[Federal Register Volume 60, Number 98 (Monday, May 22, 1995)]
[Rules and Regulations]
[Pages 26979-27005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11943]
=======================================================================
-----------------------------------------------------------------------
[[Page 26980]]
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 Sec. 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 [[Page 26981]] the regulation, not based on order of
importance.
RHCDS added several new definitions based on the comments. New
definitions include: Agency, Co-applicant, 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 home-buyers 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 [[Page 26982]] 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. [[Page 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 [[Page 26984]] 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
buy-down 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: [[Page 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
Sec. 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.
Sec. 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 service-oriented 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: [[Page 26986]]
(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
full-time 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
Sec. 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
Sec. 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 live-in 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 [[Page 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 Sec. 1980.347(e).
Rural area. An area meeting the requirements of Sec. 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.
Secs. 1980.303-1980.307 [Reserved]
Sec. 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 Sec. 1980.374, the loan note guarantee shall cover interest until
the claim is paid within the limit of the guarantee.
Sec. 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 [[Page 26988]] 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 Sec. 1980.353(c). The Lender may utilize the services
of a non-RHCDS 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 [[Page 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.
Sec. 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 Sec. 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 Sec. 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.
Sec. 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
Sec. 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 income-producing 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
income-producing 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 in-ground 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
Sec. 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 Sec. 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
Sec. 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 Sec. 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 Sec. 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 Sec. 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.
Sec. 1980.312 Rural area designation.
A rural area is an area which is identified as rural by RHCDS in
accordance with Sec. 1944.10. Current county maps showing ineligible
areas are available in RHCDS field offices.
Sec. 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 Sec. 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 all-weather 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] [[Page 26990]]
(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
Sec. 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 dealer-contractors 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 Sec. 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.
Sec. 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.
Sec. 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.
Sec. 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.
Sec. 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 [[Page 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.
Sec. 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).
Sec. 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.
Sec. 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 Sec. 1980.302(a), whichever
is higher. The lender must document the rate and the date it was
determined.
Sec. 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.
Sec. 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 [[Page 26992]] 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 Sec. 1980.376.
Sec. 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.
Sec. 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.
Sec. 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.
Secs. 1980.326-1980.329 [Reserved]
Sec. 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.
Sec. 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.
Sec. 1980.332 [Reserved]
Sec. 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 Sec. 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.
Sec. 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 Cost-New 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 [[Page 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.
Secs. 1980.335-1980.339 [Reserved]
Sec. 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 Sec. 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 Sec. 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.
Sec. 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 Sec. 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 Sec. 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 back-filling.
(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.
Secs. 1980.342-1980.344 [Reserved]
Sec. 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 Sec. 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 Sec. 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 co-obligor 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,
[[Page 26994]] 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
non-payment 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.
Sec. 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 [[Page 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.
Sec. 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 long-distance 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
Sec. 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 [[Page 26996]] 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.
Sec. 1980.348 Adjusted annual income.
Adjusted annual income is annual income as determined in
Sec. 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
Sec. 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
Sec. 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
Sec. 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.
Secs. 1980.349--1980.350 [Reserved]
Sec. 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]
Sec. 1980.352 [Reserved]
Sec. 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 Sec. 1980.302(a)
will be given preference by RHCDS. Displaced homemakers and single
parents are first-time 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
Sec. 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.
[[Page 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 service-oriented 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.
Sec. 1980.354 [Reserved]
Sec. 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.
Secs. 1980.356--1980.359 [Reserved]
Sec. 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
Sec. 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, [[Page 26998]] 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 Sec. 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.
Sec. 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]
Sec. 1980.362 [Reserved]
Sec. 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.
Secs. 1980.364-1980.365 [Reserved]
Sec. 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 Sec. 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 Sec. 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. [[Page 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 Sec. 1980.353. The Lender may proceed with
the transfer and assumption upon obtaining RHCDS approval.
Sec. 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
Sec. 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 Sec. 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 Sec. 1980.371.
Secs. 1980.368-1980.369 [Reserved]
Sec. 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]
Sec. 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.
Sec. 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. [[Page 27000]]
Sec. 1980.373 [Reserved]
Sec. 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 in-house 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
Sec. 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.
Sec. 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.
Sec. 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 [[Page 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 Sec. 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 Sec. 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.)
Sec. 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.
Secs. 1980.378-1980.389 [Reserved]
Sec. 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 [[Page 27002]] 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 low-income 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 Sec. 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 Secs. 1980.347 and 1980.348 of this subpart. Income of all
persons occupying the dwelling will be verified in accordance with
Sec. 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: [[Page 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 Sec. 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.
Sec. 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 Sec. 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
[[Page 27004]] current appraisal, if readily available, when the
appraiser meets the qualifications of Sec. 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.
Sec. 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.
Secs. 1980.393-1980.396 [Reserved]
Sec. 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 [[Page 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.
Sec. 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 Sec. 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.
Sec. 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.
Sec. 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