed the requirements for rural housing eligibility—for example, by changing population limits— and rural housing programs have evolved to serve low- and moderate- income people of all occupations. The current definition of rural considers factors such as whether an area is contained in an MSA, is “rural in character,” and “has a serious lack of mortgage credit for lower- and moderate-income families.” RHS’s Section 521 Rental Assistance Program is the agency’s largest line-item appropriation, with an annual budget of more than $500 million. The program provides rental subsidies for approximately 250,000 tenants who pay no more than 30 percent of their income for rent (RHS pays the balance to the property owner). The units in which the tenants live are created through RHS’s Section 515 Multifamily Direct Rural Rental Housing Loans and Section 514 Multifamily Housing Farm Labor Loans programs. The Section 515 and 514 programs provide developers loans subsidized with interest rates as low as 1 percent to help build affordable rental housing for rural residents and farm workers. RHS staff determine which areas are eligible for RHS housing programs by interpreting statutory requirements and agency guidance; however, their determinations involve judgment and may be open to question. Additionally, some eligibility requirements often result in areas with similar characteristics receiving different designations. For example, the requirement that an eligible area cannot be part of an MSA often results in ineligibility for what appears to be a rural area. Also, the “lack of credit” in rural areas remains an eligibility requirement, even though USDA has reported that a lack of income and ability to pay the mortgage appear to be the greater problems than a lack of credit for rural Americans. Section 520 of the Housing Act of 1949, as amended, defines rural for most RHS housing programs. Using the statute and instructions promulgated by the national office, state and local (together, field) offices determine the boundaries to delineate eligible areas from ineligible areas—a task field office officials acknowledged is time-consuming, based on judgment, and can be problematic. The statutory definition generally identifies eligible rural areas as those with populations up to 20,000 and defines “rural” and “rural areas” as any open country or any place, town, village, or city that is not part of or associated with an urban area. Specifically, there are several population levels at which communities may be determined eligible, but as a community’s population increases, the statute imposes additional requirements that include being “rural in character” (a concept that is not defined in the statute), having a serious lack of mortgage credit, or not being located within an MSA. Certain communities with populations above 10,000 but not exceeding 25,000 may be “grandfathered in,” based on prior eligibility if they still met the “rural in character” and “lack of credit” criteria. USDA’s instructions give its field offices flexibility in implementing the statute. Field office officials said that drawing the eligibility boundaries required an element of judgment because “rural in character” is open to interpretation—even with the overall national guidance on the statute and review of census populations, MSA standards, maps, aerial photographs, and visits to communities. Even when local supervisors fully understand the local conditions and rural character of an area, finding a way to equitably decide on a boundary is sometimes problematic. For instance, field staff in Maryland told us that in response to December 2002 national guidance, they stopped using natural features such as rivers or mountains as eligibility boundaries for communities. Maryland now uses only roads. Figure 1 shows a new boundary, a road that divides the eligible area on the left from the ineligible area on the right. RHS local office officials told us that the “road only” criteria forced them to find the nearest public road to a populated section of Hagerstown, which happens to go through farmland. The result is that apparently similar rural areas received different designations. Figure 2 shows an area in Brookside, Ohio, where the city line divides the eligible from the ineligible area. The Maryland example illustrates that using the only physical boundary available resulted in one piece of farmland receiving a rural designation and the other not. The Brookside example shows that using a political boundary also did not necessarily result in a readily discernible urban-rural difference. Our analysis of RHS eligible areas nationwide, compared with census data, found approximately 1,300 examples where communities with populations at or below 10,000 were within or contiguous with urban areas that had populations of 50,000 or more. The statute states that eligible communities cannot be a part of or associated with an urban area. Some field staff determinations of eligibility in these cases might be questionable as some of these communities, despite their low populations, might not be considered rural, and thus, eligible. For example, field staff told us that Belpre, Ohio, is eligible for RHS programs because it meets both the population and “rural in character” requirements. However, Belpre is contiguous with Parkersburg, West Virginia, which has a population of more than 33,000 (see fig. 3). In addition, the 2000 census considers Belpre, along with Parkersburg and Vienna, West Virginia, as part of an urbanized area because its total population exceeds 50,000. Although it is across the Ohio River from Parkersburg, bridges have connected Belpre and Parkersburg for decades and, according to a Belpre city employee, many people from Belpre work in Parkersburg. Furthermore, most of Belpre has a population density of 1,000 people or more per square mile, which the Census Bureau considers “densely settled” and a measure of urbanization. For these reasons, it is unclear whether Belpre meets the eligibility requirements. Changes to the way eligibility is defined might allow RHS to better designate “rural” areas and treat communities with similar characteristics more consistently. For instance, eliminating the MSA requirement and “grandfathering” might help RHS better serve its clients. To illustrate, we found rural communities with populations exceeding 10,000 that were directly impacted by the MSA and “grandfather” restrictions. Because MSAs are county-based and may contain both urban and rural areas, the MSA restriction and the grandfathering of certain communities resulted in some communities being eligible while others with similar demographic profiles were ineligible. We looked at two communities within the Bakersfield, California, MSA, which is basically rural outside the environs of Bakersfield (see fig. 4). Lamont was grandfathered because it lost eligibility when its population went above 10,000 at the 1980 census. Taft’s population was already over 10,000 prior to the 1980 census, so Taft was not eligible for grandfathering. The right side of the figure shows what would happen if MSAs and grandfathered eligibility were removed from the equation and a density- based system such as the Census Bureau’s urbanized areas/urban clusters were used to indicate changes in population. Taft would be in its own urban cluster outside of the Bakersfield urbanized area, which happens to include Lamont. Based on our visit, we believe this scenario, where the more rural community would be the one eligible, is more in line with the overall purpose of the legislation than the current situation. In another example, by eliminating the MSA criterion, RHS could review the eligibility of Washington Court House and Circleville, Ohio, based on population and rural character criteria. Additionally, using density-based mapping could help RHS draw boundaries around these communities, which although Census-designated as “urban clusters,” still meet rural housing program population requirements (see fig. 5). The statute imposes a requirement to demonstrate a serious lack of mortgage credit for lower- and moderate-income families in communities with populations of 10,001 to 25,000. RHS has a policy stating that a serious lack of mortgage credit at rates and terms comparable with those offered by the agency exists in all rural areas. However, a study by USDA’s Economic Research Service concluded that credit problems in rural areas are primarily limited to sparsely populated or remote rural areas; such communities generally do not fall into the population range specified above. Many of the RHS officials and industry experts with whom we spoke also saw the primary “credit” problem as lack of income rather than lack of credit. Additionally, eligibility requirements for RHS programs are based on income levels. The agency uses funding set asides, funding allocations, application reviews, and state-level strategic plans to determine areas and populations of greatest need. As a result, RHS program activity already is focused on income issues, and given RHS’s blanket policy, the “lack of credit” requirement is not central to determining participant eligibility. We reported that weaknesses in RHS’s budget estimation and oversight of rental assistance funds had resulted in largely overestimated budget levels and increased the risk that the agency was not efficiently or appropriately budgeting and allocating resources. Additionally, RHS lacked sufficient internal control to adequately monitor the disbursement of rental assistance funds. In March 2004, we reported that since 1990, RHS had consistently overestimated its budget needs for the rental assistance program. Concern had arisen about this issue because in early 2003 RHS reported hundreds of millions of dollars in unexpended balances tied to its rental assistance contracts.