[Federal Register Volume 62, Number 88 (Wednesday, May 7, 1997)]
[Rules and Regulations]
[Pages 25071-25077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11818]


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DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service
Farm Service Agency

7 CFR Part 1944

RIN 0575-AB93


Processing Requests for Section 515 Rural Rental Housing (RRH) 
Loans

AGENCIES: Rural Housing Service, Rural Business-Cooperative Service, 
Rural Utilities Service, and Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Housing Service (RHS), formerly Rural Housing and 
Community Development Service (RHCDS), a successor Agency to the 
Farmers Home Administration (FmHA), amends its regulations for 
processing loan requests for Rural Rental Housing (RRH) assistance. 
This action is taken to improve loan processing procedures to better 
accomplish the program's purpose of providing rental housing to rural 
areas of greatest need.
    In a future rulemaking document the comment period will be reopened 
for the proposed market study revisions (Exhibit A-8 of 7 CFR part 
1944, subpart E) only.

DATES: The effective date of this final rule is June 6, 1997.

FOR FURTHER INFORMATION CONTACT: Linda Armour, Senior Loan Specialist, 
Multi-Family Housing Processing Division, RHS, U.S. Department of 
Agriculture, Room 5349--South Building, Stop 0781, Washington, D.C. 
20250, telephone (202) 720-1608.

SUPPLEMENTARY INFORMATION:

Classification

    This rule has been determined to be significant for purposes of 
Executive Order 12886 and therefore has been reviewed by the Office of 
Management and Budget.

Paperwork Reduction Act

    The information collection requirements contained in this 
regulation have been previously 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 number 0575-0047, in accordance with the 
Paperwork Reduction Act of 1995. This rule does not impose any new 
information collection requirements.

Civil Justice Reform

    This rule has been reviewed under Executive Order 12778, Civil 
Justice Reform. In accordance with this rule: (1) All state and local 
laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) administrative proceedings in accordance with 7 CFR part 11 must be 
exhausted before bringing suit in court challenging action taken under 
this rule.

Unfunded Mandate Reform Act

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, RHS 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures to State, local, or tribal governments, in 
the aggregate, or to the private sector, of $100 million or more in any 
one year. When such a statement is needed for a rule, section 205 of 
the UMRA generally requires RHS to identify and consider a reasonable 
number of regulatory alternatives and adopt the least costly, more 
cost-effective or least burdensome alternative that achieves the 
objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector. Therefore, this rule is not subject 
to the requirements of sections 202 and 205 of the UMRA.

National Performance Review

    This regulatory action is being taken as part of the National 
Performance Review program to eliminate unnecessary regulations and 
improve those that remain in force.

Programs Affected

    The affected program is listed in the Catalog of Federal Domestic 
Assistance under Number 10.415, Rural Rental Housing Loans.

Intergovernmental Consultation

    For the reasons set forth in the Final Rule related Notice to 7 CFR 
part 3015, subpart V, this program is subject to Executive Order 12372 
which requires intergovernmental consultation with State and local 
officials. RHS has conducted intergovernmental consultation in the 
manner delineated in RD Instruction 1940-J.

[[Page 25072]]

Executive Order 12778

    The Office of the General Counsel has determined that these 
regulations meet the applicable standards provided in section 2(a) and 
2(b)(2) of Executive Order 12778. The provisions of this rule will not 
have retroactive effect prior to the effective date. The provisions of 
this rule will preempt state and local laws to the extent such state 
and local laws are inconsistent herewith. The administrative appeal 
provisions published at 7 CFR parts 11 and 780 must be exhausted before 
action for judicial review may be brought.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It is the determination of RHS 
that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment and in 
accordance with the National Environmental Policy Act of 1969, Public 
Law 91-190, an Environmental Impact Statement is not required.

Background

    RHS has recognized the need to revise the manner in which Section 
515 loan proposals are selected for processing to ensure that 
affordable rental housing reaches areas of the greatest need. This 
resulted from internal reviews by the Agency and reports from the 
General Accounting Office, the USDA Office of the Inspector General 
(OIG), and the Surveys and Investigations Staff of the House Committee 
on Appropriations. In response to such findings, RHS published a 
proposed rule on January 17, 1996 (61 FR 1153). This rule proposed 
changes to the manner in which loans were selected for funding and 
complied with statutory provisions of the Housing Act of 1949 at that 
time. In addition, other program enhancements were proposed to improve 
the quality of loan underwriting. Since publishing the proposed rule, 
the Agriculture, Rural Development, Food and Drug Administration, and 
Related Agencies Appropriations Act, 1997, Public Law 104-180 (herein 
referred to as the Act) was enacted on August 6, 1996. The Act amended 
the Housing Act of 1949 and revised the manner in which RHS selects 
loan proposals. The provisions of the Act conflicted with many of the 
revisions contained in the proposed rule. As a result, the Agency is 
not implementing the changes affecting the priority point system which 
were initially proposed on January 17, 1996.
    In a separate rulemaking document, published elsewhere in this 
issue of the Federal Register, RHS is implementing the provisions of 
the Act. These changes are effective upon publication.
    This rulemaking document implements the other program enhancements 
proposed on January 17, 1996, which were not affected by the Act. This 
rulemaking action is effective June 6, 1997.
    RHS is also publishing elsewhere in this issue of the Federal 
Register a Notice of Funding Availability (NOFA) announcing the 
application requirements for Fiscal Year 1997 Section 515 funding. 
Applicants for the Section 515 program should be aware that, although 
the implementation dates are staggered, the provisions of both 
rulemaking provisions published this date in the Federal Register and 
the provisions contained in the NOFA will apply to any Section 515 loan 
request to be processed in FY 1997.

Implementation Proposal

    This rule includes provisions pertaining to applicant eligibility 
and loan processing procedures that affect loan proposals in process. 
All pending loan requests to be processed in FY 97 will be reviewed for 
compliance and eligibility based on this regulation. Details of the 
provisions adopted in this rule are given in the ``Discussion of 
Comments'' section.

Discussion of Comments

    The proposed rule was published in the Federal Register, 61 FR 
1153, on January 17, 1996, with a 60-day comment period that ended 
March 18, 1996. Nineteen comments were received during the comment 
period from RHS personnel, developers, attorneys, housing advocacy 
groups, and others.
    As previously discussed, the revisions to the point system will not 
be implemented because of recent legislation that directs the Secretary 
to develop objective criteria for identifying and designating areas 
with the greatest need for Section 515 housing. We appreciate the many 
constructive comments that were received regarding the proposed 
revisions. Many of these were general comments that were helpful in 
developing regulations to implement the Act. We would also like to 
thank the RHS staff who reviewed and provided excellent comments on the 
draft census data and priority point scores for the revised system.
    Two comments were received regarding the Agency's reserve account 
requirements. One commentor expressed the opinion that Agency 
requirements were not sufficient for the replacement of major building 
components and recommended increasing the annual reserve account 
requirement from one percent of the RHS loan amount to an amount 
between five and seven percent. The second commentor mentioned the need 
to address reserve account requirements for participation loans. As a 
result, we have included guidance on reserve requirements for 
participation loans in this rule. In addition, we have modified the 
instructions for the Agency's loan agreement to ensure that reserve 
levels are based on the total project, regardless of whether RHS is the 
sole lender or is participating with other funding sources. The revised 
instructions require that the fully funded reserve amount be based on 
the project's total development cost (TDC) or the appraised value, 
whichever is greater, rather than on the RHS loan amount.
    Comments on the major proposed changes are discussed below:
    1. Section 1944.211(a)(15). Eligibility requirements for applicants 
with noncompliance issues or fair housing violations.
    Five comments were received on this section:
    Two comments pertained to paragraph (i), which provides that the 
State Director may request a waiver from the Deputy Administrator, 
Multi-Family Housing, to the requirement that applicants must be in 
compliance with existing workout plans for a minimum of 6 months. One 
commentor noted that this paragraph was inconsistent with existing 
Agency policy, which gives the State Director the authority to grant 
this waiver. This was an oversight; we have changed the appropriate 
paragraph to be consistent with this policy. The second commentor 
suggested that good faith borrowers be allowed to request a waiver 
themselves. We believe the decision to request a waiver should be made 
by the Agency; good faith borrowers should work with their local RHS 
servicing official, who may request a waiver from the State Director 
when circumstances warrant.
    One commentor felt the Agency included items in the list of fair 
housing violations that were not found in the Fair Housing Act and 
suggested eliminating the Fair Housing provisions. The same commentor 
found certain statements to be vague and asked for a definition of 
several phrases, including ``unusual circumstances'', ``in compliance 
with requirements of existing debts'', ``unacceptable compliance 
reviews'', and ``acting in good faith''. Two commentors submitted 
language they felt would accomplish the Agency's purpose and be 
``defensible''.

[[Page 25073]]

The suggested language omits the 6-month compliance period for 
borrowers with workout plans and instead requires only that an approved 
workout plan be in place; it also changes the provision that borrowers 
with serious violations will not be considered eligible to a provision 
that applicants or principals who had been debarred are eligible if the 
debarment period has expired.
    We have made several changes to this section based on the comments 
we received. The suggested wording regarding debarment has been 
included but modified to state that applicants who had been debarred 
but whose debarment period has expired will be considered for 
eligibility, subject to all eligibility requirements. We have retained 
our requirement for the 6-month compliance period to help ensure the 
applicant is complying with the terms of the workout plan and not 
merely signing a token plan in order to meet eligibility requirements. 
We have further defined ``in compliance with existing debts,'' 
``unusual circumstances,'' and ``acted in good faith.'' The paragraph 
on civil rights violations has been revised to specify that the 
applicant and principals must be in compliance with the Civil Rights 
Act of 1964, in accordance with their Assurance Agreement, Form RD 400-
4.
    2. Section 1944.213(f)(3). ``Build and fill'' policies.
    Because of the loan processing changes required by the Act, the 
proposed language in section 1944.213(f)(3) regarding preapplications 
and applications was not adopted in this rule. One commentor expressed 
the opinion that the build and fill provisions should not apply if 
there was no similarity between the proposed units and existing units 
in type or kind, for example, family units versus elderly, 1-and 2-
bedroom units versus 3-and 4-bedroom units. We considered this 
suggestion; however, regardless of type or size units, we believe it is 
necessary to assess the impact of newly developed units on the existing 
housing supply before authorizing additional units. For example, newly 
developed units may create vacancies in existing single or multi-family 
units that meet, or partially meet, the housing needs of the community. 
Therefore, no changes have been made to this policy.
    3. Section 1944.215(n), establishing profit base on initial 
investment, has been revised to include provisions pertaining to low-
income housing tax credit (LIHTC) syndication proceeds.
    4. Section 1944.215(x) has been added to require the RHS servicing 
official to complete Form RD 2006-38, ``Civil Rights Impact Analysis 
Certification,'' to ensure compliance with the civil rights policy of 
the Rural Development mission area.
    5. Section 1944.231. Several revisions were proposed to this 
section but have not been adopted in this rule because of the changes 
in loan processing procedures required by the Act.
    6. Section 1944.233. Participation with other funding sources.
    Ten comments were received on this section. No commentors opposed 
this section but several changes were recommended:
    Three commentors felt we should not require a minimum amount of RHS 
participation. Two of these felt the Agency should be as flexible as 
possible and should determine the amount of the loan on a case by case 
basis; one felt it was in the ``best interest of the government'' for 
RHS to provide the minimum funds necessary.
    We carefully weighed the pros and cons of establishing a minimum 
RHS funding level for participation loans. A major consideration is 
whether sufficient RHS rental assistance (RA) will be available for the 
large number of participation loans that could be developed without a 
minimum RHS funding level. Nevertheless, we want to encourage and 
participate in as many jointly-funded proposals as possible. Therefore, 
each state will be responsible for determining the amount of RHS loan 
funds and RA that can be provided for participation loans, based on the 
Agency's funding priorities, the state's funding and RA levels, and the 
amount of assistance needed to make the participation loan feasible. If 
RHS RA is to be provided, RHS loan participation must equal at least 
ten percent of the TDC unless an exception is granted to allow a lower 
percentage of participation by the Administrator or Deputy 
Administrator for Housing in accordance with Sec. 1944.240. No 
preference will be given to participation loans, and all loans must be 
processed in accordance with Agency regulations and funding priorities.
    Two commentors noted that the proposed provisions regarding RA for 
participation loans in this section were inconsistent with existing 
Agency policy, which stipulates that, where all units require RA, the 
RHS loan must equal at least 50 percent of TDC; where all units do not 
require RA, the RHS loan must equal at least 25 percent and the RA 
provided will be commensurate with RHS' loan participation (for 
example, if RHS is providing 40 percent of the funds, no more than 40 
percent of the units may receive RA). RA has been distributed this FY 
based on existing policy; however, beginning in FY 1997, RA will be 
distributed in accordance with Sec. 1944.233, which provides that RHS 
RA can be provided on any unit where the debt service does not exceed 
what it would have been if RHS provided full financing, up to the RA 
limits established annually in RD Instruction 1940-L.
    Several commentors felt that additional guidance was needed on 
security requirements for participation loans; one commentor offered 
suggestions for guidelines based on recent experience with jointly 
funded Community Facility projects. As a result, we have added 
additional guidance to this section.
    We have added a paragraph designated ``Design requirements,'' to 
ensure that complexes comply with the provisions of Sec. 1944.215 and 
Sec. 1944.222 and that any nonessential facilities permitted under this 
section are designed and operated with appropriate safeguards for 
tenant health and safety.
    7. Exhibit A-7, section II.A. Addition of a requirement in Exhibit 
A-7 that the Market Study address need and demand for both family and 
elderly households and the applicant's loan proposal reflect the 
greater need.
    Four commentors supported this requirement; three opposed it. Those 
who opposed this measure felt that the applicant should have a choice 
if there was a need for both types of housing. One commentor stated 
that demand will almost always be greater for families and that little, 
if any, elderly housing will be built if this requirement is 
implemented, leaving the elderly no choice but to live in family 
complexes although they often do not wish to do so.
    After considering the arguments on both sides, we are adopting this 
measure with the following modifications: First, we believe the 
community should be aware of the results of the market analysis in all 
cases, including the analyst's recommendations regarding project type 
and size. We have revised exhibit A-7 to advise that the applicant will 
make available to the community the market study's conclusions 
regarding need and demand in the community and recommendations 
regarding number of units, type and number of bedrooms. This does not 
require the release of the market study in its entirety. Second, we 
have revised ``greater need'' to ``greater proportionate need'', that 
is, the share or percentage of the community's total rental units that 
are designated for the elderly will be compared to the community's 
share of elderly households, and the share of total rental units for 
families will be compared to the share of family

[[Page 25074]]

households in the community. Third, the applicant's proposed complex 
type must reflect the greater proportionate need of the community. (For 
mixed complexes, the unit mix must reflect the proportionate need of 
family and elderly households.) In unusual circumstances, an exception 
may be granted to this requirement by the State Director if at least 
one of the following conditions is met: the community's housing plan 
indicates that the community's greater immediate need is for the 
complex type of the smaller proportionate need and the plan includes a 
specific proposal to address the housing needs of the other household 
type; the complex has the support of a public community forum 
represented by diverse interests; or the units are needed because of an 
emergency or hardship situation, for example, a loss of housing caused 
by a natural disaster. The circumstances for the exception must be 
clearly documented in the casefile.
    8. Exhibit A-7, section II.G. Use of a market survey to establish 
market feasibility on a case-by-case basis for proposals of 12 or fewer 
units.
    Three commentors supported this change; three opposed it. One 
commentor who supported the revision recommended that this authority be 
limited to loan requests meeting specific conditions or from small 
nonprofit applicants. Those who opposed this option believe a 
professional market study is needed in all cases; one commented that 
loan quality has improved since the Agency began requiring professional 
market studies.
    Opinions were evenly split on this issue, with good arguments for 
both sides. Because this change is optional for each State and requires 
a decision on a case-by-case basis under specific conditions, we have 
implemented this provision.
    9. Implementation of a preliminary preapplication stage including a 
preliminary market analysis, or a preliminary market analysis only 
(with an otherwise full preapplication).
    Three commentors favored implementing both a preliminary 
preapplication stage and market analysis; one commentor favored a 
preliminary market analysis only; two opposed either option; two 
commentors did not give an opinion (one wanted more information and 
felt little was saved from the existing process, the other stated that 
if a preliminary market analysis is implemented, a site visit should be 
required). The arguments for continuing to require a full 
preapplication and market analysis were compelling: (1) As much 
information, if not more, is required to reject a proposal as to 
authorize it; if rejected, it would be very difficult to defend the 
Agency's decision based on preliminary information only; (2) Since two 
Agency reviews would be required (preliminary and full), the processing 
time would not be shortened; and (3) If a full market study is 
requested at a later time, it implies a decision has been made and it 
would be more difficult than ever to reject based on market 
feasibility.
    Because of the valid concerns of those opposing this change and 
because there is no appreciable time savings, we are not implementing 
either option at this time. In addition, with the low volume of new 
loan requests because of reduced funding levels and the backlog of 
approved proposals, implementation of a simplified application process 
would not result in significant savings to either the public or RHS.

List of Subjects in 7 CFR Part 1944

    Administrative practice and procedure, Aged, Handicapped, Loan 
programs--housing and community development, Low and moderate income 
housing, Mortgages, Nonprofit organizations, Rent subsidies, Rural 
areas.

    Therefore, chapter XVIII, title 7, Code of Federal Regulations is 
amended as follows:

PART 1944--HOUSING

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

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

Subpart E--Rural Rental and Rural Cooperative Housing Loan 
Policies, Procedures, and Authorizations

    2. Section 1944.211 is amended by revising the introductory text of 
paragraph (a)(2) and adding paragraph (a)(15) to read as follows:


Sec. 1944.211  Eligibility requirements.

    (a) * * *
    (2) Be unable to obtain the necessary credit from private or 
cooperative sources on terms and conditions that allow establishment of 
rent or occupancy charges within the payment ability of eligible 
tenants or members.
* * * * *
    (15) Meet the following requirements if the applicant, including 
the principals, has prior or existing RHS debts and is applying for a 
new or subsequent loan or requesting incentives to preclude prepayment. 
Applicants who do not meet these requirements will be rejected for 
failure to meet the applicable provisions of this section, as well as 
Sec. 1965.213(c)(2)(i) of subpart E of part 1965 of this chapter, if 
applicable.
    (i) The applicant, including the principals, must be in compliance 
with existing debts in accordance with all legal and regulatory 
requirements and agreements, including the Promissory Note, Loan 
Agreement, and mortgage, all applicable local, state, and federal laws, 
and must provide regular financial and other required reports within 
required timeframes; or, if the applicant fails to meet any of these 
requirements, has an approved workout plan in effect that meets the 
provisions of paragraph (a)(15)(ii) of this section.
    (ii) An applicant or principal with an approved workout plan in 
effect to correct deficiencies in an existing RHS debt may be 
considered for eligibility if the applicant or principal has been in 
compliance with the provisions of the workout plan for 6 months. The 
State Director may waive this requirement for borrowers who have acted 
in good faith but are in noncompliance through circumstances beyond 
their control, including substantial local economic downturn, natural 
disaster, assuming responsibility for a troubled loan through 
substitution of the general partners, or assuming a loan with an 
existing workout plan.
    (iii) Applicants and principals must be in compliance with the 
provisions of the Civil Rights Act of 1964 (in accordance with their 
Form RD 400-4, ``Assurance Agreement'') and all other civil rights 
laws. If the Agency has reasonable grounds, based on a substantiated 
complaint, the Agency's own investigation, or otherwise, to believe 
that the representations of an applicant or borrower as to civil rights 
compliance are in some material respect untrue or are not being 
honored, assistance may be deferred or denied.
    (iv) Applicants or principals who have been debarred but whose 
debarment period has expired will be considered for eligibility subject 
to all requirements of this section.
    (v) Applicants, including principals, who have been determined 
ineligible by one state may not be determined eligible by another State 
until the problems have been corrected or workout plans are in effect 
in all States in which the applicant or principal is operating.
* * * * *


Sec. 1944.212  [Amended]

    3. Section 1944.212 is amended by adding the words ``purchase and'' 
after the word ``such'' in the introductory text of paragraph (b).
    4. Section 1944.215 is amended by revising paragraphs (n)(1) and 
(n)(2) and adding paragraph (x) to read as follows:

[[Page 25075]]

Sec. 1944.215  Special conditions.

* * * * *
    (n) * * *
    (1) Cash contributions made by the applicant from the applicant's 
own resources, which, when added to the loan and grant amounts from all 
sources, do not exceed the security value of the project. Proceeds 
received by the applicant from the syndication of low-income housing 
tax credits (LIHTC) and contributed to the project may be considered 
funds from the applicant's own resources for the portion of the 
proceeds which exceeds:
    (i) the allowable developer's fee determined by the State Agency 
administering the LIHTC, and
    (ii) the amounts expected to be contributed to the transaction, as 
determined by the State Agency administering the LIHTC.
    (2) The value of the building site or essential related facilities 
contributed by the applicant up to the amount which, when added to the 
loan and grant amounts from all sources, is not in excess of the 
security value of the project. An appraisal will be completed in 
accordance with applicable RHS regulations. Value of the applicant's 
contribution will be determined on an ``as is'' basis less liens 
against the property.
* * * * *
    (x) Civil Rights Impact Analysis. It is the policy within the Rural 
Development mission area to ensure that the consequences of any 
proposed project approval do not negatively or disproportionately 
affect program beneficiaries by virtue of race, color, sex, national 
origin, religion, age, disability, or marital or familial status. To 
ensure compliance with these objectives, the RHS approval official will 
complete Form RD 2006-38, ``Civil Rights Impact Analysis 
Certification.''
    5. Section 1944.221 is amended by revising the introductory text of 
paragraph (a) to read as follows:


Sec. 1944.221  Security.

    (a) Mortgage. Each loan will be secured in a manner that adequately 
protects the financial interest of the Government. A first mortgage 
will be taken on the property purchased or improved with the loan, 
except as indicated in paragraphs (a)(1) and (a)(3) of this section 
and, for projects that are funded jointly by RHS and other sources, as 
indicated in Sec. 1944.233(f).
* * * * *
    6. Section 1944.233 is added to read as follows:


Sec. 1944.233  Participation with other funding sources.

    In order to develop the maximum number of affordable housing units 
and promote partnerships with states, local communities, and other 
partners with similar housing goals, RHS participation loans are 
encouraged.
    Apartment complexes developed with participation funds may serve 
lower income households exclusively (RHS very-low and low income-
eligible households; LIHTC income-eligible households) or may be 
marketed to households with mixed incomes. The following will apply:
    (a) RHS loan and rental assistance (RA) participation.
    (1) RHS may participate with loan funds only, or with both RA and 
loan funds, as provided in paragraphs (a)(2) and (a)(3) of this 
section.
    (2) If RHS RA is being provided, RHS loan participation should 
equal at least ten percent of the project's total development cost 
unless authorization for a lower percentage of participation is 
obtained from the National Office in accordance with Sec. 1944.240.
    (3) RHS RA may be provided on any unit where the debt service does 
not exceed what the debt service would have been on that unit if RHS 
provided full financing. The number of RHS RA units available for 
participation loans is limited and established annually through subpart 
L of part 1940 of this chapter.
    (b) General conditions.
    (1) The number of units that will serve RHS income-eligible tenants 
must equal or exceed the number of units financed by RHS, determined by 
dividing the RHS loan amount by the State's average new construction 
cost.
    (2) The total funds provided by all sources may not exceed what is 
necessary to make the project feasible in accordance with 
Sec. 1944.213(a).
    (3) The total debt from all sources is limited to the State 
Director's loan approval authority unless written authorization is 
obtained from the National Office in accordance with Sec. 1944.213(b).
    (4) The complex will be operated and managed in compliance with RHS 
requirements and regulations.
    (5) If Low Income Housing Tax Credits are anticipated on a 
proportion of units higher than the percentage receiving RA or similar 
tenant subsidy, the market study must clearly reflect a need and market 
for units without deep subsidy. It is not the intent of RHS to provide 
servicing RA in the future nor can RHS provide RA on units which have a 
debt service higher than those if RHS had provided full financing.
    (c) Design requirements. Complexes must comply with the provisions 
of Secs. 1944.215 and 1944.222.
    (1) Design features such as patios or balconies, washers and 
dryers, and garbage disposals may be included if they are customary for 
the area and needed for marketability.
    (2) Mixed income complexes may include nonessential common 
facilities such as swimming pools provided:
    (i) The facility is not financed with RHS funds,
    (ii) The complex is able to support the facility's operating and 
maintenance costs through collection of a user fee from tenants who 
subscribe to the service, and
    (iii) The facility is designed and operated with appropriate 
safeguards for tenant health and safety.
    (d) Borrower contribution and return on investment.
    (1) The minimum required borrower contribution will be based on the 
RHS loan amount and determined in accordance with Sec. 1944.213(b).
    (2) For limited profit borrowers, additional funds exceeding the 
minimum required contribution that are provided from the borrower's own 
resources (not loans or grants from other sources) may be included in 
the borrower's initial investment, for purposes of determining return 
on investment, as provided in Sec. 1944.215(n).
    (3) A loan from the borrower to the project may be considered, 
provided the loan proposal meets all conditions of this section and the 
loan to the project is from the borrower's own resources. LIHTC 
proceeds may be considered the borrower's own resources as provided in 
Sec. 1944.215(n)(1).
    (e) Reserve requirements. RHS reserve requirements (the annual 
reserve requirement and the fully funded reserve amount) will be 
determined on a case-by-case basis, taking into consideration the 
reserve requirements of the other participating lenders, so that the 
aggregate fully funded reserve amount established by RHS and the other 
lenders equals at least 10 percent of the project's total development 
cost (TDC) or appraised value, whichever is greater. For example, if 
the other lenders do not have reserve requirements, RHS will establish 
its reserve requirements to meet the full aggregate amount (at least 10 
percent of the TDC or appraised value of the project, whichever is 
greater), regardless of the RHS loan amount. On the other hand, if the 
other lenders have aggregate reserve requirements equal to or higher 
than the minimum 10 percent of TDC or appraised value required by RHS, 
and

[[Page 25076]]

the amount is sufficient to meet project needs based on its capital 
improvement plan, it may not be necessary for RHS to establish 
additional reserve requirements. Reserve requirements and procedures 
for reserve withdrawals should be agreed upon by all lenders and 
included in the intercreditor or participation agreement referenced in 
paragraph (g) of this section.
    (f) Security requirements.
    (1) RHS will take a first or parity lien in all instances where the 
Agency's participation is 50 percent or more.
    (2) If RHS participation is less than 50 percent, every effort 
should be made to obtain a parity lien position. If a parity lien 
cannot be negotiated, an exception may be requested to accept a second 
lien position in accordance with Sec. 1944.240. The State Director will 
submit requests to accept a second lien position to the Deputy 
Administrator, Multi-Family Housing with comments and recommendations.
    (3) RHS will take a first lien on project revenue from rent or 
occupancy payments; RHS, State, or private RA payments; and operating 
and reserve accounts.
    (g) Participation agreement. RHS will enter into a participation 
(or intercreditor) agreement with the other lenders that clearly 
defines each party's relationship and responsibilities to the others.
    7. Section 1944.234 is added to read as follows:


Sec. 1944.234  Actions prior to loan approval.

    Prior to loan approval the application will be reviewed for 
continued eligibility. The applicant may be required to submit updated 
information at that time.
    8. Exhibit A-7 of subpart E is amended in paragraph I.H. by 
revising the words ``preapplication package'' to read ``loan request''; 
and by revising paragraph I.E. and section II; and by adding a new 
paragraph III.D. to read as follows:

EXHIBITS TO SUBPART E

* * * * *

Exhibit A-7--Information To Be Submitted With a Loan Request For a 
Rural Rental Housing (RRH) or a Rural Cooperative Housing (RCH) 
Loan

* * * * *
    I. * * *
    E. Evidence Concerning the Test for Other Credit--Applicants 
must be unable to obtain other credit at rates and terms that will 
allow a unit rent or occupancy charge within the payment ability of 
the occupants. Based upon a review of the applicant's financial 
condition, the servicing official may require the applicant to 
provide documentation regarding the availability of other credit.
* * * * *
    II. Need and demand.
    A. Economic justification, the number of units, and the type of 
facility (family, elderly, congregate, mixed, group home, or 
cooperative) will be based on the housing need and demand of 
eligible prospective tenants or members who are permanent residents 
of the community and its surrounding trade area. Since the intent of 
the program is to provide housing for the eligible permanent 
residents of the community, temporary residents of a community (such 
as college students in a college town, military personnel stationed 
at a military installation within the trade area, or others not 
claiming their current residence as their legal domicile) may not be 
included in determining need and project size. Similarly, homeowners 
may not be included in determining need and project size. The market 
study must include a discussion of the current market for single 
family houses and how sales, or the lack of sales, will affect the 
demand for elderly rental units. The market study may discuss how 
elderly homeowners may reinforce the need for rental housing, but 
only as a secondary market and not as the primary market. The market 
study must assess need and demand for both family and elderly renter 
households. The conclusions of the market study must be provided to 
the community by the applicant, through direct contact with 
community officials whenever possible. The type of complex (family, 
elderly, etc.) that is proposed by the applicant must reflect the 
greater proportionate need and demand of the community, that is, the 
share or percentage of the community's total rental units that are 
designated for the elderly will be compared to the community's share 
of elderly households, and the share of total rental units for 
families will be compared to the share of family households in the 
community. (For mixed complexes, the unit mix must reflect the 
proportionate need of each household type.) In unusual 
circumstances, where there is a compelling need for a complex type 
that does not represent the greater proportionate need (i.e., family 
vs. elderly need), the State Director may consider granting an 
exception to this requirement. At least one of the following 
conditions must be met in order to consider an exception: the 
community's or State's housing plan indicates that the greater 
immediate need is for the complex type of the smaller proportionate 
need and the plan includes a specific proposal to address the 
housing needs of the other household type; the complex has the 
support of a public community forum represented by diverse 
interests; or the units are needed due to an emergency or hardship 
situation, for example, a loss of housing caused by a natural 
disaster. The circumstances for the exception must be documented in 
the casefile. The bedroom mix of the proposed units must reflect the 
need in the market area based on renter household size and the 
bedroom mix of existing units. Market feasibility for the proposed 
units will be determined by RHS based on the market information 
provided by the applicant (requirements are described in section 
II.E. of this exhibit), RHS' knowledge of the market area and 
judgment concerning the need for new units, RHS' experience with the 
housing market in the State and local area, and the U.S. Department 
of Housing and Urban Development's (HUD's) or similar lender's 
analysis of market feasibility for the proposed units.
    B. The applicant must provide a schedule of the proposed rental 
or occupancy rates and, for congregate housing proposals, a separate 
schedule listing the proposed cost of any nonshelter service to be 
provided.
    C. For proposals where the applicant is requesting Low-Income 
Housing Tax Credits (LIHTC), the applicant must provide the number 
of LIHTC units and the maximum LIHTC incomes and rents by unit size. 
This information will determine the levels of incomes in the market 
area which will support the basic rents while also qualifying the 
borrower for tax credits.
    D. For Rural Cooperative Housing (RCH) proposals, market 
feasibility will be evidenced by the names and addresses of 
prospective members who have definitely affirmed their intention of 
becoming cooperative members in the proposed project. In the event 
some persons cannot be accepted for membership for financial or 
other reasons, the cooperative should obtain more names than the 
number of proposed units in order to assure adequate feasibility 
coverage. Exhibit A-4 of this subpart contains a Cooperative Housing 
Survey form which may be used for this purpose.
    E. For Rural Rental Housing (RRH) proposals, except as permitted 
by section II. G. of this exhibit, a professional market study is 
required. The qualifications of the person preparing the market 
study should include some housing or demographic experience. The 
following requirements apply:
    (1) A table of contents, the analyst's statement of 
qualifications, and a certification of the accuracy of the study 
must be included.
    (2) Market analysts must affirm that they will receive no fees 
which are contingent upon approval of the project by RHS, before or 
after the fact, and that they will have no interest in the housing 
project. An analyst with an identity of interest with the developer 
will need to fully disclose the nature of the identity.
    (3) The analyst must personally visit the market area and 
project site and must certify to same in the market study. Failure 
to do so may result in the denial of further participation by the 
analyst in the Section 515 program.
    (4) A detailed study based upon data obtained from census 
reports, state or county data centers, individual employers, 
industrial directories, and other sources of local economic and 
housing information such as newspapers, realtors, apartment owners 
and managers, community groups, and chambers of commerce is 
required. Exhibit A-8 of this subpart details the specific 
information which professional market studies are required to 
provide. The study must be presented in clear, understandable 
language. Negative as well as positive market trends

[[Page 25077]]

must be disclosed and discussed. Statistical data must be 
accompanied by analytical text which explains the data and its 
significance to the proposed housing. Mathematical calculations must 
be expressed in actual numbers and may be accompanied by 
percentages. Each table or section must identify the source of the 
data. A brief statement of the methodology used in the study should 
be included in the foreword and in other sections where necessary 
for clarity. RHS personnel will utilize the market study checklist 
found at exhibit A-12 of this subpart (available in any Rural 
Development office) as a means of measuring market study 
credibility.
    (5) The market study will include:
    a. A complete description of the proposed site and its location 
with respect to city boundary lines, residential developments, 
employment centers, and transportation; the location and description 
of available services and facilities and their distances from the 
site; a discussion of the site's desirability and marketability 
based on its location in the community, adjacent land uses, traffic 
conditions, air or noise pollution, and the location of competitive 
housing units; and a description of the site in terms of its size, 
accessibility, and terrain.
    b. Pertinent employment data, including the name and location of 
each major employer within the community and market area, its 
product or service, number of employees and salary range, commute 
times and distances, and the year the employer was established at 
the location. If income data cannot be obtained from individual 
employers, salary information for the community can be obtained from 
the state employment commission.
    c. Population data required by exhibit A-8 of this subpart, 
including population figures by year, number and percentage of 
increase or decrease, and population characteristics by age.
    d. Household data required by exhibit A-8 of this subpart, 
including number of households by year, tenure (owner or renter), 
age, income groups, and number of persons per household.
    e. Building permits issued and demolitions by year by single 
unit dwelling and multiple unit dwelling. In nonreporting 
jurisdictions, this information may be substituted with the number 
of requests for electric service connections, number of water or 
sewer hookups, etc., obtained from local suppliers.
    f. Housing stock by tenure and vacancy rates for total number of 
units, one-unit buildings, two- or more-unit buildings, mobile 
homes, and number lacking some or all plumbing facilities.
    g. A survey of existing rental housing by name, location, year 
built, number of units, amenities, bedroom mix, type (family, 
elderly, etc.), rental rates, and rental subsidies if any.
    h. A projection of housing need and demand and the analyst's 
recommendation for the number, type, and size of units, based on the 
number of RHS and LIHTC income-eligible renter households, the 
existing comparable housing supply and vacancy rates, the absorption 
rate of recently completed units, the number of comparable units 
currently proposed or under construction, and current and projected 
economic conditions.
    F. For congregate housing proposals with central dining area or 
housing involving a group living arrangement, a narrative statement 
from local, state, or federal government agencies supporting the 
current and long-range need for the facilities in the community and 
its trade area is required.
    G. For RRH proposals of 12 or fewer units, the State Director 
may authorize the use of a market survey to establish market 
feasibility on a case-by-case basis. This authority may be used when 
there is evidence of strong market demand, for example, very low 
vacancy rates and long waiting lists in existing assisted or 
comparable rental units. The casefile must be documented 
accordingly. Exhibits A-2, A-3, and A-5 of this subpart may be used 
for the market survey.
    III. * * *
    D. Appropriate zoning or evidence of capability to be 
appropriately zoned.
* * * * *
    Dated: May 1, 1997.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 97-11818 Filed 5-6-97; 8:45 am]
BILLING CODE 3410-XV-U