[Federal Register Volume 62, Number 246 (Tuesday, December 23, 1997)]
[Rules and Regulations]
[Pages 67216-67224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33396]



[[Page 67215]]

_______________________________________________________________________

Part IV

Department of Agriculture
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Services Agency
_______________________________________________________________________



7 CFR Part 1944



Rural Rental Housing (RRH) Assistance; Final Rule



Notice of Availability of Funds; Multi-Family Housing, Single Family 
Housing and Notice of Funding Availability (NOFA) for the Section 515 
Rural Rental Housing Program

  Federal Register / Vol. 62, No. 246 / Tuesday, December 23, 1997 /  
Rules and Regulations  

[[Page 67216]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency

7 CFR Part 1944

RIN 0575-AC15


Rural Rental Housing (RRH) Assistance

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

ACTION: Final rule.

-----------------------------------------------------------------------

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 the 
Rural Rental Housing (RRH) program. This action is taken to implement 
legislative reforms mandated by the Agriculture, Rural Development, 
Food and Drug Administration, and Related Agencies Appropriations Act, 
1997, Pub. L. 104-180, enacted August 6, 1996, and to implement Pub. L. 
105-86, enacted November 18, 1997, which amends the maximum loan term 
for Section 515 loans from 50 years to 30 years. The intended effect of 
these reforms is to improve the effectiveness and efficiency of the 
Section 515 RRH program.

DATES: The effective date of this final rule is January 22, 1998.

FOR FURTHER INFORMATION CONTACT: Linda Armour or Carl Wagner, Senior 
Loan Specialists, Multi-Family Housing Processing Division, RHS, U.S. 
Department of Agriculture, Room 5349--South Building, Stop 0781, 1400 
Independence Ave., S.W., Washington, D.C. 20250-0781, telephone (202) 
720-1608.

SUPPLEMENTARY INFORMATION:

Classification

    This rule has been determined to be not significant for purposes of 
Executive Order 12886 and therefore has not 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. Under the Paperwork Reduction Act of 
1995, no persons are required to respond to a collection of information 
unless it displays a valid OMB number. The valid OMB control number 
assigned to the collection of information in these final regulations is 
displayed at the end of the affected section of the regulation. This 
rule does not impose any new information collection requirements from 
those approved by OMB.

Civil Justice Reform

    This rule has been reviewed under Executive Order 12988, 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 Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 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.

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, Pub. L. 
91-190, an Environmental Impact Statement is not required.

Background

    On August 6, 1996, Congress enacted the Agriculture, Rural 
Development, Food and Drug Administration, and Related Agencies 
Appropriations Act, 1997, Pub. L. 104-180 (herein referred to as the 
Act). The Act included six reforms to the multifamily housing (MFH) 
program, which the Agency was directed to implement without delay. Four 
of the six reforms were directive and could be implemented as enacted 
without the need for public comment. However, public comment was needed 
for the other two reforms, which provided for substantive changes in 
the manner in which MFH loan requests are processed and gave the 
Secretary administrative discretion in their implementation. Because of 
the mandate to implement the reforms immediately, the rule was 
published as an interim final rule on May 7, 1997 (62 FR 25062), 
effective upon publication. The rule included a 60-day comment period, 
which ended on July 7, 1997.

Discussion of Comments

    A total of seventeen written comments were received from 
developers, nonprofit groups, Rural Development staff, members of 
Congress, and state housing agencies. The Agency appreciates the time 
and effort that went into these comments, many of which offered 
detailed and constructive suggestions.
    Several commentors expressed their support for the four directive 
reforms,

[[Page 67217]]

which have been adopted without change in this final rulemaking 
document:

(1) Assurance That Project Transfers Are in the Best Interest of the 
Tenants and the Government

    Two commentors indicated support for the provisions pertaining to 
project transfers. One stressed the importance of maintaining the 
Agency's inventory in good condition to avoid health and safety 
problems.

(2) Elimination of the Occupancy Surcharge

    Two commentors indicated their support of this legislative change. 
One suggested that the monies collected prior to the elimination of the 
surcharge be used for other program opportunities such as funding the 
Section 538 program or for servicing rental assistance (RA), if not 
returned to the properties. The Agency will consider these 
recommendations on this issue.

(3) Changes to the Equity Loan Program

    Two comments were received on the equity loan program. One 
indicated support for the legislative changes and noted that the Agency 
has not yet established an office of rental housing preservation which 
would make decisions relative to prepayment and incentives, as 
authorized by section 537 of the Housing Act of 1949. The second 
commentor expressed the opinion that the preservation of low income 
housing stock could not be accomplished without significant financial 
incentives for borrowers and predicted that new approaches to the 
prepayment issue would be forthcoming from the courts or Congress in 
the near future.

(4) Implementation of Penalties for Equity Skimming by Project Owners 
and Managers

    Two commentors indicated their support for this legislation. One 
urged the Agency to act quickly in pursuing parties who abuse the 
program to the detriment of residents and other borrowers.
    The majority of the comments on the interim final rule addressed 
the two reforms that included administrative discretion in their 
implementation: (1) Prioritization of assistance and (2) assurances 
that the amount of assistance provided is no more than necessary. Based 
on comments received, several minor changes have been made in the final 
rule.

(1) Prioritization of Assistance

    Sections 1944.228, ``Ranking of rural places based on greatest need 
for Section 515 housing,'' and 1944.229, ``Establishing the list of 
designated places for which Section 515 applications will be invited,'' 
were added to 7 CFR part 1944 to implement the statutory requirements 
pertaining to prioritization of Section 515 assistance. The statute 
directs the Secretary to identify and designate rural areas with the 
greatest need for Section 515 housing, taking into consideration the 
incidence of poverty, the lack of affordable housing and existence of 
substandard housing, the lack of mortgage credit, the rural 
characteristics of the location, and other factors determined by the 
Secretary that demonstrate the need for affordable housing.
    Section 1944.228 of the interim rule provides that places will be 
ranked as follows: Places must qualify as rural areas in accordance 
with 7 CFR 3550.10, lack mortgage credit for borrowers in accordance 
with Sec. 1944.211(a)(2), and demonstrate a need for multifamily 
housing based on the following factors, with equal weight given to 
each: the incidence of poverty, measured by determining households 
below 60 percent of the county rural median income; the incidence of 
substandard housing, measured by determining the number of occupied 
housing units lacking complete plumbing or having more than one 
occupant per room; and the lack of affordable housing, measured by 
determining households below 60 percent of rural median income who are 
paying more than 30 percent of income in rent.
    Twelve commentors addressed the provisions of Sec. 1944.228 and 
offered thoughtful suggestions for modifying the ranking system. 
Specific areas addressed were:
Ranking Factors
    Several commentors felt the ranking factors should be expanded. One 
commentor suggested using additional factors such as the availability 
of existing subsidized housing, the number of vacancies in existing 
subsidized housing, demand, the availability of services, the 
anticipated growth of the area, and the availability of adequate 
utilities. We agree that these factors need to be considered and, in 
fact, they are taken into consideration, either in the selection of 
ranked places for the designated place list or in the market 
feasibility determination. For example, after places have been ranked 
using the Census data, the list is reviewed to determine if any of the 
``build and fill'' conditions exist, one of which is a high vacancy 
rate in existing RHS or similar assisted rental units. Places with any 
``build and fill'' condition may not be included on the designated 
place list; they are deferred until the condition no longer exists. The 
other recommended factors (demand, anticipated growth, availability of 
housing, services, and utilities) are part of the market feasibility 
determination. The Agency believes this is the most effective way to 
take these factors into consideration. It would not be feasible to 
obtain and maintain current market data on all rural communities for 
inclusion in the initial ranking process.
Weights of the Ranking Factors
    Three commentors felt the formula provided an advantage to larger 
rural communities and two of these expressed the opinion that the 
Agency should consider percentages instead of raw numbers to give 
smaller rural communities a better opportunity to compete. In fact, the 
formula used by the Agency, which was not published in the Federal 
Register, considered both raw numbers and percentages. A ranking score 
was assigned to each place for the three factors (income, rent 
overburden, and substandard housing) based on the percentage of its 
total households and on the actual number of households or substandard 
units. Each score for these six rankings was totaled to reach a final 
ranking score. This method targets communities that demonstrate a high 
potential need for housing assistance both by raw numbers and high 
percentages of their total households. This has resulted in a good mix 
of small to mid-size rural communities, and we plan to continue with 
this methodology.
    One commentor suggested giving less weight to substandard housing; 
another suggested giving more weight to rent overburden. We considered 
these suggestions and ran data for several States with the adjusted 
factors. The results were inconclusive and we feel that, in the absence 
of supporting data or documentation, it would be premature to make 
changes in the formula. We intend to leave the weights unchanged for 
the remainder of the 3-year designated place cycle but will continue to 
evaluate the benefits of modifying the formula for future cycles.
Use of 60 Percent of County Rural Median Income
    Two commentors disagreed with the Agency's use of 60 percent of 
county rural median income to determine households in poverty. One 
commentor suggested using 80 percent; the other felt strongly that 30 
percent more closely represented households in poverty, and thus areas 
of greatest need,

[[Page 67218]]

as required by the statute. The Agency has compared the various 
percentages of county rural median income in several states to the 
National poverty figure. Based on our review, we agree that 30 percent 
more closely approximates the National poverty figure. As a result, 
ranking will be based on households at or below 30 percent of county 
rural median income. The ranking data has been calculated for all 
States based on this figure and will be used to select any additional 
designated places. Places that are currently on the designated place 
list will remain on the list for the remainder of their 3-year 
designation period, or until removed or deferred in accordance with 
Sec. 1944.229(d). The revised ranking data and list of designated 
places are discussed further in the ``Implementation Proposal''.
Adding Counties to the Ranking List
    Two commentors suggested the Agency rank counties as well as 
communities. This is an issue that was considered at length in the 
development of the interim final rule. Because the statute mandates the 
Secretary to identify and target areas of greatest need, we felt that a 
county-wide designation was too broad, since the needs of the 
communities within a county can vary widely. If an entire county were 
designated, an applicant might well choose areas that have higher 
incomes and less substandard housing, even though the true need for 
housing may be greater in another community. We believe it is necessary 
to identify and designate specific communities to ensure that funds are 
directed to areas of greatest need and, therefore, we have not revised 
this provision.
Flexibility in the Ranking Factors
    Eight commentors felt the ranking factors should allow more 
flexibility for state and local conditions. This is another issue that 
was discussed at length in the development of the interim final rule. 
We recognize that conditions and goals vary from state to state; 
however, we believe it is critical to maintain National standards for 
program consistency. In addition, it would be difficult for States to 
obtain objective data that could be added to the ranking formula. 
Instead of providing flexibility in the ranking factors, we provided 
flexibility in the selection of designated places. This was 
accomplished in the regulation by allowing States to select places from 
further down the ranking list, but still within the top ranked, that 
have been identified as high need areas in the state Consolidated Plan 
or state needs assessment. To provide further flexibility, we have 
included provisions in the final rule for States with an active state 
leveraging program. Details are given below under the heading 
``Designated places for States with an active state leveraging 
program''.
    As published in the interim final rule, Sec. 1944.229, 
``Establishing the list of designated places for which Section 515 
applications will be invited'', provides that the number of designated 
places may equal up to 5 percent of the State's total eligible rural 
places but must equal, in all cases, at least 10 places. To be included 
on the list of designated places, a place must have 250 or more 
households as a minimum feasibility threshold for multifamily housing 
and may not have any of the ``build and fill'' conditions specified in 
Sec. 1944.213(f)(2). Places that meet the minimum size threshold and do 
not have any ``build and fill'' conditions are then selected in rank 
order to form the list of designated places. This section provides the 
flexibility for States, with National Office concurrence, to select up 
to 10 percent of their designated places to provide geographic 
diversity or to reach high need areas, provided such places are within 
the top-ranked 10 percent of the state's total rural places.
    Nine commentors addressed the provisions of Sec. 1944.229 in the 
following areas:
Establishing the Number of Designated Places
    Five commentors felt that the limit of 5 percent of the state's 
total eligible rural places was too restrictive and did not provide 
sufficient diversity. Recommended percentages ranged from 10 to 20 
percent. One commentor recommended a percentage of places equal to 25 
percent of the state's total rural households. An analysis of several 
states showed that the latter suggestion was equivalent to 
approximately 10 percent of the states' total rural places. We reviewed 
the ranking data for several States and found that there was little 
difference in the ranking scores between places that rank in the top 5 
percent compared to those within the top 10 to 20 percent, simply 
because of the volume of places being ranked. Therefore, a small 
increase in the percentage of designated places will still target the 
neediest communities. Accordingly, the 5 percent limit has been 
modified in the final rule to allow States to designate up to 10 
percent of their total eligible rural places. In addition, based on 
comments that expressed concern that Indian reservations, colonias, 
Empowerment Zone and Enterprise Communities (EZ/ECs), and Rural 
Economic Area Partnership (REAP) communities were frequently not 
included on the list of designated places, the final rule provides that 
States may designate these special high-need areas in addition to their 
10 percent or minimum 10 places.
Build and Fill Conditions
    Three commentors mentioned their support for ``build and fill'', 
which is widely understood to mean that no additional Section 515 
housing will be approved if other Section 515 or similar assisted units 
have been approved, are under construction, or not yet filled. However, 
the ``build and fill'' provisions include other conditions which 
indicate that the market does not currently need additional rental 
housing: existing Section 515 or similar assisted housing units are 
experiencing high vacancies; a request for a Servicing Market Rate Rent 
(SMR) is pending or in effect and still needed; or the need in the 
market area is for additional rental subsidies and not for additional 
housing units. Places with any of these conditions may not be included 
on the designated place list. States are responsible for reviewing 
their ranking list, consulting with HUD and other housing agencies, and 
deferring places with ``build and fill'' conditions. In response to the 
comments we received recommending that the Agency consider these or 
similar market factors in the ranking data, we believe the provision 
which defers places with ``build and fill'' conditions accomplishes 
just that. One commentor noted that places were listed on the 
designated place list with high vacancies in assisted housing 
complexes. Any such instances should be brought to the attention of the 
RHS State office staff for their review. The Agency will continue to 
stress the importance of reviewing the designated place list annually 
for ``build and fill'' conditions. Another commentor recommended 
including low income housing tax credit (LIHTC) units in the definition 
of assisted housing complexes for purposes of ``build and fill''. We 
agree and have added a specific reference to LIHTC units in the ``build 
and fill'' provisions in Sec. 1944.213(f)(2).
Minimum Number of Households for Designated Places
    Four commentors objected to the requirement that designated places 
have a minimum of 250 households and noted that market demand should be 
the determining factor, not an arbitrary size requirement. We agree 
that market demand should determine project feasibility; however, we 
feel that places

[[Page 67219]]

with fewer than 250 households rarely have sufficient demand or the 
support services necessary for multifamily complexes. We believe it is 
prudent to maintain a National feasibility standard and, therefore, 
have retained this provision. We have also retained the ability for 
States that have been successful in developing and operating 
multifamily units in very small communities to request an exception 
from the National Office to establish a lower state-wide feasibility 
threshold. In addition, based on concerns that Indian reservations are 
sometimes excluded because households are frequently split between two 
or more communities within the same reservation, we have modified this 
provision to specify that, for Indian reservations, there must be 250 
or more households on the reservation.
Designated Places for States With an Active State Leveraging Program
    Eight comments were received from Rural Development State staff, 
state housing agencies, members of Congress, and applicants, urging the 
Agency to provide more flexibility for States with an active state 
leveraging program. It was noted that, in many cases, the areas 
targeted by the state agencies did not correspond to the RHS designated 
places. As a result, funds that had been set aside by state agencies 
for leveraging with RHS funds were not able to be fully used. The 
Agency is committed to partnering with other providers of resources; 
however, at the same time, we have a legislative mandate to designate 
rural areas of greatest need and to direct RHS funds to those areas. To 
accomplish both priorities, we have added provisions in the final rule 
to allow States with a formal state leveraging program and agreement 
with their state agency to develop a partnership designated place list 
with the state agency, which must be approved by the National Office. 
Places selected for the list must be high-need areas based on criteria 
consistent with the Agency's statutory requirements as well as the 
state's authorizing requirements. All loan requests (including those 
for places on the partnership designated place list) will be scored 
together as one group. In order of point score or, where there are 
point score ties, in order of point score and number assigned in 
accordance with Sec. 1944.231(b)(3), two ranking lists will be formed: 
the RHS ranking list will include loan requests for places on the RHS 
place list, and the partnership ranking list will include loan requests 
for places on the partnership place list. Selection for further 
processing will be as follows: Loan requests must first be selected 
from the RHS ranking list that, based on total development cost (TDC), 
are proportionate to the State's RHS allocation. Loan requests will 
then be selected in order of highest point score (or point score and 
tie-breaker number), regardless of whether the loan requests are on the 
RHS ranking list or the partnership ranking list. For example, a State 
with a Section 515 allocation of $2 million has three loan requests on 
the RHS ranking list with point scores of 20, 9, and 5 respectively; 
and two loan requests on the partnership ranking list with point scores 
of 18 and 15. The first loan request that will be processed is the 
highest ranked proposal on the RHS list, with a point score of 20. This 
request has a TDC of $1.2 million, of which the RHS loan request is 
$500,000. The next request that will be processed is the second ranked 
proposal on the RHS list, with a point score of 9. This loan request 
has a TDC of $1 million, of which the RHS loan request is $750,000. The 
total amount of RHS funds requested for these two proposals 
($1,250,000) is less than the RHS allocation of $2 million; however, 
the total TDC for the two requests equals $2.2 million, which exceeds 
the State's allocation. This satisfies the provision that loans must be 
funded in places on the RHS designated place list proportionate to the 
RHS allocation. Having satisfied this provision, the next loan requests 
will be selected in order of highest point score, regardless of whether 
they are on the RHS list or the partnership list. In this example, 
assuming there are sufficient funds remaining, the next loan request to 
be processed would be the 18-point request on the partnership list, 
followed by the 15-point request on the partnership list, and then by 
the 5-point request on the RHS list.
    Section 1944.230 was added in the interim final rule to establish 
provisions on loan application submission deadlines and the 
availability of funds. This section specifies that the Agency will 
publish annually in the Federal Register a Notice of Funds Availability 
(NOFA), any limits on the amount of individual loan requests, the dates 
for the funding cycles, and the deadline for submission of loan 
applications.
    Five commentors addressed this section. Two commentors expressed 
their support for the NOFA system; one commentor was opposed; the other 
two offered suggestions but did not indicate strong feelings one way or 
the other. One of the supporters felt the NOFA system was a very cost 
effective way for developers to participate in the program without 
having development money tied up for several years waiting for funds to 
become available. We agree, and would like to add that the decision to 
move to a NOFA system was reached with extensive input from the Section 
515 stakeholders who participated in the development of the reform 
regulations.
    The commentor who opposed the NOFA system felt that it: (1) 
Encouraged applicants to expend funds for proposals that might not 
materialize; (2) eliminated nonprofit applicants because they lack the 
time and money to put together an application; and (3) nearly 
eliminated leveraging because of the problems coordinating with 
partners. On the first issue, we believe the NOFA system will be more 
cost effective, not less, since applicants do not have to incur costs 
over a period of time waiting for funds to become available. The 
submission requirements for applicants are the same under the NOFA 
system as under the previous regulations, so the cost of submitting a 
loan request has not changed; the difference is that, under the 
previous system, applicants were required to maintain the site option 
and update the market and financial information annually and still were 
not guaranteed of funding because of the backlog of requests and 
limited availability of funds. Under the NOFA system, applicants know 
within a short timeframe whether their loan request has been selected. 
No further costs are incurred unless or until the applicant reapplies 
in the next funding cycle. As a point of interest, the Agency is 
reviewing the Section 515 submission requirements to determine if the 
initial cost to applicants can be reduced, for example, by modifying 
the initial market analysis requirements. These changes are being 
considered as part of the Agency's ``reinvention'' regulation, which is 
scheduled to be published for comment early in 1998. On the second 
issue, we do not believe the NOFA system precludes nonprofits from 
applying. In fiscal year 1997, the period of time for submitting 
applications was shortened because of the time involved in writing and 
publishing the regulations. However, in future years, the Agency will 
publish NOFA as early as possible in the fiscal year and provide a 
longer application period. In addition, places are designated for 3 
years, so applicants can continue to develop applications prior to 
publication of NOFA. On the third issue of coordinating NOFA with other 
funding cycles, we believe this issue will also be alleviated by the 
publication of NOFA early in the fiscal year. The earlier publication 
of NOFA

[[Page 67220]]

will enable States to coordinate the RHS funding cycle with the state 
agency's funding cycle. Three other commentors on this section also 
mentioned the importance of coordinating with other funding cycles and 
publishing the NOFA as early as possible.
    One commentor suggested adding a provision that a project must have 
full funding committed by the end of the fiscal year and must start 
construction within a specified number of days (270 was suggested) or 
lose its obligation. We agree that it is necessary to establish and 
enforce processing deadlines or timeframes and we are addressing this 
issue in the reinvention of the multifamily regulations.
    Section 1944.231, processing loan requests, was revised in the 
interim final rule to incorporate processing procedures for the NOFA 
system and to add provisions for scoring and ranking loan requests 
under the new system. Six commentors addressed this section in the 
following areas:
Application Requirements
    Two commentors discussed the application process and requirements. 
One suggested that the Agency develop a uniform application package and 
checklist to ensure that all applications are received in the same 
format and judged by compliance to that format. We think this is an 
excellent idea and are developing a checklist and administrative 
guidance on determining a complete application that will be provided to 
States concurrently with the publication of this rule. The other 
commentor objected to the elimination of the term ``preapplication'', 
believing this served no useful purpose and was changed merely for the 
sake of change. We adopted the term ``initial loan request'' (or 
``initial application'') because we believe it to be more appropriate 
for the NOFA process, which is a one-step annual selection process 
instead of the two-step process previously used, in which 
preapplications were kept on hand until funds became available. We also 
feel the terms are more consistent with those used by other lenders.
Scoring Loan Requests
    The interim regulation provides that loan requests will be scored 
based on five factors:
    (1) The presence and extent of leveraged assistance (including 
services, abatement of taxes, etc.) for the units that will serve RHS 
income-eligible tenants, not including tax credits or donated land. (0 
to 20 points)
    Five commentors addressed this loan scoring factor. One commentor 
felt the Agency needed to quantify amounts for services and tax 
abatements; another felt the 0-20 point range was too subjective. The 
same commentor recommended that the Agency reexamine its decision to 
give points for leveraged assistance because the benefits of the 
leveraged funds might be offset by an increase in demand for rental 
assistance. Another commentor felt that leveraging should not dominate 
the scoring and suggested that the Agency consider several additional 
factors, which are discussed below in ``Other scoring factors''. One 
commentor said it was unclear whether tax credit funds were eligible to 
receive points for leveraging, and three commentors recommended that 
tax credit funds that are dedicated back to the project's development 
or operation or to tenant subsidies be eligible to receive points.
    In response to the comment that the range of 0 to 20 points is too 
subjective, the Agency provided separate administrative guidance to RHS 
staff at the time the regulation was published to ensure that all loan 
requests were scored consistently. We also provided guidance on 
establishing a value for services and tax abatements. On the issue of 
whether tax credit funds may be considered leveraged assistance for 
purposes of awarding points, we agree that any funds the applicant 
contributes to the proposal in excess of his or her required 
contribution, including tax credit proceeds, should be eligible for 
consideration for points as long as there is an equal or positive 
impact on basic rents. We have modified this provision accordingly in 
the final rule. Regarding the demand for rental assistance (RA), we do 
not foresee a major impact on RA usage, especially with the increased 
interest in developing mixed-income complexes that require only partial 
RA.
    (2) The loan request is for units to be developed in a colonia, 
tribal land, or EZ/EC community, or in a place identified in the state 
Consolidated Plan or state needs assessment as a high need community 
for multifamily housing. (20 points)
    No comments were received on this loan selection factor; however, 
the Agency inadvertently omitted REAP (Rural Economic Area Partnership) 
communities in the list of high need areas in the interim final rule. 
This omission has been corrected in the final rule.
    (3) The loan request is in support of a National Office initiative 
announced in NOFA. (20 points)
    One commentor addressed this factor, expressing a concern that, 
without specific parameters, the factor could be used for politically 
motivated initiatives.
    This factor was developed to ensure there is flexibility in the 
regulation for initiatives that are consistent with the statute that 
would enable the Secretary to direct funds to specific areas or for 
specific purposes in the event of unforeseen circumstances or events. 
We feel it is important to maintain this flexibility and, in the 
absence of other opposing comments, we have retained this provision.
    (4) The loan request is in support of an optional factor developed 
by the State that promotes compatibility with special housing 
initiatives in conjunction with state-administered housing programs 
such as HOME funds or low income housing tax credits (LIHTC). A factor 
thus developed cannot duplicate factors already included in this 
paragraph and must be provided to the National Office prior to the 
funding cycle for concurrence and inclusion in the NOFA. (20 points)
    One comment was received on this provision. The commentor felt that 
the factor needed further description and expressed a concern that it 
could be used to give preference to LIHTC loan requests, effectively 
excluding other loan requests.
    This provision was included to give Rural Development State 
Directors more flexibility in working with their states to accomplish 
common housing goals, which we believe is critical to the Agency's 
partnership efforts. Factors developed under this provision require 
National Office concurrence, and we have retained this provision in the 
final rule.
    (5) The loan request includes donated land meeting the provisions 
of Sec. 1944.215(r)(4). (5 points)
    One commentor felt that the Agency needed to redefine its 
provisions pertaining to preference for donated land in 
Sec. 1944.215(r)(4), stating that the 1-year ownership requirement was 
too restrictive. The same commentor expressed the opinion that the 
value of land provided at no cost to the project should be included as 
leveraging or factored into the evaluation of costs.
    On the first issue, the provisions for donated land preference are 
based on statute, and pertain to land donated by States, units of local 
government, public bodies, and nonprofit organizations. The 1-year 
ownership restriction was added to prevent abuse of this preference and 
may be waived by the State Director if it is clearly documented that 
there was no intent to circumvent the provisions.
    On the issue of including donated land as leveraged assistance or 
factoring the value into the evaluation of costs,

[[Page 67221]]

the regulations do provide for this. Section 1944.211(a)(4) provides 
that the borrower's contribution may be in the form of cash, land, or a 
combination thereof. Any land value (as determined by the appraisal) 
that exceeds the borrower's required contribution may be considered 
leveraged assistance up to the amount which, when added to the loan and 
grant amounts from all sources, does not exceed the security value of 
the project. This applies to all donated land; therefore, donated land 
meeting the provisions of Sec. 1944.211(a)(4) may receive 5 points 
under the donated land scoring factor and may also be eligible for 
points for leveraged assistance under the leveraged assistance factor. 
We have revised the point score factor for leveraged assistance to 
remove the exclusion of donated land.
Other Scoring Factors
    Several commentors suggested additional factors for scoring loan 
requests. One commentor recommended awarding points for proposals in 
communities with RUS financed water or sewer systems to encourage total 
rural development. We agree there is merit in encouraging total rural 
development; however, awarding points for RUS financed facilities would 
penalize other communities with adequate systems that were not 
developed through RUS, or communities whose residents are unable to 
support the cost of these systems. In developing the interim final 
rule, we considered a similar provision whereby communities would be 
required to have water and sewer systems to qualify as a designated 
place; however, for the same reason, i.e., that communities that could 
not support the cost would be penalized, we did not adopt this 
provision. Another commentor noted that leveraged assistance should not 
dominate the scoring, and suggested other factors to consider such as 
design, construction quality, experience of the development team, 
resident services, ease of maintenance, and compatibility with the 
community. We agree these factors are critical to a successful proposal 
and, in developing the interim final rule, we considered awarding 
points for many of these same factors. However, we felt it would not be 
possible to develop standards for factors that require subjective 
judgments, such as an assessment of quality or experience, that could 
be equally applied to all proposals. With our competitive selection 
process, we believe it is essential to maintain an objective scoring 
process and, therefore, we have not adopted these factors.
Nonprofit Preference
    One commentor supported the preference for nonprofit applicants but 
asked for clarification on how the preference was given; another 
commentor stated that loan requests from nonprofit applicants should be 
selected by merit and not by lottery. In response to the first comment, 
preference is given to loan requests from nonprofit or public body 
applicants meeting the provisions of Sec. 1944.231(e) by giving 
preference in the event of point score ties. If there are point score 
ties for loan requests from two or more applicants meeting the 
provisions of Sec. 1944.231(e), selection is made by lottery. In 
response to the suggestion that applicants be selected by merit and not 
by lottery, we feel it would not be possible to develop objective 
standards for judging the quality or experience of applicants that 
could be uniformly applied; therefore, we have retained the lottery 
provisions for point score ties.
Conditional Commitments
    Two commentors recommended that the Agency issue a conditional or 
``soft'' commitment when funding from other sources is contingent upon 
RHS funding. We recognize that this has been a problem in many 
instances, with both parties wanting the other to make the first 
commitment. The following policy will be followed: The Agency will 
publish NOFA as early in the year as possible to coordinate with other 
funding cycles. Loan proposals that include secondary funds from other 
sources that have been requested but have not yet been committed will 
be scored and ranked based on the requested funds: Provided, That (1) 
the applicant includes evidence of a filed application for funds, and 
(2) the funding date of the requested funds will permit processing of 
the loan request in the current year, or, in the event the applicant 
does not receive the requested funds, will permit processing of the 
next highest ranked proposal in the current year. States will issue a 
conditional commitment letter to the applicant with a specific deadline 
for providing a commitment of funds from the other lender. If the 
deadline is not met, the application will be returned as incomplete. 
The next highest ranked proposal will then be selected for further 
processing.

(2) Assurances That the Amount of Assistance Provided is No More Than 
Necessary

    Section 1944.213 was revised in the interim final rule to implement 
the statutory reforms pertaining to necessary assistance. Four 
commentors expressed their support for these provisions and recommended 
minor revisions as follows:
Developer's Fees
    One commentor noted that the section on developer's fees was 
included twice, once in Sec. 1944.213(a)(1)(iv) and again in 
Sec. 1944.213(a)(2). This error has been corrected in the final rule.
Fee Norms
    One commentor expressed support for the fee norms in 
Sec. 1944.213(a)(1) but suggested that the rule clarify that the fee 
norms are to be used only in cases where an executed Memorandum of 
Understanding (MOU) with the state agency is not in effect.
    The regulation pages provided to RHS staff included a provision to 
this effect, as well as other administrative guidance, that was not 
published in the Federal Register. Interested parties may obtain a copy 
of the regulation pages from any Rural Development office.
Loan Request Analysis
    The same commentor expressed support for the requirement that RHS 
consult with the applicant and the state allocating agency in cases of 
potential excess assistance to strive to reach an agreement for 
reducing any excess, and asked that the phrase ``and state agency'' be 
added after the words, ``In the event that excess assistance is not 
reduced through an agreement with the applicant,'' in 
Sec. 1944.213(a)(3)(iii). This revision has been made in the final 
rule.
Excess Assistance
    Two commentors suggested that if excess assistance is determined, 
the funds be put into project reserves or otherwise used to benefit the 
project, instead of reducing the amount of assistance. One of the 
commentors noted that current mandated reserve levels are minimal and 
it would make good sense to increase the reserve level.
    We agree that additional funds could be used to benefit the 
project; however, we do not believe this would be consistent with our 
statutory mandate to provide only the amount of assistance necessary 
for the development of the project. As a point of interest, the project 
reserve requirements are being revised as part of the reinvention 
effort, which should alleviate the problems we

[[Page 67222]]

have experienced because of underfunded reserves.
    In addition to the reforms discussed above, this rule includes a 
change in the maximum loan term for Section 515 loans from 50 years to 
30 years. This change is mandated by Pub. L. 105-86, enacted November 
18, 1997.

Implementation Proposal

    The provisions of this rule become effective 30 days from the date 
of publication and all loans will be processed in accordance with the 
revised regulations. The final rule changes the income basis for the 
ranking data from 60 percent of county rural median income to 30 
percent and increases the number of designated places that may be 
selected. This, in turn, may affect loan requests on hand that were 
issued an AD-622, ``Notice of Preapplication Review Action,'' inviting 
a formal application prior to November 7, 1996 (the date Agency staff 
were advised not to issue additional AD-622s pending the implementation 
of the new statutory requirements). For purposes of this discussion, 
these loan requests will be referred to as ``AD-622s''.
    The interim final rule announced the Agency's intent to fund AD-
622s on hand, in date order received, provided they met the new 
statutory requirements and were in designated places. Agency staff were 
directed to return AD-622s that were not in designated places. This was 
later amended by a Notice published in the Federal Register (62 FR 
32752) on June 17, 1997, which directed Agency staff to hold the AD-
622s until after the publication of the final rule because of 
anticipated changes in the designated place requirements.
    Based on the large number of comments supporting an increase in the 
number of designated places, the final rule has been modified to allow 
States to select designated places up to 10 percent of their total 
rural places. Places currently on the designated place list will remain 
on the list for the duration of their 3-year designation period or 
until removed or deferred in accordance with Sec. 1944.229(d). States 
may add places from the new ranking list up to the maximum 10 percent.
    Using the revised place list, States may process AD-622s in 
designated places, in date order the complete application was received, 
up to the amount of the State's allocation. Existing AD-622s may be 
processed in this manner until the beginning of FY 2000. As in FY 1997, 
NOFA for FY 1998 will list those States that have AD-622s on hand that 
will use their direct allocation.

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--Rental, 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 1944.205 is amended in the definition of ``Eligible 
tenants or cooperative members'' by revising the words ``exhibit C of 
subpart A of this part 1944 (available in any FmHA or its successor 
agency under Pub. L. 103-354 office)'' to read ``7 CFR 3550.53'', and 
by adding in alphabetical order definitions to read as follows:


Sec. 1944.205  Definitions.

* * * * *
    EZ/EC. Empowerment Zone or Enterprise Community.
* * * * *
    REAP. Rural Economic Area Partnership.
* * * * *
    3. Section 1944.213 is amended by removing paragraph (a)(1)(iv), in 
paragraph (a)(3)(iii) by adding the words ``and state agency'' 
following the words ``In the event that excess assistance is not 
reduced through an agreement with the applicant''; and by adding the 
word ``, LIHTC'' following the word ``HUD'' in the introductory text of 
paragraph (f)(2) and in the first sentence of paragraphs (f)(2)(ii) and 
(f)(2)(iii).
    4. Section 1944.214 is amended by revising paragraph (b) to read as 
follows:


Sec. 1944.214  Rates and terms.

* * * * *
    (b) Amortization period. Each loan will be scheduled for payment 
within a period that is necessary to assure that the loan will be 
adequately secured, taking into account the probable depreciation of 
the security. The payment period will not exceed 30 years; however, if 
necessary to ensure affordability, the loan may be amortized for a 
period not to exceed 50 years.
    5. Section 1944.228 is amended in paragraphs (c)(1) and (c)(3) by 
revising the words ``60 percent'' to read ``30 percent''.
    6. Section 1944.229 is amended by revising paragraphs (a), (b)(1), 
(c), and (d), and by adding a new paragraph (f) to read as follows:


Sec. 1944.229  Establishing the list of designated places for which 
Section 515 applications will be invited.

* * * * *
    (a) Establishing the number of designated places. Initially, the 
number of designated places may equal up to 10 percent of the state's 
total eligible rural places ranked in accordance with Sec. 1944.228, 
but must equal, in all cases, at least 10 places. For example, in a 
state with 1,000 total rural places, the State may designate up to 10 
percent, or 100 places. However, in a state with 60 total rural places, 
the State would use the minimum number of 10 places, since 10 percent 
of 60 equals 6. In states where 10 percent equals more than the minimum 
number of 10, consideration in determining the number of places to 
include on the list should be given to the size and population of the 
state, funding levels, and the potential for leveraging. If warranted 
by funding levels, the Administrator may authorize in NOFA the 
selection of designated places up to 20 percent of the States' total 
rural places.
    (1) States may designate a higher number of places than 10 percent 
or the minimum 10 places to reach high-need areas in accordance with 
paragraph (c)(3) of this section.
    (2) States that anticipate high loan activity because of leveraging 
may designate a number of places higher than 10 percent or the minimum 
10 places with the concurrence of the National Office.
    (b) * * *
    (1) Must have 250 or more households as a minimum feasibility 
threshold for multi-family housing, or, for Indian reservations, must 
have 250 or more households within the boundaries of the reservation; 
and
* * * * *
    (c) Selection of designated places. Places meeting the requirements 
of paragraph (b) of this section will be selected from the ranking list 
as follows:
    (1) At least 80 percent of the State's total designated places must 
be selected in rank order from the list.
    (2) With concurrence from the National Office, up to 20 percent of 
the State's designated places may be selected for geographic diversity. 
For example, in a state with 1,000 total rural places, the State has 
elected to select designated places equal to the maximum 10 percent, or 
100 places. Of

[[Page 67223]]

the 100 places, at least 80 percent, or 80 places, must be selected 
from the places that meet the requirements of paragraph (b) of this 
section in order of their ranking; up to 20 percent, or 20 places, may 
be selected for geographic diversity. Places selected for geographic 
diversity must be the highest ranked place in each geographic division 
designated by the State, which must correspond with established State 
divisions, such as districts, regions, or servicing areas.
    (3) In addition to the designated places selected in accordance 
with paragraphs (c)(1) and (c)(2) of this section, States may designate 
the following high need areas for multi-family housing:
    (i) Places identified in the state Consolidated Plan or similar 
state plan or needs assessment report.
    (ii) EZ/ECs, Indian reservations or communities located within the 
boundaries of tribal allotted or trust land, colonias, or REAP 
communities.
    (d) Length of designation. Places will remain on the list of 
designated places for 3 years or until a loan request is selected for 
funding or the community is otherwise deferred for other ``build and 
fill'' conditions, whichever occurs first. Places that are deferred 
before the end of the 3-year designation period will be reviewed 
annually for potential inclusion on the next year's list of designated 
places. A place may be removed from the list prior to the end of the 3-
year designation period because of a substantial loss of income-
eligible population or an increase in the affordable rental housing 
supply, for example, a place that experiences the closing of a military 
base or other major employer.
* * * * *
    (f) Partnership designated place list. States with an active 
leveraging program and formal partnership agreement with the state 
agency may establish a partnership designated place list consisting of 
places identified by the partnership as high need areas based on 
criteria consistent with the Agency's and the state's authorizing 
statutes. The partnership agreement and partnership designated place 
list must have the concurrence of the Administrator. Ranking and 
selection of loan requests for places on the partnership designated 
place list will be in accordance with Sec. 1944.231(b)(3)(iii) and 
Sec. 1944.231 (b)(6) of this subpart.
    7. Section 1944.231 is amended by revising paragraphs 
(b)(2)(iii)(A) and (b)(2)(iii)(B), and by adding paragraphs (b)(3)(iii) 
and (b)(6) to read as follows:


Sec. 1944.231  Processing loan requests.

* * * * *
    (b) * * *
    (2) * * *
    (iii) * * *
    (A) The presence and extent of leveraged assistance for the units 
that will serve RHS income-eligible tenants at basic rents comparable 
to those if RHS provided full financing. Eligible types of leveraged 
assistance include loans and grants from other sources, contributions 
from the borrower above the required contribution indicated by the 
Sources and Uses Comprehensive Evaluation, and tax abatements or other 
savings in operating costs provided that, at the end of the abatement 
period when the benefit is no longer available, the basic rents are 
comparable to or lower than the basic rents if RHS provided full 
financing. Scoring will be based on the presence and extent of 
leveraged assistance for each loan request compared to the other loan 
requests being reviewed, computed as a percentage of the total 
development cost of the units that will serve RHS income-eligible 
tenants. A total monetary value will be determined for leveraged 
assistance such as tax abatements or services in order to compare such 
items equitably with leveraged funds. As part of the loan application, 
the applicant must include specific information on the source and value 
of the services for this purpose. Proposals will then be ranked in 
order of the percent of leveraged funds and assigned a point score 
accordingly. Loan proposals that include secondary funds from other 
sources that have been requested but have not yet been committed will 
be processed as follows: the proposal will be scored based on the 
requested funds: Provided, that the applicant includes evidence of a 
filed application for the funds; and the funding date of the requested 
funds will permit processing of the loan request in the current funding 
cycle, or, if the applicant does not receive the requested funds, will 
permit processing of the next highest ranked proposal in the current 
year. The Agency will issue a conditional commitment to the applicant 
with a specific deadline for providing a commitment of funds from the 
other source. If the deadline is not met, the application will be 
returned as incomplete and the next ranked proposal will be processed. 
(0 to 20 points)
    (B) The loan request is for units to be developed in a colonia, 
tribal land, EZ/EC, or REAP community, or in a place identified in the 
state Consolidate Plan or state needs assessment as a high need 
community for multi-family housing. (20 points)
* * * * *
    (3) * * *
    (iii) States with a partnership designated place list developed in 
accordance with Sec. 1944.229(f) of this subpart, will score and rank 
loan requests as follows:
    (A) All loan requests (including those for places on the 
partnership designated place list) will be reviewed and scored together 
as one group, following the process described in paragraph (b)(2) of 
this section.
    (B) Using the point score and rank order established in accordance 
with paragraphs (b)(3)(i) and (b)(3)(ii) of this section, two separate 
ranking lists will be formed: the RHS ranking list will consist of loan 
requests for places on the State's designated place list; the 
partnership ranking list will consist of loan requests for places on 
the partnership designated place list. Selection of loan requests for 
further processing will be in accordance with paragraph (b)(6) of this 
section.
* * * * *
    (6) Selection of loan requests for further processing for States 
with a partnership ranking list. States with a partnership ranking list 
developed in accordance with paragraph (b)(3)(iii) of this section, 
will use the following process:
    (i) Loan requests must first be selected in rank order from the RHS 
ranking list that, based on total development cost (TDC), are 
proportionate to the State's RHS allocation amount.
    (ii) After loan requests have been selected in accordance with 
paragraph (b)(6)(i) of this section, remaining RHS funds must be used 
for the next highest scoring loan requests (or point score and tie-
breaker number assigned in accordance with paragraph (b)(3) of this 
section), regardless of whether they are on the RHS ranking list or the 
partnership ranking list.
* * * * *
    8. Section 1944.233 is amended in paragraph (a)(3) by revising both 
occurrences of the words ``debt service'' to read ``basic rent'', and 
in paragraph (b)(5) by revising the words ``a debt service'' to read 
``basic rents''.
    9. Exhibit A of subpart E is amended in section IV.B.2.c. in the 
second sentence by revising the words ``50 years'' to read ``30 years, 
with an amortization period not to exceed 50 years.''
    10. Exhibit A-7 of subpart E is amended by removing paragraph VII 
and by redesignating paragraphs VIII and IX as paragraphs VII and VIII 
respectively.

[[Page 67224]]

    11. Exhibit A-9 off subpart E is amended by adding a new paragraph 
17 to read as follows:
    Exhibit A-9--Additional Information To be Submitted for Rural 
Rental Housing (RRH) and Rural Cooperative Housing (RCH) Loan Requests
* * * * *
    17 Comments must be submitted in accordance with 7 CFR, part 3015, 
subpart V, ``Intergovernmental Review of Department of Agriculture 
Programs and Activities.'' See RD Instruction 1940-J (available in any 
Rural Development office).
    12. Exhibit H of subpart E is amended in the fourth sentence by 
revising the words ``50-year maximum life of the loan'' to read ``30-
year maximum life of the loan''.

    Dated: December 18, 1997.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 97-33396 Filed 12-22-97; 8:45 am]
BILLING CODE 3410-XV-U