[Federal Register Volume 60, Number 92 (Friday, May 12, 1995)]
[Proposed Rules]
[Pages 25629-25660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11308]



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DEPARTMENT OF AGRICULTURE
Rural Housing and Community Development Service
Rural Business and Cooperative Development Service
Rural Utilities Service
Consolidated Farm Service Agency

7 CFR Parts 1910, 1944, 1951, and 1965

RIN 0575-AA35


Single Family 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: Proposed rule.

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SUMMARY: The Rural Housing and Community Development Service (RHCDS) 
proposes to revise its regulations for Single Family Rural Housing 
(``RH'') Loans. Under the reorganization of the Department of 
Agriculture, RHCDS is the successor to the former Farmers Home 
Administration for the administration of rural housing programs under 
the Housing Act of 1949. References to RHCDS will also include actions 
of FmHA prior to the reorganization. Regulations regarding Receiving 
and Processing Applications, Planning and Performing Site Development 
Work, Borrower Supervision, Servicing and Collection of Single Family 
Housing Loan Accounts, and Security Servicing for Single Family Rural 
Housing Loans are also impacted by the proposed revisions. This action 
is taken to implement the provisions of section 315 of the Housing and 
Community Development Act of 1987, Pub. L. 100-242, to improve the 
delivery of the program to the public, provide for the orderly 
processing of loan applications, reduce workload of RHCDS field staffs, 
to conform the section 502 RH program with the Guaranteed Rural Housing 
Loan program and industry standards, and to notify the public of the 
Agency's policy.

    Note: The Department of Agriculture Reorganization Act of 1994, 
Pub. L. 103-354, was signed on October 13, 1994. This established a 
National Appeals Division (NAD) which replaced the FmHA National 
Appeals Staff. The National Appeals Division is currently in the 
process of writing new regulations. The Final Rule will be made 
consistent with any new regulations promulgated by the National 
Appeals Division.

DATES: Comments must be received on or before July 11, 1995.

ADDRESSES: Submit written comments, in duplicate, to the Office of the 
Chief, Rural Economic and Community Development, U.S. Department of 
Agriculture, Ag Box 0743, Room 6348, South Agriculture Building, 14th 
and Independence SW., Washington, DC 20250. All written comments will 
be available for public inspection at the above address during normal 
working hours.

FOR FURTHER INFORMATION CONTACT: Betsy McDaniel, Senior Loan 
Specialist, Rural Housing and Community Development Service, USDA, Ag 
Box 0783, Room 5334, 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 and was reviewed by 
the Office of Management and Budget under Executive Order 12866.

Regulatory Flexibility Act

    The Administrator of Rural Housing and Community Development 
Service has determined that this action will not have a significant 
economic impact on a substantial number of small entities because the 
regulatory changes affect RHCDS processing of section 502 loans and 
individual applicant eligibility for the program.

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 proposed 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.

Programs Affected

    This program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.410, Low Income Housing Loans.

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 is 
excluded from the scope of Executive Order (E.O.) 12372 which requires 
intergovernmental consultation with State and local officials.

Civil Justice Reform

    This proposed regulation has been reviewed in light of E.O. 12778 
and meets the applicable standards provided in sections 2(a) and 2(b) 
of that Order. Provisions within this part which are inconsistent with 
State law are controlling. All administrative remedies pursuant to 7 
CFR part 1900, subpart B must be exhausted prior to filing suit.

Paperwork Reduction Act

    The information collection requirements contained in these 
regulations have been approved by the Office of Management and Budget 
(OMB) under the provisions of 44 U.S.C. Chapter 35 and have been 
assigned OMB control numbers 0575-0134, 0575-0099, and 0575-0062, in 
accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3507). 
[[Page 25630]] This proposed rule does not revise or impose any new 
information collection or recordkeeping requirement from those approved 
by OMB, for those mentioned above. The revised information collection 
contained in 0575-0059 and 0575-0060 will be submitted for approval to 
OMB. Public reporting for this collection of information is estimated 
to vary from 5 minutes to 1.5 hours per response, with an average of 
.41 hours per response, including time for reviewing instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. 
Please send written comments on the information collection aspect of 
the rule to the Office of Information Regulatory Affairs, OMB, 
Attention: Desk Officer for USDA, Washington, DC 20503. Please send a 
copy of your comments to Jack Holston, Agency Clearance Officer, USDA, 
RECD, Ag Box 0743, Washington, DC 20250.

Discussion

Background

    Many of Rural Housing and Community Development Service's (RHCDS's) 
single family housing size and amenity restrictions have been 
criticized as being too rigid and restrictive to best serve the housing 
needs of low income families as well as providing adequate security for 
the Agency. In the past, these restrictions served to limit the size 
and cost of properties financed, and to control the associated home 
ownership costs of RHCDS applicants/borrowers. RHCDS feels that a 
different approach can provide the control necessary to allow 
applicants the freedom to select the home of their choice which best 
suits their individual needs and still ensure that RHCDS meets its 
mission and that its financial interest is adequately secured.
    During Fiscal Year (FY) 1991, FmHA published regulations in 
connection with the Cranston-Gonzales National Affordable Housing Act 
for its Guaranteed RH program. Those regulations provided that the 
amount of the RHCDS guaranteed loan may not exceed the maximum dollar 
limitation of section 203(b) of the National Housing Act (12 U.S.C. 
1702). RHCDS now proposes to use 85 percent of the same maximum dollar 
limitations applicable to the guaranteed program for the direct single 
family RH program. The Agency has determined that an 85 percent 
limitation for the direct single family housing program should curtail 
luxury type amenities, size, and cost, and will generally result in 
modest housing similar to that presently financed by the Agency under 
this program. This will greatly simplify and standardize the properties 
acceptable under the section 502 single family housing program and 
achieve the balance previously discussed. This change will result in 
the elimination of specific characteristics, amenities, and 
restrictions relative to ``modest housing,'' and substitute reliance by 
the Agency on the percentile of maximum dollar limitation established 
by the Housing and Urban Development (HUD), hereafter called ``CAPs,'' 
for determining the type and dollar amount of housing to be financed. 
In conjunction with this change, the Agency recognizes the need to 
change the manner in which subsidy is provided on these loans.
    In order to provide sufficient subsidy to enable low-income 
applicants/borrowers to show repayment ability but at the same time 
make the applicant/borrower the true decision-maker concerning all 
aspects of the property that meets his or her housing needs, RHCDS 
proposes to provide subsidy which will result in a reduced payment 
based on the adjusted family income percentile of the area median 
income or the minimum percentage of adjusted family income, whichever 
is greater. The minimum percentage of adjusted family income will be 
based on the income category the applicant/borrower falls into and will 
include principal, interest, taxes, and insurance. These percentages 
are reasonable amounts to pay for housing expenses. This would provide 
for a maximum rate of subsidy and encourage the family to purchase a 
modestly priced property within its repayment ability.
    At the same time, the Agency desires to move away from the use of a 
``budget'' when determining the applicant/borrower's repayment ability 
and proposes to use payment ratios in the general manner as set forth 
in its guaranteed housing instructions. This is more in line with 
industry standards and it is anticipated that this change will remove 
much of the subjectivity and controversy related to its current method 
of determining repayment ability. The Agency proposes to use a 
principal, interest, taxes, and insurance (PITI) ratio of 29 percent 
and a monthly obligation to income (MOTI) ratio of 41 percent in the 
direct single family housing program.
    In addition to the above changes, RHCDS proposes to revise its 
application loan processing procedures to provide that State Directors 
will hold a separate reserve of loan funds for priority loan 
applications which will be processed immediately upon receipt. Priority 
applications include hardships, as determined by the State Director on 
a case-by-case basis, including applications from persons living in 
deficient housing for more than 6 months; applications for refinancing 
of non-RHCDS loans, servicing type loan applications including 
financing for the purchase of Government-owned inventory properties and 
subsequent loans for essential improvements or repairs, and 
applications for mutual Self-Help Housing loans. It is anticipated that 
this will direct loan funds to those applicants with the greatest need, 
reduce backlogs of applications on hand, and better meet Agency 
objectives.
    The Agency has conducted an in-depth study involving 25 counties in 
California, Delaware, Florida, Georgia, Iowa, Maine, Maryland, 
Mississippi, and Nevada. These states were selected because of the 
volume of loans closed in these states and their geographic diversity, 
and to provide a diversified range of income ranges and housing costs 
in order to determine appropriate income ratios, loan limits, and 
payment assistance to utilize in this proposal. Ninety-four percent of 
this sample control group would continue to qualify for payment 
assistance under the proposed terms. The Agency has provided for 
increased payment assistance in high cost areas, exceptions to 
published ratios in special situations, increased loan limits for 
larger or disabled families, and in areas where the applicant is unable 
to obtain lower cost housing. These provisions will result in assisting 
applicants who do not qualify within the new parameters, so they can be 
handled on an individual basis. RHCDS feels confident that the single 
family housing loan program will continue to serve the same clientele 
as it has historically served. The data generated as a result of this 
study supports the proposed revisions, which will result in stimulation 
economic growth, providing objectivity in the administration of the 
single family housing program, making the program more equitable to 
RHCDS applicants and borrowers, and expanding housing choices for RHCDS 
applicants, based on their repayment ability, so that they can maximize 
their housing benefits to their individual needs.
    The Agency is considering the possibility of implementing a 20 year 
balloon payment using a 33 or 38 year amortization in the final 
regulation. This proposal is consistent with the position that the 
Section 502 program is temporary financing to enable a very 
[[Page 25631]] low- or low-income family to obtain affordable housing. 
The objective of the program is to eventually graduate the borrower to 
other conventional sources of credit. The majority of RHCDS existing 
borrowers pay their loans in full within 12 years of loan closing. In 
additions to this, the provision related to this topic in the text is 
Section 1944.25 Rates and terms, paragraph (b) Amortization.

Prior Requests for Comments ---------

    In order to allow the public an opportunity to voice their concerns 
regarding the proposed revisions, FmHA published an Advance Notice of 
Proposed Rule Making in the Federal Register on Tuesday, April 28, 
1992, (57 FR 17858), which outlined the major issues proposed for 
revision and provided for a 30-day comment period which ended on May 
28, 1992.

    Note: At the time of the Advance Notice of Proposed Rule Making, 
the Agency referred to its ``Interest Credit Assistance'' program 
for single family housing loans. This rule proposes to rename this 
program to ``Payment Assistance'' and all future references in this 
proposal are under that title.

    Twenty-five comments were received in response to the Advance 
Notice of Proposed Rule Making. Fourteen comments were from RHCDS or 
other Federal Agency personnel. Two comments were received from groups 
representing public utilities (electric and gas companies). In 
addition, nine comments were received from individuals and various 
public interest groups. All of the comments received were considered in 
the development of this proposed rule. Comments were on the following 
issues which were addressed in the Advance Notice of Proposed Rule 
Making:

I. Use of the HUD ``CAPs'' in Defining ``Modest'' Housing

    As stated previously, existing RHCDS single family housing 
regulations have restricted the type of housing financed by limiting 
the size, design, and amenities of the dwelling. The Advance Notice 
proposed eliminating all such restrictions relative to ``modest'' 
housing and proposed that financing be limited to the dollar ``CAP'' 
established by HUD. Twenty-four respondents commented on this proposal. 
Fifteen of the respondents submitted comments in support of this 
revision; five respondents were against the proposal; and four had 
mixed feelings. Most respondents had both pro and con comments. Those 
respondents who supported the concept of the proposal, felt that the 
revision would improve RHCDS's image, remove the stigma of 
``subsidized'' housing, provide for flexibility of architectural 
design, provide freedom of choice for RHCDS applicants, reduce the 
number of appeals, simplify procedures, provide greater time savings, 
and provide uniformity in the definition of modest housing nationwide. 
In addition, these respondents felt that the proposal would provide for 
appreciation in the market value of RHCDS properties and increased 
equity for homeowners, and would alleviate problems with local 
governments and help to promote low-income housing.
    Several of the respondents had problems with the use of the HUD 
``CAPs'' stating they were not equitable, being too high in some areas 
and too low in others and that they were inflexible and hard to change, 
providing bias to existing homeowners and Real Estate Brokers. Based on 
these comments, the Agency proposes to use 85 percent of the HUD 
mortgage limits but has incorporated procedures for increasing the CAPs 
in certain situations. Other respondents felt that the CAPs would 
result in higher priced housing which, together with market inflation, 
would result in a need for higher subsidies. One respondent felt that 
it would force lower income families into older, cheaper units.
    Based on the study done by the Agency to measure the effects of the 
use of HUD CAPs, proposed changes to the payment assistance program, 
and the use of income ratios for determining repayment ability, the 
Agency feels that the price of housing financed would be limited not 
only by the HUD CAP, but by the market value of the property as 
reflected on a current real estate appraisal, and the applicant's 
repayment ability based on the proposed income ratios and the revised 
method of granting payment assistance. The study does not indicate that 
this change will result in lower-income families being forced into 
older, cheaper units.
    Several respondents expressed concern that RHCDS programs were 
becoming more like HUD programs and that the use of the CAPs would 
result in less control for RHCDS. Many of the respondents felt that the 
use of the HUD CAPs discriminates against ``one person'' and ``large'' 
households and felt that the use of CAPs would eliminate RHCDS 
financing in some areas where the CAPs are not in line with the cost of 
housing in the area. The Agency has revised the proposal to address 
these concerns in Sec. 1944.17. There was also concern expressed 
regarding potential size and additional cost items if the definition of 
modest housing is changed. The Agency feels that increased housing 
costs will be limited due to the new method of calculating payment 
assistance.
    In accordance with the Energy Policy Act of 1992, Public Law 102-
486, the Agency has adopted the Council of American Building Officials 
(CABO) Model Energy Code, 1992 (MEC-92) for new construction of single 
family homes other than manufactured homes. The Agency has deleted 
specific loan approval authorities in the field, relying instead on the 
established HUD CAP limits adopted. In addition, the Agency has agreed 
to grant a waiver to allow the loan to exceed market value for 
handicapped-accessible homes by no more than the cost of the amenities.
    RHCDS has decided not to adopt recommendations to restrict 
financing on housing constructed prior to 1953 in order to avoid 
problems with lead based paint, provide safeguards describing minimum 
standards allowed under RHCDS financing, establish RHCDS CAPs based on 
the State Directors' knowledge of their individual areas, and require 
40 percent of very low-income housing on all conditional commitments. 
However, the Agency has provided for waivers on CAP limits under 
certain circumstances and has included a requirement that repairs 
required as a condition of loan approval will be performed, after loan 
closing, in accordance with HUD Handbook 4905-1, ``1-4 Family Living 
Units,'' (available in any RHCDS field office). The Agency will 
continue to adhere to its present requirements contained in subpart A 
of part 1924 of this chapter regarding new construction and will 
require all dwellings repaired with RH loan funds to be structurally 
sound, functionally adequate, and placed in good repair. All dwellings 
financed must still provide decent, safe, and sanitary housing.

II. The Use of Income Ratios Instead of a Family Budget for Determining 
Repayment Ability

    In the past, RHCDS has utilized a family budget to determine debt 
repayment. Twenty-one respondents commented on the proposal to 
eliminate the family budget as a determinant of repayment ability and 
instead rely on the use of income ratios similar to those used in the 
single family guaranteed housing program. Ten respondents were in favor 
of this proposal and ten opposed. The remaining respondent indicated a 
need for additional information before making a decision.
    Those respondents who supported this revision felt that adoption of 
this proposal would result in considerable [[Page 25632]] savings in 
time and effort, would provide for simplification of the eligibility 
process, would result in fewer appeals, and would eliminate 
subjectivity. In addition, there were several comments that the family 
budget is subjective in nature, difficult to defend, and useless 
without clear guidelines for individual cost items. It was generally 
felt by these respondents that adopting the use of income ratios as a 
determinate of an applicant's repayment ability would be consistent 
with industry standards and a benefit to RHCDS and loan applicants.
    Several of the respondents opposed to this measure stated that 
income ratios were not appropriate for RHCDS clientele. It was felt 
that the low- and very low-income groups that RHCDS assists live within 
their TOTAL income and not a percent of their income, and that these 
were high risk loans requiring a high degree of accuracy when 
determining repayment ability. Several respondents felt that income 
ratios would result in loans to people without repayment ability due to 
their high percentage of living expenses. Another area of concern was 
the difficulty of developing ratios which would work for households, in 
all situations, nationwide. They felt that ratios were inflexible and 
would rule out those who do not fit the mold but who have repayment 
ability, and it was feared that the use of ratios would eliminate many 
very low- and low-income families. There were recommendations that 
flexibility be built into the income ratios for adjustments where 
projected costs are equal to or less than current rent, that ``non-
income'' benefits be incorporated into the calculation, that 
compensating factors such as used by Fannie Mae be included, and that 
an allowance be provided for the lower end of the income structure.
    Two respondents suggested an in-depth study be made to analyze 
where the PITI and MOTI ratios should be set, and one respondent 
suggested combining ratios with the family budget for borderline cases 
with justification for expenses which are deemed by RHCDS to be 
abnormally low. In addition, there were several recommendations 
relative to actual ratios which should be used.
    All of these comments were taken under consideration when arriving 
at the ratios established. The study undertaken by the Agency supports 
the use of a 29 percent PITI ratio; 94 percent of existing RHCDS 
borrowers would still qualify using this ratio. The decision to use a 
29 percent ratio is supported by the fact that it is the same ratio 
used in the Agency's guaranteed housing loan program. The Agency 
proposes to establish the MOTI ratio at 41 percent. Both ratios will be 
based on the applicant's gross income.
    The Agency's experience with income ratios in the guaranteed 
housing program and the study recently conducted indicates the proposed 
system should provide consistency in determining repayment ability in a 
better, less subjective manner that will improve our underwriting 
criteria and loan portfolio and be consistent with industry standards. 
Based on the comments received and the results of the study conducted, 
the Agency has incorporated exceptions to the use of income ratios when 
repayment ratios do not support adequate repayment ability for the 
proposed loan, if the applicant can demonstrate a history of meeting 
equal or greater housing related costs in the past 6 months in similar 
financial circumstances than projected housing costs, or where the 
applicant demonstrates that the use of a budget is a better determinant 
of repayment ability than ratios for their particular circumstances. 
Income ratios proposed are contained in Sec. 1944.8(a)(3).
    Other objections to this proposal included concerns that the Agency 
would no longer be a source of supervised credit, would lose valuable 
skills in money management that are still needed for loan servicing, 
and would require additional training to adapt to the new system. The 
Agency feels that a supervisory counseling role is fundamental to its 
mission and does not foresee a change in this regard. RHCDS will 
continue to be a ``hands on'' Agency and will provide credit and 
financial counseling to suit each applicant's individual needs to 
assure the applicant's success as a homeowner. Where the applicant does 
not demonstrate adequate repayment ability, or otherwise meet loan 
making criteria, RHCDS is prepared to discuss and advise the applicant 
regarding other alternatives such as reducing amenities, increasing 
sources of income, reduction of debt load, obtaining a cosigner, or 
constructing the home by the self-help method.

III. Revision of the Payment Assistance Calculation

    RHCDS proposes to revise their method of providing ``payment 
assistance'' on new loans. As noted previously, this program was 
formerly known as ``interest credit assistance.'' Under this proposal, 
only procedures for payment assistance that will be processed in 
connection with loan processing will be included in subpart A of part 
1944. All other payment assistance and deferred mortgage payment 
actions, including renewals and other servicing actions are transferred 
to subpart G of part 1951.
(a) Existing Payment Assistance System
    Currently, RHCDS calculates the amount of payment assistance needed 
based on a formula which takes into consideration the annual real 
estate taxes and property insurance premiums to be paid by the 
applicant/borrower and their adjusted family income. Under the current 
program, a borrower pays 20 percent of the borrower's adjusted family 
income for PITI (but never less than the loan amortized at a 1 percent 
interest rate). This procedure has given the applicant little incentive 
to look for an inexpensive home since the payment by the borrower 
generally did not increase drastically as a result of a higher loan 
amount. Under this program, an applicant/borrower must have a very low- 
or low-adjusted income to initially receive payment assistance. 
However, many applicants/borrowers with acceptable income levels who 
obtain small loans, will often not qualify for payment assistance under 
the present procedure since their PITI is less than 20 percent. This 
has resulted in inequities in the system.
(b) Proposed Payment Assistance System
    As explained above, under the current method of providing payment 
assistance, many families attempting to purchase inexpensive homes are 
denied assistance if the formula does not indicate that PITI will 
exceed 20 percent of adjusted family income. Conversely, many other 
applicants, purchasing homes in the higher cost ranges, receive maximum 
payment assistance even though their incomes are often in the higher 
ranges allowable under the program. To eliminate these inequities, the 
proposed method will provide a range of equivalent rates of interest 
for all new loans (including assumptions), and subsequent loans of 
existing borrowers based on area median income, regardless of the 
amount of the loan. The chart for determining the appropriate interest 
rate paid by RHCDS applicants/borrowers on loans closed after this rule 
becomes effective, is defined in Sec. 1944.34(c). Exceptions have been 
incorporated which will provide for additional assistance where needed 
to allow very low- and low-income applicants to obtain or retain 
housing or to allow very low-, low-, or moderate-income RHCDS borrowers 
to retain housing.
    The proposed payment assistance system includes floors which are 
[[Page 25633]] minimum percentages of adjusted gross income. The floor 
for very low-income is 22 percent and for low-income is 26 percent of 
adjusted family income. A new borrower will pay PITI at the minimum 
percentage floor of adjusted gross income or at the equivalent interest 
rate, whichever is greater. For loans closed under the proposed system, 
the borrower will never pay more than the note interest rate for the 
monthly installment.
    It is intended that this proposal will encourage applicants to shop 
for a home within their repayment ability instead of relying on the 
higher cost of a home to drive the equivalent interest rate down to 1 
percent which often results under the current system of payment 
assistance.
    The interest rates established for each income level were based on 
the results of a study conducted by the Agency. The Agency ran a 
comparison between the proposed system and the old system on a control 
group in nine states. The new system will result in slightly higher 
payments for new borrowers in the higher range of income. Existing 
RHCDS borrowers who are currently receiving payment assistance, will 
continue under the system in effect prior to the effective date of this 
rule.
    Under the current system, the payment assistance agreement is 
effective for a 12-month period based on the applicant/borrower's 
projected, verified income. The Agency proposes to revise the renewal 
period for self-employed borrowers to coincide with the borrower's 
business fiscal year. The Agency also proposes to eliminate the limit 
on the amount of net family assets an applicant/borrower may have when 
qualifying for payment assistance.
(c) Responses to the Advance Notice of Proposed Rule Making
    Nineteen respondents commented on this proposal. Five of these 
comments supported the proposal, eight were opposed, and six 
respondents indicated they needed more information before deciding. 
Those respondents who supported this concept stated they felt the 
proposal would save considerable effort and time, would simplify the 
process, would be more fair, would be easier to define and defend, 
would provide an incentive to seek less costly housing, would stimulate 
the rural economy and save on subsidy, and would provide the applicant/
borrower a means to see the range of payments up front so they could 
budget future costs accordingly.
    Of those respondents who were not in support of this proposal, 
several felt that the lowest-income families would be penalized since 
they pay the largest portion of income toward housing costs and this 
method could result in families paying more than 30 percent for their 
housing costs. One respondent felt that the system would be ineffective 
in their area since median income is skewed due to a large population 
of low-income college students. Several respondents felt that the 
proposed system would be nonresponsive to individual applicant/
borrower's needs, would exclude more families than it includes, did not 
provide for an applicant/borrower's future loss of income, and could 
result in more loan failures. There were also comments that there would 
be high costs involved in retraining RHCDS employees in the new system.
    The original proposal provided that applicants/borrowers whose 
homes were located in a high cost area as established by HUD would 
automatically qualify for a reduction in their equivalent interest rate 
of 1 percent. One respondent felt that the Agency was experiencing 
problems in high cost and high real estate tax areas in the single 
family housing guaranteed program which would be intensified in the 
section 502 loan program. Several respondents were not clear how the 
additional 1 percentage point subsidy in a high cost area would help. 
The Agency has re-examined this issue and has decided to revise this 
provision by providing exception authority for a reduction in the 
equivalent rate of interest by 1 percentage point, when applicants in 
high cost areas lack repayment ability without additional payment 
assistance.
    In addition to the above, there were two recommendations for 
specific subsidy rates to be utilized. There was also a suggestion to 
calculate annual income on the basis of past earnings rather than on 
projected income. The Agency is mandated to utilize the same 
calculations for annual income as are used by HUD, therefore, this 
suggestions was not adopted. There appeared to be an opinion that once 
the equivalent interest rate was set based on the family's income at 
the time of loan approval it could never be changed downward, and that 
only applicants/borrowers living in high cost areas would be eligible 
for an equivalent interest rate of 1 percent. Neither of these 
assumptions are correct.
    There was a recommendation that RHCDS allow a change in payment 
assistance when a borrower's income increases; this will be handled 
under the sliding scale, the same as a loss of income. One respondent 
suggested a change in the recapture calculation and this regulation is 
in the process of being revised. There was a recommendation that the 
payment assistance agreement, deferral, and recapture forms be 
consolidated. The Agency has partially accepted this recommendation by 
use of a separate payment assistance/deferral/repayment form for 
applicants/borrowers receiving deferral assistance.
    We urge all readers to thoroughly review this proposal and provide 
us with their detailed recommendations for any changes suggested.

IV. Revision of the Method Used for Selection and Processing of 
Applications

    The Agency intends to streamline its method of selecting and 
processing loan applications. When this section was revised, ``Fund 
Allocation'' was included under Sec. 1944.26 and ``Application 
Processing'' was completely revised and transferred to Sec. 1944.27. 
Those instructions for application processing located in subpart A of 
part 1910 which were exclusive to Single Family Housing applications 
have been moved to subpart A of part 1944, which already contained some 
application processing instructions. This section now contains a clear 
definition of a complete RH application and guidance for dealing with 
an incomplete RH application.
    In the past, RHCDS has often required that an application package 
include a credit report fee as well as information on the house to be 
financed at the time of application, despite the fact that there were 
often large backlogs of applications on hand or a lack of loan funds. 
This resulted in delays to prospective sellers of property and the need 
for reverification of information, sometimes at additional cost. Under 
the proposed rule, RHCDS will access HUD's Credit Alert Interactive 
Voice Response System (CAIVRS) to determine if the applicant is 
delinquent on a Federal debt. If a delinquent Federal debt is 
identified through CAIVRS, processing on the application will be 
suspended and the applicant notified to contact the appropriate Federal 
agency to resolve the delinquency. 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 for loan assistance until the judgment is paid in full or 
otherwise resolved. When the delinquency has been paid in full or 
otherwise resolved, processing of the application will be continued; 
RHCDS loan funds may not be used to satisfy an outstanding judgment. If 
a judgment remains outstanding or the applicant is unable to resolve a 
Federal debt delinquency, the [[Page 25634]] application will be 
rejected and the applicant notified of the rights of appeal. In 
addition, RHCDS will order an on-line profile credit report, where 
available, on each application received. Derogative credit reported 
will be discussed with the applicant and information on the address and 
telephone number of the credit repository provided so that the 
applicant may resolve potential credit problems. Applicants will not be 
rejected on the basis of the on-line credit report; this service is 
provided for the primary purpose of allowing the applicant to identify 
potential credit problems prior to paying a fee for a credit report and 
to clarify the difference between eligibility for program assistance 
and loan approval. RHCDS will make a preliminary determination of 
eligibility upon receipt of an application based on the information 
provided on the application form and the information received as a 
result of the CAIVRS inquiry and on-line credit report. A final 
determination of eligibility will be made after the application is 
selected for processing and all information necessary to determine 
eligibility for the RH program has been verified.
    Under current regulations, the Agency assigns a processing priority 
to each application. The County Supervisor selects a number of 
applications to be processed each quarter based on assigned priority 
and availability of loan funds. The Agency has determined that this 
system does not adequately serve the neediest applicants and facilitate 
efficient loan processing.
    The Agency proposes to provide for a separate reserve of loan funds 
to be held by the State Director for priority applications. This 
reserve will include hardship cases as determined by the State 
Director, including applicants living in deficient housing, 
applications for refinancing of debts, servicing type loans to existing 
RHCDS borrowers for essential improvements or repairs, loans for the 
purchase of Government-owned inventory properties, subsequent loans in 
connection with assumptions of existing RHCDS loans, and mutual self-
help housing loans. These priority applications as well as applications 
for the purchase of Government-owned inventory property or assumption 
of existing RHCDS loans, will be processed immediately, and will not 
compete for the same pool of funds as other applications. All other 
applications will be considered for processing in date order.
    If an applicant is clearly not eligible, an applicant may be 
rejected upon receipt of the application. Applications received from 
persons who appear to meet basic eligibility requirements for the 
program will be held until funding is available. Each quarter the 
County Supervisor, with guidance from the District Office, will select 
enough applicants/borrowers to potentially fund 175 percent of the 
anticipated quarterly allotment. This figure is an administrative 
determination based on information available for applications on hand, 
percent of applications rejected and withdrawn, and number of loans 
closed per quarter. It is anticipated that almost half of the 
applications selected for processing will not be processed to the point 
of loan closing due to ineligibility, marital changes, lack of 
interest, and other reasons.
    Applicants/borrowers selected will be advised in writing that they 
have 30 days to supply information needed for verifying data submitted 
on their applications, including any fees for credit reports, so a 
final determination of eligibility can be made. Detailed guidance is 
provided regarding the means of verifying data. The proposed regulation 
continues RHCDS's general policy that written income verification is 
the preferred method of income verification. When an applicant/
borrower's eligibility for an RH loan is determined, the income 
verification must not be more than 90-days old. In addition, RHCDS will 
continue to require a copy of the applicant/borrower's most recently 
filed income tax return and will randomly spot-check reported wages 
through wage matching sources, where available, for 5 percent of all 
applications where all adult members of the household are employed 
full-time. Income for all other applicants/borrowers, including those 
with non-taxable income, will be confirmed through this source where it 
is available. Applicants/borrowers who are supposed to receive court 
ordered alimony or child support but who actually do not receive it, 
may certify that they have exhausted all efforts to collect same, and 
in such cases, the alimony/child support will not be included in the 
applicant/borrower's annual income. The applicant interview section has 
been expanded to include discussion of all new requirements such as 
income ratios, HUD CAPs, and penalties connected with providing false 
information.
    Once a final determination of eligibility has been made, the Agency 
will issue a ``Certificate of Eligibility,'' valid for 90 days, to 
eligible RH applicants who have been selected for processing. The 
applicant may take the certificate to real estate agents, builders, and 
sellers to verify eligibility for an RHCDS loan. The certificate will 
not guarantee that adequate funds are available, but is intended to 
assist applicants in locating an adequate home within their repayment 
ability and reduce application processing time. The applicant will be 
required to submit information on the dwelling to be financed within 90 
days or the application will be withdrawn unless an extension is 
granted. There will be a maximum of two 60-day extensions allowed if 
the applicant is actively working on supplying the requested 
information.
    Time guidelines for RHCDS actions have been added. Appraisals will 
generally be completed within 30 days of submission of information 
requested by RHCDS. After the appraisal is completed and required loan 
approval information has been received, a loan will usually be approved 
within 30 days. If no funding is available, it will be held as an 
approved loan until the next quarter's funding becomes available.
    Sixteen comments were received as a result of the summary of 
proposed revisions published as a Notice of Proposed Rule Making; eight 
supported the proposal, three opposed it, and five indicated they did 
not have enough information to make an evaluation. Those who supported 
the proposal felt it was a positive approach, would reduce and help 
manage backlogs of applications, would address the most urgent cases 
according to need, would result in considerable time savings and be 
less difficult to explain, and would result in greater assurance of 
fund availability for Self-Help Housing applications.
    Of those respondents who did not support this proposal, several 
felt the proposed system had potential for discrimination, that it 
would extend the selection/approval period by an additional 30 days and 
there was no provision for people living in substandard housing to be 
handled as a priority. It should be noted that the hardship reserve 
established by the State Director does include applicants living in 
substandard housing and there has been no extension of the application 
selection/approval time. The Agency finds no basis for the comment 
regarding the potential for discrimination.
    There were also comments that the Certificate of Eligibility would 
create a lot of extra work for RHCDS with little or no benefit and was 
valueless since RHCDS was the lender. The certificate will provide 
information on the maximum loan limit, the repayment 
[[Page 25635]] ratios, and the effective interest rate based on the 
applicant's projected income. It will be the responsibility of the Real 
Estate Broker, contractor, or packager to work with the applicant to 
find a suitable home that fits within the repayment parameters of the 
certificate. RHCDS feels there is little extra work created by this 
form, that it will encourage Real Estate Brokers and contractors to 
work with an applicant in finding suitable housing, and would provide 
for the orderly processing of loan applications.
    One respondent felt that 175 percent of the allocation for loan 
processing was too restrictive, and another felt that the number of 
applications processed should be left to the discretion of the State 
Director based on local conditions. The Agency states that 175 percent 
is the minimum required and is, therefore, not restrictive. It was also 
decided to make this a nationwide requirement in order to provide 
consistency in the program.
    A recommendation was made to retain the National Office's annual 
``pooling'' of loan funds; there is no plan to eliminate this 
provision. Another recommendation was made to provide for sufficient 
funds in the priority reserve pool; the proposal allows the State 
Director to determine the amount retained in this pool based on 
historical or other data available. Other suggestions included 
restricting the Certificate of Eligibility to applicants who have 
submitted all information necessary for loan processing, requiring a 
sales agreement for a completed application, and limiting the 
Certificate of Eligibility renewal to one 90-day period.
    Restricting the certificate as requested, would negate the purpose 
for the form. The information on the Certificate will assist the 
applicant to find suitable housing at a price the applicant can afford. 
Once the house is found, data necessary for an appraisal and loan 
processing is submitted to the RHCDS field office. Extensions to this 
90-day period will only be granted when the applicant presents evidence 
that the applicant is actively working on supplying the information 
requested. There will be a maximum of two 60-day extensions allowed.
    One respondent requested a definition of hardship so as to 
eliminate politics, and to include persons living in substandard 
housing as a hardship. The definition of hardship is left to the 
discretion of the State Director on a case-by-case basis but will 
include persons living in deficient housing as defined in Sec. 1944.2 
for more than 6 months. The Agency feels that it would be too 
restrictive to place a definition on what constitutes a hardship since 
it is impossible to address every situation, but a new definition for 
deficient housing has been included.
    The last comment was a suggestion to separate low- and very low-
income application processing. The Agency feels this would be too 
cumbersome and has not included this suggestion in the proposed rule.

Other Changes Proposed

    In addition to the four issues addressed in the Advance Notice of 
Proposed Rule, the Agency proposes to make the following changes in 
subpart A of part 1944 regarding single family housing loans:

General

    The section dealing with denial of loans and services on a 
discriminatory basis has been revised to include the term ``familial 
status'' as required under the Fair Housing Amendments Act of 1988. 
This section has also been revised to provide that applicants for 
assistance are required to identify any known relationship or 
association with an RHCDS employee and provides for reasonable 
accommodations for applicants with developmental disabilities as 
required under the 1988 amendments to the Fair Housing Act and the 
Americans with Disabilities Act of 1990. This revision also provides 
for the collection of fees for real estate appraisals.

Definitions

    Several new definitions have been added and some existing 
definitions have been revised to more clearly describe annual payment 
borrowers, certificate of eligibility, conditional commitment, 
cosigners, deficient housing, elderly family, existing dwellings, 
household or family, income, insurance, live-in aides, median income, 
minors, monthly payment borrowers, net family assets, payment 
assistance, and real estate taxes.

Loan Purposes

    The proposed change incorporates the provisions of Sec. 315 of the 
Housing and Community Development Act of 1987, Pub.L. 100-242, which 
added Sec. 501(i) of the Housing Act of 1949; loan funds may be used to 
pay loan packaging fees when the application is packaged by qualified 
public or private nonprofit organizations exempt under the Internal 
Revenue Code of 1986. Packaging fees are not authorized for inventory 
property sales. In addition, the cost of personal liability insurance 
for Self-Help Housing applicants/borrowers has been added as an 
authorized loan purpose. A section has also been included to allow the 
purchase of single family housing units located in Planned Unit 
Developments (PUDs) under certain conditions.

Loan Restrictions

    The restriction against income-producing property has been revised 
to more clearly define those types of home-based operations that will 
be allowed under certain conditions, such as the production of crafts, 
child care facilities, etc. Small businesses which are run from the 
home which do not require specifically designed features to accommodate 
the enterprise will not be restricted; however, housing related 
expenses which are claimed as business expense deductions for income 
tax purposes, such as real estate taxes, mortgage interest, etc., will 
not be allowed when determining income eligibility for RHCDS 
assistance.
    The restriction against packaging fees has been lifted as it 
pertains to public and private non-profit organizations. Restrictions 
regarding loans to former RHCDS borrowers who sold their homes within 
the last 2 years have been deleted. Restrictions regarding applicants/
borrowers who have demonstrated an inability to carry out the required 
obligations of the loan have been removed and transferred to the 
section dealing with other eligibility requirements.
    The Agency has further clarified that funds may not be used to 
refinance debts on a manufactured home and that loan funds may not be 
used to pay off existing RHCDS debts in lieu of an assumption.

Income

    RHCDS is required by the Housing Act of 1949, as amended, to use 
income definitions established by HUD; however, several definitions 
have been revised or added for clarification purposes. Income 
definitions have been revised to include cost of living allowances 
(COLAs) or other proposed increases in income expected to take place on 
or before loan approval, loan closing, or the effective date of the 
payment assistance agreement. Clarification has been added regarding 
allowance of deductions for verified business related expenses which 
are not reimbursed for salaried employees. Revisions have been made to 
allow the applicant/borrower to certify that court awarded alimony and/
or child support is not being received after all reasonable efforts for 
enforcing same have been exhausted. Amounts received for educational 
scholarships and allowable [[Page 25636]] deductions have been more 
clearly defined. Income which a Federal statute exempts has been 
removed from this section and transferred to exhibit J (available in 
any RHCDS field office). Income of live-in aides is defined.
    The 6-month waiting period is being removed where the spouse is 
living apart from the household and separation or divorce proceedings 
have not been initiated. The proposal clarifies that medical expenses 
anticipated for an elderly family may be for any household member.

Income Eligibility Requirements

    As noted previously, the Agency has moved from determining 
repayment ability on the basis of a budget and is relying on income 
ratios. As a result of the study conducted by the Agency, where ratios 
do not support adequate repayment for the proposed loan, exceptions to 
the use of ratios have been added where the applicant can present 
evidence of meeting similar costs in similar circumstances over the 
past 6 months or where the use of a budget is a better method of 
determining repayment ability for a particular applicant/borrower's 
circumstances. Income ratios have been defined in Sec. 1944.8(a)(3). 
The proposal also clarifies the responsibilities of a cosigner on an 
RHCDS loan.

Other Eligibility Requirements

    The Agency has included a provision that applicants will be 
expected to utilize nonessential liquid assets to reduce the amount of 
loan needed. Information on verification of alien status has been 
transferred to exhibit B (available in any RHCDS field office).
    Credit history standards have been slightly liberalized to allow up 
to two debt payments more than 30 days late within the last 12 months 
and to allow one rent payment paid 30 days or more past due within the 
last 2 years. In addition, the section dealing with outstanding 
collection accounts has been rewritten to clarify that collection 
accounts paid off within 3 months of filing an application for RHCDS 
assistance will be considered as an indicator of an unacceptable credit 
history unless there is a record of regular payments maintained prior 
to the final payment. This clarification was necessary to prohibit 
persons with unsatisfactory credit from paying off this indebtedness 
for the sole purpose of obtaining an RHCDS loan.
    Pursuant to the Federal Debt Collection Act of 1990, Pub. L. 101-
647 (Nov. 29, 1990), prohibits making a loan to an applicant/borrower 
who has a judgment which is or could become a lien against the debtor's 
property for a debt owed to the United States Government until the 
judgment is paid in full or otherwise satisfied. The RHCDS 
Administrator may waive this requirement upon making a determination 
that it is in the best interest of the Government to do so.
    In addition to referral for criminal prosecution, RHCDS plans to 
debar applicants/borrowers who have falsified applications and/or 
income information submitted to RHCDS for program eligibility purposes. 
Applicants/borrowers who have a documented history of inability to 
carry out the required obligations of a RHCDS RH loan will be denied 
assistance.

Rural Areas

    This section has been revised to require a ``buffer'' zone of open 
space incorporated as an ineligible area when new boundaries are drawn. 
Rapid growth areas and eligible areas within an Metropolitan 
Statistical Area (MSA) will be reviewed for eligibility every 3 years 
or more often as needed, instead of the 5-year review required for 
other areas. In addition, RHCDS is now required to consult with local 
planning boards, where available, at the time of each review to assure 
that open spaces identified are not scheduled for development in the 
near future. These changes are a direct result of recommendations made 
by the Office of Inspector General (OIG) during past audits.

Site Requirements

    Currently, RHCDS generally restricts financing to sites of 1 acre 
or less. Due to the large number of exceptions which have been 
requested, the Agency proposes to broaden its definition of an adequate 
site to include those sites which cannot be subdivided into two or more 
sites under current zoning ordinance requirements for the area. In 
addition, the proposal clarifies the requirements for other than 
central waste and water disposal systems, and requires a legally 
binding agreement which allows interested third parties to enforce the 
obligation of the owner/operator of privately owned water and waste/
water disposal systems to provide satisfactory service at reasonable 
rates.

Ownership Requirements

    Buyers and sellers under a recorded land purchase contract must 
convert the purchaser's interest to a deed/mortgage or trust deed 
situation prior to loan closing.
    Conditions for allowable leases are simplified and changed to 
require that unless the loan is guaranteed by a public agency or Indian 
housing authority, the remaining term of the lease must be at least 150 
percent greater than the term of the RHCDS loan. If the loan is 
guaranteed by a public agency or Indian housing authority, the 
remaining term must be at least 2 years longer than the repayment 
period of the RHCDS loan. In no case may the remaining term of the 
lease be less than 15 years.

Dwelling Requirements

    All references to modest housing, characteristics of new dwellings, 
dwelling designs and materials, prohibited features and amenities, and 
permitted features have been removed. Homes financed must still provide 
decent, safe, and sanitary housing but loan amounts will be limited to 
85 percent of the HUD established mortgage limits unless an exception 
is granted. In-ground swimming pools and income producing properties 
are still prohibited except as discussed under loan restrictions. The 
section on existing dwellings has been revised to provide for 
inspections by RHCDS or disinterested third parties. Repairs to 
existing dwellings will be done after loan closing and performed in 
accordance with HUD Handbook 4905.1, ``1-4 Family Living Units.''

Maximum Loan Amounts

    RHCDS recognizes that the revision allowing fees for appraisals as 
an authorized loan purpose will likely result in the need for loan 
funds in excess of the purchase price of the dwelling. Most applicants/
borrowers would not be expected to have the resources to pay this 
additional cost. RHCDS believes it is necessary to allow the financing 
of this fee. The Agency proposes a revision to permit loans in excess 
of the appraised value or the purchase price of the dwelling (whichever 
is less) for most program type loans.
    The loan amount may not exceed 85 percent of the maximum dollar 
limitation of section 203(b) of the National Housing Act (12 U.S.C. 
1702), unless authorized by the State Director or RHCDS Administrator. 
These amounts are the HUD established CAPs and are available from any 
HUD office. Exceptions to these loan limits are provided for where the 
existing HUD mortgage limit is insufficient to provide adequate housing 
for RHCDS applicants/borrowers or where different mortgage limits exist 
in adjoining areas of the same community. Exceptions have also been 
provided for the needs of larger families or to accommodate a disabled 
or disabled household member. [[Page 25637]] 

Security Requirements

    The section on mortgage insurance has been revised to clarify what 
is needed in State supplements when financing is provided to a holder 
of possessory rights on an American Indian reservation or State-owned 
land.
    The section on best mortgage obtainable has been revised to provide 
that title clearance and legal services required under subpart B of 
part 1927 are waived when taking a real estate mortgage to secure a 
subsequent loan to an existing RHCDS borrower for minimal essential 
repairs which are necessary to preserve the Government's security.
    The proposed regulation contains a new provision regarding the 
amount of attorney fees permitted for foreclosures on prior mortgages 
when RHCDS is requested to take a subordinate lien position. The 
current regulation prohibits the charge of a flat fee of more than 5 
percent; the proposal will limit these costs to that customary for the 
area.
    The section on life estates has been revised to provide for a 
guardian or conservator for the remainder interests of a person who is 
not legally competent. Land purchase contracts must be converted to a 
deed/mortgage situation to be considered for financing.

Refinancing Non-RHCDS Debts

    This section has been renamed and the section dealing with 
refinancing of RHCDS debts has been moved to the section dealing with 
loan restrictions. This section has been revised to clarify that 
refinancing of non-RHCDS debts is not permitted on manufactured homes. 
In addition, this section has been broadened to permit refinancing of a 
debt that is not currently delinquent when it is clear that the 
applicant will be unable to continue to maintain payments for reasons 
beyond the applicant's control, and this will likely result in the 
applicant's loss of the dwelling at an early date if the debt is not 
refinanced. The Agency has removed its restriction on the use of loan 
funds to refinance non-RHCDS debts on building sites without a dwelling 
under certain conditions.

Loans to Farm Ownership (FO), Individual Soil and Water (SW) and 
Recreation (RL) Borrowers

    This section has been removed from subpart A of part 1944 as being 
unnecessary. There are no restrictions on such loans.

Technical Services

    As noted previously, there will be an appraisal fee charged for 
each application involving an appraisal. Sales of a Government-owned 
inventory property do not require an appraisal, and, therefore, no 
appraisal fee will be charged in these cases. This fee will be the 
applicant/borrower's responsibility and may be included as a loan cost 
if the applicant/borrower chooses. Appraisals will generally be 
completed within 30 days of receipt of the information requested when 
the Certificate of Eligibility is issued to the applicant.
    The collection of appraisal fees has been waived for appraisals 
done for subsequent loans being made to existing RHCDS borrowers for 
minimal essential repairs necessary to protect the Government's 
security.
    The limit on total indebtedness necessitating a real estate 
appraisal has been raised from $7,500 to $15,000. There has also been a 
change to indicate that a real estate appraisal is not required when 
making a loan to an existing RHCDS borrower where the existing real 
estate appraisal indicates the property value is sufficient to secure 
the total real estate indebtedness when the total debt, including the 
planned loan, does not exceed the amount of the original loan.

Rates and Terms

    This section has been revised to remove the paragraph regarding the 
source of funds, reword the section on eligibility for 38-year terms, 
and remove the section dealing with Repair and Rehabilitation loans. 
Under the revised payment assistance method, there is no benefit in 
making these loans and the authority for same is removed.

Preparation of Loan Docket

    This section has been removed from the body of the instruction and 
transferred to exhibit E (available in any RHCDS field office).

Loan Approval

    Time guidelines have been included to provide that loans will 
generally be approved within 30 days of receipt of information needed 
to complete the loan docket.

Loan Closing

    This section has been revised to require that all new loans will be 
closed on a monthly basis with the exception of existing RHCDS 
borrowers who have annual payment promissory notes.

Deferred Mortgage Payments

    This section has been revised to clarify the provisions of the 
program. The Agency has increased the percentage of PITI used in the 
calculation to determine eligibility for deferred mortgage payments 
from 20 percent of adjusted family income to 29 percent of gross annual 
income. Applicants whose PITI ratio exceeds 29 percent of gross annual 
income will be considered for a longer term loan; if the PITI ratio, 
calculated at a 1 percent equivalent rate of interest for the maximum 
loan term still exceeds 29 percent of gross annual income, the 
applicant will qualify for additional subsidy in the amount of .25 
percent of the payment at the 1 percent equivalent rate of interest.

Subsequent Loans

    A requirement that a new credit report will be obtained for all 
applicants for subsequent loans has been included. Reference has been 
made to the waiver of title clearance and appraisal fees for subsequent 
loans made for essential repairs as provided in Sec. Sec. 1944.18 and 
1944.24.

Mutual Self-Help Housing

    This section has been rewritten for clarification.

Housing Demonstration Programs

    Section 1944.41 has been added to this subpart to authorize 
demonstration housing programs. In the past, demonstration programs 
have been utilized to study the effects of various ways to provide 
housing to meet the objectives of the RHCDS RH program in ways that 
could not have been accomplished otherwise based on existing 
regulations. Demonstration programs will be announced prior to 
implementation.

Conditional Commitments

    A conditional commitment is assurance by the Agency to an owner, 
qualified builder, or dealer-contractor that a dwelling offered for 
sale will be acceptable for purchase by a qualified RH loan applicant 
under specified limited conditions. In the past, commitments has been 
limited to the construction of new housing or the rehabilitation of 
existing housing. The Agency has revised this section to allow a 
conditional commitment on an existing house, with or without repairs. 
This will allow a seller of a home to obtain a conditional commitment 
prior to finding a buyer for the property.
    The loan limit for a conditional commitment is currently the 
appraised value of the property, less closing costs. Based on the 
revision of the maximum loan amount discussed previously, the Agency 
proposes to remove the requirement that the commitment amount be 
reduced by the amount of [[Page 25638]] loan closing costs. In 
addition, the Agency proposes to increase the charge for a conditional 
commitment fee to cover the cost of a real estate appraisal and 
required inspections. The holder of the conditional commitment will be 
reimbursed for the appraisal portion of the fee at the time of loan 
closing in an amount equal to the appraisal fee charged to the RHCDS 
loan applicant.
    Existing houses will be eligible for conditional commitments to 
address the needs in those areas with an abundance of existing, 
eligible housing. The restriction on 15 outstanding conditional 
commitments in any one County has been removed.
    An exception has been incorporated under certain conditions to 
allow construction to begin prior to obligation of loan funds for a 
qualified loan applicant. These exceptions will generally be limited to 
situations where it is necessary to begin construction because of 
impending weather conditions, and it is likely that funding will be 
forthcoming shortly. Under this type of exception, sales agreements 
must be modified to outline the circumstances under which the loan has 
been approved, and provide an option for the contractor to terminate 
the sales agreement if the loan is not funded and closed within 90 
days. In these situations, the conditional commitment issued on the 
property to be constructed will be honored by RHCDS for the remaining 
commitment period to allow the commitment holder the opportunity of 
finding another eligible loan applicant. The prior RHCDS loan applicant 
will be issued a Certificate of Eligibility so that the applicant may 
locate another suitable dwelling.

Rural Housing Disaster Loans and Construction Financing for Builders by 
Private Credit Sources

    These sections have been deleted from this subpart.
    Exhibits to Subpart A of Part 1944.
    The exhibits to this regulation are not required to be published. 
They contain administrative requirements and will be available at any 
RHCDS field office upon publication of the regulation.

Other Affected Regulations

    Conforming changes which are necessary to other regulations as a 
result of revisions proposed to subpart A of part 1944 will be done at 
publication of the Final Rule. Revisions were necessary to the 
following regulations as noted, due to the revisions proposed to 
subpart A of part 1944:

Subpart A of Part 1910--Receiving and Processing Applications

    Section 1910.4 has been revised to remove information on what 
constitutes a completed RH application and verification of information 
supplied with the application and to make minor editorial changes. This 
information is now contained in subpart A of part 1944 of this chapter. 
Other revisions made to conform with revisions to subpart A of part 
1944 of this chapter.

Subpart J of Part 1944--Section 504 Rural Housing Loans and Grants

    This section has been revised to provide a definition of ``owner-
occupant,'' allow payment of environmental and tax monitoring expenses 
as an authorized loan purpose, limit packaging fees to $300, and 
provide for the use of a guardian or conservator for incompetent 
applicants. When evaluating an applicant's personal resources to meet 
their housing needs, the Agency proposes to increase the limit for 
liquid assets from $5,000 to $7,500; however, excess real estate must 
be included in this evaluation. In addition, subsequent loans in areas 
where the designation has recently changed from rural to nonrural, will 
be limited to essential repairs.
    Due to the increased cost of materials and labor, the Agency has 
found it difficult to remove all major health and safety hazards under 
existing loan and grant limits. For this reason, the maximum amount of 
section 504 loan and grant assistance has been raised; the maximum loan 
outstanding to any owner/occupant may not exceed $20,000 and the 
maximum lifetime grant assistance to any owner/occupant may not exceed 
$7,500. In addition, the Agency has increased the amount of total 
indebtedness where a real estate appraisal is required to $20,000.

Subpart G of Part 1951--Borrower Supervision, Servicing, and Collection 
of Single Family Housing Loan Accounts

    A new section has been added for payment assistance. Corrections, 
renewals, and cancellations of payment assistance agreements and 
payment assistance granted as a servicing action on existing loans will 
be handled under this section.
    Clarification has been added regarding the preparation of payment 
assistance agreements for applicants/borrowers who claim to have no 
income and situations where the coapplicant/coborrower has left the 
dwelling due to domestic discord.
    While loans may be made only to low- or very low-income applicants 
who will receive payment assistance, this assistance will also be 
available to existing RHCDS borrowers with incomes that do not exceed 
the moderate income limit. Corrections on existing agreements will be 
processed when information is available to indicate a change in family 
income that would change the amount of authorized payment assistance in 
accordance with Sec. 1944.34(c). Applicants/borrowers will be required 
to present a copy of their most recently filed federal income tax 
return unless exempted from filing a return.

Subpart C of Part 1965--Security Servicing for Single Family Rural 
Housing Loans

    Minor changes have been made to bring this instruction into line 
with proposed changes to subpart A of part 1944 relative to minimum 
adequate sites and modest housing.

List of Subjects in 7 CFR Parts 1910, 1944, 1951, and 1965

    Accounting servicing, Administrative practice and procedure, Aged, 
Applications, Credit, Grant programs--Housing and community 
development, Home improvement, Loan programs--Housing and community 
development, Housing standards, Low- and moderate-income housing, Low- 
and moderate-income housing--rental, Low- and moderate-income housing--
Servicing, Marital status discrimination, Mobile homes, Mortgages, 
Nonprofit organizations, Rural areas, Rural housing, Sex 
discrimination, Subsidies.

    Therefore, as proposed, Chapter XVIII, Title 7, Code of Federal 
Regulations is amended as follows:

PART 1910--GENERAL

    1. The authority citation for part 1910 continues to read as 
follows:-

    Authority: 7 U.S.C. 1989, 42 U.S.C. 1480, 5 U.S.C. 301.

Subpart A--Receiving and Processing Applications

    2. Section 1910.4 (a) is revised to read as follows:


Sec. 1910.4  Processing applications.

* * * * *
    (a) Completed RH applications. Completed applications are those as 
described in Sec. 1944.27 of subpart A of part 1944 (copies available 
in any RHCDS field office), and all applications for Rural Housing 
loans will be processed as outlined in that instruction.
* * * * * [[Page 25639]] 
    3. Section 1910.5 is amended by revising the reference 
``1944.4(c)'' to read ``1944.9.'' in the last sentence of paragraph 
(c)(6) and by adding a new paragraph (e) to read as follows:


Sec. 1910.5  Evaluating applications.

* * * * *
    (e) Delinquency on a Federal debt. The Department of Housing and 
Urban Development's Credit Alert Interactive Voice Response System 
(CAIVRS) will be used to help determine if an applicant is delinquent 
on any Federal debt.


Sec. 1910.6  [Amended]

    4. Section 1910.6(g) is amended in the first sentence by revising 
the words ``Rural Housing'' to read ``RH'' and by revising the 
reference ``Sec. 1944.26'' to read ``Sec. 1944.27.''

PART 1944--HOUSING

    7. The authority citation for part 1944 continues to read as 
follows:

    Authority: 7 U.S.C. 1989, 42 U.S.C. 1480, 5 U.S.C. 301.

    8. Subpart A of part 1944 is revised to read as follows:
Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and 
Authorizations
Sec.
1944.1  General.-
1944.2  Definitions.
1944.3  Loan purposes.-
1944.4  Loan restrictions.
1944.5  Annual income.
1944.6  Adjusted annual income.-
1944.7  [Reserved]-
1944.8  Income eligibility requirements.-
1944.9  Other eligibility requirements.-
1944.10  Rural area designation.-
1944.11  Site requirements.-
1944.12-1944.14  [Reserved]-
1944.15  Ownership requirements.-
1944.16  Dwelling requirements.-
1944.17  Maximum loan amounts.-
1944.18  Security requirements.-
1944.19-1944.21  [Reserved]-
1944.22  Refinancing non-RHCDS debts.-
1944.23  [Reserved]
1944.24  Technical services.-
1944.25  Rates and terms.
1944.26  Fund allocation.
1944.27  Application processing.-
1944.28-1944.30  [Reserved]
1944.31  Loan approval.
1944.32  [Reserved]
1944.33  Loan closing.-
1944.34  Payment assistance.
1944.35  Deferred mortgage payments.-
1944.36  [Reserved]
1944.37  Subsequent section 502 RH loans.-
1944.38  Mutual Self-Help Housing.-
1944.39  RH loans to RHCDS employees and loan closing officials.-
1944.40  [Reserved]-
1944.41  Housing demonstration programs.
1944.42-1944.44  [Reserved]
1944.45  Conditional commitments.-
1944.46  Appeals.
1944.47-1944.48  [Reserved]
1944.49  FmHA Instructions.
1944.50  [Reserved]

Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and 
Authorizations


Sec. 1944.1  General.

    This Subpart sets forth the policies and procedures and delegates 
authority for making section 502 Rural Housing (``RH'') loans to 
individuals under title V of the Housing Act of 1949, as amended. The 
objective of section 502 RH loans is to provide eligible persons who 
will live in rural areas with an opportunity to own adequate but 
modest, decent, safe, and sanitary dwellings and related facilities. 
The requirements of subpart E of part 1901 will be applied as 
appropriate. Loans and services provided under this subpart shall not 
be denied to any person or applicant based on race, sex, national 
origin, color, religion, marital status, familial status, age, physical 
or mental disabled (applicant must possess the capacity to enter into a 
legal contract for services or have a court appointed guardian/
conservator empowered to obligate the applicant in real estate 
matters), receipt of income from public assistance, or because the 
applicant/borrower has, in good faith, exercised any right under the 
Consumer Protection Act.
    (a) In compliance with the 1988 amendments to the Fair Housing Act 
and the Americans with Disabilities Act of 1990, reasonable 
accommodations must be given to individuals who are developmentally 
disabled so that they have the opportunity to become successful 
homeowners. When an applicant or an applicant's representative 
indicates the existence of a disability during the loan process, e.g. 
by requesting the Rural Housing and Community Development Service 
(RHCDS) disability deduction to income due to mental or physical 
disability or through verification of income from a Federal or state 
government source because of mental or physical disability, RHCDS must 
ask the applicant or the applicant's representative what reasonable 
accommodations should be made in order for the loan to be processed. 
The reasonable accommodation request must be provided to RHCDS by the 
applicant or the applicant's representative. Reasonable accommodations 
can include allowing a court appointed guardian or conservator to 
execute appropriate loan making and loan closing documents on behalf of 
the applicant; the court order must show that the guardian/conservator 
has the power and responsibility to obligate the applicant in real 
estate matters and a copy of the court order must be made a part of the 
loan docket.
    (b) 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.
    (c) RHCDS will collect fees for credit reports, real estate 
appraisals, and conditional commitment applications when appropriate. 
RHCDS may use its own employees or other agents or institutions in 
carrying out its responsibilities under this subpart.


Sec. 1944.2  Definitions.

    The following definitions apply to this subpart:
    Annual payment borrowers. Borrowers who signed promissory notes 
providing for annual payments, including borrowers converted to monthly 
payments through the use of Form FmHA 1951-34, ``Direct Payment Plan 
Change.''
    Certificate of Eligibility. Certificate issued by RHCDS to 
applicants who have received a final determination of eligibility after 
verification of all income. Applicants can present this to real estate 
agents, builders and sellers to provide their eligibility 
documentation.
    Conditional Commitment. Assurance from RHCDS, in exchange for a 
specific fee, to an owner, qualified builder, or dealer-contractor that 
a dwelling offered for sale will be acceptable for purchase by a 
qualified RH loan applicant under specified limited conditions.
    Cosigner. A party who joins in the execution of a promissory note 
to compensate for any deficiency in the borrower's repayment. The 
cosigner becomes jointly liable to comply with the terms of the note in 
the event of the borrower's default, but is not entitled to any 
interest in the security or borrower rights. If the security is 
transferred to the cosigner, the cosigner may assume the RHCDS 
indebtedness on program or nonprogram terms, as applicable.
    Deficient housing. A dwelling which meets one or more of the 
following conditions:
    (1) Lacks complete plumbing; i.e. no bathtub or shower, wash basin, 
flush toilet, or hot running water for the exclusive use of the 
occupant; [[Page 25640]] 
    (2) Lacks adequate heating;
    (3) Is physically deteriorated or structurally unsound; i.e. roof 
leaks, falling plaster or sheetrock, extensive termite or wood rot 
damage, dangerous electrical service; or
    (4) Overcrowding situations which will be corrected after loan 
closing; i.e. more than 2 persons per bedroom.
    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 his/her 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 any 
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:
    (1) Is attributable to a mental or physical impairment or 
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 three 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,
    (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.
    Elderly family. An elderly family consists of one of the following:
    (1) A person who is the head, spouse or sole member of a family 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 persons who are living together, at least one of 
whom is age 62 or older, disabled and who is the applicant/borrower or 
coapplicant/coborrower; or
    (3) In the case of a family where the deceased borrower, 
coborrower, or spouse, was at least 62 years old, disabled, the 
surviving household member shall continue to be classified as an 
``elderly family'' for the purpose of determining adjusted income even 
though the surviving member or 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 the death; and,
    (ii) If one of the surviving family 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 the death of the deceased family member, the 
dwelling was financed under title V of the Housing Act of 1949.
    Equivalent interest rate. The interest rate charged under payment 
assistance. It is determined by a comparison of the borrower's adjusted 
annual income to the median income for the area where the security 
property is located, based on income figures published by the 
Department of Housing and Urban Development (``HUD'') as reflected in 
exhibit C (available in any RHCDS field office).
    Existing dwelling. A dwelling which is:
    (1) More than 1 year old; or
    (2) Less than 1 year old but the dwelling is covered by an approved 
10-year warranty plan as described in subpart A of part 1924 and the 
contractor provides complete plans and specifications, together with a 
certification that construction was completed in compliance with said 
plans and specifications, applicable building codes, and thermal 
performance standards (``TPS'') for new construction. In addition, the 
contractor must provide evidence that the contractor meets any 
licensing requirements in the state and is an approved builder in good 
standing under the approved 10-year warranty plan.
    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 
would be parents living with their adult children.
    Farm. Includes the total acreage of one or more tracts of land 
which:
    (1) Is owned by the applicant/borrower;
    (2) Is operated as a single unit;
    (3) Is in agricultural production; and
    (4) Annually will produce agricultural commodities for sale and 
home use with a gross annual value equivalent to $400 in 1944.
    Full-time student. A person who is carrying a subject load that is 
considered full-time for day students (excluding correspondence 
courses) under the standards and practices of the educational 
institution attended. An educational institution includes a vocational 
school with a diploma or certificate program, as well as an institution 
offering a college degree.
    Household or family. The applicant/borrower, coapplicant/
coborrower, and all other persons who will make the applicant/
borrower's dwelling their primary residence for all or part of the next 
12 months (excluding foster children placed in the home and live-in 
aides). Children who are members of the family, but have been removed 
and placed in foster care, will be counted as residents of the 
household. Children who are subject to a joint custody agreement and 
live in the unit at least 50 percent of the time are considered to be 
household members.
    Income. Income limits (the definitions of which are included below 
in order from the lowest to the highest) are contained in exhibit C 
(available in any RHCDS field office).
    (1) Very-low income. An adjusted annual income that does not exceed 
the very low-income limit according to size of household as established 
by HUD for the county or Metropolitan Statistical Area (``MSA'') where 
the property is or will be located.
    (2) Low-income. An adjusted annual income greater than the very 
low-income limit but that does not exceed the low income limit 
according to size of household as established by HUD for the county or 
MSA where the property is or will be located.
    (3) Moderate-income. An adjusted annual income greater than the 
low-income limit but that does not exceed the maximum limit for 
moderate-income households.
    (4) Above moderate-income. An adjusted annual income that exceeds 
the maximum limit for moderate-income households.
    Insurance. The insurance required by RHCDS as a condition of loan 
approval, including fire and extended coverage [[Page 25641]] insurance 
and flood insurance when applicable.
    Live-in aides. Persons living in the household for the sole purpose 
of providing essential care and well being for an elderly, or disabled 
household member. Live-in aides cannot be related to a household member 
and would not be living in the unit except to provide essential 
supportive services.
    Median income. An adjusted median annual income for the size of 
household as established by HUD for the county or MSA where the 
property is or will be located.
    Metropolitan Statistical Area (MSA). MSAs are defined according to 
a set of detailed standards prepared by the Federal Committee on MSAs. 
An area qualifies as an MSA if it contains a city of at least 50,000 
population or an urbanized area of at least 50,000 with a total 
metropolitan population of at least 100,000. MSAs are defined in terms 
of entire counties, except in the six New England states where they are 
defined in terms of cities and towns. An MSA may also include 
additional counties having strong economic and social ties to the 
central county. The term Standard Metropolitan Statistical Area (SMSA) 
was in use prior to the June 30, 1983, effective date of the MSA 
terminology.
    Minor. For the purposes of determining adjusted annual income, this 
definition is restricted to persons under 18 years of age. Neither the 
head of household nor spouse may be counted as a minor. Foster children 
are not counted as minors for determining annual or adjusted annual 
income.
    Monthly payment borrowers. Borrowers who signed promissory notes 
providing for payment of monthly installments.
    Net family assets. Include:
    (1) The value of equity in real property (other than the dwelling 
or site); cash on hand; savings; checking accounts; demand deposits; 
and the market value of stocks, bonds, and other forms of capital 
investments, including voluntary retirement plans that are accessible 
to the applicant/borrower such as individual retirement accounts 
(IRAs), 401(k) plans, and Keogh accounts, as well as amounts that can 
be withdrawn from other retirement and pension funds without retiring 
or terminating employment, but exclude:
    (i) Interests in American Indian trust land,
    (ii) Cash on hand which will be used to reduce the amount of the 
loan,
    (iii) The value of necessary items of personal property such as 
furniture and automobile,
    (iv) 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
    (v) The value of a trust fund that has been established where the 
trust is not revocable by, or under the control of, any member of the 
household, so long as the fund continues 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 therefor. In the case of a disposition as part 
of a separation or divorce settlement, the disposition shall not be 
considered to be for less than fair market value if the household 
member receives important consideration not measurable in dollar terms.
    Nonfarm tract. A parcel of land that is not a farm and is located 
in a rural area, or a building site that is part of a farm, and which 
secures an RH loan in accordance with Sec. 1944.18(b)(10).
    Place. An area containing a concentration of inhabitants within a 
determinable unincorporated area.
    Real estate taxes. Real estate taxes mean the amount of real estate 
taxes and assessments estimated to be due and payable on the dwelling 
and the dwelling site, reduced by the amount of any tax exemption 
available to the borrower, regardless of whether such an exemption is 
actually claimed. Tax exemptions may include such things as homestead 
exemptions, special exemptions for low-income families, senior 
citizens, veterans, and others.
    Rehabilitation. Major repairs and improvements to existing 
dwellings such as the installation or completion of bathroom 
facilities, installation of major items of equipment, additions, or 
structural changes.
    Senior citizen. Is a person who is 62 years of age or older.
    Town. Is a municipality similar to a city but does not include a 
New England-type town which resembles a township or county in most 
States.
    Urban area. Either a town, village, city, place, or any associated 
combination thereof which, with the immediately adjacent densely 
settled areas, has a population in excess of the limits prescribed in 
1944.10 (a)(2)(i) and (ii).


Sec. 1944.3  Loan purposes.

    (a) A loan may be made to an eligible applicant/borrower for the 
following purposes:
    (1) To buy, build, rehabilitate, improve, or relocate a dwelling 
and provide related facilities for use by the applicant/borrower as a 
permanent residence.
    (2) To buy, build, rehabilitate, improve, or relocate a dwelling, 
and provide related facilities for a farm owner to provide housing to 
be occupied by the farm manager, tenants, sharecroppers, or farm 
laborers.
    (3) To refinance secured debts or unsecured debts as provided in 
Sec. 1944.22, except for manufactured homes.
    (b) A loan made under paragraph (a) (1) or (2) of this section may 
be used to:
    (1) Purchase, in fee title, a minimum adequate site, as outlined in 
Sec. 1944.11 on which the improvements are or will be located, if the 
applicant/borrower does not own an adequate site.
    (2) Pay reasonable acquisition costs for a leasehold interest in a 
minimum adequate site at the time of making the initial RH loan.
    (3) Provide an adequate and safe water supply or an adequate waste/
water disposal facility.
    (4) Provide site preparation, including grading, foundation 
plantings, seeding or sodding of lawns, trees, walks, yard fences, and 
driveways to building sites.
    (5) Purchase and install essential equipment in the dwelling 
including items such as a range, refrigerator, clothes washer or 
clothes dryer, if these items are normally sold with dwellings in the 
area, and if purchase of these items is not the primary purpose of the 
loan.
    (6) Provide special design features or equipment when necessary 
because of physical disability of the applicant/borrower or of a member 
of the household.
    (7) Purchase and install approved energy saving measures and 
approved furnaces and space heaters which use a type of fuel that is 
commonly used, and is economical and dependably available.
    (8) Provide storm cellars and similar protective structures.
    (9) Pay incidental expenses such as legal fees, costs of title 
clearance, and loan closing services; appraisal, surveying, 
environmental, tax monitoring, and other technical services; personal 
liability insurance fees for self-help housing borrowers; and 
incidental expenses authorized in exhibit G (available in any RHCDS 
field office).
    (10) Pay lender fees and points in connection with participation 
loans, (except as provided in Sec. 1944.4), which are customary, 
reasonable, and do not exceed the amount typical for the area.
    (11) Pay reasonable connection fees for utilities such as water, 
sewer, electricity and gas, which are required [[Page 25642]] to be 
paid by the borrower and which cannot be paid from other funds.
    (12) Pay the borrower's share of Social Security taxes for labor 
hired by the borrower in connection with making the planned 
improvements.
    (13) Pay real estate taxes which are due and payable on the 
building and site owned by the applicant at the time of closing an 
initial loan, if this amount is not a part of the loan.
    (14) Establish escrow accounts for the payment of real estate taxes 
or property insurance premiums in those States where the use of escrow 
accounts is authorized by the National Office.
    (15) Provide living area for all members of the applicant/
borrower's household, including ``extended family.''
    (16) Finance the purchase of single family housing units located in 
a Planned Unit Development with a Homeowners' Association that has 
employed professional management, with prior National Office approval.
    (17) Pay fees for the development and packaging of loan 
applications and related actions to public and private nonprofit 
organizations which are tax exempt under the Internal Revenue Code of 
1986 (except when restricted under Sec. 1944.4) when:
    (i) The loan has been packaged in accordance with exhibit A to FmHA 
instruction 1944-A (available in any RHCDS field office) and the 
limitations of Sec. 1944.17, and
    (ii) The charges are reasonable considering:
    (A) The amount and purpose of the assistance,
    (B) The repayment ability of the recipient, and
    (C) The cost of similar services in the same or a similar rural 
area.--
    (iii) The State Director may issue a State Supplement outlining 
what is considered a reasonable amount for his/her jurisdiction.


Sec. 19 44.4  Loan restrictions.

    Loan funds may not be used to:
    (a) Make a new loan to pay off existing RHCDS debts in lieu of a 
transfer with assumption.
    (b) Refinance:
    (1) RHCDS debts, except as authorized under Sec. 1951.318.
    (2) Debts on a manufactured home.
    (c) Purchase or improve income-producing land, or buildings to be 
used principally for income-producing purposes, or buildings not 
essential for RH purposes, or buy or build buildings which are either 
largely, or in part, specifically designed to accommodate a business or 
income-producing enterprise. (Home based operations such as child care, 
home/beauty product sales, the production of crafts, etc., that do not 
require specifically designed features to accommodate the enterprise, 
are not restricted under this subpart; however, housing related 
expenses such as mortgage interest, real estate taxes, and insurance, 
which may be claimed as business expense deductions for income tax 
purposes, will not be allowed when determining annual income for RHCDS 
assistance.)
    (d) Pay fees, charges, or commissions, such as finders' fees, fees 
for packaging the application (except as provided in Sec. 1944.3), or 
placement fees for the referral of a prospective applicant to RHCDS.
    (e) Pay packaging fees (as provided under Sec. 1944.3) for the 
purchase of an RHCDS inventory property or where the packager is 
receiving a grant under subpart B of part 1944.
    (f) Improve the entry of a homestead entryman or desert entryman 
prior to receipt of patent.
    (g) Finance manufactured homes which are not constructed and 
installed in accordance with exhibit F to FmHA instruction 1944-A and 
exhibit J of subpart A of part 1924. (Both exhibits are available in 
any RHCDS field office.)


Sec. 1944.5  Annual income.

    Annual income determinations will be thoroughly documented in the 
case file. Historical data based on the past 12 months or last fiscal 
year may be used if a determination of expected income cannot logically 
be made. Annual income will be calculated as follows: -
    (a) Current verified income, either part-time or full-time, 
received by the applicant/borrower and all adult members of the 
household including the spouse is derived by multiplying:
    (1) An hourly wage by 2080 hours (for part-time employment use 
anticipated annual hours); or
    (2) A weekly wage by 52 weeks; or
    (3) A biweekly wage by 26 weeks; or
    (4) A monthly wage by 12 months.
    (b) If the spouse or 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 projected unless the applicant/borrower or 
the person involved signs a statement that the person is not presently 
employed and does not intend to resume employment in the foreseeable 
future, or, if payment assistance is involved, during the term of the 
payment assistance agreement.
    (c) Income from such sources as seasonal work of less than 12 
months duration, commissions, overtime, bonuses, and unemployment 
compensation will be computed as the estimated annual amount of such 
income for the ensuing 12 months. Temporary income such as unemployment 
benefits, worker's compensation, etc., will be projected over 12 months 
when computing payment assistance on an annual basis. Historical data 
based on the past 12 months may be used if a determination of expected 
income cannot logically be made.
    (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 
compensations for personal services of all adult members of the 
household. If a cost of living allowance or a proposed increase in 
income has been estimated to take place on or before loan approval, 
loan closing, or the effective date of the payment assistance 
agreement, it will be included as income.
    (2) The net income from the operation of a farm, business, or 
profession. The following provisions apply:
    (i) Expenditures for business or farm expansion, capital 
improvements, or payments of principal on capital indebtedness shall 
not be used as deductions in determining income. A deduction is allowed 
in the manner prescribed by Internal Revenue Service (IRS) regulations 
only for interest paid in amortizing capital indebtedness.
    (ii) Farm and nonfarm business losses are considered ``0'' 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 actually 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 is allowed for verified business expenses, such as 
lodging, meals, and fuel, for overnight business trips made by salaried 
employees, such as long-distance truck drivers, who must meet these 
expenses without reimbursement.
    (vi) Housing related expenses for the property being financed such 
as [[Page 25643]] mortgage interest, real estate taxes, and insurance, 
which may be claimed as business expense deductions for income tax 
purposes, will not be deducted from annual income.
    (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. 1944.2, 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, as determined by 
RHCDS.
    (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. Amounts 
received from the United States Government which are attributable to 
underpayment of benefits for one or more prior months shall be excluded 
in the calculation of annual income as provided in 42 U.S.C. 1382b.
    (5) Payments in lieu of earnings, such as unemployment and 
disability compensation, worker's compensation, and severance pay.
    (6) Public assistance except as indicated in exhibit J to FmHA 
instruction 1994-A (available in any RHCDS field office).
    (7) Periodic allowances, such as:
    (i) Alimony and child support awarded in a divorce decree or 
separation agreement, unless the applicant/borrower certifies the 
payments are not received, and the applicant/borrower provides 
documentation to RHCDS that a reasonable effort has been made to 
collect the payments through the official entity responsible for 
enforcing such payments; 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 Veterans 
Administration (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 spouse, whether or not that family member 
lives in the home.
    (e) The following are not included in annual income but will be 
considered in determining repayment ability:
    (1) Income over $1,000 from employment of minors (including foster 
children) under 18 years of age. The applicant/borrower, coapplicant/
coborrower, or spouse may never be considered minors.
    (2) Payments received for the care of foster children.
    (3) The income of an applicant/borrower's spouse, when the spouse 
has been living apart from the applicant/borrower (for reasons other 
than military or work assignment), or court proceedings for divorce or 
legal separation have been commenced.
    (4) Casual, sporadic, or irregular cash gifts.
    (5) Lump-sum additions to family assets such as inheritances, 
capital gains, insurance payments included under 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) The full amount of student financial assistance paid directly 
to the student or to the educational institution;
    (8) Reparation payments paid by a foreign government arising out of 
the Holocaust. If an applicant for an RHCDS loan was deemed ineligible 
because the applicant's income exceeded the low income (moderate income 
for guaranteed loans) because of the applicant's Nazi persecution 
benefits, the RHCDS approval official should notify the applicant to 
reapply for a loan.
    (9) Any earned income tax credit will not be counted as part of 
annual income, but will remain part of the applicant's income for 
purposes of repayment ability.
    (10) Any other revenue which a Federal statute exempts shall not be 
considered income or used as a basis for determining eligibility for an 
RHCDS loan, payment assistance, or denying or reducing Federal 
financial assistance or benefits to which the recipient would otherwise 
be entitled. For information on additional financial assistance which 
is considered exempt income under Federal statutes, refer to exhibit J 
(available in any RHCDS field office).
    (f) Income of live-in aides as described in Sec. 1944.2, will not 
be counted when calculating annual income and will not be considered in 
determination of repayment ability.


Sec. 1944.6  Adjusted annual income.

    Adjusted annual income is annual income as determined in 
Sec. 1944.5 less the following:
    (a) A deduction of $480 for each member of the family residing in 
the household, as defined by Sec. 1944.2, other than the applicant/
borrower, coapplicant/coborrower, or spouse who is:
    (1) Under 18 years of age; or
    (2) Eighteen years of age or older and is disabled as defined in 
Sec. 1944.2; or
    (3) A full-time student aged 18 or older.
    (b) A deduction of $400 for any elderly family as defined in 
Sec. 1944.2.
    (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/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.
    (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. 1944.2. This includes medical expenses, for any household member, 
the applicant/borrower anticipates incurring over the ensuing 12 months 
which are not covered by insurance. Examples of medical expenses are 
dental expenses, prescription medicines, medical insurance premiums, 
eyeglasses, hearing aids and batteries, the cost of home nursing care, 
the costs of transportation to and from medical treatment, monthly 
payments on accumulated major medical bills, and cost of 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.


Sec. 1944.7  [Reserved]


Sec. 1944.8  Income eligibility requirements.

    (a) Repayment Ability. An applicant/borrower is eligible for a 
section 502 RH [[Page 25644]] loan only if the following requirements 
are met:
    (1) Income limit. The adjusted annual income as defined in 
Sec. 1944.6 at the time of loan approval does not exceed the applicable 
income limit in exhibit C to FMHA instruction 1944-A (available in any 
RHCDS field office).
    (2) Adequate and dependable income. The applicant/borrower (and 
coapplicant/coborrower, if applicable), has adequate and dependably 
available income. The determination of income dependability will 
include consideration of the applicant/borrower's past history of 
annual income and/or the history of the typical annual income of others 
in the area with similar types of employment. Such income must be 
sufficient to meet the income ratios described in Sec. 1944.8(a)(3), as 
modified by Sec. Sec. 1944.34 and 1944.35.
    (3) Determining repayment ability. In considering whether the 
applicant/borrower has adequate repayment ability, RHCDS must calculate 
the principal, interest, taxes, and insurance (PITI) and monthly 
obligation to income (MOTI) ratios. The PITI ratio is calculated by 
dividing the monthly PITI for the proposed loan (less any payment 
assistance for which the applicant/borrower may qualify) by the gross 
monthly family income. The MOTI ratio is calculated by dividing the 
applicant/borrower's monthly obligations by total gross monthly family 
income.
    (i) Monthly obligation consists of the PITI for the proposed loan 
(less any payment assistance for which the applicant/borrower may 
qualify), homeowner and other assessments, and long term obligations. 
Long term obligations include those obligations such as alimony, child 
support, child care, and other obligations with a remaining repayment 
period of more than 6 months, other shorter term obligations that are 
considered to have a significant impact on repayment ability, plus 5 
percent of the current balance on all revolving credit cards.
    (ii) Income, for the purpose of determining these ratios, includes 
the total gross monthly income of the applicant/borrower, coapplicant/
coborrower, and any other member of the household who will be a party 
to the note, including any income that may be excepted under 
Sec. 1944.5.
    (iii) The applicant/borrower is considered to have repayment 
ability when the proposed PITI and MOTI ratios are less than or equal 
to a PITI ratio of 29 percent and a MOTI ratio of 41 percent as defined 
in Sec. 1944.8(a)(3). Applicants whose PITI ratio exceeds the ratio 
shall be considered for deferred mortgage assistance as provided in 
Sec. 1944.35.
    (iv) When the ratios do not support repayment of the proposed loan, 
at the applicant/borrower's request, RHCDS may make an exception to the 
above income ratio calculations under the following circumstances or 
compensating factors:
    (A) When the applicant presents documented evidence of having met 
housing related costs in the past 6 months that are equal to or greater 
than the projected housing costs after approval of the proposed loan. 
These housing costs must have been maintained when the applicant's 
household income was equal to or less than the current annual income, 
and the applicant's household debt load was equal to or greater than 
the current debt load. Projected housing costs will include the RHCDS 
monthly payment after application of any payment assistance for which 
the applicant may qualify, projected real estate taxes and assessments, 
premiums for required property and/or flood insurance, estimated 
utility and maintenance costs, and any other costs expected to be 
incurred with home ownership.
    (B) When the applicant/borrower presents evidence that, due to 
unusual circumstances a budget form should be utilized to determine 
repayment ability in lieu of repayment ratios. In these circumstances, 
a budget will be prepared jointly between RHCDS and the applicant/
borrower to determine the applicant/borrower's repayment ability.
    (b) Additional coapplicant. Applicants/borrowers applying who do 
not meet the requirements of paragraph (a)(2) of this section will be 
considered ineligible unless other adults in the household have 
adequate income and wish to join in the application as a coapplicant. 
The combined incomes and obligations shall then be considered in 
determining repayment ability.
    (c) Cosigner. RHCDS will also consider the use of a cosigner when 
the applicant/borrower applying for assistance does not meet the 
requirements of paragraph (a)(2) of this section. Cosigners must have 
adequate and dependably available income sufficient to repay any 
deficit in the applicant/borrower's repayment ability. Cosigners are 
subject to the same determination of repayment ability outlined in 
paragraph (a)(3) of this section as the applicant/borrower, with the 
amount of the applicant/borrower's repayment deficiency considered as 
part of the cosigner's PITI ratio. The cosigner may be an individual or 
an entity but may not be a member of the applicant/borrower's 
household.


Sec. 1944.9  Other eligibility requirements.

    In addition to the income eligibility requirements of Sec. 1944.8 
the applicant/borrower must:
    (a) Qualify as one of the following:
    (1) A person who does not own a dwelling (except for refinancing 
purposes), or owns a dwelling which is not structurally sound, 
functionally adequate, or large enough to accommodate the needs of the 
applicant/borrower, or,
    (2) A farmowner without decent, safe, and sanitary housing for the 
farmowner's own use or for the use of farm tenants, sharecroppers, farm 
laborers, or farm manager.
    (b) Be without sufficient resources to provide the necessary 
housing or related facilities, and be unable to secure the necessary 
credit from other sources upon terms and conditions which the 
applicant/borrower could reasonably be expected to fulfill. If the 
applicant/borrower has only an undivided interest in the land to be 
improved, those co-owners whose execution of the mortgage is required 
under Sec. 1944.18(b)(8) must also be unable to provide the improvement 
with their own resources or obtain the necessary credit elsewhere, 
either individually or jointly with the applicant/borrower. Applicants/
borrowers are expected to reduce the need for loan funds by utilizing 
available nonessential assets and/or cash on hand; however, IRAs, SEPs, 
401(k) plans, and similar personal retirement accounts do not have to 
be liquidated when considering other resources. Reasonable reserves may 
be retained for unforeseen events.
    (c) Be a natural person (individual) who resides as a citizen in 
any of the 50 states, the Commonwealth of Puerto Rico, the U.S. Virgin 
Islands, Guam, American Samoa, the Commonwealth of the Northern 
Marianas, the Federated States of Micronesia, the Republic of Palau, or 
the Republic of the Marshall Islands, or a noncitizen who resides in 
one of the foregoing areas after being legally admitted for permanent 
residence or on parole. An applicant who indicates that the applicant 
is not a United States citizen on the application is required to submit 
evidence that the applicant has been lawfully admitted to the country 
as a permanent resident. Exhibit B (available in any RHCDS field 
office) provides additional information for evaluating alien status for 
these applicants. Verification is only required when the applicant 
indicates the applicant is not a U.S. citizen.
    (d) Possess legal capacity to incur the loan obligation (or have a 
court appointed guardian/conservator who is [[Page 25645]] empowered to 
obligate the applicant in real estate matters), and have reached the 
legal age of majority in the state, or have had the disability of 
minority removed.
    (e) Have the potential ability to personally occupy the home on a 
permanent basis. Due to the probability of moving after graduation, 
full-time students will not be granted loans unless:
    (1) The applicant intends to make the home a 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 and to sign checks for 
work performed.
    (f) 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 RHCDS determines that the cause was beyond the 
applicant/borrower's control (except for Federal judgments described in 
paragraph (f)(1)(i) of this section), and satisfies the criteria in 
paragraph (f)(3) of this section:
    (i) 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 for any loan or 
grant until the judgment is paid in full or otherwise satisfied. RHCDS 
loan or grant funds may not be used to satisfy the judgment. Questions 
regarding whether or not a judgment is still outstanding should be 
directed to the Office of the General Counsel. The Administrator may 
waive the rejection of an application based on verification of an 
outstanding Federal judgment upon specific determination that it is in 
the best interest of the Government to do so. Verification of 
delinquent Federal debt and processing of applications with such debt 
must comply with Sec. 1944.27(b)(4).
    (ii) Incidents of more than two secured or unsecured debt payments 
being more than 30 days late if the incidents have occurred within the 
last 12 months. This includes more than two late payments on a single 
account. Instances of more than two late payments may be waived in the 
event that the RHCDS loan will result in a significant reduction in 
shelter costs, which will contribute to improved debt payment ability.
    (iii) Loss of security due to a foreclosure if the foreclosure has 
been completed within the last 36 months.
    (iv) An outstanding IRS tax lien.
    (v) Other outstanding tax liens with no satisfactory arrangements 
for payments.
    (vi) A court-created or affirmed obligation (judgment), caused by 
non-payment, that is currently outstanding or has been outstanding 
within the last 12 months, not including hospital or state motor 
vehicle liens described under Sec. 1944.17.
    (vii) Two or more rent payments paid 30 days or more past due, that 
have occurred within the last 2 years. Notwithstanding the previous 
sentence, if there have been no other credit problems in the 
applicant's last two year's general credit history, only the past 
rental year will be considered. Instances of more than two late 
payments may be waived in the event that the RHCDS loan will result in 
a significant reduction in shelter costs, which will contribute to 
improved debt payment capability.
    (viii) Accounts which have been converted to collections within the 
last 12 months (utility bills, medical debts, etc.).
    (ix) Collection accounts outstanding with no satisfactory, 
reasonable arrangements for repayment, or collection accounts which 
have been outstanding within the last 12 months which were paid in full 
within 3 months of filing an application for RHCDS assistance, where 
there is no record of regular payment being maintained on the account 
prior to receipt of the final payment.
    (x) Non-RHCDS debts written off within the last 36 months.
    (xi) RHCDS debts which were debt settled pursuant to subpart B of 
part 1956, or by release from personal liability under subpart A of 
part 1955 or subpart C of part 1965, or debt settlement is being 
considered except where the conditions of Sec. 1944.9(g) can be met.
    (2) The following will not indicate an unacceptable credit history:
    (i) ``No history'' of credit transactions by the applicant/
borrower.
    (ii) A bankruptcy in which the applicant received a discharge more 
than 36 months before the date of application.
    (iii) A satisfied judgment, or foreclosure with no monetary loss 
which was completed more than 12 months before the date of application.
    (3) When an applicant/borrower has an unacceptable credit history, 
an exception may be considered by the loan approval official (except 
for Federal judgments described in paragraph (f)(1)(i) of this section) 
when the applicant/borrower provides documentation that:
    (i) The circumstances were of a temporary nature, were beyond the 
applicant/borrower's control, and have been removed. Examples: loss of 
job; delay or reduction in benefits, or other loss of income; increased 
expenses due to illness, death, etc.
    (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.
    (4) Applicants will be advised of adverse credit which is 
discovered as a result of an on-line profile credit report at the time 
of application and will be provided the telephone number and address of 
the credit repository so that the applicant may contact the repository 
directly to correct the negative or incorrect information or discuss 
the circumstances of the credit problem with the RHCDS staff. 
Applicants will not be rejected on the basis of information contained 
in an on-line credit report; however, once a full written credit report 
is received by RHCDS, it will be the responsibility of the applicant/
borrower to work directly with the credit repository to correct any 
erroneous credit bureau records. The credit history cannot be 
determined satisfactory until:
    (i) The credit repository issues a corrected report, showing that 
the error has been removed, or
    (ii) The credit repository has not issued a corrected report within 
30 days of the applicant's submission of disputed credit information 
but the applicant/borrower submits conclusive proof, acceptable to 
RHCDS, that the report is in error, such as creditor correspondence, 
court documents, etc.
    (g) Meet the following conditions if the applicant had any previous 
RHCDS debt settled pursuant to subpart B of part 1956, or by release 
from personal liability under subpart A of part 1955 or subpart C of 
part 1965, or debt settlement is being considered:
    (1) RHCDS must determine that failure to pay the debt was the 
result of circumstances beyond the applicant's control, or the 
conditions which necessitated the debt settlement or release, other 
than weather hazards, disasters, or price fluctuations, have been or 
will be removed by making the loan, and
    (2) Before causing the applicant to incur any expense in connection 
with the loan, with the exception of the cost of a credit report, RHCDS 
must determine the applicant's eligibility and notify the applicant of 
same. [[Page 25646]] 
    (h) Have the ability to carry out the required obligations of the 
loan. If the applicant has demonstrated inability to do so by recent 
failure to maintain a former residence in a habitable and responsible 
manner, or by unauthorized conversion or alteration of the structure, 
or by creating a public nuisance in or around a former residence, RHCDS 
must determine that the reasons contributing to such inability have 
been removed and are not likely to recur.
    (i) Provide accurate and truthful application and financial 
information to RHCDS at the time of application. Applicants who have 
failed to fully disclose financial and application information will be 
denied program assistance.


Sec. 1944.10  Rural area designation.

    (a) For the purposes of this subpart, a rural area is:
    (1) Open country which is not part of or associated with an urban 
area.
    (2) Any town, village, city, or place, including the immediately 
adjacent densely settled area, which is not part of or associated with 
an urban area and which:
    (i) Has a population not in excess of 10,000 if it is rural in 
character, or
    (ii) Has a population in excess of 10,000 but not in excess of 
20,000, and
    (A) Is not contained within an MSA, and
    (B) Has a serious lack of mortgage credit for low- and moderate-
income households as determined by the Secretary of Agriculture and the 
Secretary of HUD.
    (3) An area classified as a rural area prior to October 1, 1990, 
(even if within an MSA), with a population exceeding 10,000, but not in 
excess of 25,000, which is rural in character, and has a serious lack 
of mortgage credit for low- and moderate-income families. This is 
effective through receipt of census data for the year 2000.
    (b) A determination that open country, or any town, village, city, 
or place is not part of or associated with an urban area must include a 
finding that any densely populated section of the area in question is 
separated from the densely populated section of any adjacent urban area 
by open spaces. Open spaces include undeveloped, agricultural, or 
sparsely settled areas. Other spaces such as physical barriers (e.g., 
rivers, canals), public parks, commercial and industrial developments, 
small areas reserved for recreational purposes, recognized open spaces 
for which development is planned, and similar nonresidential areas, are 
not considered open spaces for the purpose of this program. RHCDS files 
must contain documentation that local planning boards, where available, 
were contacted at the time of each review to verify that areas 
considered as open spaces are not scheduled for development in the next 
5 years.
    (c) Two or more towns, villages, cities, and places may have 
contiguous boundaries, and each be considered separately if they are 
not otherwise associated with each other, and their densely populated 
areas are not contiguous, as determined after consideration of 
paragraphs (a) and (b) of this section.
    (d) Population count in any area will be taken from the decennial 
U.S. Census of Population, national population updates published by the 
Bureau of the Census, any special population census conducted by the 
Bureau of the Census, and the following:
    (1) Significant new development on the periphery of ineligible 
areas which requires a change in boundaries.
    (2) Redesignation of corporate limits by local authorities which 
affects the eligibility status of an area.
    (e) In determining population count for area eligibility, 
consideration must be given to developed areas in counties or states 
which are contiguous to, and, therefore, a part of developed areas in 
other counties or states. This determination must be made in agreement 
between the State Directors concerned.
    (f) In order to ensure that the RH program is limited to eligible 
areas, RHCDS will periodically review areas under their jurisdiction. 
If the review shows that an area is not rural, RHCDS will limit the RH 
program in that area after the date of the decision, to the loan 
purposes prescribed in paragraph
    (i) of this section.
    (g) [Reserved]
    (h) [Reserved]
    (i) If an area designation is changed from rural to nonrural, loans 
may be made only in the following instances:
    (1) Applications received by RHCDS prior to the change of 
designation may be processed.
    (2) New conditional commitments may be issued and existing 
conditional commitments will be honored only in conjunction with the 
approval of RH loan applications which were received prior to the date 
the area was designated nonrural.
    (3) Inventory property sales and transfers by assumption may be 
processed in such areas as authorized by Sec. 1955.103(q) or 
Sec. 1965.126, respectively.
    (4) Subsequent loans may be made on property in an area where the 
designation was changed from rural to nonrural after the initial loan 
was made:
    (i) To make necessary repairs.
    (ii) To pay equity in connection with an assumption and transfer of 
an RH loan.


Sec. 1944.11  Site requirements.

    (a) Location. The property on which the loan is made must be 
located on a farm, or in a designated rural area as defined in 
Sec. 1944.10, or in an area where the designation has been changed as 
provided in Sec. 1944.10(i) and must also meet the requirements of 
subpart G of part 1940. A nonfarm tract to be purchased or improved 
with loan funds must not include farm service buildings.
    (b) Access. The property must be contiguous to and have direct 
access from a street, road, or driveway that meets the applicable 
requirements of Sec. 1924.115(b) (Site access).
    (c) Minimum adequate site. A nonfarm tract on which a loan is to be 
made must have an adequate water and/or wastewater disposal system, 
other related facilities, and a yard, or those items must be provided 
with loan funds. The site must be of a size that it cannot be 
subdivided into two or more adequate sites under existing zoning 
ordinance requirements for the area.
    (1) When the site is served by a centrally owned and operated water 
and/or wastewater disposal system, the system must meet the applicable 
water and wastewater disposal system requirements of subpart C of part 
1924 as well as the design requirements of the state Department of 
Health or comparable reviewing and regulatory agency.
    (2) Written verification must be obtained from the regulatory 
agency that the wastewater disposal systems comply with the Safe Water 
Drinking Act and the Clean Water Act, respectively. There must be 
assurance of continuous service at reasonable rates for central water 
and wastewater disposal systems. A system owned or operated by a 
private party must have a legally irrevocable agreement which allows 
interested third parties to enforce the obligation of the operator to 
provide satisfactory service at reasonable rates.


Secs. 1944.12-1944.14  [Reserved]


Sec. 1944.15  Ownership requirements.

    (a) After the loan is closed, the borrower must have an interest in 
the property to be purchased, improved, or refinanced, which qualifies 
as one of the following:
    (1) Full marketable title.
    (2) The buyer and the seller will convert the purchaser's interest 
under a [[Page 25647]] recorded land purchase contract to a deed/
mortgage situation with full marketable title prior to loan closing.
    (3) An undivided fee interest if the co-owners meet the security 
requirements imposed by Sec. 1944.18(b)(8).
    (4) A life estate interest with rights of present possession, 
control, and beneficial use of the property if the remaindermen meet 
the security requirements imposed by Sec. 1944.18(b)(9).
    (5) Leasehold interest if all of the following conditions are met:
    (i) The applicant/borrower is unable to obtain fee title to the 
property and the rent charged for the lease does not exceed the rate 
being paid for similar leases.
    (ii) The lessor owns the fee simple title. This paragraph does not 
apply to American Indians with leasehold interests on tribal allotted 
or trust land.
    (iii) Neither the leasehold nor the fee simple title is subject to 
a prior lien, unless RHCDS authorizes acceptance of the prior lien 
prior to approval of the loan. The amount of the RH loan plus any prior 
liens shall not exceed the market value of the leasehold.
    (iv) The written lease contains the following provisions:
    (A) The lessor's consent to the RH mortgage.
    (B) Reasonable security of tenure. The borrower's interest must not 
be subject to summary forfeiture or cancellation.
    (C) The right of RHCDS to foreclose the RH mortgage and sell 
without restrictions that would adversely affect the market value of 
the security.
    (D) The right of RHCDS to bid at foreclosure sale or to accept 
voluntary conveyance of the security in lieu of foreclosure.
    (E) The right of RHCDS, after acquiring the leasehold through 
foreclosure or voluntary conveyance in lieu of foreclosure, or in event 
of abandonment by the borrower, to occupy the property or sublet it, 
and to sell for cash or credit. In case of an inventory property sale 
of the leasehold, the right of RHCDS to take a mortgage with rights 
similar to those under the original RH mortgage.
    (F) The right of the borrower, in the event of default or inability 
to continue with the lease and the RH loan, to transfer the leasehold, 
subject to the RH mortgage, to an eligible transferee with assumption 
of the RH debt.
    (G) Advance written notice of at least 90 days to RHCDS of lessor's 
intention to cancel or terminate the lease.
    (H) Negotiated provisions as to the liability of RHCDS for unpaid 
rentals or other charges accrued at the time RHCDS acquires possession 
of the property or title to the leasehold, and those which become due 
during RHCDS's possession or ownership, pending further servicing or 
liquidation.
    (I) [Reserved]
    (v) An unexpired term which is at least 150 percent of the term of 
the RHCDS loan, unless the RHCDS loan is guaranteed by a public 
authority, Indian tribe, or Indian Housing Authority, in which case the 
unexpired term of the lease must be at least 2 years longer than the 
repayment period of the loan; provided that: in no case may the 
unexpired term of the lease be less than 15 years.
    (6) Possessory rights on an American Indian reservation or State-
owned land if the security requirements imposed by Sec. 1944.18 are 
met.
    (7) The interest of an American Indian in land held in severalty 
under trust patents or deeds containing restrictions against alienation 
if the security requirements imposed by Sec. 1944.18(b)(3) are met.
    (b) If an applicant's title to any part of the property does not 
qualify as an ownership interest under paragraph (a) of this section, 
an RH loan may nevertheless be made, if:
    (1) The defect cannot be cured at a reasonable cost, and
    (2) No improvements to be constructed or repaired with loan funds 
will be located on the parcel to which title is defective, and
    (3) No security value will be accorded to the parcel to which title 
is defective.


Sec. 1944.16  Dwelling Requirements.

    Dwellings financed must provide decent, safe, and sanitary housing. 
Costs of dwellings financed cannot exceed 85 percent of the maximum 
dollar limitation established under section 203(b) of the National 
Housing Act (12 U.S.C. Sec. 1702) (available from any HUD office) 
unless authorized by RHCDS under Sec. 1944.17(g). Loans shall not be 
approved for dwellings containing in-ground swimming pools or 
structures designed for income-producing facilities or purposes.
    (a) New dwellings. Construction must meet the requirements 
contained in subpart A of part 1924 as well as the thermal performance 
standards for new construction outlined in exhibit D of subpart A of 
part 1924.
    (b) Existing dwellings. Consideration should be given to financing 
existing dwellings in areas with a good supply of competitively priced, 
suitable housing. Homes financed should be affordable to the applicant/
borrower, including operating and maintenance costs.
    (1) Loans will not be made on an existing manufactured home unless 
it is already financed by RHCDS or is being sold from RHCDS inventory.
    (2) Existing homes, including those already in the program, must be 
inspected by RHCDS or by a disinterested third party inspector to 
determine that the dwelling meets the criteria outlined in paragraphs 
(b)(2)(i), (ii), and (iii) of this section. The sales agreement must 
identify the party (i.e., purchaser or seller) who has accepted 
responsibility for obtaining and paying for these inspections and 
certifications. Inspections are not required on public water and 
wastewater disposal systems. RHCDS inventory property will be inspected 
and repaired in accordance with the subpart B of part 1955. The 
inspector will:
    (i) Determine that the dwelling is structurally sound, functionally 
adequate, in good repair, or will be placed in good repair with loan 
funds, and meets the ``General'' requirements in Guide 2 of subpart A 
of part 1924 (available in any RHCDS field office).
    (ii) Certify that the dwelling meets thermal performance standards 
for existing dwellings required in exhibit D of subpart A of part 1924.
    (iii) Certify that the dwelling has adequate electrical, heating, 
plumbing, water, and wastewater disposal systems, and is free of 
termites and other wood damaging pests and organisms.
    (c) Repairs. Any dwelling repaired with RH funds must be 
structurally sound, functionally adequate, and be placed in good repair 
with loan funds. If the loan is not more than $7,500 and is scheduled 
for repayment in not more than 15 years from the date of the note, the 
dwelling may lack some equipment or features such as a complete bath, 
kitchen cabinets, closets, or completed finished interior in some 
rooms. Such dwellings must meet the housing needs of the applicant/
borrower and provide decent, safe, and sanitary living conditions when 
the improvements financed with the loan are completed. Repairs required 
as a condition of loan approval will be performed in accordance with 
HUD Handbook 4905.1, ``1-4 Family Living Units'' (available in any 
RHCDS field office), after loan closing. Repairs on manufactured homes 
are limited to those financed by a subsequent loan for existing homes 
currently financed with a section 502 RH loan, inventory property 
sales, and transfers.
    (d) Improvements. Improvements financed with loan funds must be on 
land which, after loan closing, is part of a tract owned by the 
borrower in [[Page 25648]] accordance with Sec. 1944.15(a), or on an 
easement appurtenant to such a tract.
    (e) Manufactured homes. Exhibit F to FMHA instruction 1944-A 
(available in any RHCDS field office) contains supplemental information 
concerning construction requirements for manufactured homes.


Sec. 1944.17  Maximum loan amounts.

    The amount of the loan may not exceed 85 percent of the maximum 
dollar limitation of section 203(b) of the National Housing Act (12 
U.S.C. Sec. 1702) (available from any HUD office) unless authorized by 
RHCDS as an exception. A loan may exceed the market value or the equity 
value in the security property by the appraisal fee. Applicants/
borrowers are expected to reduce the need for loan funds by using 
available non-essential assets including cash on hand as outlined under 
Sec. 1944.9.
    (a) The maximum loan amount will be the lesser of the cost of:
    (1) The acquisition and any necessary development or
    (2) The market value of the security, less the unpaid principal 
balance and past-due interest of any other liens against the security 
property, plus an appraisal fee, for the following types of dwellings:
    (i) An existing dwelling, as described in Sec. 1944.2, including 
one being financed by transfer or inventory property sale, except as 
provided in exhibit F (available in any RHCDS field office).
    (ii) A new dwelling when any one of the following conditions exist:
    (A) A conditional commitment was issued in accordance with 
Sec. 1944.45.
    (B) The RH loan will be closed prior to the start of construction, 
and construction conforms to the requirements contained in subpart A of 
part 1924.
    (C) The required construction inspections were made by the Federal 
Housing Administration (FHA) or Veterans Administration (VA). If 
qualified under this paragraph, a complete set of plans and 
specifications must be submitted together with copies of construction 
phase inspection reports or certification by FHA or VA indicating the 
dwelling was built in accordance with approved plans and 
specifications. The builder will also furnish a certification of 
compliance with RHCDS thermal standards for new construction as 
required by exhibit D of subpart A of part 1924 (available in any RHCDS 
field office).
    (D) The manufactured home and site meet the requirements in exhibit 
F and exhibit J of subpart A of part 1924 of this chapter. (These 
exhibits are available in any RHCDS field office.)
    (b) A loan will be limited to 90 percent of the market value of the 
security, plus an appraisal fee, for any dwelling that does not meet 
the requirements of paragraph (a) of this section, with the exception 
of manufactured housing units.
    (c) Notwithstanding the provisions of paragraph (a) of this 
section, a loan on a dwelling which causes the total secured 
indebtedness to exceed the requirements of paragraph (a) of this 
section, may be made when the excess indebtedness is all or part of a 
lien held by a public body (except for a lien arising out of a judgment 
against the applicant/borrower in favor of the United States in a 
Federal Court other than the United States Tax Court), hospital, or 
welfare institution for advances made for medical bills, welfare 
payments, or state motor vehicle judgments provided:
    (1) The applicant/borrower is unable to settle or compromise such 
lien sufficiently to avoid exceeding the market value;
    (2) The lien securing the excess amount will at all times be 
inferior to the RHCDS mortgage securing the initial loan and any 
subsequent loan or advances determined by the RHCDS to be reasonably 
necessary to carry out the purpose of the initial loan or to protect 
the Government's financial interest;
    (3) The existence of the excess lien will not jeopardize the 
security or servicing so as to preclude the making of a sound RH loan;
    (4) The applicant/borrower has the ability to meet any payments on 
the excess debt as they become due or are likely to become due.
    (d) Notwithstanding the provisions of paragraph (a) of this 
section, when a subsequent loan for closing costs only is made 
simultaneously with an inventory property sale (as provided in 
Sec. 1955.117(f) or a transfer, the total indebtedness may exceed the 
sale price or market value of the security property, whichever is less, 
by no more than 1 percent.
    (e) Notwithstanding the provisions of paragraph (a) of this 
section, when RHCDS is refinancing the loan of an existing RHCDS 
borrower in accordance with Sec. 1951.318, the debt may exceed the 
market value of the security property to the extent necessary to 
refinance the borrower's outstanding indebtedness plus closing costs 
required in connection with the refinancing.
    (f) Notwithstanding the provisions of paragraph (a) of this 
section, when a subsequent loan is needed for repairs essential to 
protect the Government's security interest, the total RHCDS 
indebtedness may exceed the market value of the security by no more 
than the amount of the subsequent loan consisting of the cost of 
essential repairs and reasonable closing costs.
    (g) RHCDS may grant exceptions to allow the amount of the loan to 
exceed 85 percent of the maximum dollar limitation of section 203(b) of 
the National Housing Act (12 U.S.C. Sec. 1702) may be granted under the 
following conditions:
    (1) RHCDS may increase the loan amount in selected areas when the 
existing mortgage limit is insufficient to provide adequate housing for 
RHCDS applicants and modest housing costs in the area exceed maximum 
loan limits or where different maximum loan limits exist in adjacent 
areas of the same community, for example: One limit on one side of the 
street compared to a higher limit on the other side.
    (2) RHCDS may increase the loan amount where necessary to 
accommodate the specific needs of the family such as a larger home to 
correct overcrowding situations for exceptionally large households and 
reasonable accommodations for a disabled household member. When the 
request is to allow reasonable accommodations for a disabled household 
member, the additional loan amount will not exceed the cost of the 
special features provided and the amount of the appraisal fee.


Sec. 1944.18  Security requirements.

    (a) Adequate security. Except as provided below, to protect the 
interests of RHCDS, all loans must be adequately secured. Except as 
provided in Sec. 1944.17(c) and paragraph (b) of this section, a loan 
is adequately secured only when all of the following requirements are 
met:
    (1) RHCDS obtains at closing a mortgage on all ownership interests 
in the entire tract.
    (2) No liens prior to the RHCDS mortgage exist at the time of 
closing, and no junior liens are likely to be taken immediately 
subsequent to or at the time of closing.
    (3) The provisions of subpart B of part 1927 regarding title 
clearance and the use of legal services are complied with.
    (4) The property improvements and proposed improvements are totally 
on the site and do not encroach on adjoining property. RHCDS may 
require a survey, at the buyer's or seller's expense.
    (b) Exceptions. Exceptions to the usual security requirements will 
be made only as follows: [[Page 25649]] 
    (1) Note only. A loan of $2,500 or less, scheduled for repayment in 
not more than 10 years from the date of the note, that is not subject 
to recapture of subsidy in accordance with subpart I of part 1951, may 
be secured by the borrower's promissory note alone when RHCDS 
determines that:
    (i) The applicant/borrower has a credit history which indicates an 
ability and willingness to pay debts when they are due;
    (ii) The applicant/borrower will have sufficient income to readily 
meet all obligations; and
    (iii) The applicant/borrower's equity in the real estate as 
improved, equals, or exceeds the amount of the proposed loan.
    (2) Mortgage insurance. When the applicant/borrower is the holder 
of possessory rights on an American Indian reservation or State-owned 
land, adequate security is required. This may include mortgage 
insurance guaranteeing payment from a state agency or American Indian 
tribe. States will issue a state supplement covering special security 
and title clearance requirements needed for loans of this type.
    (3) American Indian land. American Indian land in trust or 
restricted status acquired with an RH loan will remain in trust or 
restricted status. These mortgages must be approved by the Secretary of 
the Department of the Interior. A State Supplement will be issued to 
prescribe the actions to be taken by RHCDS personnel to implement the 
making of loans under such conditions.
    (4) Best mortgage obtainable. Loans of $7,500 or less scheduled for 
repayment in not more than 15 years from the date of the note and 
subsequent loans made for minimal essential repairs necessary to 
preserve the Government's security must be secured by a mortgage, 
except as provided in paragraph (b)(1) of this section, but title 
clearance and the use of legal services in accordance with subpart B of 
part 1927 are not required unless the loan approval official determines 
that the procedures in subpart B of part 1927 are necessary to assure 
repayment or accomplish the objective of the loan. Evidence of 
ownership must be in accordance with Sec. 1944.24(d)(2).
    (5) Leasehold. When the applicant/borrower owns only a leasehold 
interest will treat the lessee's interest like any other type of 
ownership interest in determining whether a mortgage on the leasehold 
is required. The lease must meet the requirements of Sec. 1944.15(a)(5) 
(iv) and (v). In any state in which applicants/borrowers are likely to 
own a leasehold interest, the State Director will issue a State 
Supplement outlining the technical requirements for making such loans.
    (6) Security by junior lien. RHCDS may take a junior mortgage as 
security for an RH loan if the tract, which will secure the RHCDS 
mortgage, provides adequate security for the entire prior lien debt and 
the RH loan, and
    (i) The prior mortgage does not contain provisions that may 
jeopardize RHCDS's security position or the applicant/borrower's 
ability to repay the loan, such as provisions for future advances, 
forfeiture, cancellation, foreclosure without adequate notice to junior 
lienholders, attorney's fees exceeding those customary for the area in 
cases of foreclosure; or
    (ii) Such provisions are satisfactorily limited, modified, or 
waived; and
    (iii) The conditions set forth in subpart B of part 1927 are met.
    (7) Liens junior to RHCDS lien. Liens junior to the RHCDS lien will 
be allowed at closing or immediately subsequent to closing only when:
    (i) The junior lien will not interfere with the purpose or 
repayment of the RH loan, and
    (ii) The total amount of the RH loan, the junior lien, and any 
prior liens will not exceed the market value of the security except as 
provided in Sec. 1944.17(c), and
    (iii) The conditions set forth in subpart B of part 1927 are met.
    (8) Undivided interest. When the applicant/borrower owns an 
undivided interest in the property, the co-owners' interests need not 
be included in the mortgage in the following instances:
    (i) When one or more of the co-owners are not legally competent 
(and there is no representative who can legally consent to the 
mortgage) or cannot be located, or the ownership rights are divided 
among such a large number of co-owners that it is not practical for all 
their interests to be mortgaged, the mortgaging of interests not 
exceeding 50 percent may be excluded from the security requirements 
upon prior approval by RHCDS. All legally competent co-owners using or 
occupying the property will be required to sign the mortgage. Co-owners 
will be required to sign the note when necessary for a sound loan or to 
obtain the required security. The loan may not exceed the value of the 
percentage of the market value of the property represented by the 
interests of the owners who sign the mortgage. In determining such 
value, consideration will be given to any adverse effect which might 
result from sale of the mortgaged interests separately from the 
nonmortgaged interests.
    (ii) When the applicant/borrower owns only an undivided interest in 
a building site which will be a part of the farm, the interest of the 
applicant/borrower's co-owners may be excluded from the security 
requirements upon approval by RHCDS if:
    (A) The market value of the jointly owned tract is at least equal 
to the debts against it (including the RHCDS loan), and
    (B) The applicant/borrower's participation in the joint ownership 
of part of the farm and its operations has been and is likely to 
continue to be successful.
    (9) Life estate. When the applicant/borrower owns a life estate 
interest in the property, the remainder interests need not be included 
in the mortgage if one or more of the persons holding remainder 
interests are not legally competent (and there is no representative who 
can legally consent to the mortgage) or cannot be located, or if the 
remainder rights are divided among such a large number of people that 
it is not practicable to obtain the signatures of all the remainder 
interests. In the instance of numerous heirs, the mortgaging of 
remainder interests, not exceeding 50 percent of the total remainder 
interest may be excluded from the security requirements upon prior 
approval by RHCDS. In such cases, the loan may not exceed the value of 
the property owned by the persons executing the mortgage.
    (10) Farm dwelling. When the applicant/borrower is the owner of a 
farm, a mortgage may be taken only on the dwelling and dwelling site 
provided the following conditions can be met:
    (i) The tract to be mortgaged must not include farm service 
buildings, must be in a good residential location, be otherwise 
suitable as a residential type of nonfarm tract, provide adequate 
security for the loan, be contiguous to and have direct access to a 
public road, or
    (ii) The tract to be mortgaged must contain at least enough land to 
clearly provide adequate security for the loan and to make the tract 
readily saleable in the area.
    (11) Land purchase contract. When the ownership interest is by 
virtue of a land purchase contract (as described in Sec. 1927.52), the 
transaction must be converted to a deed/mortgage situation prior to 
loan closing and meet the conditions of Sec. 1944.22(b)(6) prior to 
loan closing.
    (c) Additional security. When necessary to supplement the 
applicant/borrower's equity in the farm or [[Page 25650]] nonfarm tract 
on which the dwelling is located, or to facilitate servicing the loan, 
RHCDS may also require a mortgage on other real estate owned by the 
applicant/borrower.
    (d) Assignment of income from real estate to be mortgaged. Income 
to be received by the borrower from royalties, leases, or other 
existing agreements under which the value of the real estate security 
will be depreciated will be assigned and disposed of in accordance with 
applicable portions of subpart C of part 1965, and the provisions for 
written consent of any prior lienholder. In small nonfarm tract cases, 
RHCDS may authorize withholding transmittal of assignments to lessees 
for execution until production begins.


Sec. Sec. 1944.19-1944.21  [Reserved]


Sec. 1944.22  Refinancing non-RHCDS debts.

    (a) Loan funds may be used for refinancing non-RHCDS debts on a 
dwelling (except for manufactured homes) if the debt was incurred by 
the applicant prior to the date the application was filed and the 
following conditions can be met:
    (1) The debt was incurred for purposes for which a section 502 RH 
loan could be made or is a protective advance by the mortgagee for 
items covered by the mortgage to be refinanced, including accrued 
interest, insurance premiums, real estate tax advances, or preliminary 
foreclosure costs.
    (2) The debt must be a lien against the property which will be 
security for the RH loan. The promissory note and security instrument 
for the debt to be refinanced must represent rates and terms that were 
typical and customary for long-term residential financing in the area 
at the time the debt was incurred.
    (3) A loan to refinance a qualified secured debt may also include 
short-term or unsecured debts, if necessary to establish a sound 
repayment ability, if such short-term or unsecured debts were incurred 
for authorized section 502 RH loan purposes and are not a significant 
portion of the loan.
    (4) Payments on the debt are so seriously delinquent or, if not 
delinquent, it must be evident that the applicant will be unable to 
continue to maintain payments, for reasons beyond the control of the 
applicant, and the applicant is likely to lose the dwelling at an early 
date if the debt is not refinanced. Such delinquency must be due to 
loss of employment or household income, illness, or other such similar 
events or unforeseen circumstances.
    (5) A statement must be obtained from the creditor for each debt to 
be refinanced showing the purpose for which the debt was incurred, the 
date on which it was incurred, the final due date, interest rate, 
amount and frequency of installments, unpaid principal and accrued 
interest, and amount of delinquency, if any.
    (6) Refinancing such debts will not jeopardize the required 
priority of the RHCDS security instrument.
    (b) Loan funds may be used for refinancing non-RHCDS debts on a 
building site without a dwelling when the applicant is unable to pay 
the debt from personal resources and failure to authorize the use of RH 
funds to pay such costs would prevent the applicant from acquiring 
decent, safe, and sanitary housing and the following conditions can be 
met:
    (1) The site meets the conditions prescribed in Sec. 1944.11(c).
    (2) The debt was incurred prior to the date of application for the 
sole purpose of purchasing the site.
    (3) The debt is a lien against the property which will be used as 
security for the RH loan. The promissory note and security instrument 
for the debt represent rates and terms that were typical and customary 
for short-term residential financing in the area at the time the debt 
was incurred.
    (4) The refinancing loan will include adequate funds for 
constructing a modest dwelling on the site for the use of the 
applicant, which conforms with the requirements of Sec. 1944.16(a).
    (5) A statement must be obtained from the creditor for each debt to 
be refinanced showing the purpose for which the debt was incurred, the 
date on which it was incurred, the final date due, interest rate, 
amount and frequency of installments, unpaid principal and accrued 
interest, and amount of delinquency, if any.
    (6) Refinancing such debts will not jeopardize the required 
priority of the RHCDS security instrument.
    (c) If a loan of $5,000 or more is necessary for repairs to correct 
major deficiencies and make the dwelling decent, safe, and sanitary, an 
existing lien which meets the requirements of paragraphs (a)(1), (2), 
(3), and (5) of this section may be refinanced regardless of 
delinquency, if necessary for the applicant to have repayment ability 
for the existing loan and the requested loan for repairs.
    (d) Debts or costs incurred after the date of application may be 
refinanced if the costs were incurred for:
    (1) Fees for legal, architectural, and other technical services, or
    (2) Materials, construction, or site acquisition.
    (e) RHCDS may authorize the use of RH funds to pay costs provided 
for in paragraphs (d)(1) and (2) of this section only when RHCDS 
retains the same lien priority as the debt to be refinanced and all of 
the following conditions exist:
    (1) The costs were incurred after the applicant filed a written 
application for a loan but before the loan was closed. In the event of 
a subsequent loan to complete improvements previously planned, the 
costs must have been incurred after the initial loan was closed.
    (2) The applicant is unable to pay such costs from personal 
resources or to obtain credit from other sources and failure to 
authorize the use of RH funds to pay such costs would jeopardize the 
applicant's capability of repaying the loan.
    (3) The construction or repair work conforms to that shown on the 
building plans and specifications or the RHCDS Development Plan, when 
applicable, and the costs were incurred for authorized Section 502 RH 
loan purposes.


Sec. 1944.23  [Reserved]


Sec. 1944.24  Technical services.

    (a) Planning and performing construction work. Any construction 
work will be planned and completed in accordance with subpart A of part 
1924 or a lesser standard as may be prescribed by RHCDS for 
demonstration type loans.
    (b) Planning and performing site development work. Any site 
development will be planned and completed in accordance with subpart C 
of part 1924, except as provided for manufactured homes in exhibit J of 
subpart A of part 1924. Subdivisions will be accepted by RHCDS without 
further processing when the developer provides written evidence of 
current subdivision acceptance by HUD or VA and the developer provides 
proof of compliance with exception conditions established by HUD or VA.
    (c) Appraisals. Appraisals will be required as follows:
    (1) When a mortgage will be taken to secure a total indebtedness of 
more than $15,000, an appraisal of the security property will be made. 
The loan can exceed the market value of the security by the amount of 
an appraisal fee. A fee will be charged for each application for a 
section 502 RH loan when an appraisal is needed for initial and 
subsequent loans and assumptions. Fees will be waived for appraisals 
done for subsequent loans to existing RHCDS [[Page 25651]] borrowers 
for minimal essential repairs that are necessary to protect Government 
security property. The fee will be collected at loan closing by the 
closing agent.
    (2) When the total indebtedness will be $15,000 or less, an 
appraisal of the real estate or leasehold interest is not required, 
unless RHCDS is uncertain as to the adequacy of the security.
    (3) Real estate mortgaged as additional security will be appraised 
when it represents a substantial portion of the security for the loan 
or when requested by the loan approving official.
    (d) Title clearance and legal services. (1) When real estate will 
be taken as security (including a mortgage on a leasehold), except on a 
best mortgage obtainable basis, title clearance and legal services for 
making and closing the loan will be provided in accordance with subpart 
B of part 1927. Title clearance and legal services will not be 
requested until the loan is approved.
    (2) When real estate will not be mortgaged or when the best real 
estate mortgage obtainable is taken as security without title clearance 
or use of legal services, the applicant will be required to submit 
evidence of ownership of the farm or nonfarm tract. When RHCDS is 
uncertain as to whether or not the applicant is a qualified owner, such 
action will be taken as RHCDS considers necessary, such as requiring 
the applicant to furnish additional information. No loan will be made 
if RHCDS has actual knowledge that the applicant does not have valid 
title to the property.


Sec. 1944.25  Rates and terms.

    (a) Interest rate. The interest rate charged by RHCDS will be the 
lower of the rates in effect at the time of loan approval or loan 
closing. Interest rates are specified in exhibit B of FmHA Instruction 
440.1 (available in any RHCDS field office) for the type of assistance 
involved.
    (b) Amortization. Loans will be scheduled for repayment over a 
period that will not exceed the expected useful life of the property as 
a dwelling. Only one of the amortization periods listed in this 
paragraph may be used for a borrower. Each loan will be scheduled for 
repayment from the date of the promissory note, for a period not to 
exceed one of the following as applicable:
    (1) Thirty-three years for initial and subsequent loans.
    (2) Thirty-eight years for initial loans (subsequent loans may be 
made for a period not to exceed the remaining years of the initial 
loan) when the following conditions are met:
    (i) Adjusted annual income does not exceed 60 percent of the median 
income for the area as reflected in exhibit C, (available in any RHCDS 
field office), and
    (ii) The longer term is necessary to show repayment ability, with 
or without mortgage payment deferral.
    (3) Thirty years for manufactured homes.
    (4) Ten years for loans not exceeding $2,500 which are not secured 
by a real estate mortgage.
    (c) Payment Assistance. Borrowers may be eligible for a non-cash 
credit which may reduce the borrower's scheduled payment to a level 
equivalent to amortizing the loan to as low as 1 percent. The policies 
and procedures for granting and servicing payment assistance are set 
forth in Sec. 1944.34 and subpart G of part 1951, respectively.


Sec. 1944.26  Fund allocation.

    State Directors will maintain an adequate reserve to fund hardship 
applications, servicing type loans, and the state's portion of funds 
for Mutual Self-Help Housing loans. Reserve funds will be used for:
    (a) Hardship applications. (1) Hardships as determined by the State 
Director on a case-by-case basis, including applications from persons 
living in deficient housing as defined in Sec. 1944.2, for more than 6 
months.
    (2) Refinancing non-RHCDS debts in accordance with 
Sec. Sec. 1944.22(a) and 1951.315.
    (b) Servicing type loans. (1) Financing for the purchase of 
Government-owned inventory properties;
    (2) Subsequent loans for essential improvements or repairs;
    (3) Subsequent loans in connection with inventory property sales or 
transfers with assumption of the RHCDS indebtedness.
    (c) Mutual Self-Help Housing Loans. Homes must be located in an 
RHCDS approved self-help project.


Sec. 1944.27  Application processing.

    (a) Accepting applications. RHCDS will accept completed 
applications in accordance with subpart A of part 1910.
    (1) Complete applications. A completed application will consist of 
Form FmHA 410-4, ``Application for Rural Housing Assistance (Nonfarm 
Tract) Uniform Residential Loan Application'' (hereafter called URLA) 
and an RHCDS form for verifying employment, for each employer, all of 
which are available in any RHCDS field office.
    (2) Incomplete applications. If the application is not dated and 
signed or sections are not properly completed, it may be returned for 
completion.
    (3) Packaged applications. Builders, brokers, contractors, the 
applicant/borrower, and others, including not-for-profit organizations, 
may package loan applications in accordance with exhibit A (available 
in any RHCDS field office). Builders and sellers holding conditional 
commitments may also assist applicants/borrowers in applying for an RH 
loan.
    (b) Processing steps. (1) [Reserved)
    (2) Complete applications will be processed in the order received, 
in accordance with subpart A of part 1910 and subpart E of part 1901, 
except that preference will be given to applications for Mutual Self-
Help Housing loans, loan servicing purposes, purchase of an inventory 
property, assumption of an existing RHCDS loan, and to applicants who 
qualify as a hardship, as outlined in Sec. 1944.26; veterans 
preference, as outlined in subpart A of part 1910, will apply.
    (3) [Reserved]
    (4) If HUD's Credit Alert Interactive Voice Response System 
(CAIVRS) identifies a delinquent Federal debt, RHCDS will immediately 
suspend processing of the application and the applicant will be 
notified in writing of the suspension 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 RHCDS with 
official documentation that the delinquency has been paid in full or 
otherwise resolved, processing of the application will be continued. 
After 30 days from the suspension notification, if CAIVRS indicates the 
existence of an unsatisfied judgment in the favor of the United States, 
or if the applicant remains delinquent on a Federal debt and is unable 
to resolve the delinquency, the applicant will be rejected. The RHCDS 
Administrator may grant an exception to this requirement if it is in 
the best interest of the Government to do so.
    (5) If an on-line profile credit report, where available, reveals 
adverse credit information, the applicant will be given the opportunity 
to correct the adverse information. Applicants will not be rejected or 
withdrawal encouraged based on information provided in the on-line 
credit report. This service is provided for the sole purpose of 
providing assistance to the applicant by identifying any credit 
problems at the beginning of the loan process and to clarify the 
difference between eligibility for program assistance and loan 
approval.
    (c) Determination of eligibility and notification to applicant. 
Eligibility determination will be made regardless [[Page 25652]] of 
ranking or funding levels. If an applicant/borrower is determined 
ineligible because the applicant's income is too high, RHCDS may advise 
the applicant/borrower that applicant may qualify for the purchase of a 
Government inventory property or the assumption of an existing RHCDS 
borrower's loan on nonprogram terms and may be counseled regarding the 
RH guaranteed loan program. If an applicant/borrower is given an 
adverse decision, the applicant/borrower will be given appeal rights as 
provided in subpart B of part 1900. The letter will contain the Equal 
Credit Opportunity Act (ECOA) paragraph set forth in subpart A of part 
1910.
    (1) Delayed processing. When available loan funds are not adequate 
to complete the processing of all applications as they are received, or 
a large backlog of applications exists which prohibits immediate 
processing of the application, a preliminary determination of 
eligibility may be made based on the information provided by the 
applicant/borrower.
    (i) If available funds are not adequate, applicants/borrowers who 
appear eligible at the time of application will be advised in writing 
within 30 days of filing of the application of their preliminary 
eligibility determination and the estimated waiting period. They should 
be further advised that a final determination of eligibility will be 
made when loan funds are available for the processing of their 
application.
    (ii) Where there are more than 50 unprocessed applications on hand, 
RHCDS will inform each applicant/borrower, at least every 6 months, of 
the current funding status and provide an estimate of when the loan is 
anticipated to be processed. At that time, the applicant/borrower 
should be advised to contact RHCDS if they are still interested in 
funding, and that the application will be withdrawn in 30 days if there 
is no response.
    (2) Immediate processing. Where there is no backlog, available loan 
funds are adequate, and the application can be processed in a timely 
manner, RHCDS shall make a preliminary determination of eligibility 
based on information submitted by the applicant/borrower and will 
request additional information as necessary to make a final 
determination of eligibility.
    (i) On-line profile credit reports may be used to allow a means for 
the applicant to determine if there is adverse credit information on 
the applicant's record prior to payment of the credit report fee.
    (ii) The age of the applicant/borrower will not be considered 
except as provided in Sec. 1944.9.
    (iii) Repayment ability will be evaluated in accordance with 
Sec. 1944.8.
    (iv) RHCDS will apply the objective standards of credit evaluation, 
outlined in Sec. 1944.9, for each applicant/borrower. All applications 
will be considered under the same standards.
    (v) [Reserved]
    (d)-Selection for processing. (1) Completed applications for a 
reserve funding category, as outlined in Sec. 1944.26, as well as 
applications for the assumption of an existing RHCDS loan, will be 
processed upon receipt.
    (2) All other completed applications will be selected for 
processing in the order received, as funding becomes available. 
Selected applicants/borrowers have 30 days to provide information 
required under paragraph (e) of this section (including any fees for 
credit reports) for a final determination of eligibility. Selected 
applicants/borrowers who do not respond to this 30-day notice will be 
rejected. Applications selected will be funded in the order that 
information is received, until all available loan funds are exhausted. 
Selected applicants/borrowers who respond affirmatively to the first 
notice, but who are not funded within the quarter will be held over and 
counted as a selected applicant for the next quarterly allotment. If 
all requested information is not received within 45 days after the 
second written selection notification, the application will be 
rejected.
    (e) Verification of information. (1) Income verification. All 
applicants/borrowers will be required to submit a complete, legible 
copy of their most recently filed Federal income tax return (showing 
the applicant's signature) unless exempted from filing a return. The 
return shall be stored in a secure place separate from the loan docket 
to prevent any wrongful release of the tax return information. In cases 
where a tax preparer has provided the applicant with copies of the 
return, one of the copies which has the original signature of the tax 
preparer should be signed by the applicant and submitted. In Puerto 
Rico applicants/borrowers must submit a signed photocopy of the most 
recently filed state income tax returns. Applicants who do not have 
signed photocopies of their Federal returns should contact their 
Regional Internal Revenue Service. In addition to copies of tax 
returns, other income verification may be required.
    (i) Applicant/borrowers will complete such forms as required by 
RHCDS. A form will be used to verify employment income of each 
borrower/applicant except for self-employment.
    (ii) RHCDS may confirm reported wages and earnings, including 
``non-taxable income'' with the Department of Labor or similar agency 
where this information is available.
    (iii) Applicants/borrowers deriving their income from a farming or 
business enterprise, must provide current documentation of income and 
expenses. This information must not be older than the previous fiscal 
year.
    (iv) Applicants must provide a copy of the most recent award or 
benefit letter prepared and signed by the authorizing agency to verify 
Social Security, pension, and disability income. In addition, the Cost-
of-Living (COLA) in Social Security Benefits and Supplemental Security 
Income Payments Notice, Social Security Benefit Statement, Forms SSA-
1099 and SSA-1042, or Notice of Change in Benefits may be required for 
documentation of Social Security and/or Supplemental Security Income.
    (v) The applicant must provide a copy of the divorce decree or 
other legal document indicating the amount of the payments to verify 
alimony and/or child support payments. When the applicant/borrower 
states that less than the amount awarded is received, RHCDS may request 
documentation from the official entity through which payments are 
received, or other third parties capable of providing the verification 
when payment is not made through an official entity, indicating the 
dates and amounts of payments made to the applicant/borrower during the 
previous 12 months.
    (vi) Income information that cannot be obtained by use of RHCDS 
forms will be obtained in writing from knowledgeable third parties to 
the extent possible. When it is not feasible to verify income through 
third parties, RHCDS may accept an affidavit from the applicant/
borrower; in the case of child support or alimony, the affidavit must 
state the effort made to collect the amount awarded, and the amounts 
and dates of payments received during the previous 12 months.
    (2) Verification of alien status. Aliens are required to present 
documentation of their status. Exhibit B (available in any RHCDS field 
office) outlines the acceptable forms of documentation.
    (3) Verification of disability or handicap. Form FmHA 1944-4, 
``Certification of Disability or Handicap,'' is used to verify 
disability or handicap in cases where State Review Boards or Social 
Security records are not available. When Form FmHA 1944-4 contains 
information [[Page 25653]] which could affect the applicant/borrower's 
eligibility, the applicant/borrower may be required to furnish his/her 
physician's written opinion regarding the applicant/borrower's capacity 
to incur the loan obligation.
    (4) [Reserved]
    (5) [Reserved]
    (f) Applicant interview. After verification of all information 
necessary for making a final determination of eligibility but prior to 
issuance of the Certificate of Eligibility, the borrower/applicant will 
submit to a personal interview with RHCDS. The applicant/borrower may 
be accompanied by an advisor but the applicant/borrower or court 
appointed guardian/conservator must be personally responsive to all 
questions or issues during the interview. During the interview, RHCDS 
and the applicant/borrower will:
    (1) Verify information concerning persons who will occupy the 
dwelling and on whose income eligibility for the loan and payment 
assistance is based. Applicants/borrowers who may be able to obtain 
other credit will be expected to apply for same from a lender making 
loans for similar purposes. If requested, the applicant/borrower will 
have the lender indicate the amount, interest rate, and terms of 
housing credit the lender would be willing to extend to the applicant/
borrower.
    (2) Reach an understanding that failure of the applicants/borrowers 
to fully disclose financial and application information or material 
falsification or concealment of such information will result in a 
denial of assistance and possible penalties.
    (3) [Reserved]
    (4) [Reserved]
    (5) [Reserved]
    (6) [Reserved]
    (g) Issuance of ``Certificate of Eligibility.'' Once all 
information has been verified and eligibility has been determined, a 
``Certificate of Eligibility'' will be issued to all applicants/
borrowers selected for further processing. The certificate will be 
valid for a period not to exceed 90 days. The certificate will not be 
issued to applicants/borrowers who have submitted packaged applications 
that already contain information necessary to complete a real estate 
appraisal.
    (1) Appraisals. After the Certificate of Eligibility is issued the 
applicant/borrower has 90 days to provide information needed to 
complete the real estate appraisal on the property to be financed.
    (i) Information requested will include a copy of the option or 
sales agreement; a legal description of the property; a direction map; 
certified building plans and specifications or repair estimates as 
appropriate; copies of existing surveys, title information, and tax 
bills; and other information deemed necessary by the appraiser.
    (ii) The applicant/borrower must advise RHCDS if they wish to have 
the cost of the real estate appraisal included in the loan funds.
    (iii) Appraisals will generally be completed within 30 days of the 
date information requested is received.
    (2) Extensions or withdrawals. At the end of 90 days, if the 
applicant/borrower has not submitted the information requested, the 
application will be deemed withdrawn unless an extension is approved 
based on evidence that the applicant/borrower is actively working on 
supplying the necessary information. A maximum of two 60-day extensions 
can be approved.
    (h) Appeals. If the decision on the applicant/borrower's request 
for assistance is unfavorable, the applicant/borrower will be notified 
of the appropriate appeal rights in accordance with subpart B of part 
1900. The applicant/borrower will be notified that a new application 
may be filed when curative action is taken to remove the reasons for 
rejection.
    (i) Accountability. Applicants/borrowers should be made aware of 
the accountability requirements of persons paid to influence the making 
of an RHCDS housing loan and/or grant as described in subpart S of part 
1940.


Secs. 1944.28-1944.30  [Reserved]


Sec. 1944.31  Loan approval.

    (a) RHCDS employees are authorized to approve or disapprove loans, 
as delegated, in accordance with subpart A of part 1901.
    (b) All loan approvals are subject to the availability of funds.
    (c) [Reserved]
    (d) [Reserved]
    (e) If title evidence is required in accordance with subpart B of 
part 1927 or in accordance with any special requirements for the loan 
but is not included in the docket, the loan may be approved subject to 
the applicant/borrower furnishing the required title evidence. When the 
applicant/borrower furnishes required title evidence, RHCDS will 
proceed with processing the loan. In those cases in which the title 
evidence does not comply with the conditions specified, the docket will 
be reconsidered by the approval official.


Sec. 1944.32  [Reserved]


Sec. 1944.33  Loan closing.

    (a) Reverification of income. If a loan made on program terms will 
be closed or the payment assistance agreement will be executed more 
than 90 days after the date of the last verification of employment, or 
if there is evidence to indicate the applicant/borrower's financial 
status has changed significantly, the applicant/borrower's income will 
be reverified in accordance with Sec. 1944.27 and the amount of payment 
assistance will be determined on the basis of the applicant/borrower's 
new income, based on the schedules defined in Sec. 1944.34(c). If the 
adjusted income is such that the applicant/borrower is no longer 
eligible for payment assistance, the loan may be closed if there is 
documented evidence to clearly indicate other credit is not available 
and the applicant/borrower has adequate repayment ability based on the 
revised income and PITI for the proposed loan. Payment assistance may 
be granted if the applicant/borrower's income was at or below the low-
income level at the time of loan approval but payment assistance will 
not be granted if the adjusted income exceeds the moderate-income limit 
set forth in exhibit C (available in any RHCDS field office).
    (b) Promissory note. An RHCDS approved ``Promissory Note'' will be 
prepared and signed in accordance with subpart B of part 1927. Payments 
of principal and interest will be deferred during the period the 
dwelling is not suitable for occupancy as a residence because of 
construction or repairs. If the loan is closed before any funds are 
advanced by RHCDS or loan funds are distributed by multiple advance, 
accrued interest is added to principal and repaid in regular amortized 
installments (payment alternative I) after the deferment period. The 
monthly payment provision will be used for all borrowers except 
existing RHCDS borrowers whose previous loans were made on an annual 
payment basis. If the annual payment provision is used and installments 
are not to be deferred, the amount of the first installment will be 
determined by RHCDS after considering the immediate debt paying ability 
of the borrower. The amount of the first installment may not be less 
than an amount equal to interest on the loan from the date of loan 
closing to the next January 1.
    (c) Real estate mortgage. An RHCDS approved real estate mortgage 
form will be used for loans to be secured by a real estate mortgage.
    (d) Collection of the first installment. If the annual payment 
provision of the note is used and payments are not to be deferred, the 
first installment of a loan closed during December will be paid at the 
time of loan closing. [[Page 25654]] 
    (e) Hazard insurance. Buildings on the property taken as security 
for the loan will be insured in accordance with subparts A and B of 
part 1806 (FmHA Instructions 426.1 and 426.2 as appropriate). The 
policy and a paid receipt for 1 full year's premium must be presented 
by the applicant/borrower at loan closing.
    (f) [Reserved]
    (g) [Reserved]
    (h) [Reserved]
    (i) Effective date of loan closing. A loan secured by a real estate 
mortgage is closed when the mortgage is filed for record and the 
expected lien is obtained. In other cases, a loan is closed when the 
borrower executes the note and any other required instruments.


Sec. 1944.34  Payment assistance.

    (a) General. It is the policy of RHCDS to grant payment assistance 
on loans to qualified applicants to assist them in obtaining and 
retaining decent, safe, and sanitary dwellings and related facilities. 
This section pertains to the granting of payment assistance connected 
with loan making activities. All other provisions dealing with payment 
assistance are contained in subparts G and I of part 1951.
    (b) Approval authority. RHCDS officials who are authorized to 
approve section 502 RH loans are also authorized to approve payment 
assistance.
    (c) Amount of Payment Assistance. Payment assistance granted will 
be the difference between the installment due on the promissory note 
and the amount the borrower would pay if the note were amortized at a 
rate equivalent to that relating to the borrower's income range or the 
amount of principal and interest due based on the floor calculation in 
accordance with this section. The floor is a minimum percentage of 
adjusted family income which the borrower must pay for PITI. Very low-
income borrowers will pay a minimum of 22 percent and low-income 
borrowers will pay a minimum of 26 percent of their adjusted family 
income for PITI or the payment determined at the equivalent interest 
rate, whichever is greater. The equivalent interest rate is determined 
by a comparison of the borrower's adjusted annual income as determined 
in Sec. 1944.6 to the median income for the area where the security 
property is located, based on income figures published by HUD as 
reflected in exhibit C (available in any RHCDS field office). The 
following chart is to be used for determining the equivalent interest 
rate paid by the applicant/borrower when eligible for payment 
assistance, for loan making and loan servicing for loans closed after 
the effective date of this issuance. EXCEPTION: Present RHCDS borrowers 
who are currently receiving payment assistance as of the date of this 
issuance, will be reviewed under the system in effect prior to the 
effective date of this issuance. Any other exception to the use of 
these interest rates or minimum percentages of adjusted family income 
will be made by the RHCDS Administrator under Sec. 1944.34(h). Median 
income is that reflected in Exhibit C to FmHA instruction F144-A 
(available in any RHCDS field office). In determining percents, 
rounding should not be used.

                            Percentage of Median Income--Equivalent Rate of Interest                            
----------------------------------------------------------------------------------------------------------------
                               When the applicant/borrower's adjusted income is--                               
-----------------------------------------------------------------------------------------------------------------
                                                                                        Then the equivalent rate
 Equal to or more than--                         But less than--                          of interest is--\1\   
----------------------------------------------------------------------------------------------------------------
00 percent-..............  50.01 percent of median income............................  1 percent.               
50.01 percent............  55 percent of median income...............................  2 percent.               
55 percent -.............  60 percent of median income...............................  3 percent.               
60 percent -.............  65 percent of median income...............................  4 percent.               
65 percent -.............  70 percent of median income...............................  5 percent.               
70 percent -.............  75 percent of median income...............................  6 percent.               
75 percent -.............  80.01 percent of median income............................  6.5 percent.             
80.01 percent............  90 percent of median income...............................  7.5 percent.             
90 percent -.............  100 percent of median income..............................  8.5 percent.             
100 percent..............  110 percent of median income..............................  9 percent.               
110 percent..............  or more than median income................................  9.5 percent.             
----------------------------------------------------------------------------------------------------------------
\1\Or note rate, whichever is less; in no case will the effective interest rate be less than 1 percent except as
  provided in Sec. 1944.35.                                                                                     

    (d) Recapture. Borrowers who receive payment assistance must agree 
to provisions for recapture of payment assistance the borrower may 
receive during the life of the loan. See subpart I of part 1951.
    (e) Eligibility. To be eligible for payment assistance, an 
applicant/borrower must qualify for a section 502 RH loan, must 
personally occupy the dwelling, and must meet the following additional 
requirements:
    (1) Initial loans including inventory property sales. Payment 
assistance may be granted at loan closing if:
    (i) The applicant/borrower's adjusted annual income, at the time of 
loan approval, did not exceed the applicable low-income limit in 
exhibit C to FMHA instruction 1944-A (available in any RHCDS field 
office).
    (ii) The term of the loan will not be less than 25 years.
    (2) Subsequent loans. Payment assistance may be granted on 
subsequent loans which meet the terms of paragraph (e)(1) of this 
section. If payment assistance is presently being granted on the 
initial loan and the applicant/borrower's adjusted income does not 
exceed the moderate-income limit, it may also be granted on a 
subsequent loan, providing the term of the subsequent loan is 25 years 
or more.
    (3) Assumptions. Payment assistance may be granted to an applicant/
borrower assuming an RH loan on new rates and terms, provided the 
assuming parties qualify according to paragraph (e)(1) of this section. 
Payment assistance may only be granted on ``same term'' assumptions if 
the original loan was approved on or after August 1, 1968.
    (f) Processing payment assistance. (1) General. The adjusted 
payment for which an applicant/borrower qualifies after application of 
payment assistance will be stated in the most current payment 
assistance agreement. Payment assistance agreements will be for a 12-
month period, with the following exceptions:
    (i) Self-employed borrowers. For a self-employed applicant/
borrower, the initial payment assistance agreement will run from the 
effective date to 3 months after the end of the applicant/borrower's 
business fiscal year, but not more than a 12-month period. This will 
[[Page 25655]] allow subsequent agreements to coincide with the 
applicant/borrower's business fiscal year with a 3-month over-lap to 
provide sufficient time for the applicant/borrower to supply 
verification of the previous year's income.
    (ii) Unemployed borrowers. For an applicant/borrower receiving 
unemployment benefits, the agreement will be effective for the period 
during which the applicant/borrower will receive unemployment benefits, 
or, if the period is unknown, no longer than 6 months. The expiration 
date of the agreement will be established by RHCDS.
    (iii) Annual payment borrowers. For an applicant/borrower currently 
paying an annual installment, who receives a subsequent loan, the 
initial payment assistance agreement including the subsequent loan will 
be in effect until the next January 1.
    (2) [Reserved]
    (3) [Reserved]
    (g) Applicant notice of right to appeal. All applicants/borrowers 
who request and are denied payment assistance may appeal in accordance 
with subpart B of part 1900.
    (h) Exceptions. RHCDS may make exceptions to proposed transactions 
in which the conditions prescribed in the foregoing paragraphs of this 
section cannot be met. This paragraph is primarily intended to be used 
for those cases in which the granting of payment assistance is 
necessary for the applicant/borrower to retain or obtain a dwelling for 
the applicant/borrower's own use, and there are no other means to do 
so. RHCDS may authorize a further reduction of the equivalent rate of 
interest in high cost areas as determined by HUD when there is evidence 
to indicate that there is no adequate, lower-cost housing available to 
the applicant which would reduce the applicant's need for additional 
subsidy; the housing to be financed is comparable in cost to housing 
financed for very low-income applicants in the area; and the applicant 
will be unable to acquire adequate housing unless additional subsidy is 
authorized. This exception is limited to an additional percentage point 
reduction in the equivalent rate of interest but in no event may the 
equivalent rate of interest be less than 1 percent except as authorized 
in Sec. 1944.35. A high cost area is an area which has been designated 
as high cost by HUD under the maximum dollar limitation of section 
203(b) of the National Housing Act (12 U.S.C. 1702) (available from any 
HUD office).


Sec. 1944.35  Deferred mortgage payments.

    (a) General. It is the policy of RHCDS to defer 25 percent of the 
installment amount at the 1 percent equivalent interest rate to 
qualified RHCDS borrowers, to assist them in obtaining decent, safe, 
and sanitary dwellings and related facilities. Only principal and 
interest can be deferred.
    (b) Approval authority. RHCDS officials authorized to approve 
section 502 RH loans are also authorized to approve the deferral.
    (c) Eligibility. In order to qualify for deferred mortgage payments 
under this section, the following conditions must exist:
    (1) The applicant/borrower's adjusted family income, at the time of 
initial loan approval, must not exceed the applicable very low-income 
limits in exhibit C to FMHA instruction 1944-A (available in any RHCDS 
field office);
    (2) The term of the loan is 38 years, or 30 years for manufactured 
housing units;
    (3) The applicant/borrower qualifies for the maximum payment 
assistance (equivalent to an interest rate of no more than 1 percent) 
allowable under Sec. 1944.34;
    (4) The applicant/borrower's PITI, calculated at 1 percent 
equivalent interest rate for 38 years, exceeds 29 percent of the gross 
annual income; and,
    (5) The initial deferral assistance under this section is granted 
in connection with the initial loan closing; or deferral assistance is 
being renewed, without interruption, during the 15-year period from the 
effective date of the initial agreement.
    (d) Amount and terms of deferral. (1) The deferral amount is 
determined as follows:
    (i) The applicant/borrower will be the maximum payment assistance 
allowable under Sec. 1944.34.
    (ii) RHCDS will calculate the applicant/borrower's PITI based on 
the equivalent 1 percent interest rate for 38 years (30 years for 
manufactured housing units), and the annual real estate taxes and 
insurance due for the current year (or escrow amounts for real estate 
taxes and insurance premiums due during the current year, where 
applicable).
    (A) If the amount of real estate taxes due for the initial 
agreement is less than a typical year's taxes (such as in new 
construction), then ``eligibility'' for deferral assistance will be 
determined based on the amount of taxes due in a typical year but the 
``amount'' of deferral for which the applicant/borrower qualifies will 
always be based upon actual taxes due for the current year. This may 
result in the applicant/borrower being eligible for assistance but not 
qualifying for deferral in the first year. Although there may not be 
any portion of the payment deferred in the first year, the 15-year 
period for assistance will still be calculated from the date of loan 
closing.
    (B) For renewals of deferral assistance, only the regularly 
scheduled PITI due for the current year calculated at 1 percent 
equivalent interest rate for 38 years, will be considered when 
calculating the deferral amount. Protective advances, additional 
payment agreements, and other payment agreements will not be considered 
in this calculation.
    (iii) If the reduced PITI calculated at 1 percent for 38 years (30 
years for manufactured housing units) still exceeds 29 percent of gross 
annual income, the deferred mortgage payment will be 75 percent of the 
monthly installment amount at the 1 percent equivalent interest rate 
amortized over 38 years.
    (2) Deferred mortgage payments will be effective for a 12-month 
period. The effective date will coincide with the anniversary date of 
the payment assistance agreement. Deferred mortgage assistance may be 
continued, without interruption, for up to 15 years after the effective 
date of the initial agreement. A borrower who no longer qualifies for 
deferred mortgage assistance because of an increase in income, will not 
receive deferred mortgage assistance again, even if income decreases at 
a later date.
    (3) Any principal deferred will accrue interest at rate of 1 
percent per annum. Interest deferred under this section will not accrue 
interest and will not be converted to principal through reamortization 
or other servicing action.
    (e) Review process. The borrower's income, taxes, and insurance 
will be reviewed annually to determine eligibility for continued 
deferred mortgage assistance and payment assistance. The review for 
both types of assistance shall be performed simultaneously. It is not 
the responsibility of RHCDS to monitor changes in the borrower's 
income. If a borrower whose payments are being deferred experiences a 
change in income that qualifies under subpart G of part 1951 for a 
change in payment assistance, the borrower should request a review for 
deferred mortgage payment assistance. Adjustments to deferred mortgage 
assistance and payment assistance will be effective as of the date of 
income change.
    (1) Annual review. The annual review will be scheduled to take 
place during the payment assistance review period as 
[[Page 25656]] defined in subpart G of part 1951 (available in any 
RHCDS field office).
    (2) Responsibilities of the borrower. Before a deferral will be 
approved, the borrower must:
    (i) Provide RHCDS with income verification, as described in 
Sec. 1944.27;
    (ii) Provide RHCDS with information needed to complete the deferral 
section of the Payment Assistance/Deferral/Repayment Agreement;
    (iii) Review and sign appropriate RHCDS forms and documents, and
    (iv) Participate in an interview to review the deferral 
information.
    (3) [Reserved]
    (4) [Reserved]
    (f) Cancellation of deferred mortgage payments. Deferred mortgage 
payments may be canceled for any of the conditions in subpart G of part 
1951. Once a borrower goes off of deferred mortgage payments, the 
borrower is not eligible to receive this assistance again. Deferred 
payments may only be continued for up to 15 years after the effective 
date of the initial payment assistance agreement.
    (g) Recapture. The amount deferred is subject to repayment and 
recapture in accordance with subpart I of part 1951.
    (h) Appeal/review rights. Because the deferred mortgage regulations 
are based on the objective application of formulas, deferred mortgage 
payment calculations are not appealable; however, a review may be 
requested in accordance with subpart B of part 1900. Applicants/
borrowers who request and are denied deferred mortgage payments, or 
whose deferral amount has been reduced, canceled, or not renewed based 
on contested income calculations, may appeal that decision in 
accordance with subpart B of part 1900.


Sec. 1944.36  [Reserved]


Sec. 1944.37  Subsequent section 502 RH loans.

    Subsequent section 502 RH loans may be made to existing borrowers 
for the same purposes and under the same conditions and limitations as 
an initial loan, except as provided in this section. A new credit 
report is required for all applicants for subsequent loans in 
accordance with Sec. 1944.27.
    (a) The subsequent loan will be processed in the same manner as an 
initial loan, except that a new appraisal report will be required in 
accordance with Sec. 1944.24 only when real estate will be taken as 
security and at least one of the following conditions exists:
    (1) The property was not appraised in connection with the initial 
loan;
    (2) The latest appraisal report of the real estate is over 2 years 
old;
    (3) The physical characteristics of the property have changed 
significantly;
    (4) RHCDS is uncertain of the adequacy of the security; or
    (5) The subsequent loan is in connection with a transfer of an 
existing loan subject to subsidy recapture in accordance with subpart I 
of part 1951.
    (b) A subsequent RH loan may be made on a note-only basis, provided 
the amount of the subsequent loan plus the unpaid principal balance of 
any prior note-only RH loans do not exceed $2,500. Applicants/borrowers 
for such loans must meet the requirements of Sec. 1944.18.
    (c) [Reserved]
    (d) The subsequent loan will bear interest at a rate determined in 
accordance with exhibit B of FmHA Instruction 440.1 (available in any 
RHCDS field office).
    (e) A subsequent loan may be made to permit the remaining borrower, 
if eligible, to purchase the equity of a departing coborrower.
    (f) When an area designation has been changed from rural to non-
rural, subsequent RH loans may be made only in accordance with the 
provisions of Sec. 1944.10.
    (g) The loan approval official may authorize reamortization of a 
prior RH loan at the time a subsequent loan is made in those cases in 
which it is determined that the borrower cannot reasonably be expected 
to meet installments due unless the account is reamortized. If the 
account is reamortized, the reamortization must be in accordance with 
subpart G of part 1951.
    (h) Title clearance and appraisal fees for subsequent loans to 
existing RHCDS borrowers for minimal essential repairs to protect the 
Government's security will be handled in accordance with 
Sec. Sec. 1944.18 and 1944.24.


Sec. 1944.38  Mutual Self-Help Housing.

    Low-income applicants may build their homes by participating in a 
Mutual Self-Help Housing project.
    (a) An eligible organization must file a preapplication with the 
District Office for a Self-Help Technical Assistance grant. RHCDS will 
issue Form AD-622, ``Notice of Preapplication Review Action,'' if the 
grant request is approved. If the grantee is eligible but there are no 
available grant and/or loan funds, processing of RH applications will 
not begin until authorized by RHCDS.
    (b) The value of homes financed under this section must be no 
greater than the equivalent value of most modest homes built in the 
area, as described in Sec. 1944.403.


Sec. 1944.39  RH loans to RHCDS employees and loan closing officials.

    RHCDS employees, and loan closing agents, or members of their 
families may obtain a section 502 RH loan subject to the provisions of 
this subpart:
    (a) Written evidence indicating the applicant/borrower's inability 
to obtain the needed credit elsewhere will be included in the 
application.
    (b) Applications will be processed and loans will be serviced 
according to subpart D of part 1900.
    (c) Loans, inventory property sales, or assumption agreements will 
not be approved under this authority for any of the following purposes:
    (1) Buying RHCDS inventory property;
    (2) Buying RHCDS security property from a borrower; or
    (3) Buying RHCDS security property at foreclosure sale.


Sec. 1944.40  [Reserved]


Sec. 1944.41  Housing demonstration programs.

    RHCDS may authorize demonstration programs that may not be 
consistent with some of the provisions of this chapter. Those 
demonstration programs will be clearly identified as such.


Secs. 1944.42-1944.44  [Reserved]


Sec. 1944.45  Conditional commitments.

    (a) General. A conditional commitment is assurance from RHCDS to a 
qualified builder, dealer-contractor, or seller that a dwelling to be 
offered for sale will be acceptable for purchase by qualified RH loan 
applicants if accepted by RHCDS and/or built or rehabilitated in 
accordance with RHCDS approved plans, specifications, and regulations, 
and priced at not more than a specified amount. The conditional 
commitment does not reserve funds nor does it assure that an eligible 
loan applicant will be available to buy the dwelling. The conditional 
commitment is not effective if the area does not remain rural.
    (b) Eligibility. To be eligible for conditional commitments, the 
builder, dealer-contractor, or seller must:
    (1) Be the owner as defined in Sec. 1944.15, prior to the beginning 
of any planned construction, of the site on which the dwelling is 
located or to be built, except as set out in subpart G of part 1822 
(FmHA Instruction 444.8).
    (2) Have the experience and ability to complete any proposed work 
in a competent and professional manner.
    (3) Be financially responsible and have the ability to finance or 
obtain financing for any proposed construction or rehabilitation.
    (4) Comply with the requirements of subpart E of part 1901 and all 
applicable [[Page 25657]] laws, regulations, and Executive Orders 
relating to equal opportunity.
    (5) Plan to build or rehabilitate dwellings which will qualify for 
purchase by RH applicants and which will be in compliance with all 
applicable laws, ordinances, and codes.
    (6) Have the legal capacity to enter into the required agreements 
and the actual capacity to carry them out.
    (c) Limitations. (1) Conditional commitments will be issued only in 
cases where the commitment applicant's selling price does not exceed 
the commitment price, which will never be more than the lower of the 
appraised value or the maximum loan amount as contained in 
Sec. 1944.17.
    (2) Conditional commitments will be issued by RHCDS for new homes 
to be constructed, new manufactured homes, or existing homes (other 
than manufactured).
    (3) Conditional commitments for new or substantially rehabilitated 
dwellings will not be issued after construction has started.
    (4) The total number of conditional commitments issued in any 
locality will not exceed the number of homes for which there is an 
immediate and ready market in that locality. In addition, the total 
number of conditional commitments outstanding in the area served by an 
RHCDS field office will not exceed the number on which the approval 
official can reasonably expect to be able to approve RH loans within 3 
months after the houses covered by the commitments are completed, 
considering the availability of loan funds, and the number of 
applications in any RHCDS field office.
    (5) The period of the conditional commitment will be for 12 months 
from the date of issuance. The commitment may be extended for an 
additional 6 months because of unexpected delays in construction caused 
by such factors as bad weather or materials shortages or marketing 
difficulties.
    (6) When five or more conditional commitments have been issued to 
one recipient during a 12-month period, an affirmative marketing plan 
will be required in accordance with Sec. 1901.203(c).
    (d) Conditional commitments involving packaging of applications. A 
conditional commitment may be made to a seller, builder, or dealer-
contractor who packages a RH application for an applicant to buy the 
property. In cases where the dwelling is presold and is to be 
constructed for sale only to a specific applicant and the information 
on the house and the loan applicant is submitted at the same time, all 
of the following conditions must be met:
    (1) The conditional commitment will not be approved until the RH 
loan has been approved;
    (2) Construction will not begin until loan funds are obligated for 
the RH loan. RHCDS may make an exception to this requirement when it 
appears likely that funding will be forthcoming and it is necessary to 
begin construction because of weather conditions or similar 
circumstances provided the commencement of construction prior to 
closing the RH loan will not jeopardize RHCDS's lien priority.
    (i) In these situations, the sales agreement must indicate that the 
loan has been approved but not funded and must provide that if the loan 
is not closed within 90 days of the date of approval, the contractor 
may, in writing, terminate the sales agreement and sell the home to 
another party. If the sales agreement is terminated, the conditional 
commitment will be honored for another eligible RHCDS loan applicant 
for the remaining period of the commitment, providing the contractor 
has met all other requirements of this subpart.
    (ii) If the sales agreement is terminated, a Certificate of 
Eligibility will be issued to the loan applicant in accordance with 
Sec. 1944.27.
    (3) The RH loan will be closed only after the dwelling is 
constructed or the required rehabilitation completed and final 
inspection has been made.
    (e) Fees. Each commitment applicant will pay a fee for each 
conditional commitment at the time an application is submitted. Fees 
are established in exhibit G (available in any field office). 
Conditional commitment contractors will be reimbursed at the time the 
section 502 RH loan is closed for an amount equal to the fee the 
section 502 RH applicant is charged for the real estate appraisal.
    (f) Processing applications. (1) Applications for conditional 
commitments will be submitted on Form FmHA 1944-36, ``Application for 
Conditional Commitment.'' Attachments as required by on the form will 
be included for each individual dwelling for which a conditional 
commitment is requested.
    (2) [Reserved]
    (3) Evaluation of applications. The commitment applicant must meet 
the requirements of paragraphs (b) and (c) of this section, and the 
dwelling and site must meet the requirements of this subpart and 
subpart A of part 1924 and comply with all local codes and ordinances. 
The property must meet the requirements of subpart C of part 1924 and 
subpart G of part 1940. If the commitment applicant, dwelling, and site 
qualify, an appraisal will be obtained in accordance with subpart C of 
part 1922.
    (4) Failure of applicant or dwelling to qualify. If the application 
is denied for failure to meet the requirements of paragraph (b) (2) or 
(3) of this section, the applicant may appeal in accordance with 
subpart B of part 1900.
    (i) The application fee will be refunded if for any reason 
preliminary inspection of the property or investigation of the 
commitment applicant indicates that a conditional commitment will not 
be issued.
    (ii) Application fees will not be refunded for any property on 
which the required appraisal has been made.
    (5) Conditional commitment approval. The commitment price may not 
exceed the loan approval authority for section 502 RH loans. See 
subpart A of part 1901.
    (g) Inspections. Failure to correct any deficiencies or to complete 
the work in accordance with plans and specifications approved by RHCDS 
will be a basis for canceling the conditional commitment. The applicant 
must allow RHCDS access for the purpose of inspection. See subpart A of 
part 1924.
    (h) Changes in plans, specifications, and/or commitment price. 
RHCDS may approve changes in plans and specifications that are 
consistent with the applicable development standard and exhibit D of 
subpart A of part 1924. If the changes are requested after an option 
has been executed by an RH applicant, the change will be approved only 
if the applicant and the commitment holder agree to the request in 
writing. If a change will reduce or increase the appraised value of the 
property, RHCDS will revise the commitment price and inform the 
commitment holder. Also, in cases when the holder of a commitment 
reports to RHCDS that costs associated with the construction or repair 
of a dwelling have increased, RHCDS may increase the commitment price 
provided the property has not been optioned by an RH applicant, and 
RHCDS determines that the increase is clearly justified, the 
circumstances causing the price increase were beyond the commitment 
holder's control, and the value of the property is adequate to permit 
the increased commitment price. A revised appraisal report will be 
prepared.
    (i) Cancellation of outstanding conditional commitments.
    (1) Conditional commitments may be canceled when construction of 
the dwelling is not begun within 60 days after the commitment is 
issued. [[Page 25658]] 
    (2) Conditional commitments will be canceled when construction is 
not in accordance with all RHCDS requirements, approved plans, 
specifications, or the applicable development standards, and the 
builder does not make corrections necessary for compliance.
    (j) [Reserved]
    (k) Builder's warranty. The builder or seller, as appropriate, will 
execute an RHCDS approved ``Builder's Warranty,'' or provide a 10-year 
insured warranty when construction is completed or the loan to buy the 
dwelling is closed.


Sec. 1944.46  Appeals.

    Any applicant/borrower who requests and is denied assistance or who 
has a right denied, reduced, or canceled may appeal the action in 
accordance with subpart B of part 1900. If a decision is not 
appealable, such as decisions based on verified income or clear and 
objective statutory or regulatory requirements, the applicant/borrower 
may request review rights pursuant to subpart B of part 1900.


Sec. 1944.47-1944.48  [Reserved]


Sec. 1944.49  FmHA Instructions.

    Detailed FmHA Instructions for administering this subpart are 
available in any RHCDS field office.


Sec. 1944.50  [Reserved]

Subpart J--Section 504 Rural Housing Loans and Grants

    9. Section 1944.453(d) is added to read as follows:


Sec. 1944.453  Definitions.

* * * * *
    (d) Owner/occupant. Adults living in the household who have 
ownership rights in the property at the time a loan or grant is closed.
    10. Section 1944.456 is amended by inserting ``, environmental, tax 
monitoring,'' after the word ``architectural'' in paragraph (i); by 
inserting ``, not to exceed $300,'' after the word ``fees'' in 
paragraph (m) introductory text; by removing paragraph (m)(2); by 
redesignating paragraph (m)(3) as paragraph (m)(2); and by adding a new 
paragraph (m)(3) to read as follows:


Sec. 1944.456  Loan and grant purposes.

* * * * *
    (m) * * *
    (3) The package is acceptable and the request is funded.
    11. Section 1944.457 is amended by revising the heading; by 
inserting the word ``loan'' after the word ``Maximum'' in paragraph 
(a)(1); by removing the word ``individual'' in paragraphs (a)(1) and 
(2) and inserting the words ``owner/occupant'' in its place; by 
revising ``$15,000'' to read ``$20,000'' at the end of paragraph 
(a)(1); by revising ``$5,000'' to read ``$7,500'' at the end of 
paragraph (a)(2); and by revising paragraph (a)(4) to read as follows:


Sec. 1944.457  Loan and grant restrictions and record keeping.

* * * * *
    (a) * * *
    (4) Document the amount of grant provided each grantee on a list of 
Section 504 recipients and retain it in the office operational file. 
The list will contain the names of all owner/occupants at the time of 
the grant closing. The list must include the following information 
recorded at the time a section 504 grant is made:
    (i) Grantee's names, address, and case number;
    (ii) Amount of the grant; and
    (iii) Date grant was closed.
* * * * *
    12. Section 1944.458(d)(1) is revised to read as follows:


Sec. 1944.458  Eligibility requirements.

* * * * *
    (d) * * *
    (1) Evaluation of personal resources will exclude the dwelling and 
a minimum adequate site, personal automobile, household goods, and 
liquid assets up to $7,500. Liquid assets are cash or other assets that 
can be converted to cash in 90 days or less. Real estate acreage larger 
than a minimum adequate site will not be excluded from the evaluation.
* * * * *
    13. Section 1944.461(b)(3) introductory text is amended by removing 
the word ``remaindermen's'' before the word ``interests'' in the first 
sentence and inserting the word ``remainder'' in its place, and by 
revising paragraphs (b)(3)(i), (iii), and (iv) to read as follows:


Sec. 1944.461  Security and other requirements.

* * * * *
    (b) * * *
    (3) * * *
    (i) One or more of the holders of remainder interests is not 
legally competent (and there is no guardian or conservator who can 
consent to the mortgage), cannot be located, or the remainder rights 
are divided among such a large number of people that it is not 
practical to obtain the signatures of all the remainder interests;
* * * * *
    (iii) All legally competent persons (or the guardian or conservator 
for any person who is not legally competent) holding remainder 
interests who are using or occupying the dwelling sign the mortgage; 
and,
    (iv) The loan does not exceed the market value of the portion of 
the property represented by the remainder interests of the persons 
signing the mortgage.
* * * * *
    14. Section 1944.463 is amended by inserting the words ``and/or 
other construction development'' after the words ``safety hazards'' in 
the first sentence of paragraph (a) introductory text; by inserting the 
words ``security is taken and'' after the word ``when,'' and by 
revising ``$7,500'' to read ``$15,000'' in the first sentence of 
paragraph (d) introductory text, by removing the word ``Total FMHA 
indebtedness'' from the first sentence of paragraphs (e)(1) and (e)(2) 
and inserting the word ``assistance'' in their place, and by revising 
paragraph (d)(1) to read as follows:


Sec. 1944.463  Technical services.

* * * * *
    (d) * * *
    (1) On a nonfarm tract or small farm, or on a leasehold interest in 
a nonfarm tract or small farm, an estimate of value (limited vs. 
complete appraisal) will be done in accordance with subpart C of part 
1922, based on the direct sales comparison approach only, utilizing the 
most recent comparable sales data available. The Uniform Residential 
Appraisal Report (URAR) will be used for this purpose. These appraisals 
will be done by RHCDS employees having a good understanding of 
appraisal concepts and adequate appraisal training. A small farm, for 
the purpose of this subpart, is a farm as defined in Sec. 1944.2 which 
has value primarily as a residence rather than for the production of 
agricultural commodities, and repayment of the RH loan is not dependent 
on farm income.
* * * * *
    15. Section 1944.467 is amended by removing paragraphs (a)(3), (d), 
and (h); by removing and reserving paragraph (c) by redesignating 
paragraphs (e), (f), and (g) as paragraphs (d), (e), and (f) 
respectively; by revising the introductory text of paragraph (a), and 
by adding a new paragraph (a)(3) to read as follows:


Sec. 1944.467  Processing applications.

    (a) Application. Application for Section 504 assistance will be 
made on Form FmHA 410-4, ``Application for Rural Housing Assistance 
(Non-farm Tract) Uniform Residential Loan Application'', (hereafter 
called URLA) [[Page 25659]] which is available at any RHCDS field 
offices, and the application will be processed in accordance with 
Sec. 1944.27 using applicable forms from exhibit E, available in any 
RHCDS field office.
* * * * *
    (3) Actions taken under this subpart are subject to the 
environmental requirements of subpart G of part 1940.
* * * * *
    (c) [Reserved]


Sec. 1944.468  [Amended]

    16. Section 1944.468 is amended by removing the words ``must not be 
over 90 days old.'' at the end of paragraph (b) and inserting the words 
``are as prescribed in subpart A of this part).''


Sec. 1944.469  [Amended]

    17. Section 1944.469 is amended by removing and reserving 
paragraphs (b) and (c):
    18. Section 1944.472 is amended by adding new language at the end 
of the paragraph to read as follows:


Sec. 1944.472  Subsequent Section 504 loans and/or grants.

    * * * If the area designation has changed from rural to nonrural, 
subsequent loans and grants will be made only for essential repairs.

PART 1951-GENERAL

    19. The authority citation for Part 1951 continues to read as 
follows:

    Authority: 7 U.S.C. 1989, 42 U.S.C. 1480, 5 U.S.C. 301.

Subpart G--Borrower Supervision, Servicing, and Collection of 
Single Family Housing Loan Accounts


Secs. 1951.313-1951.319  [Redesignated as Secs. 1951.314-1951.320]

    20. Sections 1951.313 through 1951.319 are redesignated as 
Secs. 1951.314 through 1951.320 and a new 1951.313 is added to read as 
follows:


Sec. 1951.313  Payment assistance.

    (a) General. The correction, renewal, and cancellation of payment 
assistance agreements and payment assistance granted as a servicing 
action on existing loans is handled under this section. Recapture of 
payment assistance will be calculated and repaid in accordance with 
subpart I of this part.
    (b) [Reserved]
    (c) Existing loans. Payment assistance may be granted at any time 
after loan closing if the following conditions are met.
    (1) The loan was approved on or after August 1, 1968.
    (2) The borrower personally occupies the dwelling unless determined 
uninhabitable by RHCDS or is temporarily not occupied for reasons such 
as seasonal or migratory employment, military call-up, or 
hospitalization.
    (3) The borrower's adjusted annual income does not exceed the 
moderate-income limit contained in exhibit C to FmHA Instruction 1944A 
(available in any RHCDS field office).
    (i) If there is not a reasonable expectation that current income 
will continue for 12 months, income will be projected for the period 
expected rather than for 12 months. For example, if a borrower is 
receiving unemployment benefits, the payment assistance agreement will 
be effective for the period of the benefits. At the end of the benefit 
period or earlier if circumstances change, the borrower's situation 
will be reviewed and appropriate action taken based on current 
circumstances.
    (ii) [Reserved]
    (iii) If one coborrower has left the dwelling due to domestic 
discord, payment assistance may be based on the remaining borrower's 
income if the following conditions are met:
    (A) The remaining coborrower is occupying the dwelling, owns a 
legal interest in the property, is liable for the debt, and agrees to 
notify RHCDS if the other coborrower returns.
    (B) Legal papers have been filed to commence divorce or legal 
separation, a restraining order has been obtained, or one coborrower 
has not been living in the dwelling for at least 3 months. Payment 
assistance will not be granted if separation is due to work assignment 
or military order.
    (4) The term of the loan at closing was at least 25 years. If an 
account has been reamortized and the term of the loan was at least 25 
years initially, payment assistance may be granted even though the term 
of the reamortized loan is less than 25 years. If the term of the loan 
was less than 25 years prior to reamortization, the reamortized term 
must be at least 25 years.
    (5) The amount of payment assistance granted will be based upon the 
borrower's adjusted family income compared to median income for the 
area where the property is located as determined by Sec. 1944.34(c).
    (6) Payment assistance may be granted retroactively for up to 6 
months if the conditions described in paragraphs (c)(1) through (c)(5) 
of this section existed at the time.
    (d) Correction. A corrected payment assistance agreement will be 
prepared under the following circumstances.
    (1) Change in income. RHCDS is not responsible for monitoring 
changes in a borrower's income. If RHCDS becomes aware of income 
changes outside of the renewal period that will change the amount of 
authorized payment assistance as defined in Sec. 1944.34(c), a new 12-
month agreement will be prepared effective the due date following the 
date RHCDS became aware of the change.
    (2) Insufficient payment assistance. If a borrower received less 
payment assistance than the borrower was eligible to receive, a 
corrected agreement will be prepared. The effective date of the 
corrected agreement will be the same date as the agreement being 
replaced.
    (3) Unauthorized assistance. If a borrower received unauthorized 
payment assistance, the account will be serviced in accordance with 
Subpart M of this part. This includes situations where the borrower did 
not advise RHCDS of income increases as required on the Payment 
Assistance/Deferral/Repayment form.
    (e) Renewal--(1) Contractors. State Directors are authorized to 
enter into contracts for the processing of payment assistance renewals. 
Renewal contracts will cover all required actions except approval or 
cancellation of payment assistance.
    (2) [Reserved]
    (i) Borrower Interview. The borrower must be available for an 
interview during each renewal period.
    (ii) Determination of eligibility. Adjusted annual income will be 
determined and documented in the file. All borrowers will be required 
to submit a copy of their most recent Federal income tax return. In 
addition, income for wage earning borrowers will be verified by use of 
an RHCDS form (available in any RHCDS field office), and wage matching, 
if available. Borrowers receiving social security or retirement 
benefits must provide copies of their most recent benefit/award 
letters. Payment assistance will not be renewed if the borrower's 
adjusted family income exceeds the moderate-income limit, (available in 
any RHCDS field office) or if the borrower does not occupy the 
dwelling.
    (iii) Renewals not completed prior to expiration of existing 
agreement. If not due to RHCDS error, the effective date of the renewal 
will be the next due date after the date of approval. If due to RHCDS 
error, the effective date will be the expiration date of the previous 
agreement.
    (3) Termination of foreclosure action. If a payment assistance 
agreement expired after a problem case report recommending foreclosure 
was submitted and the foreclosure action was terminated prior to sale 
or payment [[Page 25660]] in full, payment assistance will be renewed 
effective as of the expiration date of the previous agreement if RHCDS 
is to continue with the loan.
    (4) [Reserved]
    (f) Cancellation. Payment assistance will be canceled when any of 
the following conditions occur:
    (1) The borrower has never occupied the dwelling and RHCDS will not 
continue with the loan. Cancellation will be effective as of the date 
of loan closing or amortization effective date, whichever is 
appropriate.
    (2) The borrower ceases to occupy the dwelling. Cancellation will 
be effective the payment due date following the date of non-occupancy 
if known; otherwise, the payment due date following the date RHCDS 
became aware of the situation.
    (3) The borrower has received improper payment assistance as 
determined in accordance with subpart M of this part and a corrected 
agreement will not be submitted. Cancellation will be effective the 
payment due date following the date RHCDS became aware of the 
situation.
    (4) The borrower is no longer eligible for payment assistance due 
to an increase in income. Cancellation will be effective the payment 
due date following the date RHCDS became aware of the increase.
    (5) The borrower sells or title to the security property is 
otherwise transferred. Cancellation will be effective the payment due 
date prior to the date title transferred. When security property is 
acquired by RHCDS, cancellation will be effective the payment due date 
prior to the date of acquisition.
    (g) [Reserved]
    (h) Notice of right for review or appeal. All borrowers who request 
and are denied payment assistance or whose payment assistance is 
reduced, canceled, or not renewed may appeal or request a review in 
accordance with subpart B of part 1900 of this chapter.
    (i) [Reserved]
    (j) Hardship waiver. The approval official may submit to the 
District Director any situation in which the borrower cannot meet the 
conditions of paragraphs (c) and (e) of this section and it is 
determined that without payment assistance the borrower would 
experience extreme hardship or lose the property through foreclosure. A 
waiver may be granted if the above can be determined and the borrower 
has no other means of retaining the dwelling.

PART 1965--REAL PROPERTY

    21. The authority citation for part 1965 continues to read as 
follows:

    Authority: 7 U.S.C. 1989; 42 U.S.C. 1480; 5 U.S.C. 301.

Subpart C--Security Servicing for Single Family Rural Housing Loans


Sec. 1965.126  [Amended]

    22. Section 1965.126 is amended by removing the words ``serve as a 
minimum adequate site for another dwelling.'' and inserting the words 
``be subdivided and sold.'' in their place at the end of the first 
sentence of paragraph (b)(3); by removing the second, third, and fourth 
sentences and the word ``however'' and the comma preceding it in the 
last sentence of paragraph (b)(4)(i); and by adding the words ``except 
as provided in Sec. 1944.17 of subpart A of part 1944 of this 
chapter,'' following the words ``being assumed'' in the first sentence 
of paragraph (b)(8).

    Dated: March 23, 1995.
Michael V. Dunn,
Acting Under Secretary for Rural Economic and Community Development.
[FR Doc. 95-11308 Filed 5-11-95; 8:45 am]
BILLING CODE 3410-07-U