[Federal Register Volume 68, Number 105 (Monday, June 2, 2003)]
[Proposed Rules]
[Pages 32872-32954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12761]



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Part III





Department of Agriculture





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Rural Housing Service



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7 CFR Part 3560



Streamlining and Consolidation of the Sections 514, 515, 516, and 521 
Multi-Family Housing (MFH) Programs; Proposed Rule

  Federal Register / Vol. 68 , No. 105 / Monday, June 2, 2003 / 
Proposed Rules  

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DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3560

RIN 0575-AC13


Streamlining and Consolidation of the Sections 514, 515, 516, and 
521 Multi-Family Housing (MFH) Programs

AGENCY: Rural Housing Service, USDA.

ACTION: Proposed 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), proposes to streamline and 
reengineer its regulations and to utilize private sector process and 
techniques in the administration of the origination, management, 
servicing, and preservation of its Multi-Family Housing (MFH) programs. 
These programs include the section 515 Rural Rental Housing (RRH) loan 
program, the section 514/516 Farm Labor Housing loan and grant program, 
and the section 521 Rental Assistance (RA) program.
    This action is to reduce regulations, assure quality housing for 
residents, improve customer service, and improve the Agency's ability 
to achieve effectiveness and flexibility in managing the MFH portfolio. 
This streamlining will result in a reduction to the Code of Federal 
Regulations (CFR) coverage of the MFH programs by 90 percent. To 
explain how this was accomplished, the rewrite of the 1930-C regulation 
is offered as an example. This regulation alone covers 366 pages of 
CFR. The extensive language currently describes in detail, the form and 
format for conducting internal MFH supervisory activities by Agency 
personnel. This regulation has been replaced in the proposed rule with 
a four-page chapter. This was accomplished by using the authority of 
the regulation to develop a new handbook, which will provide direction 
on conducting monitoring actions. The handbook will incorporate many 
ideas that were obtained from the streamlining process into the 
streamlining of Agency supervisory efforts and will clarify and 
standardize the monitoring requirements, thereby reducing burden on 
borrowers and management agents.

DATES: Written or e-mail comments on this proposed rule must be 
received on or before August 1, 2003.

ADDRESSES: Written comments may be submitted, in duplicate, to the 
Branch Chief, Regulations and Paperwork Management Branch, Support 
Services Division, U.S. Department of Agriculture, Stop 0742, 1400 
Independence Avenue SW., Washington, DC 20250-0742. Comments may be 
submitted via the Internet by addressing them to 
``[email protected]'' and must contain the word ``Streamlining'' in 
the subject. All comments will be available for public inspection at 
3rd floor, 300 E Street, SW., Washington, DC 20546 during normal 
working hours.

FOR FURTHER INFORMATION CONTACT: Sue Harris-Green, Deputy Director, 
Multi-Family Housing Direct Loan Division, Rural Housing Service, U.S. 
Department of Agriculture, Room 1241, South Building, Stop 0781, 1400 
Independence Avenue, SW., Washington, DC 20250-0781; Telephone: (202) 
720-1660.

SUPPLEMENTARY INFORMATION:

Classification

    This proposed rule has been determined to be significant and was 
reviewed by the Office of Management and Budget (OMB) under Executive 
Order (E.O.) 12866.

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 the proposed action does not constitute a major Federal action 
significantly affecting the quality of the environment and in 
accordance with the National Environmental Policy Act of 1969, Pub. L. 
91-190, an Environmental Impact Statement is not required.

Regulatory Flexibility Act

    The proposed rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned 
has determined and certified by signature on this document that this 
rule will not have a significant economic impact on a substantial 
number of small entities since this rulemaking action does not involve 
a new or expanded program nor does it require any more action on the 
part of a small business than required of a large entity.

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose a substantial direct compliance costs on state and local 
governments. Therefore, consultation with the states is not required.

Civil Justice Reform

    This proposed rule has been reviewed under E.O. 12988, Civil 
Justice Reform. If this proposed rule is adopted: (1) Unless otherwise 
specifically provided, all state and local laws that are in conflict 
with this rule will be preempted: (2) no retroactive effect will be 
given this rule except as specifically prescribed in the rule; and (3) 
administrative proceedings of the National Appeals Division of the 
Department of Agriculture (7 CFR part 11) must be exhausted before 
bringing suit.

Unfunded Mandate Reform Act

    Title II of the Unfunded Mandate 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, 
federal agencies generally must prepare a written statement, including 
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 statement is needed for a 
rule, section 205 of the UMRA generally requires a federal Agency 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.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, the Agency 
will seek Office of Management and Budget (OMB) approval of the 
reporting and recordkeeping requirements contained in this proposed 
regulation.
    Title: Direct Multi-Family Housing Loans and Grants.
    Type of Request: New Information Collection.
    Abstract: Through public and private partnerships, RHS enables 
limited profit and nonprofit sponsors to develop rental housing for 
low-, very low- and moderate-income rural residents across rural 
America. In addition, loans and grants are made to house farmworkers,

[[Page 32873]]

one of the most under-housed segments of our society. The $11.8 million 
portfolio of 444,000 units and nearly 17,400 projects often provides 
the only decent, safe, and sanitary affordable rental housing available 
in rural areas.
    The information collected is used by the Agency to manage, plan, 
evaluate, and account for Government resources. The reports are 
required to ensure the proper and judicious use of public funds.
    Estimate of Burden: Public reporting burden for this collection of 
information is estimated to average 0.61 hours per response.
    Respondents: Limited for profit and nonprofit developers, public 
bodies and rural tenant households.
    Estimated Number of Respondents: 500,000.
    Estimated Number of Responses per Respondent: 4.3.
    Estimated Number of Responses: 2,166,709.
    Estimated Total Annual Burden on Respondents: 1,318,434 hours.
    Copies of this information collection can be obtained from Tracy 
Givelekian, Regulations and Paperwork Management Branch, at (202) 692-
0039.
    Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Agencies, including whether the information will have practical 
utility; (b) the accuracy of the Agencies' estimate of the burden of 
the proposed collection of information, including the validity of the 
methodology and assumptions used; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (d) ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology.
    All responses to this notice will be summarized, included in the 
request for OMB approval, and will become a matter of public record. 
Comments should be submitted to Tracy Givelekian, Regulations and 
Paperwork Management Branch, Support Services Division, Rural Housing 
Service, U.S. Department of Agriculture, STOP 0742, 1400 Independence 
Avenue, SW., Washington, DC 20250-0742. A comment is best assured of 
having its full effect if it is received within 30 days of publication 
of this rule.

Programs Affected

    The programs affected by this regulation are listed in the Catalog 
of Federal Domestic Assistance under number 10.405--Farm Labor Housing 
Loans and Grants; 10.415--Rural Rental Housing Loans; and 10.427--Rural 
Rental Assistance Payments.

Intergovernmental Consultation

    These loans are subject to the provisions of E.O. 12372 which 
require intergovernmental consultation with state and local officials. 
RHS conducts intergovernmental consultations for each loan in a manner 
delineated in RD Instruction 1940-J (available in any RD office and on 
the Internet at http://rdinit.usda.gov/regs/).

Background Information

An Overview

    Most communities in rural America have a scarcity of decent rental 
housing affordable to very low-income families. In addition, migrant 
farm workers and farm laborers, whose incomes are extremely limited, 
face some of the worst housing conditions in the nation. Despite 
improvements in housing quality, especially in the number of rural 
units with complete plumbing facilities, there are about 2.7 million 
families who live in substandard housing. According to 1990 census 
data, rural renters were more than twice as likely to live in 
substandard housing as people who owned their own homes. With lower 
median incomes and higher poverty rates than homeowners, many renters 
are simply unable to find decent housing that is affordable. RHS's 
rental housing programs are some of the few resources that enable the 
very low-income renters in rural America to access decent, safe, 
sanitary and affordable housing. In many of America's rural 
communities, there are simply no other safe and sanitary alternatives 
for very low-income people.
    Through public and private partnerships, RHS enables limited profit 
and nonprofit developers to build rental housing for low-income and 
very low-income tenants across rural America. The $11.8 billion 
portfolio of 444,000 units and nearly 17,400 projects often provides 
the only decent, affordable rental housing available in rural areas. 
The program provides affordable rental housing to very low income and 
low-income rural families, to handicapped and to elderly residents. The 
average tenant has an adjusted income of $8,105.
    This direct loan program employs a public-private partnership by 
providing subsidized loans at an interest rate of 1 percent to 
developers to construct or renovate affordable rental complexes in 
rural areas. This 1 percent loan keeps the debt service on the property 
sufficiently low to support below-market rents affordable to low-income 
tenants. Many of these projects also utilize low-income housing tax 
credit proceeds. This program is typically used in conjunction with RHS 
section 521 Rental Assistance, which provides project-based rental 
assistance payments to property owners to subsidize tenants' rents to 
an affordable level. With rental assistance, tenants pay 30 percent of 
income towards their rent (including utilities). Some 515 projects also 
utilize HUD's Section 8 project-based assistance, which enables 
additional very low-income families to be served.

Goals of the Regulatory Streamlining Process

    This proposed rule is a result of RHS's pledge to make its programs 
more customer-friendly, streamline the processes, reduce costs to the 
taxpayer, and increase the Agency's level of customer service. This 
goal was accomplished through the input and commitment that resulted 
from numerous stakeholder meetings with recognized leaders in the 
multi-family industry. These leaders included borrowers, management 
agents identified by industry groups and tenant representatives. 
Representatives of state housing finance agencies, accounting firms and 
the USDA Office of Inspector General also participated. Through these 
meetings, we were able to draw a vast amount of expertise and knowledge 
to meet the following objectives of MFH streamlining and consolidation: 
Assure affordable safe, decent and sanitary housing for very low and 
low-income residents of rural America.
    [sbull] Consolidate and simplify 13 regulations into one regulation 
for rural rental housing, farm labor housing and rental assistance.
    [sbull] Develop an efficient loan application process that supports 
the creation of partnerships and leveraging with local, state and other 
federal entities.
    [sbull] Clarify our existing policies and procedures to reflect the 
best practices within the Agency and within the multi-family field.
    [sbull] Improve efficiency and service to our customers, correcting 
past problems and addressing concerns raised by our stakeholders so 
that particularly complex processes, such as preservation, work better.
    [sbull] Make much of the farm labor housing review and approval 
processes the same as those for rural rental housing.
    [sbull] Create a series of handbooks available to the field staff 
and to our

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applicants, borrowers and partners that will give clear guidance on 
policies, such as project budget approvals, determining project 
feasibility, and servicing actions.

Streamlining and Consolidation

The Proposed Regulation
    RHS has undertaken a major redevelopment and consolidation of Rural 
Development regulations affecting the sections 514, 515, 516, and 521 
Multi-Family Housing (MFH) programs. The result of the streamlining and 
consolidation is a proposed rule that revises and consolidates Agency 
regulations affecting the section 514, 515, 516, and 521 Multi-Family 
Housing (MFH) Programs. This rule consolidates the policies outlined in 
13 separate regulations and a number of administrative notices into one 
regulation and moves the procedural guidance to program handbooks. A 
list of the regulations being consolidated follows:
    [sbull] 7 CFR part 1806, subpart A--Real Property Insurance.
    [sbull] 7 CFR part 1930, subpart C--Management and Supervision of 
Multi-Family Housing Borrowers and Grant Recipients.
    [sbull] 7 CFR part 1944, subpart D--Farm Labor Housing Loan and 
Grant Policies, Procedures, and Authorizations.
    [sbull] 7 CFR part 1944, subpart E--Rural Rental and Rural 
Cooperative Housing Loan Policies, Procedures and Authorizations.
    [sbull] 7 CFR part 1951, subpart D--Final Payment on Loans.
    [sbull] 7 CFR part 1951, subpart K--Predetermined Amortization 
Schedule System (PASS) Account Servicing.
    [sbull] 7 CFR part 1951, subpart N--Servicing Cases Where 
Unauthorized Loan or Other Financial Assistance Was Received--Multi 
Family-Housing.
    [sbull] 7 CFR part 1955, subpart A--Liquidation of Loans Secured By 
Real Estate and Acquisition of Real and Chattel Property.
    [sbull] 7 CFR part 1955, subpart B--Management of Property.
    [sbull] 7 CFR part 1955, subpart C--Disposal of Inventory Property.
    [sbull] 7 CFR part 1956, subpart B--Debt Settlement Farm Loan 
Programs and Multi-Family Housing.
    [sbull] 7 CFR part 1965, subpart B--Security Servicing for Multiple 
Housing Loans.
    [sbull] 7 CFR part 1965, subpart E--Prepayment and Displacement 
Prevention of Multi-Family Housing Loans.
    These changes have two clear benefits. First, the consolidated 
streamlined regulation makes information easier to access. Answers to 
policy questions are found in one document that has been shortened from 
over 1,500 pages to approximately 180 pages. Similarly, answers to 
process and implementation questions are found in three handbooks. 
These handbooks provide ``how-to'' guidance on loan origination, asset 
management, and loan servicing. Agency staff, property owners, property 
managers, and residents can look for most of their answers to day-to-
day questions in the handbooks where they will find plain English 
explanations and examples. If the regulatory basis for a procedure is 
in question, that information can be easily found in the streamlined 
regulation. The increased ease of finding information should help 
improve public understanding of the rules and eliminate inconsistencies 
in interpretation.
    Second, the division of policy and procedure gives the agency more 
flexibility to update and revise program procedures. For example, as 
automation changes the way program reporting occurs, relevant 
procedures can be updated in the handbooks without going through a 
complex process of changing the regulation. This will make the agency 
more responsive to changes in the business environment, an important 
initiative as the Federal Government strives to have more of its 
business conducted on-line and through electronic submissions.
    The paperwork burden reduction resulting from the proposed rule 
would be approximately 25 percent. This estimate is derived from the 
Paperwork Burden Report that RHS prepared.
The Proposed Handbooks
    As stated above, the Agency is developing three separate handbooks 
that will present the reader with the administrative guidance on 
matters. One handbook will be devoted entirely to General Requirements 
and Loan Origination Requirements. It will instruct the reader on 
procedures and provide information on matters such as what forms must 
be filed, where to submit loan requests and the agency's internal 
processing procedures. The same principles will be followed in the 
publication of the Asset Management Handbook and the Project Servicing 
Handbook respectively. The handbooks will not be published in the 
Federal Register but will be available to the public at no cost.
    RHS is currently developing the proposed Handbooks while 
aggressively analyzing all existing burden imposed upon the public to 
obtain and retain MFH program assistance. The Handbooks will be 
available on RHS's Web site at http://www.rurdev.usda.gov/rhs/index.html. Access to the Handbooks will also be available through the 
local RHS servicing office.
Current Regulations and Notices
    Current regulations may be found on RHS's Web site at http://rdinit.usda.gov/regs/index.html or in the Code of Federal Regulations.
Exhibits
    Many of the exhibits that are part of the current regulations may 
be found in the three companion handbooks to 7 CFR part 3560: Loan 
Origination, Asset Management, and Project Servicing. The Loan 
Origination Handbook will provide RHS multifamily housing staff with 
the guidance needed to originate loans and grants efficiently and 
effectively. The Asset Management Handbook will provide RHS multifamily 
housing staff with guidance about the Agency's procedures for 
overseeing borrowers' performance in meeting their responsibilities 
under the program. The Project Servicing Handbook will provide Loan 
Servicers with guidance about the Agency's procedures for servicing 
actions involving borrowers receiving loans or grants for multifamily 
housing projects. As an example, Exhibit A-13 of 7 CFR part 1944, 
subpart E will be found in Attachment 6-B to Chapter 6 of the Loan 
Origination Handbook and Exhibit B-1 of 7 CFR part 1930, subpart C will 
be found in Exhibit 3-1 of Chapter 3 of the Asset Management handbook.

Changes to the Rule With Significant Impact

Reserve Requirements for Project Improvements

    This proposed rule will require an annual minimum of 1 percent of 
total development cost to be put in a reserve account, with a maximum 
reserve requirement up to the level needed to assure resources being 
available to maintain the housing at Agency standards.
    Current regulations include standards for physical condition, 
maintenance, and reserve levels to address the physical condition of 
the property. However, projects are experiencing physical maintenance 
problems due to their average age. One of the sources of this problem 
is that project reserves are inadequate to cover ongoing capital needs. 
Current regulations require that borrowers contribute initially 1 
percent annually of total development costs toward a reserve for 
project

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improvements until a total of 10 percent is reached. While borrowers 
are permitted to request adjustments to their reserve contributions, 
there is no systematic provision for reevaluating reserves over the 
life of the project. A recent study found that while an average MFH 
project has accumulated $5,000 in reserves per unit at the end of 10 
years and maintained at that level thereafter, the full cost of 
rehabilitation is likely to be close to $16,000 per unit. When 
rehabilitation is needed and the reserve is inadequate to meet the 
need, the project owner usually applies for a subsequent loan, which, 
if received, requires that rents be increased. In recent years, RHS has 
been experiencing a growing number of requests for subsequent loans and 
rent increases to cover costs of rehabilitation, while funding for such 
loans has been limited.
    Increasing the reserve requirements would be appropriate to address 
the physical needs and the life expectancy of most MFH projects. It 
will help reduce the need for subsequent loans or servicing actions, 
and improve the long-term physical condition of projects and help 
protect the MFH portfolio from defaults. In existing projects where RHS 
is taking servicing actions, the proposed rule would help ensure that 
each project's physical needs are addressed in current servicing 
actions and, thus, reduce the need for attention at a later date. Such 
servicing actions include write-downs of existing loans. Thus, it is 
possible that the proposed rule would result in additional write-downs 
as a means of addressing the need for the project improvements. To 
date, RHS has written-down only a limited number of MFH loans. Further, 
the additional reserve requirement will be reflected in project costs, 
which means that rents will increase, and the amount of rental 
assistance payments needed to maintain existing contracts for such 
assistance will increase.

Investment Earnings on Reserve Account Funds

    RHS has found that most project owners are putting their reserve 
funds in accounts that earn no or minimal income. The average reserve 
account has been earning only 2 percent interest annually. Project 
owners indicate that, under current regulations and tax rules, they 
have few options for investing these funds and face a strong 
disincentive for investing them in a manner that maximizes their 
return. The disincentive is due to Internal Revenue Service (IRS) rules 
that treat income earned on reserve accounts as investment income for 
the owner and, thus, taxable, rather than project income.
    The proposed rule makes two changes to address these limitations. 
First, it allows a greater number of investment options. These options 
include relatively conservative investment vehicles that are used by 
other public agencies and are not expected to pose a significant 
increased risk to the funds. This change would give owners more 
flexibility for investing their reserve funds and is expected to result 
in greater returns on these funds and thus more income to be put toward 
better project operations and capital improvements. The increase in 
interest income would lower the amount needed from tenant rents and 
rental assistance to meet project needs.
    Second, the rule addresses the issue of ``phantom income,'' the 
interest income earned on reserve accounts. This income is committed to 
the project but not accessible to the owner. To ease the burden of 
paying taxes on this ``phantom income,'' the rule allows owners, with 
RHS' approval, to withdraw up to 25 percent of the annual interest 
income earned on the reserves to cover the tax expense. The 25 percent 
allowance was determined to be a reasonable estimate of the tax rate 
for the average investor. It was decided to use a single rate for all 
owners to simplify the administration of this feature. RHS also 
consulted with OIG and the American Institute of Certified Public 
Accountants (AICPA) in arriving at the 25 percent figure.

Prepayment Policies and Procedures

    The agency, borrowers, and tenant advocates agreed that the 
prepayment request process is a difficult and confusing process. Agency 
staff in the National Office recognized that they were spending a great 
deal of time providing technical assistance to Field Offices in 
responding to prepayment requests. Borrowers commented that the process 
was unduly burdensome to borrowers who were within their rights to 
request prepayment. Tenant advocates pointed out that tenants are 
virtually excluded from the process because the process complexity 
makes it difficult for tenants to take action. Discussion of these 
concerns at the stakeholders meetings indicated that RHS needed to 
clarify many of the policies toward prepayment and where possible, make 
policy changes that would help simplify the process. Consequently, the 
proposed rule includes changes to agency policy regarding tenant 
notification and projects on the waiting list for incentives.
Tenant Notifications
    Stakeholders suggested changes to the content and timing of tenant 
notifications to provide tenants with the information they need to 
participate in the prepayment process. The proposed rule replaces the 
requirement for one early tenant notification with a series of 
notifications aimed at keeping the tenants informed of the Agency's and 
the borrower's decisions throughout the process.
Waiting List
    One of the most common complaints heard about the prepayment 
process is its open-ended nature. Borrowers who are approved for 
incentives and agree to stay in the program in exchange for incentives 
may have to wait years before the funds for the incentives become 
available. The current waiting list includes requests for incentives 
dating back to 1996. The proposed rule establishes a maximum time on 
the waiting list of 15 months and allows borrowers three choices at the 
end of that time: (1) Stay on the waiting list and continue waiting for 
the incentives, (2) withdraw from the list and continue operating the 
property for program purposes, or (3) offer to sell the property to a 
nonprofit organization. This last option may allow some properties, 
eventually to prepay if they complete the process involved in offering 
the project for sale and fail to receive a bona fide offer. However, 
this option responds to the reality that the agency may not always have 
the resources to keep borrowers in the program indefinitely and that 
costly legal battles are likely if they do not allow the borrowers 
other options. Currently, the prepayment waiting list contains 
approximately 15 properties that have exceeded the 15-month time 
period. However, this number would be expected to grow appreciably over 
the next few years without a significant increase in funding for 
incentives to accommodate the anticipated increase in number of 
projects meeting the 20-year statutory restrictions on use.
    Further, it is believed that many borrowers have not applied for 
prepayment incentives and joined the waiting list because of the 
extended time period they must currently remain on the list. If the 15-
month maximum time period is implemented, a greater number of these 
borrowers may seek prepayment with the expectation that they will be 
allowed to exercise one of the three options at the end of the 15-month 
time period. If borrowers do prepay and convert their apartment 
complexes to market rate units, RHS

[[Page 32876]]

will take measures to protect the tenants at these properties by 
providing them a letter of priority entitlement (LOPE) that gives them 
priority in agency-financed housing elsewhere. However, if alternative 
vacant RHS financed rental housing is not available in the market, the 
impacted tenants face displacement or rent overburden if they remain in 
place.
Incentives
    The proposed rule clarifies the Agency's policy on incentives and 
adds several requirements to help ensure that the limited amount of 
funding available for incentives, as discussed in the overview section 
of this analysis, is used efficiently to benefit the program. For 
example, the proposed rule outlines the process a borrower must follow 
when requesting permission to prepay and be eligible to receive 
incentives.
    In addition, the proposed rule clarifies that third-party equity 
loans are an option for borrowers who are seeking equity loans through 
the prepayment process. The use of third-party equity funding stretches 
RHS incentive funds by providing resources from alternative funding 
sources. However, it should be noted that debt costs from other sources 
might be higher than financing received under the Section 515 program. 
For example, Section 515 funding is lent at an effective 1 percent 
interest rate and amortized for 50 years, whereas, third-party funds 
may be lent at rates ranging from interest free to market rate 
depending upon the source of the funds, with amortization periods 
ranging from fully deferred to 30 years. All proposed third-party 
incentive loans must be underwritten and reviewed to the same standard 
as RHS Section 515 lending to ensure that no project is made 
financially unfeasible as a result of a third party loan.

Initial Operating Capital

    Under current regulations, borrowers are required to pay the 
equivalent of 2 percent of the cost of developing a project into an 
account for initial operating costs. They earn no interest on this 
account, which also receives funds from other sources including rental 
income. If, within 2 years, the project is operating successfully and 
there is sufficient capital in the operating account to maintain the 
financial soundness of the account, the borrower may take out up to the 
full amount of his /her contribution. While on deposit in the operating 
account, the borrower receives no return on investment for the funds. 
After 2 years, any portion of the contribution that is still in the 
account must remain there for meeting ongoing operating capital needs.
    During the stakeholder meetings, borrowers expressed concern that 
the current regulation does not allow them sufficient time to recover 
their contribution, even when a project is functioning well and no 
longer needs the additional capital. RHS determined that the 2-year 
limit was originally due to difficulties in tracking the funds within 
the projects overall budget, and that its new ADP system, MFIS III, has 
the capacity to provide better tracking and disclosure of these funds. 
Therefore, RHS has included a provision in the proposed rule that would 
extend the time limit for the recovery of initial operating capital 
from 2 to 7 years. In selecting 7 years for the new limit, RHS received 
input from field staff and industry groups indicating that the 
prospects for recovery after 7 years were minimal, either because 
financial soundness could not be established or the owner was willing 
to leave his/her contribution in the account.
    This change would allow more borrowers to fully recover the 
payments they made to initial operating capital accounts. It is 
uncertain how many borrowers would benefit from the change and how many 
dollars these borrowers would be allowed to recover from these 
accounts. Because of the limitation on recovery from only financially 
sound accounts, it is unlikely that there would be immediate, negative 
impacts on the performance of the MFH programs. However, it should be 
noted that by allowing borrowers to recover funds from initial 
operating capital accounts, these funds would not be available for 
ongoing capital needs. The potential withdrawal of initial operating 
capital is not considered to have significant impacts on rents and, 
thus, costs to the Government and tenants. While it would tend to make 
it more difficult to avoid rent increases, it is far outweighed by 
other changes in the proposed rule, specifically, the raising of 
reserve requirements and additional earnings on reserve accounts.

Other Changes to the Rule

Conventional Rents for Comparable Units

    RHS has developed the concept ``Conventional Rents for Comparable 
Units'' (CRCU). This is one of the most comprehensive policy issues 
that 7 CFR part 3560 will introduce. The concept is applicable to loan 
origination, budgets, loan servicing, replacement reserve set-asides, 
preservation, and other program areas. In essence, rents will be capped 
at conventional rents for comparable units in the area where the 
housing is located. Comparable units would be those equivalent to RHS 
financed units in terms of quality and amenities. If no such units are 
located in the same community, units from a similar community could be 
used for comparison. Comparable units also means that the units the 
Agency finances would meet a standard of economical development, i.e., 
modest in size, facilities and design, yet compatible with the 
community.
    RHS will continue to require that rents be based on the project's 
operating costs. However, under the proposed rule, RHS would not 
approve project proposals, servicing actions, or prepayment incentives 
that involve rents above the CRCU, except in exceptional circumstances, 
where such rents are determined to be in the best interest of the 
Government and the tenants of the project.
    By placing an upper limit on rents, RHS expects to protect the 
Government from investing in projects that may be wasteful or 
fraudulent, and to ensure that projects are competitive so that vacancy 
and other market-driven problems can be avoided. In this way, the CRCU 
should improve the long-term viability of MFH projects, limit the costs 
of RA, and reduce the risk of defaults.
    However, the proposed rule maintains flexibility for serving areas 
where MFH projects provide the only decent, safe and sanitary rental 
housing in a local housing market, or where a significant amount of the 
substandard housing rents for less than the cost of operating an MFH 
project. In such cases, RHS may base the CRCU on rents outside the 
local community. It may also grant an exemption for exceptional 
circumstances.
    CRCU will create a definitive underwriting standard. It will apply 
to leveraging other low-interest loan funds or paying for additional 
owner contributions (up to 3 percent return on investment (ROI) over 
required contribution); improving project design and amenities (within 
the definition of economical development); and adjusting reserves or 
other serving actions. In areas where rents are below CRCU, Rental 
Assistance (RA) costs and loan levels may increase. However, it will 
also ensure ``marketable units'' should the Agency lose RA.
    The Agency is asking public input on whether exclusions to CRCU may 
be needed in certain areas of the country where conventional rents may 
not be adequate to fund operation and maintenance, debt service and 
replacement reserve expenses plus an

[[Page 32877]]

aged upon owner's return on investment.

Cost Reasonableness Basis for Evaluation of Project Proposals

    The proposed rule also includes changes related to evaluating the 
cost reasonableness of project proposals. Under current regulations, 
the agency has applied a policy of cost containment when evaluating 
whether the costs of the proposed design for new projects are 
reasonable. While this policy has effectively held down construction 
costs for new projects, agency field staff and borrowers report that 
lower-cost project design features are not always cost-effective over 
the long term. They report that while certain design features reduce 
initial construction costs, they actually cost more over the life of 
the project because the components used require higher levels of 
maintenance and more frequent replacement.
    Projects with these design features experience higher routine 
maintenance costs, higher expenditures of project reserves, and a 
greater need for subsequent financing for rehabilitation. The result is 
an upward pressure on project rents and increased use of rental 
assistance payment assistance. To the extent a project cannot support 
the rent increases needed to cover these costs, the project faces an 
increased risk of financial failure or compliance violations due to 
physical deficiencies.
    Currently, RHS has no process for conducting life cycle analyses. 
The proposed requirement for a life cycle cost analysis will be used 
for new and existing facilities. The requirement is intended to assure 
quality construction as well as long-term viability of complexes. 
Reserve levels would be set based on life cycle costs to provide 
necessary resources when needed to replace essential building 
components. Existing loan agreements are to be modified as needed by an 
addendum properly executed by the borrower. Under the proposed rule, 
the agency would change its policy for evaluating project proposals to 
consider the life cycle costs of proposed project designs. Under this 
policy, the agency may approve a proposed project design that is not 
the lowest cost if a life cycle cost analysis prepared by the project 
architect reveals that the design achieves the lowest overall cost over 
the life of the project. Industry standards will be used for the 
analysis. To assure that new projects are affordable and appropriate to 
the local housing market, the proposed rule restricts the agency from 
approving project designs that would cause rents to exceed the market 
standard (except in exceptional circumstances where such costs are 
determined to be in the best interest of the Government and the 
tenants). Examples of two design features that may cost more initially 
but decrease operating expenses over the life of the project are brick 
exteriors and increased thermal standards. In the past, many projects 
were built using a popular exterior plywood siding. These buildings are 
now requiring replacement of the original siding. Similar buildings 
that utilized brick as an exterior finish or partial finish are not 
having similar expenses, therefore, decreasing demands on the reserve 
accounts. Thermal standards in RHS financed projects often exceed local 
codes. By building RHS projects more energy efficient, tenant and owner 
utility expenses are kept lower, thereby, decreasing the need for rent 
increases or tenant utility allowance increases. By avoiding the 
additional rent and utility allowance increases, tenant rent overburden 
is avoided, as is additional drain on scarce rental assistance 
resources.
    Because this change will allow for more costly designs, the agency 
expects the size of initial loans and initial rents to grow slightly. 
However, higher up-front costs would be offset by lower long-term 
costs. The agency expects that new projects receiving funding under 
this policy will have lower maintenance and rehabilitation needs, 
leading to lower project rents and lower use of agency rental 
assistance over the life of the project. Lower maintenance expenses, 
resulting in rents essentially the same as projects built under cost 
containment guidelines, would offset the increased debt service due to 
higher construction costs. This change will also lower demand for 
subsequent loans from the agency in a time when additional loan funds 
are increasingly scarce.

Management Certification

    Under current regulations, RHS must approve the management 
agreement between the borrower and the management entity for a project. 
This approval is designed to ensure that the management agent is also 
accountable for meeting program requirements. However, the agency has 
found that this policy results in a time-consuming approval process 
because these agreements frequently include complex contractual 
language that is difficult to evaluate. Further, OIG has found that 
many management agreements and plans lack the specificity to accurately 
describe how project and management agency costs are prorated between 
expenses paid by the project and those that are paid by the management 
fee.
    The proposed rule eliminates agency approval of management 
agreements and requires borrowers to submit a management certification 
in an agency-approved format. In submitting this document, borrowers 
certify that their agreement with the management entity for the project 
obligates that entity to comply with program requirements, establishes 
sanctions for failure to comply with these requirements, including 
termination of the agent, and specifies penalties for false 
certifications. This change eliminates the administrative burden on RHS 
for approving management agreements, while strengthening the agency's 
ability to hold borrowers and their agents accountable for their 
management responsibilities. In addition, revisions to management fee 
policy, discussed below, allow for a more definitive method to 
differentiate between project and management agent expenses.

Management Plan

    Under current regulations, borrowers are also required to obtain 
RHS' approval of the management plans for their projects. The purpose 
of this policy is to provide the agency assurance that the borrower and 
management entities have adequate systems in place to comply with 
program requirements. However, experience has shown that these plans 
are time consuming to process. The requirement to obtain agency 
approval for updates only adds to the burden for agency staff and 
borrowers. This policy also leaves the agency in an awkward position 
when borrowers with sound projects have changed their operations, but 
not updated their management plan. OIG has reported audit findings 
where borrowers and management agents have not been operating the 
properties in conformance with the executed management plan. While this 
is true, when examined, it has been found that the practice the agent 
and owner have engaged in is not improper, just not documented 
correctly in the management plan. The OIG has agreed that had the 
practice been correctly disclosed in the management plan, the practice 
would not have been listed as an audit finding. OIG has worked with the 
RHS during the stakeholder process and subsequently to eliminate this 
particular area of confusion. The result of the change will be that RHS 
will not be required to micromanage borrower and management agent 
business practices when the practice is one that is beneficial to the 
tenants and the project. Additionally, fewer OIG

[[Page 32878]]

findings will result, requiring less OIG and RHS staff time to resolve.
    The proposed rule eliminates agency approval of project management 
plans and requires instead that borrowers submit a management plan that 
addresses a specified list of operational areas. RHS staff would review 
the plan to see if the required areas have been covered in the plan but 
will not approve the plan. The plan will be used to monitor project 
performance, but discrepancies between project operations and the plan 
will not constitute a violation of program requirements unless the 
discrepancies affect program performance. This change reduces the 
administrative burden on RHS staff and borrowers. It also provides 
borrowers with greater flexibility to make sound changes in project 
operations without creating a performance concern.

Management Fees

    Current program regulations require that management fees for 
projects be reasonable and competitive. However, OIG staff found that 
the management fees approved for projects varied significantly, ranging 
from as low as $25 per unit per month to $55 per unit per month across 
States. This led OIG to question whether the higher fees found in some 
instances was reasonable. As with management plans, the OIG expressed 
concern that current regulations were neither clear nor consistent 
concerning what services were to be included in the management fee. In 
some States, many of the maintenance services provided by management 
company staff were included in the management fees and in other States, 
the charges were not. Another example is that in some States, insurance 
and tax costs for project employees were included in management fees 
while in other States the costs were billed directly to the project. 
Comments by agency staff at stakeholder meetings revealed that the 
variations were often due to differences in field office 
interpretations about the bundle of services covered by the management 
fee. They noted that services not covered by the fee were paid for as a 
line item on the budget. When management fees plus other fees for 
services were accounted for, management compensation was consistent.
    Together with representatives of the property management industry 
and OIG, RHS developed the bundle of management services that is a part 
of this regulatory change. By moving to a standardized grouping of 
services that is to be included in the management fee, RHS and OIG 
believe that the change will greatly improve consistency between areas 
of the country and RHS offices. As stated in the previous paragraph, as 
these services were all being provided previously but charged to the 
project on different lines of the operating budget, the grouping of 
these expenses in a different manner would neither increase nor 
decrease the overall cost to the project or the rents being charged.
    The proposed rule and accompanying handbooks address the 
inconsistencies in fees by establishing a standard bundle of services 
covered by the management fee and a framework for setting standard 
adjustments for project characteristics that warrant slightly higher 
fees, such as for a new management agent taking over a troubled 
property. However, the proposed rule should improve RHS' ability to 
document that the management fees for projects are reasonable. It 
should also ensure consistency between RHS field offices in 
interpretation of services included in fees. Additionally, the number 
of OIG findings should be reduced, requiring less OIG and RHS staff 
time to resolve.

Standards for Physical Conditions at Projects

    Current regulations establish the borrower's responsibility to 
maintain their projects in decent, safe, and sanitary condition. 
However, the OIG raised concerns about consistency in the 
implementation of this standard.
    Therefore, the proposed rule establishes specific standards for 
physical conditions that clarify the conditions that constitute decent, 
safe, sanitary housing. These standards do not represent a change in 
agency policy. Rather, they make agency expectations explicit and thus 
improve the agency's ability to enforce physical standards, thereby 
improving the quality of living conditions for tenants and better 
preserving the security for agency loans.

Recertifications of Tenant Eligibility

    Recertifications are used to document a tenant's income for the 
purpose of determining eligibility to live in an MFH unit and qualify 
for rental assistance payments. Current regulations require both an 
annual recertification and an interim recertification whenever the 
tenant's income changes. Stakeholders indicated that the 
recertification process is time consuming for tenants, borrowers, and 
the agency.
    The proposed rule simplifies the process by eliminating the 
requirements for an interim recertification for tenant income changes 
that have an impact on the rent of $25 or less. RHS arrived at the $25 
threshold by comparing the cost of re-certifying a tenant with the 
benefit either the Government or the tenant would receive as a result 
of increased or decreased rent. Based on consultation with industry 
groups and OIG, RHS determined that the cost to re-certify a tenant was 
about $150. Assuming that any change would apply for only 6 months of 
the year, the $150 figure was converted to a monthly figure of $25, 
which became the threshold. The regulations allow a tenant to request a 
recertification any time their income decreases. This provision was 
included in order not to negatively impact tenants with the lowest 
income for which the $25 per month figure may constitute a significant 
portion of income for which the $25 per month figure may constitute a 
significant portion of income.
    While a detailed analysis of how the impact of the $25 threshold 
might be distributed between the Government and tenants was not 
completed, recent OIG audits have indicated the current recertification 
process produces approximately the same amount of rent increases as 
rent decreases, and thus results in little or any overall change in 
rental assistance payments.
    The proposed rule also adds a requirement for electronic reporting 
of information, including tenants' income. The faster transmission of 
this information provides RHS with more time for analyzing the 
information. Consequently, the proposed rule extends by 10 days the 
period for submitting recertifications, giving borrowers more time to 
comply with agency requirements, thus improving customer service while 
maintaining program performance.

Lease Protection

    The proposed rule would require that leases for rental units that 
receive rental assistance include a clause that specifies that the 
tenant's contribution to rent will not increase if rental assistance is 
terminated due to actions by the borrower/owner. This requirement is 
not contained in current regulations. RHS estimates that there have 
been two to four incidents a year in which a borrower/owner has 
attempted to make up for the loss of rental assistance payments due to 
a default on his/her part, by raising tenants' rents. Such action 
usually occurs in a contentious situation, with the borrower/owner 
already in default and uncooperative. Consequently, requiring that the 
lease include a clause specifically prohibiting such action may not 
resolve all cases. However, it would provide tenants with

[[Page 32879]]

a regulatory and lease citation that could be used in bringing court 
proceeding against an abusive borrower/owner. Further, it would provide 
RHS with an additional instance of non-compliance with regulations that 
could be used against the owner in a liquidation action or criminal or 
civil court case. However, it is uncertain whether cases could be 
resolve more quickly at less cost to the Government.
    While the proposed rule offers some additional protection to 
tenants and imposes some additional responsibility on borrower/owners, 
it is difficult to place a monetary value on these impacts. Each case 
is likely to be different, and the resolutions uncertain. The low 
incidence, however, suggests that the impacts would not be significant 
in value.

Application Process for Rental Subsidies

    Rental subsidies provide critical funds for housing very low-income 
tenants. Projects that receive RHS' rental assistance, including 
interest subsidy and rental assistance payments, depend on the 
continued availability of these subsidies to maintain in-place tenants 
in their units.
    Under the current regulations, borrowers must complete full rental 
assistance requests to renew expiring subsidies. Stakeholders noted 
that the agency gathers sufficient information through the budget 
approval process to assess project needs for rental assistance.
    Therefore, the proposed rule states that expiring subsidies will be 
renewed, at the existing number of units; to the extent sufficient 
funds are available. To indicate that rental assistance units are 
needed, the borrower must fill in a single check box on the project 
budget form (which must be filed annually) instead of completing a 
separate form as currently required. These changes relieve borrowers of 
the burden of applying and the agency the burden of reviewing the 
requests. The review can instead be accomplished as part of the budget 
approval process. The change has no effect on project or program 
budgets, as it does not change the agency determination about rental 
subsidies, it simply streamlines the process.

Budget Approval

    RHS requires its borrowers to submit an annual budget, which is 
used in setting rents. Approximately 92 percent of these budgets arrive 
for approval at the same time because most owners operate on a calendar 
year basis and their schedules for developing budgets is about the 
same. Budget approval is a time-consuming process that taxes RHS staff 
resources in times of high volume and forces borrowers to operate for 
extended periods of time with unapproved budgets while the review 
process is underway. Current regulations require that all budgets be 
reviewed in the same way, regardless of whether they represent no real 
change from the previous year or contain significant and potentially 
controversial changes. The proposed rule establishes an expedited 
review for those budgets that are within a certain threshold requiring 
little or no increase in rents. The threshold will be based on data to 
be obtained from the MFIS III ADP system on area-wide norms for 
projects within RHS' MFH portfolio as well as commercially-available 
family income and expense surveys. Details on how the threshold will be 
computed will be contained in a handbook rather than the proposed rule. 
This will facilitate making any necessary adjustments in the threshold 
to meet changing conditions.
    The new process could improve program performance by allowing RHS 
to focus its review on those budgets that contain significant changes 
while expediting approval of those with little or no change. However, 
it is unlikely that the new process would have measurable budget 
impacts, such as reduced rental assistance costs or fewer defaults, 
because the decisions RHS makes on whether or not to approve a budget 
will most likely be the same under the new process as under the 
existing system. Those decisions will, however, be reached in a more 
efficient manner.

Annual Financial Reporting

    Under the current regulations, the agency requires that for all 
projects of 25 units or more, the owner contract with a CPA perform an 
audit in accordance with generally accepted government auditing 
standards (GAGAS). Because a large percentage of the Agency's portfolio 
consists of projects with between 16 and 24 units, audited financial 
statements have not been prepared for a substantial number of projects 
financed by the Agency. In addition, the current audit guide currently 
does not require the auditor to provide information that is of specific 
importance to the agency, such as information on Identity-of-Interest 
transactions.
    Under the proposed regulation, large MFH projects, defined as 
projects with 16 or more units, will be required to submit a GAGAS 
audit prepared by an independent CPA. The audit guide, which is 
currently being revised, will provide specific instructions on how the 
auditor should handle compliance issues. The audit must be completed 
using ``agreed upon procedures'' that help meet certain performance 
standards. It must be initiated by the borrower using an engagement 
letter, which will either:
    [sbull] Reference the Audit guide, which will specify the program 
compliance issues that the Agency wants the CPA to address, and 
guidelines for testing compliance; or
    [sbull] State the list of compliance issues that the Agency wants 
the CPA to address.
    Small projects, defined as projects with fewer than 16 units, must 
submit annual financial statements that are prepared in a manner 
consistent with the agency's audit guide and that is accompanied by a 
certification signed by the borrower. The annual financial statements 
may be prepared by a CPA or other individual with the training and 
experience to prepare the report. The information presented in the 
annual financial statements must be prepared in a manner consistent 
with the requirements of the audit guide.
    In response to OIG concerns, the agency is proposing to implement 
these changes to the annual financial reporting system to ensure that a 
higher percentage of projects are prepared by CPAs, that GAGAS 
principles are followed in the preparation of these audits, and that 
the auditors are made aware of specific concerns of the agency, to 
ensure that project funds are spent appropriately.

Special Servicing, Enforcement, Liquidation, and Other Actions

    In response to stakeholder, OIG and agency staff comments, the 
agency made a number of changes to strengthen agency servicing. None of 
the changes to the regulation on servicing constitute changes in 
policy; rather they address a lack of clarity in existing rules and 
incorporate policies that previously existed only in administrative 
notices. As such, the changes are not anticipated to have either a 
negative or positive budget impact.
    For example, the proposed rule clarifies the definition of 
``default'' by spelling out specific actions that an owner may take or 
fail to take that would cause the agency to determine that the loan is 
at risk. The proposed rule also simplifies the submission requirements 
for transfers of project ownership. Other changes serve to simplify 
servicing actions in an effort to enhance the agency's flexibility to 
address servicing issues.

[[Page 32880]]

    These changes would allow swifter and more consistent action to 
address troubled projects. For example, focusing action for the agency 
and the borrower. This would help to avert more serious problems in the 
long term and allow agency staff to concentrate their efforts on other 
portfolio management issues.

Management and Disposition of Real Estate Owned Properties

    The proposed rule consolidates current regulations regarding real 
estate owned (REO) property and clarifies the specific requirements 
that apply to multifamily housing properties. Current regulations 
address many different types of REO properties acquired by USDA, 
including MFH properties. Often, the guidance provided is generic or 
relates to non-MFH properties. The proposed rule would provide specific 
guidance to MFH properties, taking into consideration the physical 
condition of the property, occupancy status of the property by eligible 
program tenants, and determinations of whether the property is still 
needed under the program.
    The proposed rule also adds flexibility to the agency's 
requirements for selling the property. The change allows the sale to be 
conducted taking into account local market conditions. It also provides 
the field offices several options in selling REO properties, giving 
them authority that previously rested with the national office. With 
more options and flexibility, processing and sales times will be 
reduced.

Farm Labor Housing

    The proposed regulation consolidates separate program regulations 
for the Farm Labor Housing Program along with separate regulations for 
the other MFH programs. It does, however, maintain separate subparts 
for off-farm labor housing and on-farm labor housing. This was 
necessary to preserve the distinction between off-farm labor housing 
consisting of multi-unit housing operated by nonprofit corporations or 
public bodies who receive loans or both loans and grants under the 514 
and 516 programs, and on-farm labor housing consisting of single or 
small multi-family housing operated by farm operators who receive only 
loans. Several statutory changes to the Farm Labor Housing Program have 
been made over the past 4 years. The current regulations have been 
modified to incorporate those changes prior to the drafting of this 
proposed rule. As those changes are currently in place, they are not 
addressed again in this analysis. No further program changes other than 
regulation consolidation are included.

Office of Rental Housing Preservation

    Recent changes to the 1949 Housing Act required the establishment 
of an Office of Rental Housing Preservation within RHS for handling 
matters relating the preservation on the agency's MFH portfolio. RHS 
recently established this office within its Multi-Family Housing 
Portfolio Management Division. The office has a Director of the Office 
and a Senior Loan Specialist. Additional positions within the office 
are to be filled.
    The Office of Rental Housing Preservation has already taken steps 
to enhance the agency's consistency in the review of prepayment 
requests and the offer of incentives by making a single entity 
responsible for coordinating all preservation actions. The proposed 
rule recognizes the establishment of this office and defines its 
responsibility to coordinate, direct and monitor the RHS' multifamily 
housing preservation activities. This addition to the rule complies 
with the statute and clarifies the role of the national office in the 
preservation process.

Unauthorized Assistance

    When tenants receive unauthorized assistance through their own 
error, the agency has a duty to try to recapture the assistance. Under 
current regulations, much of this responsibility is put on project 
owners. The process is both time consuming and burdensome. Furthermore, 
project owners as well as RHS, have only limited ability to collect 
unauthorized assistance and, in many cases, the cost of pursuing 
unauthorized assistance has outweighed the funds collected.
    Recognizing these circumstances, the proposed rule relieves project 
owners of the responsibility of recovering unauthorized assistance due 
to tenant error once the tenant has moved out. It also provides for RHS 
to determine whether or not unauthorized assistance should be pursued. 
These changes give the agency greater flexibility to apply resources 
cost effectively toward cases that most deserve to be pursued, and 
relieve project owners of the burden of pursuing tenants who no longer 
live in their projects. The proposed rule also brings RHS into 
compliance with the Debt Collection Improvement Act by allowing the use 
of collection agencies and offsets to collect unauthorized assistance 
from project owners and tenants.

Changes in Definitions

Basic Rent
    Under the current regulations, basic rent is determined on the 
basis of operating the project with payments of principal and interest 
on a loan to be repaid over a 30-year or longer period at 1 percent per 
annum and covering budgeted project expenses. Basic rent also means 
basic occupancy charge. This definition does not take into 
consideration conventional rents for comparable units, and in effect, 
does not put any limitation on operating costs and rents.
    The definition under the proposed regulation is similar to the 
definition shown above. However, it also takes into consideration, if 
appropriate, a return on the borrower's equity in a project. Further, 
the proposed definition states that basic rent must not exceed 
conventional rents for comparable units at the time the rent is 
established. This will prevent project rents from becoming excessively 
high and will cap the amount of RA that the agency is required to 
provide.
Disability
    Agency regulations currently have separate definitions for the 
terms ``Individual with disability'' and ``Individual with handicap.'' 
The definition of the term ``Individual with disability'' is, in large 
part, taken from section 501(b) of the Housing Act of 1949. The 
definition of the term ``Individual with handicaps'' is taken from the 
Fair Housing Act. Other civil rights laws, such as the Americans with 
Disabilities Act and Section 504 of the Rehabilitation Act of 1973, 
utilized the term ``disability'' rather than handicap; however, they 
define it in the same manner as the Fair Housing Act defines handicap.
    Rather than having two separate terms, the Agency will only use the 
term ``Disability'' and it will be considered equivalent to the term 
``Handicap.'' If a person meets either the Housing Act of 1949's 
definition of handicap or the Fair Housing Act's definition of 
handicap, they will be considered to be disabled.

Participation With Other Funding or Financing Sources

    7 CFR 3560.66 encourages participation from public and private 
sources. The section 515 policy of restricting rental assistance to 
basic rents that do not exceed what they would have been had the Agency 
provided full financing is still maintained. Because the Agency is 
delivering financing at 1 percent, this provision would be difficult 
for an applicant to meet under the most aggressive leveraging or other 
low-interest loan funds financing package. Therefore, the Agency is 
inviting comment as to whether it would serve

[[Page 32881]]

the public to expand the underwriting standard of CRCU to guide the 
Agency in determining basic rent guidelines for Rental Assistance.

30-Year Term and 50-Year Amortization Period

    Though not a new issue or policy, the reform regulations require 
that new loans have a 30-year term with a 50-year amortization 
schedule. The new regulation will make clear that, at end of 30 years, 
the borrower has the option to pay-off the residual balloon with no 
restrictive use on the property, and the Agency has the option to 
refinance (or not) for the facility's remaining economic life. In 
effect, loans will have a 30-year use restriction, versus the current 
50-year, with additional use restrictions only should the Agency 
refinance.

Conforming Household Income Calculation to Industry Standards

    By changing the calculation of tenant household income and assets 
to be consistent with other funding sources in the MFH industry, RHS 
has made a significant contribution to reducing paperwork burden to the 
public. No longer will a separate calculation have to be made for a MFH 
loan when a separate calculation was already executed for Low-Income 
Housing Tax Credit (LIHTC) or another affordable housing program. 
Tenant income and assets will be calculated in accordance with 24 CFR 
813.106 and 24 CFR 813.102, which are regulations published by the U.S. 
Department of Housing and Urban Development.

Electronic Submission of Certifications/Recertifications

    The proposed rule adds a requirement for electronic reporting of 
information, including tenants' income. The faster transmission of this 
information provides RHS with more time for analyzing the information. 
Consequently, the proposed rule extends by 10 days the period for 
submitting recertifications, giving borrowers more time to comply with 
agency requirements, thus improving customer service while maintaining 
program performance.

Regulatory Crosswalk

    The following is a crosswalk that shows where the content of the 13 
regulations that are being consolidated can be found in 7 CFR part 
3560.
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List of Subjects in 7 CFR Part 3560

    Accounting, Accounting servicing, Administrative practice and 
procedure, Aged, Farm labor housing, Foreclosure, Grant programs--
Housing and community development, Government acquired property, 
Government property management, Handicapped, Insurance, Loan programs--
Agriculture, Loan programs--Housing and community development, Low and 
moderate income housing, Low and moderate income housing--Rental, 
Migrant labor, Mortgages, Nonprofit organizations, Public housing, Rent 
subsidies, Reporting and recordkeeping requirements, Rural areas, Rural 
housing, Sale of government acquired property, Surplus government 
property.
    Therefore, chapter XXXV, title 7, Code of Federal Regulations is 
proposed to be amended as follows:

CHAPTER XXXV--RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE

    1. Part 3560, consisting of subparts A through P, is added to read 
as follows:

PART 3560--DIRECT MULTI-FAMILY HOUSING LOANS AND GRANTS

Subpart A--General Provisions and Definitions
Sec.
3560.1 Applicability and purpose.
3560.2 Civil rights.
3560.3 Environmental requirements.
3560.4 Compliance with other federal requirements.
3560.5 State, local or tribal laws.
3560.6 Borrower responsibility and requirements.
3560.7 Delegation of responsibility.
3560.8 Administrator's exception authority.
3560.9 Reviews and appeals.
3560.10 Conflict of interest.
3560.11 Definitions.
3560.12-3560.49 [Reserved]
3560.50 OMB control number.
Subpart B--Direct Loan and Grant Origination
3560.51 General.
3560.52 Program objectives.
3560.53 Eligible use of funds.
3560.54 Restrictions on the use of funds.
3560.55 Applicant eligibility requirements.
3560.56 Processing section 515 housing proposals.
3560.57 Designated places for section 515 housing.
3560.58 Site requirements.
3560.59 Environmental requirements.
3560.60 Design requirements.
3560.61 Loan security.
3560.62 Technical, legal, insurance, and other services.
3560.63 Loan limits.
3560.64 Initial operating capital contribution.
3560.65 Reserve account.
3560.66 Participation with other funding or financing sources.
3560.67 Rates and terms for section 515 loans.
3560.68 Permitted return on investment (ROI).
3560.69 Supplemental requirements for congregate housing and group 
homes.
3560.70 Supplemental requirements for manufactured housing.
3560.71 Construction financing.
3560.72 Loan closing.
3560.73 Subsequent loans.
3560.74 Loan for final payments.
3560.75-3560.99 [Reserved]
3560.100 OMB control number.
Subpart C--Borrower Management and Operations Responsibilities
3560.101 General.
3560.102 Housing project management.
3560.103 Maintaining housing projects.
3560.104 Fair housing.
3560.105 Insurance and taxes.
3560.106-3560.149 [Reserved]
3560.150 OMB control number.
Subpart D--Multi-Family Housing Occupancy
3560.151 General.
3560.152 Tenant eligibility.
3560.153 Calculation of household income and assets.
3560.154 Tenant selection.
3560.155 Assignment of rental units and occupancy policies.
3560.156 Lease requirements.
3560.157 Occupancy rules.
3560.158 Changes in tenant eligibility.
3560.159 Termination of occupancy.
3560.160 Tenant grievances.
3560.161-3560.199 [Reserved]
3560.200 OMB control number.
Subpart E--Rents
3560.201 General.
3560.202 Establishing rents and utility allowances.
3560.203 Tenant contributions.
3560.204 Security deposits and membership fees.
3560.205 Rent and utility allowance changes.
3560.206 Conversion to Plan II (Interest Credit).
3560.207 Annual adjustment factors for Section 8 units.
3560.208 Rents during eviction or failure to recertify.
3560.209 Rent collection.
3560.210 Special servicing note rate rents (SNRs).
3560.211-3560.249 [Reserved]
3560.250 OMB control number.
Subpart F--Rental Subsidies
3560.251 General.
3560.252 Authorized rental subsidies.
3560.253 Allocation and prioritization of Agency rental assistance.
3560.254 Eligibility for rental assistance.
3560.255 Requesting rental assistance.
3560.256 Rental assistance payments.
3560.257 Assigning rental assistance.
3560.258 Terms of agreement.
3560.259 Transferring rental assistance.
3560.260 Rental subsidies from non-Agency sources.
3560.261 Improperly advanced rental assistance.
3560.262-3560.299 [Reserved]
3560.300 OMB control number.
Subpart G--Financial Management
3560.301 General.
3560.302 Accounting, bookkeeping, budgeting, and financial 
management systems.
3560.303 Housing project budgets.
3560.304 Initial operating capital.
3560.305 Return on investment.
3560.306 Reserve account.
3650.307 Reports.
3560.308 Annual financial reports.
3560.309-3560.349 [Reserved]
3560.350 OMB control number.
Subpart H--Agency Monitoring
3560.351 General.
3560.352 Agency monitoring scope, purpose, and borrower 
responsibilities.
3560.353 Scheduling of on-site monitoring reviews.
3560.354 Borrower response to monitoring review notifications.
3560.355-3560.399 [Reserved]
3560.400 OMB control number.
Subpart I--Servicing
3560.401 General.
3560.402 Loan payment processing.
3560.403 Account servicing.
3560.404 Final loan payments.
3560.405 Borrower organizational structure or ownership interest 
changes.
3560.406 Multi-family housing ownership transfers or sales.
3560.407 Sales or other disposition of security property.
3560.408 Lease of security property.
3560.409 Subordinations or junior liens against security property.
3560.410 Consolidations.
3560.411-3560.449 [Reserved]
3560.450 OMB control number.
Subpart J--Special Servicing, Enforcement, Liquidation, and Other 
Actions
3560.451 General.
3560.452 Monetary and non-monetary defaults.
3560.453 Workout agreements.
3560.454 Special servicing actions related to housing operations.
3560.455 Special servicing actions related to loan accounts.
3560.456 Liquidation.
3560.457 Negotiated debt settlement.
3560.458 Special property circumstances.
3560.459 Special borrower circumstances.
3560.460-3560.499 [Reserved]
3560.500 OMB control number.
Subpart K--Management and Disposition of Real Estate Owned (REO) 
Properties
3560.501 General.
3560.502 Tenant notifications and assistance.
3560.503 Disposition of REO property.
3560.504 Sales price and bidding process.
3560.505 Agency loans to finance purchases of REO properties.
3560.506 Conversion of single family type REO property to multi-
family housing use.

[[Page 32888]]

3560.507-3560.549 [Reserved]
3560.550 OMB control number.
Subpart L--Off-Farm Labor Housing
3560.551 General.
3560.552 Program objectives.
3560.553 Loan and grant purposes.
3560.554 Use of funds restrictions.
3560.555 Eligibility requirements for off-farm labor housing loans 
and grants.
3560.556 Application requirements and processing.
3560.557 [Reserved]
3560.558 Site requirements.
3560.559 Design and construction requirements.
3560.560 Security.
3560.561 Technical, legal, insurance and other services.
3560.562 Loan and grant limits.
3560.563 Initial operating capital.
3560.564 Reserve accounts.
3560.565 Participation with other funding or financing sources.
3560.566 Loan and grant rates and terms.
3560.567 Establishing the profit base on initial investment.
3560.568 Supplemental requirements for seasonal off-farm labor 
housing.
3560.569 Supplemental requirements for manufactured housing.
3560.570 Construction financing.
3560.571 Loan and grant closing.
3560.572 Subsequent loans.
3560.573 Rental assistance.
3560.574 Rental structure and changes.
3560.575 Occupancy restrictions.
3560.576 Tenant priorities for labor housing.
3560.577 Financial management of labor housing.
3560.578 Servicing off-farm labor housing.
3560.579-3560.599 [Reserved]
3560.600 OMB control number.
Subpart M--On-Farm Labor Housing
3560.601 General.
3560.602 Program objectives.
3560.603 Loan purposes.
3560.604 Restrictions on use of funds.
3560.605 Eligibility requirements.
3560.606 Application requirements and processing.
3560.607 [Reserved]
3560.608 Site and construction requirements.
3560.609 [Reserved]
3560.610 Security.
3560.611 Technical, legal, insurance and other services.
3560.612 Loan limits.
3560.613 [Reserved]
3560.614 Reserve accounts.
3560.615 Participation with other funding sources.
3560.616 Rates and terms.
3560.617 [Reserved]
3560.618 Supplemental requirements for on-farm labor housing.
3560.619 Supplemental requirements for manufactured housing.
3560.620 Construction financing.
3560.621 Loan closing.
3560.622 Subsequent loans.
3560.623 Housing management and operations.
3560.624 Occupancy restrictions.
3560.625 Maintaining the physical asset.
3560.626 Affirmative Fair Housing Marketing Plan.
3560.627 Response to resident complaints.
3560.628 Establishing and modifying rental charges.
3560.629 Security deposits.
3560.630 Financial management.
3560.631 Agency monitoring.
3560.632--3560.649 [Reserved]
3560.650 OMB control number.
Subpart N--Housing Preservation
3560.651 General.
3560.652 Prepayment and restrictive-use categories.
3560.653 Prepayment requests.
3560.654 Tenant notification requirements.
3560.655 Rural Housing Service requested extension.
3560.656 Incentive offers.
3560.657 Processing and closing incentive offers.
3560.658 Borrower rejection of the incentive offer.
3560.659 Sale or transfer to nonprofit organizations and public 
bodies.
3560.660 Acceptance of prepayments.
3560.661 Sale or transfers.
3560.662 Restrictive-use provisions and agreements.
3560.663 Post-prepayment responsibilities for loans subject to 
continued restrictive-use provisions.
3560.664--3560.669 [Reserved]
3560.700 OMB control number.
Subpart O--Unauthorized Assistance
3560.701 General.
3560.702 Unauthorized assistance sources and situations.
3560.703 Identification of unauthorized assistance.
3560.704 Unauthorized assistance determination notice.
3560.705 Recapture of unauthorized assistance.
3560.706 Offsets.
3560.707 Program participation and corrective actions.
3560.708 Unauthorized assistance received by tenants.
3560.709 Demand letter.
3560.710--3560.749 [Reserved]
3560.750 OMB control number.
Subpart P--Appraisals
3560.751 General.
3560.752 Appraisal use, request, release, and review.
3560.753 Agency appraisal standards and requirements.
3560.754 Non-completion of appraisal assignment.
3560.755--3560.799 [Reserved]
3560.800 OMB control number.

    Authority: 42 U.S.C. 1480

Subpart A--General Provisions and Definitions


Sec.  3560.1  Applicability and purpose.

    (a) This part sets forth requirements, policies, and procedures for 
multi-family housing direct loan and grant programs to serve eligible 
very-low, low- and moderate-income households. The programs covered by 
this part are authorized by title V of the Housing Act of 1949 and are:
    (1) Section 515 Rural Rental Housing, which includes congregate 
housing, group homes, and Rural Cooperative Housing. Section 515 loans 
may be made to finance multi-family units in rural areas as defined in 
Sec.  3560.11.
    (2) Sections 514 and 516 Farm Labor Housing loans and grants. 
Housing under these programs may be built in any area with a need and 
demand for housing for farm workers.
    (3) Section 521 Rental Assistance. A project-based tenant rent 
subsidy which may be provided to Rural Rental Housing and Farm Labor 
Housing facilities.
    (b) The programs covered by this part provide economically designed 
and constructed rural rental, cooperative, and farm labor housing and 
related facilities operated and managed in an affordable, decent, safe, 
and sanitary manner.


Sec.  3560.2  Civil rights.

    (a) All actions taken by recipients of loans and grants will be 
conducted without regard to race, color, religion, sex, familial 
status, marital status, national origin, age, or disability. These 
actions include any actions in the sale, rental, or advertising of the 
dwellings, in the provision of brokerage services, or in residential 
real estate transactions involving RHS assistance. It is unlawful for a 
borrower or grantee or an agent of a borrower or grantee:
    (1) To refuse to make accommodations in rules, policies, practices, 
or services that would provide a person with a disability an 
opportunity to use or continue to use a dwelling unit and all public 
and common use areas; or
    (2) To refuse to provide a reasonable accommodation at the 
borrower's expense that would not cause an undue financial or 
administrative burden, or to refuse to allow an individual with a 
disability to make reasonable modifications to the unit at their own 
expense with the understanding that the owner may require the tenant to 
return the unit to its original condition when the unit is vacated by 
the tenant making the modifications (see Sec.  3560.104(c)).
    (b) Any tenant or prospective tenant seeking occupancy in or use of 
a multi-family housing project or related facility for which a loan or 
grant has been provided by the Rural Housing Service and who believes 
they are being discriminated against because of race, color, religion, 
sex, familial status,

[[Page 32889]]

marital status, national origin, age, or disability may complain to the 
Secretary of Agriculture, U.S. Department of Agriculture, Washington, 
DC 20250, or the Secretary of Housing and Urban Development, U.S. 
Department of Housing and Urban Development, Washington, DC 20410.
    (c) Borrowers or grantees that fail to comply with the requirements 
of title VIII of the Civil Rights Act are subject to sanctions 
authorized by law.


Sec.  3560.3  Environmental requirements.

    The Rural Housing Service (RHS) will consider environmental impacts 
of proposed housing as equal with economic, social, and other factors. 
By working with applicants, federal agencies, Indian tribes, State and 
local governments, interested citizens, and organizations, RHS will 
formulate actions that advance program goals in a manner that protects, 
enhances, and restores environmental quality. Loan and grant processing 
and servicing actions taken by RHS under this part are subject to an 
environmental review conducted in accordance with 7 CFR part 1940, 
subpart G.


Sec.  3560.4  Compliance with other federal requirements.

    RHS is responsible for ensuring that the application is in 
compliance with all applicable federal requirements, including the 
following specific requirements:
    (a) Intergovernmental review. 7 CFR part 3015, subpart V, or any 
successor regulation, including the Agency supplemental administrative 
instruction, RD Instruction 1940-J, available in any Rural Development 
office.
    (b) National flood insurance. The National Flood Insurance Act of 
1968, as amended by the Flood Disaster Protection Act of 1973; the 
National Flood Insurance Reform Act of 1994; and 7 CFR part 1806, 
subpart B.
    (c) Clean Air Act and Water Pollution Control Act Requirements. For 
any contract, all applicable standards, orders or requirements issued 
under section 306 of the Clean Air Act; section 508 of the Clean Water 
Act, Executive Order 11738, and 40 CFR part 32.
    (d) Historic preservation requirements. The provisions of 7 CFR 
part 1901, subpart F.
    (e) Lead-based paint requirements. The provisions of 7 CFR part 
1924, subpart A.


Sec.  3560.5  State, local or tribal laws.

    Applicants must comply with all applicable State and local laws, 
and laws of federally-recognized Indian tribes to the extent they are 
not inconsistent with this part.


Sec.  3560.6  Borrower responsibility and requirements.

    (a) Borrower responsibilities and requirements specified in this 
part may be carried out by an individual or entity designated by the 
borrower to act on behalf of the borrower such as a resident manager or 
management agent. Ultimate accountability to the Agency, however, is 
with the borrower whether or not the borrower designated another person 
or entity to act on the borrower's behalf.
    (b) Borrowers who have not executed a loan agreement, and who were 
not required to execute a loan agreement by the regulations in effect 
at the time of their loan closing are exempt from the requirements of 
subparts D through G of this part, as long as the borrower is not in 
default of any applicable requirement, security instrument, payment, or 
any other agreement with the Agency. Such borrowers must provide 
evidence of tenant income eligibility in accordance with Sec.  
3560.152(a), except in Farm Labor Housing where the tenant is not 
paying shelter cost.


Sec.  3560.7  Delegation of responsibility.

    The Rural Housing Service Administrator may delegate, on an 
individual or other basis, any decision-making responsibility for RHS 
programs, unless otherwise noted.


Sec.  3560.8  Administrator's exception authority.

    The RHS Administrator may make an exception to any provision of 
this part or address any omissions provided that the exception or other 
action is consistent with the applicable statute and is in the best 
financial interest of the Federal government. Exception requests 
presented to the RHS Administrator must have the concurrence of a Rural 
Development State Office or a Deputy Administrator in the RHS National 
Office.


Sec.  3560.9  Reviews and appeals.

    Rural Housing Service decisions may be appealed pursuant to 7 CFR 
part 11.


Sec.  3560.10  Conflict of interest.

    To reduce the potential for employee conflict of interest, all RHS 
activities will be conducted in accordance with 7 CFR part 1900, 
subpart D.


Sec.  3560.11  Definitions.

    Unless otherwise noted, terms listed in this part shall be defined 
as follows:
    Administrator. The head of the Rural Housing Service (RHS) who 
reports directly to the Under Secretary for Rural Development in the 
U.S. Department of Agriculture.
    Agency. The Rural Housing Service within the Rural Development 
mission area of the U.S. Department of Agriculture.
    Amortization. Payment of debt in regular, periodic installments of 
principal and interest, as opposed to interest only payments.
    Assistance. Financial assistance in the form of a loan, grant, 
interest credit, or rental assistance.
    Association of farmers. Two or more farmers acting as a single 
legal entity. Association members may include the individual members of 
farming partnerships or corporations.
    Basic rent. The rent necessary to cover expenses in a housing 
project's approved budget and the required loan payment set in the 
borrower's promissory note reduced by the interest credit agreement.
    Borrower. An individual, partnership, cooperative, trust, public 
agency, private or public corporation, or other entity which has 
received a loan from the Agency.
    Caretaker. An individual employed by a borrower or a management 
agent to handle routine interior and exterior maintenance and upkeep of 
a multi-family housing project.
    Congregate housing. A housing program authorized by section 515 of 
the Housing Act of 1949 which provides housing for elderly persons, 
individuals with disabilities, and families who require some 
supervision and central services but are otherwise able to care for 
themselves.
    Consumer cooperative. A corporation organized under the cooperative 
laws of a State or Federally recognized Indian tribe which will own and 
operate the housing on a cooperative basis solely for the benefit of 
its members.
    Conventional rents for comparable units (CRCU). Market rents for 
comparable rental units in non-government assisted conventional housing 
in the same geographic area as the RHS project.
    Current appraisal. An appraisal of a multi-family housing project's 
value which is no more than 1 year old.
    Daily Interest Accrual System (DIAS). A system where interest is 
charged daily on outstanding principal. Level loan payments are made by 
the borrower. The amount of interest due on any date is equal to the 
unpaid daily interest that has accrued.
    Default. Failure by a borrower to meet monetary or non-monetary 
obligations or terms of a loan, grant, or other agreement with the 
Agency within 30 days of the date such obligation is due

[[Page 32890]]

or required to be paid or performed, or within time periods specified 
in notices of compliance violations.
    Delinquent account. An account with a payment more than 10 days 
past due from the payment due date under the terms of a note or loan 
agreement.
    Disability. The term disability is considered equivalent to the 
term handicap. Eligibility requirements for fully accessible units are 
contained in Sec. Sec.  3560.154(g)(1)(i) and 3560.155(b). A person is 
considered to have a disability if either of the following two 
situations occur:
    (1) As defined in section 501(b) of the Housing Act of 1949. The 
person is the head of household (or his or her spouse) and is 
determined to have an impairment which:
    (i) Is expected to be of long-continued and indefinite duration;
    (ii) Substantially impedes his or her ability to live 
independently; and
    (iii) Is of such a nature that such ability could be improved by 
more suitable housing conditions, or if such person has a developmental 
disability as defined in section 102(7) of the Developmental Disability 
and Bill of Rights Act (42 U.S.C. 6001(7)).
    (2) As defined in the Fair Housing Act; the Americans with 
Disabilities Act; and Section 504 of the Rehabilitation Act of 1973. 
The person has a physical or mental impairment which substantially 
limits one or more of such person's major life activities; a record of 
such impairment; or being regarded as having such an impairment. The 
term does not include current, illegal use of or addiction to a 
controlled substance. As used in this definition, physical or mental 
impairment includes:
    (i) Any physiological disorder or condition, cosmetic 
disfigurement, or anatomical loss affecting one or more of the 
following body systems: neurological; musculoskeletal; special sense 
organs; respiratory, including speech organs; cardiovascular; 
reproductive; digestive; genito-urinary; hemic and lymphatic; skin; and 
endocrine; or
    (ii) Any mental or psychological disorder, such as mental 
retardation, organic brain syndrome, emotional or mental illness, and 
specific learning disabilities. The term ``physical or mental 
impairment'' includes, but is not limited to, such diseases and 
conditions as orthopedic, visual, speech and hearing impairments, 
cerebral palsy, autism, epilepsy, muscular dystrophy, multiple 
sclerosis, cancer, heart disease, diabetes, Human Immunodeficiency 
Virus infection, mental retardation, emotional illness, drug addiction 
(other than addiction caused by current, illegal use of a controlled 
substance), and alcoholism.
    (iii) Major life activities means functions such as caring for 
one's self, performing manual tasks, walking, seeing, hearing, 
speaking, breathing, learning, and working.
    (iv) Has a record of such an impairment means has a history of, or 
has been misclassified as having, a mental or physical impairment that 
substantially limits one or more major life activities.
    (v) Is regarded as having an impairment means:
    (A) Has a physical or mental impairment that does not substantially 
limit one or more major life activities but that is treated by the 
borrower or management agent as constituting such a limitation;
    (B) Has a physical or mental impairment that substantially limits 
one or more major life activities only as a result of the attitudes of 
others toward such impairment; or
    (C) Has none of the impairments described in this definition but is 
treated by another person as having such an impairment.
    Domestic farm laborer. An individual or an immediate family member 
residing with an individual who, consistent with the requirements in 
Sec.  3560.575(b)(2), receives a substantial portion of his or her 
income from farm labor employment (not self-employed) in the United 
States, Puerto Rico, or the Virgin Islands and either is a citizen of 
the United States or resides in the United States, Puerto Rico or the 
Virgin Islands after being legally admitted for residence.
    Due diligence on hazardous substances. Due diligence is the process 
of inquiring into the environmental conditions of real estate, in the 
context of a real estate transaction to determine the presence of 
contamination from hazardous substances, and to determine the impact 
such contamination may have on the market value of the property.
    Elderly person. A person who is at least 62 years old. The term 
also means a person with a disability as separately defined in this 
paragraph, regardless of age.
    Elderly household or individual with a handicapped household. A 
household in which the tenant or co-tenant of the household is 62 years 
old or older or is an individual with a disability. An elderly 
household may include persons younger than 62 years old and the 
household of an individual with a handicap may include persons without 
disabilities.
    Engagement. An Agency defined financial review of a housing 
project's financial status which a borrower will contract with a 
certified public accountant to perform. An engagement will result in 
annual financial reports for use by the Agency as described in Sec.  
3560.308.
    Familial status. A classification granted to an individual who has 
not attained the age of 18 years domiciled with persons having legal 
custody of such individual or with persons having the written 
permission of the persons having legal custody. The protection against 
discrimination afforded by familial status shall apply to any person 
who is pregnant or is in the process of securing legal custody of any 
individual who has not attained the age of 18 years.
    Family farm corporation or partnership. A private corporation or 
partnership involved in agricultural production in which at least 90 
percent of the stock or interest is owned and controlled by persons 
related by blood, which shall include parents, siblings, and children, 
or law. If more than three separate households are supported by the 
farming operation, the family farm corporation or partnership must be:
    (1) Legally organized and authorized to own and operate a farm 
business within the State,
    (2) Legally able to carry out the purposes of the loan, and
    (3) Prohibited from the sale or transfer of 90 percent of the stock 
or interest to other than family members by either the articles of 
incorporation, bylaws or by agreement between the stockholders or 
partners and the corporation or partnership.
    Farm labor. Services in connection with cultivating the soil, 
raising or harvesting any agriculture or aquaculture commodity; or in 
catching, netting, handling, planting, drying, packing, grading, 
storing, or preserving in the unprocessed stage any agriculture or 
aquaculture commodity; or delivering to storage, market, or a carrier 
for transportation to market or to processing any agricultural or 
aquacultural commodity in its unprocessed stage.
    Farm labor contractor. A person--other than an agricultural 
employer, a member of an agricultural association, or an employee of an 
agricultural employer or agricultural association--who recruits, 
solicits, hires, employs, furnishes, or transports any year-round or 
seasonal migrant farm laborer for money or other valuable 
consideration.
    Farm labor housing. On-farm or off-farm housing for farm laborers 
authorized by section 514 and section 516 of the Housing Act of 1949.

[[Page 32891]]

    Farmer. A person involved in day to day on-site operations of a 
farm as defined in 7 CFR 1941.4, and who devotes a substantial amount 
of personal time to operation of a ``family farm,'' as defined in 7 CFR 
1941.4.
    Farm owner. An individual who meets the requirements as defined in 
7 CFR part 1941, subpart A.
    Foreclosure. A proceeding in or out of court to extinguish all 
rights, title, and interest of the owners of property in order to sell 
the property to satisfy a lien against it.
    General overhead. Includes general operation items necessary for 
the contractor to be in business. They may include, but are not limited 
to the following: Tools and minor equipment; worker's compensation and 
employer's liability; unemployment tax; Social Security and Medicare; 
manager's, clerical, and estimator's salaries; pension and bonus plans; 
main office insurance, rental, utilities, miscellaneous expenses; 
general liability insurance; legal, accounting, and data processing; 
automotive and light truck expense; vehicle expenses; depreciation of 
overhead capital expenditures; and office equipment maintenance.
    General requirements. Include items that are required in the 
construction contract for the contractor to provide for the specific 
project. They do not include items that pertain to a specific trade nor 
overhead expenses of the contractor's general operation. Items may 
include, but are not limited to, the following: Field supervision; 
field engineering; field office, sheds, toilets, phone; performance and 
payment or latent defects bonds; cost certification; building permits; 
site security; temporary utilities; property insurance; and cleaning or 
rubbish removal.
    Grantee. An entity that has received a grant from the Agency.
    Group home. Housing that is occupied by elderly persons or 
individuals with disabilities who share living space within a rental 
unit and in which a resident assistant may be required.
    Home base state. The state which a farm laborer claims as their 
domicile.
    Household. The tenant or co-tenant and the persons or dependents 
living with a tenant or co-tenant, but not including a resident 
assistant.
    Household furnishings. Basic durable items such as stoves, 
refrigerators, drapes, drapery rods, tables, chairs, dressers and beds.
    Housing project. A property with two or more affordable, decent, 
safe and sanitary rental units and related facilities operated under 
one management plan and financed with funds appropriated under the 
authority of sections 515, 514, or 516 of the Housing Act of 1949.
    Identity-of-Interest (IOI). A relationship between applicants, 
borrowers, grantees, management agents, or suppliers of materials or 
services described under, but not limited to, any of the following 
conditions:
    (1) There is a financial interest between the applicant, borrower, 
grantee and a management agent or the supplying entity;
    (2) One or more of the officers, directors, stockholders or 
partners of the applicant, borrower, or management agent is also an 
officer, director, stockholder, or partner of the supplying entity;
    (3) An officer, director, stockholder, or partner of the applicant, 
borrower, or management agent has a 10 percent or more financial 
interest in the supplying entity;
    (4) The supplying entity has or will advance funds to an applicant, 
borrower, or management agent;
    (5) The supplying entity provides or pays on behalf of the 
applicant, borrower, or management agent the cost of any materials or 
services in connection with obligations under the management plan or 
management agreement;
    (6) The supplying entity takes stock or a financial interest in the 
applicant, borrower, or management agent as part of the consideration 
to be paid them; or
    (7) There exists or come into being any side deals, agreements, 
contracts or understandings entered into thereby altering, amending, or 
canceling any of the management plan, management agreement documents, 
organization documents, or other legal documents pertaining to the 
property, except as approved by the Agency.
    Indian tribe. The term Indian tribe means any Indian tribe, band, 
group, and nation, including Alaskan Indians, Aleuts, and Eskimos, and 
any Alaskan Native Village, of the United States, which is considered 
an eligible recipient under the Indian Self-Determination and Education 
Assistance Act (Pub. L. 93-638) or under Chapter 67 of Title 31 prior 
to repeal of such chapter.
    Interest credit. A form of assistance available to eligible 
borrowers that reduces the effective interest rate of the loan.
    Land lease. A written agreement between a land owner and a borrower 
stipulating the terms for possession and use of land for a specified 
period of time.
    Lease. A contract setting forth the rights and obligations of a 
tenant or cooperative member and a property owner, including charges 
and terms under which a tenant or cooperative member will occupy or use 
the housing or related facilities.
    Legal or qualified alien. Legal or qualified alien refers to any 
person lawfully admitted to the country who meets the criteria in 
section 214 of the Housing and Community Development Act of 1980, 42 
U.S.C. 1436a.
    Letter of Priority Entitlement (LOPE). A letter issued by the 
Agency providing a tenant with priority entitlement to rental units in 
other Agency-financed housing projects for 120 days from the date of 
the LOPE.
    Leveraged participation loan. A loan made in conjunction with an 
Agency loan by a lender other than the Agency to finance a multifamily 
housing project.
    Life cycle cost. The Life Cycle Cost has 2 purposes:
    (1) To determine the expected usable life (utility) of a building 
component or furnishing and
    (2) To determine which building components or furnishings are the 
most cost efficient over the life of the building. Cost efficient is 
not to be construed to mean the least initial cost.
    Life Cycle Cost Analysis.
    (1) Life cycle cost analysis is the comparison of different 
materials to examine anticipated useful life and the cost of using a 
specific material or building component. The analysis has multiple 
uses, such as:
    (i) To conduct a cost efficiency comparison between products,
    (ii) For developing component replacement time tables, and
    (iii) For estimating future component replacement costs.
    (2) Life cycle cost analysis can be accomplished through various 
methods, such as: insurance actuary tables or Agency documentation of a 
component's life expectancy.
    (3) Life cycle cost analysis is conducted by a design professional. 
For Agency financed projects, a life cycle cost analysis is to be 
conducted for specific components:
    (i) Drives and parking,
    (ii) Roofing system and roofing material,
    (iii) Exterior finishes, and
    (iv) Energy source items.
    Limited Liability Company (L.L.C.). An unincorporated organization 
of one or more persons or entities established in accordance with 
applicable state laws and whose members may actively participate in the 
organization without being personally liable for the debts,

[[Page 32892]]

obligations or liabilities of the organization.
    Limited partnership. An ownership arrangement consisting of general 
and limited partners; general partners manage the business, while 
limited partners are passive and liable only for their own capitol 
contributions.
    Loan agreement. A written agreement between the Agency and the 
borrower which sets forth the borrower's responsibilities with respect 
to Agency financing.
    Low-income household. A household that has an adjusted income that 
is greater than the Department of Housing and Urban Development's (HUD) 
established very-low income limit, but that does not exceed the HUD 
established low-income limit (generally 80 percent of median income 
adjusted for household size for the county where the property is or 
will be located).
    Low-Income Housing Tax Credit (LIHTC). A federal tax credit allowed 
for investment in qualified low-income housing administered by the 
Internal Revenue Service (IRS) under section 42 of the Internal Revenue 
Code.
    Management agent. A firm or individual employed or designated by a 
borrower to act on the borrower's behalf in accordance with a written 
management agreement.
    Management agreement. A written agreement between a borrower and a 
management agent setting forth the management agent's responsibilities 
and fees for management services.
    Management fee. The compensation provided to a management agent for 
services provided in accordance with a management agreement.
    Management plan. A detailed description of the policies and 
procedures to be followed by the borrower in managing a multi-family 
housing project.
    Maximum debt limit. The maximum amount that the Agency will lend or 
grant for a multi-family housing project based on the appraised value 
or total development cost excluding costs ineligible for payment from 
loan or grant funds, whichever is less, reduced by all funding 
available to the borrower from sources other than the Agency, 
multiplied by 95, 97, or 102 percent depending upon the applicant 
entity and their use of the low-income housing tax credit, in 
accordance with Sec.  3560.63(b).
    Member or co-member. A stockholder or other person who has executed 
documents or stock pertaining to a cooperative housing type of living 
arrangement and has made a commitment to upholding the cooperative 
concept.
    Migrants or migrant agricultural laborers. Individuals performing 
agriculture work and their family dependents who establish a temporary 
residence at one or more locations away from their home base state, 
excluding day-haul agricultural workers whose travels are limited to 
work areas within one day of their residence.
    Minor. An individual under 18 years of age who is a dependent of a 
tenant or an individual age 18 or older who is a full-time student and 
a dependent of a tenant.
    Moderate-income household. A household that has an adjusted income 
that is greater than the HUD-established low-income limit but does not 
exceed the low-income limit by more than $5,500.
    Mortgage. A legal document pledging a described property for 
repayment of a loan under certain terms or conditions.
    Net recovery value. The value realized from the Government's 
acquisition of security property in a default situation after 
subtracting all costs, actual or anticipated, from acquiring, holding, 
and disposing of the security property.
    New construction. A multi-family housing project being constructed 
to be occupied for the first time.
    NOFA. A ``Notice of Funding Availability'' issued by the Agency to 
inform interested parties of the availability of assistance and other 
matters pertinent to the program.
    Nonprofit organization. A private organization that:
    (1) Is organized under State or local laws;
    (2) Has no part of its net earnings inuring to the benefit of any 
member, founder, contributor, or individual; and
    (3) Is neither controlled by, nor under the direction of, 
individuals or entities seeking to derive profit or gain from the 
organization although a nonprofit organization may be sponsored or 
created by a for-profit entity provided--
    (i) The for-profit entity is not an entity whose primary purpose is 
the development or management of housing, such as a builder, developer, 
or real estate management firm,
    (ii) The for-profit entity does not have the right to appoint more 
than one-third of the membership of the organization's governing body,
    (iii) The board members appointed by the for-profit entity are not 
permitted to appoint the remaining two-thirds of the board members, and
    (iv) The local nonprofit organization is free to contract for goods 
and services from vendors of its own choosing;
    (4) Has documentation of tax exempt status under section 501(c)(3) 
or (4) of the Internal Revenue Code of 1986, from the Internal Revenue 
Service;
    (5) Does not include a public body as one of its members; although 
a state or local government chartered organization may qualify as a 
local nonprofit organization;
    (6) Has standards of financial accountability that conform to 24 
CFR 84.21;
    (7) Has among its purposes the provision of decent housing that is 
affordable to very-low, low, and moderate-income persons, as evidenced 
in its charter, articles of incorporation, resolutions or by-laws;
    (8) Maintains accountability to low-income community residents by--
    (i) Maintaining at least one-third of its Board of Director's 
membership for residents of low-income neighborhoods, other low-income 
community residents, or elected representative of low-income 
neighborhood organizations, and
    (ii) Providing a formal process for low-income program 
beneficiaries to advise the organization in its decisions regarding the 
design, siting, development, and management of affordable housing;
    (9) Has a capacity for developing and operating affordable rural 
housing as demonstrated by hiring experienced key staff members who 
have successfully completed similar projects, or by contracting with a 
consultant with housing experience and a plan to train appropriate key 
staff members of the organization; and
    (10) Has a history of serving the community within which housing to 
be assisted is to be located as demonstrated by being able to show 1 
year of the organization's service in the community or 1 year of 
service to the community by members of the organization's governing 
board, prior to receiving an Agency loan or grant or by demonstrating 
that its parent organization has at least 1 year of service to the 
community.
    Nonprofit organization of farm workers. A nonprofit organization 
which is incorporated with the State, Puerto Rico, or the Virgin 
Islands, which has local representation in the membership and whose 
membership is composed of at least 51 percent farm workers.
    Note. The rent necessary to cover expenses in a housing project's 
approved budget and the required loan payment set in the borrower's 
promissory note.
    Occupancy agreement. A contract establishing the rights and 
obligations of the cooperative member and the cooperative, including 
the amount of the monthly occupancy charge and the

[[Page 32893]]

other terms under which the member will occupy the housing.
    Occupancy charge. The amount of money charged a cooperative member 
to cover their proportional share of the cooperative's operating costs 
and cash requirements.
    Office of the General Counsel (OGC). The USDA Office of the General 
Counsel, including the Regional Attorney, Associate Regional Attorney, 
or Assistant Regional Attorney.
    Office of Inspector General (OIG). The USDA Office of Inspector 
General.
    Overage. That portion of a tenant's net rent contribution that 
exceeds basic rent up to note rate rent. Full overage is an amount 
equal to the difference between the note rate rent for a unit and the 
basic rent.
    Patronage capital refund. Amounts received by a cooperative in 
excess of operating costs and expenses which have been assigned to 
members' patronage capital accounts each year of membership in the 
cooperative.
    Plan I. A type of interest subsidy available to borrowers prior to 
October 27, 1980. Budgets and rental rates developed for Plan I loans 
are based on a 3 percent loan amortization.
    Plan II. A type of interest subsidy available to borrowers 
operating on a limited profit basis. Budgets and rental rates developed 
for Plan II loans are based on both the loan being amortized at the 
interest rate shown on the promissory note and at a 1 percent 
subsidized rate.
    Predetermined Amortization Schedule System (PASS). A system where 
loan payments are applied based on an amortization schedule.
    Prepayment. Payment in full of the outstanding balance on an Agency 
loan prior to the note's maturity date.
    Program requirements. All provisions related to multi-family 
housing contained in the loan document, grant agreement, statute, 
regulation, handbook, or administrative notice.
    Promissory note. A legal document containing conditions (interest 
rate and timing) for repayment of indebtedness.
    Real estate owned (REO) property. The real estate owned by the 
Agency acquired through voluntary conveyance, foreclosure or other 
court action.
    Related facilities. Facilities in a multi-family housing project 
that are related to the housing and are in addition to rental units, 
(e.g., community rooms or buildings, cafeterias, dining halls, 
infirmaries, child care facilities, assembly halls, and essential 
service facilities such as central heating, sewerage, lighting systems, 
clothes washing facilities, trash disposal and safe domestic water 
supply).
    Renovation. Renovation is when the remodeling of a property is of a 
complex nature involving structural repairs; or when two or more of the 
life cycle cost components are included in the remodeling of a 
property. Examples: changing the use of a building, replacing wall or 
floor system members, altering a building that has shifted due to 
settlement, remodeling an entire property that includes new roofing and 
siding.
    Rent. The amount established as a charge for occupancy in a rental 
unit of Agency-financed multi-family housing. The following terms are 
used to describe rents for various program purposes.
    (1) Note rate rent is the rental charge established to cover 
expenses in the housing project's approved budget and the required loan 
payment set at the interest rate shown in the promissory note.
    (2) Basic rent is the rental charge established to cover expenses 
in the housing project's approved budget and the required loan payment 
contained in the promissory note reduced by the interest credit 
agreement.
    (3) HUD contract rent is the rental charge established for housing 
receiving project-based Section 8 rental subsidies in accordance with 
24 CFR part 880 or part 884, as applicable.
    (4) Low-income housing tax credit (LIHTC) rent is the rental charge 
established in accordance with LIHTC requirements.
    Rental assistance (RA). The portion of the approved shelter cost 
paid by the Agency to compensate a borrower for the difference between 
the approved shelter cost and the tenant contribution.
    Rental assistance obligation. The number of rental assistance units 
and dollar amounts of rental assistance specified in a rental 
assistance agreement between the Agency and a borrower for a multi-
family housing project.
    Rental assistance units. Dwelling units in a multi-family housing 
project qualified for rental assistance. There are three types of 
rental assistance units.
    (1) New construction units are units provided in conjunction with 
initial loans for construction or substantial rehabilitation of the 
multi-family housing projects.
    (2) Replacement units are Agency-funded rental assistance units 
which replace units with expiring rental assistance agreements or which 
replace Section 8 units which have expired under the Section 8 
contract.
    (3) Servicing units are units provided to an operational multi-
family housing project provided as an incentive to avert prepayment of 
a loan or as part of a debt forgiveness package.
    Repair and replacement. Repair and replacement is the restoration 
of minor building materials, elements, components, equipment and 
fixtures. Examples: painting, carpeting, appliances, cabinets, and 
other fixtures.
    Resident assistant. A person residing in a rental unit who is 
essential to the well-being and care of an elderly person or an 
individual with a disability, but who:
    (1) Is not obligated for the tenant's financial support;
    (2) Would not be living in the unit except to provide the needed 
services;
    (3) May be a family member, but is not a dependent of the tenant 
for tax purposes;
    (4) Is not subject to the eligibility requirements of a tenant; and
    (5) Is not considered a household member in the determination of 
household income.
    Resident or site manager. The individual employed by the borrower 
and who is responsible for the day-to-day operations of the housing.
    Retired domestic farm laborer or domestic farm laborer with a farm 
labor-related disability. An individual who is at least 55 years of age 
and who has spent the last 5 years prior to retirement as a domestic 
farm laborer or spent the majority of the last 10 years prior to 
retirement as a domestic farm laborer or an individual with a 
disability as separately defined in this paragraph and who was a 
domestic farm laborer prior to becoming disabled.
    Return on Investment (ROI). The annual amount of profit an owner 
operating on a limited or full profit basis may withdraw from a 
project, as established in the loan agreement. The amount is calculated 
as a percentage of the owner's investment in the project.
    Rural area. (1) Any open country, or any place, town, village, or 
city which is not (except in the cases of Pajaro, in the state of 
California, and Guadalupe, in the State of Arizona) part of or 
associated with an urban area and which:
    (i) Has a population not in excess of 2,500 inhabitants, or
    (ii) Has a population in excess of 2,500 but not in excess of 
10,000 if it is rural in character, or
    (iii) Has a population in excess of 10,000 but not in excess of 
20,000 and:
    (A) Is not contained within a standard metropolitan statistical 
area; and
    (B) Has a serious lack of mortgage credit for lower and moderate-
income families, as determined by the Secretary and the Secretary of 
Housing and Urban Development.

[[Page 32894]]

    (2) For purposes of this part, any area classified as ``rural'' or 
a ``rural area'' prior to October 1, 1990, and determined not to be 
``rural'' or in a ``rural area'' as a result of data received from or 
after the 1990 decennial census shall continue to be so classified 
until the receipt of data from the decennial census in the year 2000, 
if such area has a population in excess of 10,000, but not in excess of 
25,000, is rural in character, and has a serious lack of mortgage 
credit for lower and moderate-income families. Notwithstanding any 
other provision of this paragraph, the city of Plainview, Texas, shall 
be considered a rural area for purposes of this part, and the city of 
Altus, Oklahoma, shall be considered a rural area for purposes of this 
part until the receipt of data from the decennial census in the year 
2000.
    Rural Cooperative Housing (RCH). A housing program authorized under 
section 515 of the Housing Act of 1949, in which a consumer 
cooperative, organized and operating on a nonprofit basis, may own and 
operate a multi-family housing development.
    Rural Housing Service (RHS). The Agency within the Rural 
Development mission area of the U.S. Department of Agriculture or its 
successor agency which administers programs authorized by sections 514, 
515, 516, and 521 of the Housing Act of 1949, as amended.
    Rural Rental Housing (RRH). A housing program authorized by section 
515 of the Housing Act of 1949 to provide rental housing in rural areas 
for persons of very low, low and moderate income.
    Seasonal housing. Housing operated on a seasonal basis, typically 
for migrants or migrant agricultural laborers as opposed to year round.
    Security deposit. A one-time fee charged a tenant prior to 
occupancy of a unit to cover possible loss or damage to the housing 
unit caused by the tenant.
    Self-employed. A person who meets the IRS definition of self-
employed at 26 CFR 1.401-10.
    Service agreement. A written agreement between a borrower and a 
service provider establishing the specific service to be provided to a 
multi-family housing project, the cost of the service, and the length 
of time the service will be provided.
    Service plan. A written plan describing how services will be 
provided to a multi-family housing project and which, at a minimum, 
must specify the services to be provided, the frequency of the 
services, who will provide the services, how tenants will be advised of 
the availability of services, and the staff needed to provide the 
services.
    Service provider. A person who signs a written agreement with a 
borrower to provide services to a multi-family housing project.
    Servicing note rent (SNR). A rental rate charged at a Plan II 
project experiencing vacancies that is less than note rent but higher 
than basic rent.
    Shelter costs. Basic or note rate rent plus the utility allowance, 
when used, or the occupancy charge plus the utility allowance. If the 
utility costs are included in the rent, the rent will equal shelter 
costs.
    Sources and Uses Comprehensive Evaluation (SAUCE). A computer 
software program used by the Agency to analyze the total funds provided 
to a multi-family housing project to ensure that the Agency is not 
providing excess assistance.
    Tenant or co-tenant. An individual who signs a lease and occupies 
or will occupy a rental unit in a multi-family housing project. The 
term tenant or co-tenant also refers to a member of cooperative housing 
occupying or planning to occupy a dwelling unit in cooperative housing.
    Tenant contribution. The net or gross amount due from a tenant to 
pay for occupancy of a rental unit in a multi-family housing project.
    (1) Net tenant contribution equals the amount of rent paid by a 
tenant from the tenant's own resources.
    (2) Gross tenant contribution equals the amount of rent plus the 
utility allowance paid by tenants from their own resources.
    Total development cost (TDC). The cost of constructing, purchasing, 
improving, altering, or repairing multi-family housing and related 
facilities, buying household furnishings (for sections 514/516 only), 
and purchasing or improving the necessary land, including 
architectural, engineering, or legal fees, and charges and other 
technical and professional fees and charges, but excluding fees, 
charges, or commissions such as payments to brokers, negotiators, or 
other persons for the referral of prospective applicants or 
solicitations of loans. Although a developer's fee is part of the 
project's development cost for purposes of tax credit calculations 
basis, such fees are not eligible for payment from Agency loan or grant 
funds and are not included in determining the Agency authorized 
development cost.
    Utility allowance. An amount determined by a borrower as the amount 
to be considered a tenant's portion of utility cost in the calculation 
of a tenant's total shelter cost when utility costs are not included in 
the rent.
    Very low-income household. A household that has an adjusted income 
that does not exceed the HUD established very low-income limit 
(generally 50 percent of median income adjusted for household size in 
the county where the property is or will be located).
    Workout agreement. An agreement between a borrower and the Agency 
listing actions to be taken over a period of time to prevent or correct 
a compliance violation or to cure a monetary or non-monetary default.


Sec. Sec.  3560.12-3560.49  [Reserved]


Sec.  3560.50  OMB control number. [Reserved]

Subpart B--Direct Loan and Grant Origination


Sec.  3560.51  General.

    This subpart contains the Agency's loan origination requirements 
for multi-family housing direct loans for Rural Rental Housing, Rural 
Cooperative Housing, and Farm Labor Housing. Additional requirements 
for farm labor housing loans and grants are contained in subpart L for 
Off-Farm Labor Housing and subpart M for On-Farm Labor Housing.


Sec.  3560.52  Program objectives.

    The Agency uses appropriated funds to finance the construction, 
rehabilitation of program properties, or purchase and rehabilitation of 
multi-family housing and related facilities to serve eligible persons 
in rural areas. The Agency encourages the use of such financing in 
conjunction with funding or financing from other sources.


Sec.  3560.53  Eligible use of funds.

    Funds may be used for the following purposes.
    (a) Construct housing. Funds may be used to construct multi-family 
housing.
    (b) Purchase and rehabilitate buildings. Funds may be used to 
purchase and rehabilitate buildings that have not been previously 
financed by the Agency.
    (1) Rehabilitation must meet the definition of either moderate or 
substantial rehabilitation as defined in 7 CFR part 1924, subpart A.
    (2) The building to be rehabilitated must be structurally sound and 
the improvements to the building must be necessary to meet the 
requirements of decent, safe, and sanitary living units.
    (3) The total development cost (TDC) for the purchase and 
rehabilitation of existing buildings must not be more than the 
estimated TDC for construction

[[Page 32895]]

of a similar type and unit size property in the same area.
    (c) Subsequent loans. Funds may be used to provide subsequent loans 
in accordance with the provisions of Sec.  3560.73.
    (d) Purchase and improve sites. Funds may be used to purchase and 
improve the site on which multi-family housing will be located, 
provided that the amount of loan funds used to purchase the site does 
not exceed the appraised market value of the site immediately prior to 
purchase.
    (e) Develop and install necessary systems. Funds may be used to 
install streets, a water supply, sewage disposal, heating and cooling 
systems, electric, gas, solar, or other power sources for lighting and 
other features necessary for the housing. If such facilities are 
located off-site, loan funds may only be used if the following 
additional requirements are met:
    (1) The loan applicant will hold title to the facility or have a 
legal right to use the facility for a period of at least 50 percent 
longer than the term of the loan or grant and the title or right is 
transferable to any subsequent owner of the housing.
    (2) The facilities will either be provided for the exclusive use of 
the proposed housing project, or Agency funds are limited to the 
prorated part of the total cost of the facility according to the use 
and benefit to the multi-family housing project. If entities other than 
the housing project financed by the Agency use the facilities on a 
reimbursable fee basis, the loan applicant must agree, in writing, to 
apply any fees collected in excess of operating expenses to their 
Agency loan account as an extra loan payment.
    (f) Landscaping and site development. Funds may be used to provide 
landscaping and site development related to a multi-family housing 
project such as lighting, walks, fences, parking areas, and driveways.
    (g) Tenant-related facilities. Funds may be used to develop tenant-
related facilities appropriate to the size, economics, and prospective 
tenants of a multi-family housing project, such as a community room, 
development of space for education and training purposes for tenants, 
central laundry facility, outdoor seating, space for passive 
recreation, tot lots, and a small emergency care infirmary. In 
congregate housing and group homes, funds may be used for central 
cooking and dining areas.
    (h) Management-related facilities. Funds may be used to develop 
management-related facilities appropriate to the size and economics of 
a multi-family housing project such as a maintenance workshop, storage 
facilities, office, and living quarters for a resident manager and 
other personnel.
    (i) Purchase and install equipment and appliances. Funds may be 
used to purchase and install equipment and appliances affixed to the 
property as customary and appropriate for the area in which the housing 
is located.
    (j) Household furnishings (Section 514/516). For farm labor housing 
sections 514 and 516 only, funds may be used to purchase household 
furnishings.
    (k) Initial operating capital. Loan funds equal to 2 percent of 
total development cost or appraised value, whichever is less, may be 
used by a state or political subdivision thereof, Indian tribe, 
consumer cooperative, or any public or private nonprofit borrower who 
is not receiving LIHTC, to make the initial operating capital 
contribution required by Sec.  3560.64. Other borrowers must use their 
own resources to make the required initial operating capital 
contribution and may not use loan funds for that purpose.
    (l) Builder's profit, overhead and general requirements. Subject to 
the following limits, funds may be used for builder's profit, overhead 
and general requirements.
    (1) Up to 10 percent of the construction contract may be used for 
builder's profit.
    (2) Up to 4 percent of the construction contract may be used for 
general overhead.
    (3) Up to 7 percent of the construction contract may be used for 
general requirements.
    (m) Legal, technical and professional services. Funds may be used 
for the costs of legal, technical, and professional services related to 
the borrower's multi-family housing project, including appraisals, 
environmental documentation, and due diligence reports.
    (n) Permit and application fees. Funds may be used for required 
multi-family housing permits and application fees.
    (o) Reimbursement to nonprofit organizations and public bodies. 
Funds may be used to reimburse a nonprofit organization or public body 
for costs that are reasonable and typical for the area, up to 2 percent 
of total development costs for section 515, or up to 4 percent of total 
development costs for off-farm labor housing, of:
    (1) Development and packaging of a loan application and a multi-
family housing proposal, and
    (2) Legal, technical, and professional fees incurred in the 
formation of the loan application and multi-family housing proposal; or
    (3) Technical assistance from another nonprofit organization to 
assist in the organization's formation and in the development and 
packaging of a loan application and multi-family housing proposal.
    (p) Educational programs. Funds may be used for educational 
programs related to owning and managing a cooperative housing project 
for the board of directors of a housing cooperative during the first 
year of the housing operation. Such funds will be available from the 
initial operating account. The amount of the funds disbursed will be 
subject to RHS approval and availability of financial resources from 
the project.
    (q) Interest and customary charges. Funds may be used for interest 
accrued and customary charges necessary to obtain interim financing.
    (r) Purchase housing from an interim lender. Funds may be used to 
purchase multi-family housing from an interim lender that holds fee 
simple title to Agency-financed housing upon which construction 
commenced and a letter of commitment had been issued by the Agency but 
the original applicant for whom funds were obligated will not or cannot 
continue with construction of the housing. In order for the purchase to 
take place, there must be no outstanding unpaid obligations in 
connection with the housing.
    (s) Uniform Relocation Assistance and Real Property Acquisition Act 
of 1970. Funds may be used for necessary costs incurred to comply with 
the Uniform Relocation Assistance and Real Property Acquisition Act of 
1970.
    (t) Demonstration programs. With the RHS Administrator's approval, 
funds may be used to construct demonstration housing involving 
innovative units and systems which do not meet existing published 
standards, rules, regulations, or policies but meet the intent of 
providing affordable, decent, safe, and sanitary rural housing, and are 
consistent with the requirements of title V of the Housing Act of 1949.
    (u) Conversion of section 502 properties. In accordance with Sec.  
3560.506, loan funds may be used to finance the conversion of real 
estate owned units originally financed under section 502 of the Housing 
Act of 1949, to multi-family housing authorized by section 515 of the 
Housing Act of 1949.


Sec.  3560.54  Restrictions on the use of funds.

    (a) Ineligible uses of funds. Funds may not be used for:
    (1) Housing intended to serve temporary and transient residents, 
with the exception of housing to serve

[[Page 32896]]

migrant farm workers in accordance with Sec.  3560.554;
    (2) Special care facilities or institutional-type homes;
    (3) Facilities which are not in compliance with the design 
requirements specified in Sec.  3560.60;
    (4) Any costs associated with space in a housing project that is 
leased for commercial use or any commercial facilities except essential 
service-type facilities when otherwise not conveniently available;
    (5) Specialized equipment for training and therapy;
    (6) Operating capital for a central dining facility or any items 
which do not become affixed to the real estate security with the 
exception of household furnishings for farm labor housing units 
financed under sections 514 and 516;
    (7) Compensation to a loan applicant for value of land contributed 
in excess of the equity contribution requirements in Sec.  3560.63(c);
    (8) Refinancing of an applicant's debt except when the debt 
involves interim financing or when refinancing is necessary to obtain a 
release of an existing lien on land owned by a nonprofit organization;
    (9) Payment of any fee, charge, or commission to a broker or anyone 
else as a developer's fee or for referral of a prospective loan 
applicant or solicitation of a loan;
    (10) Payment to any officer, director, trustee, stockholder, 
member, or agent of an applicant; or
    (11) Purchasing land for a site in excess of what is needed, except 
when:
    (i) The applicant cannot acquire an alternate site or cannot 
acquire the needed land as a separate parcel;
    (ii) The applicant agrees to sell the excess land as soon as 
practical and to apply the proceeds to the loan; and
    (iii) Program site density requirements are met in accordance with 
the site requirements established under Sec.  3560.58.
    (b) Obligations incurred before loan approval. Funds may not be 
used for expenses incurred by an applicant prior to approval except 
when all the following conditions are met:
    (1) The debts were incurred for eligible purposes;
    (2) Contracts, materials, construction, and any land purchased meet 
Agency standards and requirements;
    (3) Payment of the debts will remove any attached liens and any 
basis for liens that may attach to the property on account of such 
debts; and
    (4) The appropriate level of environmental review in accordance 
with 7 CFR part 1940, subpart G has been completed.


Sec.  3560.55  Applicant eligibility requirements.

    Applicants for off-farm labor housing loans and grants should also 
refer to Sec.  3560.555, and applicants for on-farm labor housing loans 
should refer to Sec.  3560.605.
    (a) General. To be eligible for Agency assistance, applicants must 
meet the following requirements:
    (1) Be a U.S. citizen or qualified alien(s); a corporation; a state 
or local public Agency; an American Indian tribe as defined in Sec.  
3560.11; or a limited liability company (LLC), nonprofit organization, 
consumer cooperative, trust, partnership, or limited partnership in 
which the principals are U.S. citizens or qualified aliens;
    (2) Be unable to obtain similar credit elsewhere at rates that 
would allow for rents within the payment ability of eligible residents;
    (3) Possess the legal and financial capacity to carry out the 
obligations required for the loan or grant;
    (4) Be able to maintain, manage, and operate the housing for its 
intended purpose and in accordance with all Agency requirements;
    (5) With the exception of applicants who are a nonprofit 
organization, housing cooperative or public body, be able to provide 
the borrower contribution from their own resources (this contribution 
must be in the form of cash, or land, or a combination thereof);
    (6) Have or be able to obtain a minimum of 2 percent of the total 
development costs for use as initial operating capital (for nonprofit 
organizations, cooperatives, or public bodies, this amount may be 
financed through Agency funds); and
    (7) Not be suspended, debarred, or excluded based on the ``List of 
Parties Excluded from Federal Procurement and Nonprocurement 
Programs.'' The list is available to Federal agencies from the U.S. 
Government Printing Office. Non-federal parties should contact the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, (202) 512-1800.
    (8) Not delinquent on Federal debt or a Federal judgment debtor, 
with the exception of those debtors described in Sec.  3560.55(b).
    (b) Additional requirement for applicants with prior debt. If an 
applicant has a prior or existing Agency debt, the following additional 
requirements must be met.
    (1) The applicant must be in compliance with any existing loan or 
grant agreements and with all legal and regulatory requirements or must 
have an Agency-approved workout agreement and be in compliance with the 
provisions of the workout agreement. The Agency may require that 
applicants with monetary or non-monetary deficiencies be in compliance 
with an Agency-approved workout agreement for a minimum of 6 
consecutive months before becoming eligible for further assistance.
    (2) The applicant must be in compliance with the Civil Rights Act 
of 1964 and all applicable civil rights laws.
    (c) Additional requirements for nonprofit organizations. In 
addition to the eligibility requirements of paragraphs (a) and (b) of 
this section, nonprofit organizations must meet the following criteria:
    (1) The applicant must have received a tax-exempt ruling from the 
IRS designating the applicant as a 501(c)(3) or 501(c)(4) organization.
    (2) The applicant must include as part of its organization purposes 
the provision of decent, safe, and sanitary housing that is affordable 
to very-low, low- and moderate-income persons.
    (3) No part of the applicant's earnings may benefit any of its 
members, founders, or contributors.
    (4) The applicant must be legally organized under state and local 
law.
    (5) The applicant's membership should be composed of:
    (i) At least one-third representatives of the low-income community.
    (ii) No more than one-third representatives of the public sector.
    (d) Additional requirements for limited partnerships. In addition 
to the applicant eligibility requirements of paragraphs (a) and (b) of 
this section, limited partnership loan applicants must meet the 
following criteria:
    (1) The general partners must be able to meet the equity 
contribution requirements if the partnership is not able to do so at 
the time of loan request.
    (2) The general partners must maintain a minimum 5 percent 
financial interest in the residuals or refinancing proceeds in 
accordance with the partnership organizational documents.
    (3) The partnership must agree that new general partners can be 
brought into the organization only with the prior written consent of 
the Agency.
    (e) Additional requirements for Limited Liability Companies (LLCs). 
In addition to the applicant eligibility requirements of paragraphs (a) 
and (b) of this section, LLC loan applicants must meet the following 
criteria.
    (1) One member who holds at least a 5 percent financial interest in 
the LLC must be designated the authorized agent to act on the LLC's 
behalf to bind the LLC and carry out the management functions of the 
LLC.

[[Page 32897]]

    (2) No new members may be brought into the organization without 
prior consent of the Agency.
    (3) The members must commit to meet the equity contribution 
requirements if the LLC is not able to do so at the time of loan 
request.


Sec.  3560.56  Processing section 515 housing proposals.

    Processing requirements for farm labor housing proposals are found 
in subpart L for Off-Farm and subpart M for On-Farm.
    (a) Notice of Funding Availability (NOFA) responses.
    (1) The Agency will publish an annual NOFA with deadlines and other 
information related to submission of new construction multi-family 
housing proposals, including expansion of existing multi-family housing 
in designated places selected in accordance with Sec.  3560.57.
    (2) To be eligible for funding consideration, multi-family housing 
proposals must be submitted in accordance with the NOFA and must 
provide information requested in the NOFA for the Agency to score and 
rank the proposals.
    (3) Multi-family housing proposals needing rental subsidies must 
include requests for Agency rental assistance or a description of any 
non-Agency rental subsidy to be used with the proposal and must provide 
information required by Sec.  3560.260(c).
    (4) The Agency will consider housing proposals requesting rental 
assistance in rank order to the extent rental assistance is available. 
When there is no rental assistance available, the Agency will consider 
only those housing proposals in rank order which do not require rental 
assistance.
    (b) Preliminary proposal assessment. The Agency will make a 
preliminary assessment of the application using the following criteria 
and will reject those applications which do not meet all of these 
criteria:
    (1) The proposal was received by the submission deadline specified 
in the NOFA;
    (2) The proposal is complete as specified in the NOFA;
    (3) The proposal is for an authorized purpose; and
    (4) The applicant meets Agency eligibility requirements.
    (c) Scoring and ranking project proposals. The Agency will score 
and rank each housing proposal which meets the criteria of paragraph 
(b) of this section.
    (1) The following criteria will be used to score housing proposals 
as more completely established in the NOFA:
    (i) The presence and extent of leveraged assistance in the proposal 
for the units that will serve tenants meeting Agency income limits at 
basic rents comparable to what the rent would be if the Agency provided 
full financing.
    (ii) The proposal will provide rental units in a colonia, tribal 
land, Rural Economic Area Partnership (REAP) community, Enterprise Zone 
or Empowerment Community (EZ/EC) or in a place identified in the state 
Consolidated Plan or a state needs assessment as a high need community 
for multi-family housing.
    (iii) The proposal supports Agency initiatives announced in the 
NOFA.
    (iv) The proposal uses a donated site which meets the following 
conditions:
    (A) The site is donated by a state, unit of local government, 
public body or a nonprofit organization;
    (B) The site is suitable for the housing proposals and meets Agency 
requirements;
    (C) Site development costs do not exceed what they would be to 
purchase and develop an alternative site;
    (D) The overall cost of the multi-family housing is reduced by the 
donation of the site; and
    (E) A return on investment is not paid to the borrower for the 
value of the donated site nor is the value of the site considered as 
part of the borrower's contribution.
    (2) The Agency will rank housing proposals based on their scoring.
    (i) When proposals have an equal score, preference will be given to 
Indian tribes as defined in Sec.  3560.11 and local nonprofit 
organizations or public bodies whose principal purposes include low-
income housing that meet the conditions of Sec.  3560.55(c) and the 
following conditions.
    (A) Is exempt from Federal income taxes under section 501(c)(3) or 
501(c)(4) of the Internal Revenue Code;
    (B) Is not wholly or partially owned or controlled by a for-profit 
or limited-profit type entity;
    (C) Whose members, or the entity, do not share an identity of 
interest with a for-profit or limited-profit type entity;
    (D) Is not co-venturing with another entity; and
    (E) The entity or its members will not be receiving any direct or 
indirect benefits pursuant to LIHTC.
    (ii) A drawing will be held in the event of a tie score, first for 
proposals from applicants who meet the conditions of paragraph 
(c)(2)(i) of this section and next for proposals from applicants for 
which paragraph (c)(2)(i) of this section is not applicable. Each 
proposal will be numbered in the order in which it is drawn.
    (3) The Agency will request initial loan applications from parties 
who submitted the housing proposals with the highest ranking, taking 
into consideration available funds. The Agency will notify non-selected 
parties with the reasons for their non-selection, and the process that 
may be used to seek a review of the non-selection decision.
    (d) Processing initial loan applications. The Agency will review 
all initial loan applications submitted in accordance with Agency 
requirements to further evaluate the eligibility and feasibility of the 
housing proposals. This determination will include:
    (1) A review of the preliminary plans and cost estimates;
    (2) A market feasibility review;
    (3) An Agency site visit to gather preliminary environmental 
information and determine that the proposed site meets the site 
requirements of Sec.  3560.58;
    (4) A review of the Affirmative Fair Housing Marketing Plan;
    (5) An analysis of current credit reports; and
    (6) A review of Civil Rights Impact Analysis in accordance with 7 
CFR part 2006, subpart P.
    (7) Completion of the appropriate level of environmental review in 
accordance with 7 CFR part 1940, subpart G.
    (e) Processing order of initial loan applications. The Agency will 
process initial loan applications in rank order, taking into account 
available funds. If any initial loan applications are withdrawn, 
rejected, or delayed for a period of time that will not permit funding 
in the current funding cycle, the Agency will process, in rank order, 
the next initial loan application as funding levels permit.
    (f) Other assistance. During each stage of loan application 
processing, loan applicants must notify the Agency of all other 
assistance, including other Federal Government assistance proposed or 
approved for use in connection with the loan application.
    (g) Proposal withdrawal or rejection. An applicant may withdraw a 
housing proposal, an initial loan application, or a final loan 
application at any time during the Agency review process with a written 
request. The Agency may reject a housing proposal, an initial loan 
application, or a final loan application at any time during the Agency 
review process when an applicant fails to provide information requested 
by the Agency within the time frame specified by the Agency.
    (h) Final applications. Applicants, with initial loan applications 
that are selected by the Agency for further processing, must submit a 
final

[[Page 32898]]

application, with any additional information requested by the Agency, 
to confirm and document a housing proposal's eligibility and 
feasibility. The Agency will notify applicants with initial loan 
applications that are not selected for further processing of their non-
selection, the reasons for their non-selection, and the process that 
may be used to seek a review of the non-selection decision.
    (i) Rural cooperative housing proposals. Rural cooperative housing 
loan proposals will be solicited through a NOFA and will be assessed 
and processed in the same manner described in paragraphs (a) through 
(h) of this section.


Sec.  3560.57  Designated places for section 515 housing.

    (a) Establish a list of designated places. The Agency will 
establish a list of designated places from which loan proposals will be 
accepted. The list is updated each fiscal year and is available when 
the Notice of Funding Availability (NOFA) is published. The NOFA 
provides information on obtaining the list. This list will be developed 
from a list of rural places which the Agency identifies as having the 
greatest need for multifamily housing based on the following factors:
    (1) Qualification as a rural area as defined in Sec.  3560.11;
    (2) Lack of mortgage credit;
    (3) Demonstrated need for multi-family housing based on:
    (i) The incidence of poverty;
    (ii) The existence of substandard housing;
    (iii) The lack of affordable housing; and
    (iv) The following high need areas:
    (A) Places identified in the state Consolidated Plan or similar 
state plan or needs assessment report;
    (B) Indian reservations or communities located within the 
boundaries of tribal allotted or trust land; and
    (C) EZ/EC or REAP communities.
    (b) Establishing partnership designated place list. The Agency, in 
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.
    (c) Administrator's discretion. The Administrator may add to the 
list of designated places any place that is determined to have a 
compelling need for multi-family housing, for example, a place that has 
had a substantial increase in population not reflected in the most 
recent Census data, or a place that has experienced a loss of 
affordable housing because of natural disaster.
    (d) Restrictions on loans in certain designated places.
    (1) Initial loan applications will not be requested and final loan 
applications will not be closed for housing proposals in designated 
places where any of the following conditions exist.
    (i) The Agency has selected another multi-family housing proposal 
in the designated place for processing.
    (ii) A previously funded Agency, HUD, low-income housing tax credit 
or other similar assisted multi-family housing in the designated place 
has not been completed or has not reached projected occupancy levels.
    (iii) Existing assisted multi-family housing in the designated 
place is experiencing high vacancy levels.
    (iv) A special note rate rent or other loan servicing tool is 
pending or in effect for other assisted housing in the designated 
place, or
    (v) The need in the market area is for additional rental assistance 
and not additional rental units.
    (2) Exceptions to the provisions in Sec.  3560.57(d)(1) may be 
made:
    (i) When a group home is proposed for persons with disabilities in 
an area where the existing multi-family housing is insufficient or 
unavailable for their needs; or
    (ii) There is a compelling need for additional multi-family 
housing, for example when the units that have been approved or are 
under development represent only a small portion of the total units 
needed in the community.


Sec.  3560.58  Site requirements.

    (a) Location.
    (1) New construction section 515 loans will be made only in 
designated places selected by the Agency in accordance with the 
requirements of Sec.  3560.57.
    (2) Agency-financed multi-family housing must be located in 
residential areas as part of established rural communities, except as 
permitted in Sec.  3560.58(b), and for farm labor housing units 
financed under sections 514 and 516, which may be developed in any area 
where a need for farm labor housing exists.
    (3) Communities in which Agency-financed multi-family housing is 
located must have adequate facilities and services to support the needs 
of tenants.
    (4) Housing complexes will not be located in areas where there are 
undesirable influences such as high activity railroad tracks; adjacent 
to or near industrial sites; bordering sites or structures which are 
not decent, safe, or sanitary; or bordering sites which have potential 
environmental concerns such as processing plants. Sites which are not 
an integral part of a residential community and do not have reasonable 
access, either by location or terrain, to essential community 
facilities such as water, sewerage removal, schools, shopping, 
employment opportunities, medical facilities, are not acceptable. 
Consistent with Federal law and Departmental Regulation, the Agency 
must conduct an environmental assessment and a civil rights impact 
analysis before a site can be accepted. Sites may be found as 
unacceptable if any of the above concerns exist.
    (b) Structures located in central business areas. The Agency will 
consider financing construction or the purchase and substantial 
rehabilitation of an existing structure located in the central business 
area of a rural community. With prior consent from the Agency, a 
portion of such a structure may be designated for commercial use on a 
lease basis. RHS funds may not be used to finance any cost associated 
with the commercial space.
    (c) Site development costs and standards. The cost of site 
development must be less than or comparable to the cost of site 
development at other available sites in the community and the site must 
be developed in accordance with 7 CFR part 1924, subpart C and any 
applicable standards imposed by a state or local government.
    (d) Densities. Allowable site densities will be determined based on 
the following criteria:
    (1) Compatibility and consistency with the community in which the 
multi-family housing is located;
    (2) Impact on the total development costs; and
    (3) Size sufficient to accommodate necessary site features.
    (e) Flood or mudslide-prone areas.
    (1) The Agency will not approve sites subject to 100-year floods 
when non-floodplain sites exist. The environmental review process will 
assess the availability of a reasonable site outside the 100-year 
floodplain.
    (2) Sites located within the 100 year floodplain are not eligible 
for federal financial assistance unless flood insurance is available 
through the National Flood Insurance Program (NFIP). The Agency will 
complete FEMA Form 81-93, Standard Flood Hazard Determination, to 
document the site's location in relation to the

[[Page 32899]]

floodplain and the availability of insurance under NFIP.


Sec.  3560.59  Environmental requirements.

    Under the National Environmental Policy Act, the Agency is required 
to assess the potential impact of the proposed action on protected 
environmental resources. Measures to avoid or at least mitigate adverse 
impacts to protected resources may require a change in the site or 
project design. Therefore, a site cannot be approved until the Agency 
has completed the environmental review in accordance with 7 CFR part 
1940, subpart G, or any successor regulation. Likewise, the applicant 
should be informed that the environmental review must be completed and 
considered before the Agency can make a commitment of resources to the 
project.


Sec.  3560.60  Design requirements.

    (a) Standards. All Agency-financed multi-family housing will be 
constructed in accordance with 7 CFR part 1924, subpart A and will 
consist of two or more rental units plus appropriate related 
facilities. Single family structures may be used for group homes and 
cooperative housing. Also, manufactured homes may be used to create 
multi-family housing and single family housing originally financed 
through section 502 of the Housing Act of 1949 may be converted to 
multi-family housing. Maintenance requirements are listed in Sec.  
3560.103(a)(3).
    (b) Residential design. All multi-family housing must be 
residential in character, except as provided for in Sec.  3560.58(b), 
and must meet the needs of eligible residents.
    (c) Economical construction, operation and maintenance. Taking into 
consideration life-cycle costs, all housing must be economical to 
construct, operate, and maintain and must not be of elaborate design or 
materials.
    (1) Economical construction means construction that results in 
housing of at least average quality with amenities that are reasonable 
and customary for the community and necessary to appropriately serve 
tenants.
    (2) Economical operating and maintenance means housing with 
operational and maintenance costs that allow a basic rent structure 
less than or consistent with conventional rents for comparable units in 
the community or in a similar community.
    (3) In meeting the Agency objective of economical construction, 
operation and maintenance, housing proposals must:
    (i) Contain costs without jeopardizing the quality and 
marketability of the housing;
    (ii) Employ life cycle cost analysis acceptable to the Agency to 
determine the types of materials which will reduce overall costs by 
lowering operation and maintenance costs, even though their initial 
costs may be higher; and
    (iii) Provide assurances that costs will be reduced when the Agency 
determines that housing costs are not economical. If assurances cannot 
be provided, funding may be withdrawn.
    (4) The housing proposal will give maximum consideration to energy 
conservation measures and practices.
    (d) Accessibility. All housing will meet the following 
accessibility requirements.
    (1) For new construction of multi-family housing, at least 5 
percent of the units (but not less than one) must be constructed as 
fully accessible units to persons with disabilities. The Uniform 
Federal Accessibility Standards (UFAS), as defined in 36 CFR part 1190, 
will be followed. When calculating how many accessible units are 
required, always round up to the next whole number to ensure the 5 
percent requirement is met.
    (2) For existing properties that do not have fully accessible 
units, the 5 percent requirement will apply when making substantial 
alterations as defined by UFAS. The UFAS defines substantial alteration 
as alteration to any building or facility is to be considered 
substantial if the total cost for a twelve month period amounts to 50 
percent or more of the full and fair cash value of the building * * * 
UFAS further defines full and fair cash value as the assessed valuation 
of a building or facility as recorded in the assessor's office of the 
municipality and as equalized at one hundred percent (100%) valuation, 
or the replacement cost, or the fair market value. The 5 percent rule 
will also apply to repair or renovation work on a single unit. For 
instance, if a unit is damaged by fire and extensive repair is 
necessary, to the extent possible the unit is to be converted to a 
fully accessible unit.
    (3) The variety of bedroom sizes of fully accessible units will be 
comparable to the variety of bedroom sizes of units which are not fully 
accessible. Borrowers will not, however, be required to exceed the 5 
percent requirement simply to have an accessible unit of each bedroom 
size. In addition, accessible units should be distributed throughout 
the complex so not to segregate the units in one location.
    (4) All multi-family housing must meet:
    (i) The accessibility requirements as contained in section 504 of 
the Rehabilitation Act of 1973;
    (ii) The requirements of the Fair Housing Amendments Act of 1988;
    (iii) The requirements of the Americans with Disabilities Act of 
1990, as applicable; and
    (iv) All other Federal, State, and local requirements. When 
architectural standards differ, the most stringent standard will be 
followed.


Sec.  3560.61  Loan security.

    (a) General. Each loan made by the Agency will be secured in a 
manner that adequately protects the financial interest of the Federal 
Government throughout the period of the loan based on a value-in-use 
appraisal consistent with the requirements of subpart P of this part.
    (b) Lien position.
    (1) The Agency will seek a first or parity lien position on Agency-
financed property in all instances. The Agency may accept a junior lien 
position if the Federal government's interests are adequately secured.
    (2) The Agency will seek a first or parity lien on revenue from 
rent; Agency, HUD, state or private rental subsidy payments; chattels; 
assignments; and operating and reserve accounts. The Agency will accept 
a junior lien position if the Federal Government's interests are 
adequately secured.
    (c) Liability. Personal liability will be required of all 
individual borrowers. Personal liability will not be required for the 
members or stockholders of any corporation or trust or any partners in 
a limited partnership.
    (d) Housing and land ownership. Applicants must own the multi-
family housing and related land for which the loan is being requested, 
or become the owner when the loan is closed or have a leasehold 
interest in the land. Use of leased land for MFH projects is limited to 
loan applicants who are nonprofit bodies, states, political 
subdivisions, public bodies, public agencies, and American Indian 
tribes where land is not available for purchase. If an applicant is not 
the owner of the housing and the related land, the following conditions 
must be met prior to or at loan closing.
    (1) A recorded mortgage on the improvements is given as collateral.
    (2) The amount of the loan against the collateral does not exceed 
its estimated market value.
    (3) The unexpired term of the lease on the date of loan closing is 
at least 50 percent longer than the term of the loan and rent charged 
for the lease does not

[[Page 32900]]

exceed the rate being paid for similar leases in the area.
    (4) The applicant's leasehold interest is not subject to summary 
foreclosure or cancellation.
    (5) The lease permits:
    (i) The Agency to foreclose the mortgage and to transfer the lease;
    (ii) The Agency to bid at a foreclosure sale or to accept voluntary 
conveyance of the security in lieu of foreclosure;
    (iii) The Agency to occupy the property, sublet the property, or 
sell the leasehold for cash or credit if the leasehold is acquired 
through foreclosure, if the Agency accepts voluntary conveyance in lieu 
of foreclosure, or if the borrower abandons the property; and
    (iv) The applicant, in the event of default or inability to 
continue with the lease and the loan, to transfer the leasehold subject 
to the mortgage to a transferee that will assume the property ownership 
obligations.


Sec.  3560.62  Technical, legal, insurance, and other services.

    (a) Legal services. Applicants must have written contracts for any 
legal services that are to be paid out of Agency loan funds.
    (b) Title clearance. Applicants must obtain title clearance in 
accordance with the provisions of 7 CFR part 1927, subpart B applicable 
to title clearance, which would include title insurance or title 
opinion, unless the loan applicant is leasing the property or is an 
organization or an individual with special title or loan closing 
problems, in which case title clearance and related legal services will 
be obtained in accordance with procedures approved by the Agency.
    (c) Architectural services. Applicants must obtain a written 
contract for architectural services in accordance with the provisions 
of 7 CFR part 1924, subpart A.
    (d) Insurance. Applicants must have property and liability coverage 
at loan closing as well as flood insurance, if needed. Fidelity 
coverage must be in force as soon as there are assets within the 
organization and it must be obtained before any loan funds or interim 
financing funds are made available to the borrower. At a minimum, 
applicants must meet the property, liability, flood, and fidelity 
insurance requirements in Sec.  3560.105.
    (e) Surety bonding. Applicants must comply with the surety bonding 
provisions of 7 CFR part 1924 subpart A.


Sec.  3560.63  Loan limits.

    (a) Determining the security value. The security value for an 
Agency loan is the lesser of the total development cost (exclusive of 
any developer's fee as provided by paragraph (d)(2) of this section) or 
the housing project's value as determined by a value-in-use appraisal 
conducted in accordance with subpart P of this part, minus any prior or 
parity liens on the housing project. For purposes of determining 
security value:
    (1) Total development cost must be calculated excluding costs not 
considered allowable under Sec.  3560.54(a), and excluding costs 
related to compliance with the Uniform Relocation Assistance and Real 
Property Acquisition Act of 1970.
    (2) The value-in-use appraisal shall be obtained by the Agency and 
conducted in accordance with subpart P of this part.
    (b) Limitations on loan amounts. The Agency will not make any loans 
without adequate security. The following limitations will be set on 
loan amounts.
    (1) For all loan applicants who will receive benefits from the low-
income housing tax credit program, the amount of Agency financing for 
the housing will not exceed 95 percent of the security value available 
for the Agency loan.
    (2) For all loan applicants who will not receive low-income housing 
tax credit benefits and who are comprised solely of nonprofit 
organizations, consumer cooperatives, or state or local public 
agencies, the amount of the loan will be limited to the security value 
available for the Agency loan, plus the 2 percent initial operating 
capital and any necessary relocation costs incurred.
    (3) For all other loan applicants who will not receive low-income 
housing tax credit benefits, the loan amount will be limited to no more 
than 97 percent of the security value available for the Agency loan.
    (c) Equity contribution. Loan applicants, with the exception of 
nonprofit organizations, consumer cooperatives, or state or local 
public agencies who will not be receiving tax credits, must make an 
equity contribution from their own resources.
    (1) Loan applicants who will receive benefits from the low-income 
housing tax credit program must make an equity contribution in the 
amount of 5 percent of the Agency loan. The maximum Agency loan will be 
determined in accordance with Sec.  3560.63(b).
    (2) Loan applicants who will not receive benefits from the low-
income housing tax credit program and are not nonprofit organizations, 
consumer cooperatives, or state or local public agencies must make an 
equity contribution in the amount of 3 percent of the Agency loan. The 
maximum Agency loan will be determined in accordance with Sec.  
3560.63(b).
    (d) Review of assistance from multiple sources. The Agency will 
analyze Federal government and other assistance provided to any multi-
family housing project to establish the maximum loan amount and to 
assure that the assistance is not more than the minimum necessary to 
make the housing affordable, decent, safe, and sanitary to potential 
tenants.
    (1) Determining minimum assistance. For purposes of determining 
minimum assistance, the total amount paid for builder's profit, 
overhead, and general requirements may not exceed 21 percent of the 
construction contract. Unless specified differently in a Memorandum of 
Understanding between the Agency and the state agency that allocates 
low-income housing tax credits, limits will be those specified in Sec.  
3560.53(l).
    (2) Developer's fee. While, in accordance with Sec.  3560.54(a)(9), 
payment of a developer's fee is not an eligible use of Agency loan 
funds, the Agency will include in total development costs a developer's 
fee paid from other sources when analyzing the Federal government 
assistance to the housing. The Agency may recognize a developer's fee 
paid from other sources on construction or rehabilitation of up to 15 
percent of the total development costs authorized for low-income 
housing tax credit purposes, or by another Federal government program. 
Likewise for transfer proposals that include acquisition costs, the 
developer's fee on the acquisition cost may be recognized up to 8 
percent of the acquisition costs only when authorized under a Federal 
government program providing assistance. The developer's fee is not 
included in determining the Agency's maximum debt limit and loan 
amount.
    (e) Limits on equity loans. For equity loans to avert prepayment, 
the amount of the Agency equity loan will be limited to no more than 
the difference between 90 percent of current value of the property when 
appraised as conventional unsubsidized multi-family housing and all 
current unpaid balances.
    (f) Cost overruns.
    (1) All applicants must agree in writing to provide funds at no 
cost to the housing and without pledging the housing as security to pay 
any cost for completing planned construction after the maximum debt 
limit is reached.
    (2) After loan approval, the Agency will only approve cost 
increases for housing proposals involving new construction or major 
rehabilitation when the additional costs will not cause

[[Page 32901]]

the maximum debt limit to be exceeded and the cost increases were 
caused by:
    (i) Unforeseen factors beyond the borrower's control;
    (ii) Design changes required by the Agency, state, or the local 
government; or
    (iii) Financing changes approved by the Agency.


Sec.  3560.64  Initial operating capital contribution.

    Borrowers are required to make an initial operating capital 
contribution to the general operating account in the amount of at least 
2 percent of the total development cost or appraised value, whichever 
is less.
    (a) Borrowers that are nonprofit organizations, consumer 
cooperatives, or state or local public agencies and are not receiving 
low-income housing tax credits, may use loan funds for their initial 
operating capital contribution. All other borrowers must fund the 
initial operating capital contribution from their own resources.
    (b) Borrowers must provide to the Agency for approval a list of 
materials and equipment to be funded from the general operating account 
for initial operating expenses. As specified in Sec.  3560.304(b), 
initial operating capital may be used only to pay for approved budgeted 
expenses. If total initial operating expenses exceed 2 percent, the 
additional amount must be paid by the borrower from its own resources, 
except that borrowers meeting the provisions of Sec.  3560.64(a) who do 
not have sufficient resources for this purpose may request Agency 
assistance. Withdrawals from the reserve account will not be approved 
for such expenses.
    (c) Borrowers must provide the Agency with documentation of their 
initial operating capital contribution deposited into the general 
operating account prior to the start of construction or loan closing, 
whichever comes first, and such funds thereafter, may only be used for 
authorized budgeted purposes.
    (d) If the conditions specified in Sec.  3560.304(c) are met, funds 
contributed as initial operating capital may be returned to the 
borrower.


Sec.  3560.65  Reserve account.

    To meet major capital expenses of a housing project, borrowers must 
establish and fund a reserve account which meets requirements of Sec.  
3560.306. At a minimum, the borrower must agree to make monthly 
contributions to the reserve account in amounts that will equal an 
annual contribution of 1 percent of the multi-family housing's total 
development cost.


Sec.  3560.66  Participation with other funding or financing sources.

    (a) General requirements. The Agency encourages the use of funding 
or financing from other sources in conjunction with Agency loans. When 
the Agency is not the sole source of financing for multi-family 
housing, the following conditions must be met.
    (1) The Agency will enter into a participation (or intercreditor) 
agreement with the other participants that clearly defines each party's 
relationship and responsibilities to the others.
    (2) The rental units that will serve tenants eligible for housing 
under the Agency's income standards must meet Agency standards and the 
number of units that will serve the Agency's tenants are at least equal 
to the units financed by the Agency.
    (3) All rental units must be operated and managed in compliance 
with the requirements of the Agency and the other sources. To the 
extent these requirements overlap, the most stringent requirement must 
be met. The Agency may negotiate the resolution of overlapping 
requirements on a case-by-case basis; however, at a minimum, Agency 
requirements must be met.
    (4) If the number of units subject to the low-income housing tax 
credit (LIHTC) rent and income restrictions is greater than the number 
of units projected to receive Agency rental assistance (RA) or similar 
tenant subsidy, the market feasibility documentation must clearly 
reflect a need and demand by LIHTC income-eligible households 
financially able to afford the projected rents without such a subsidy 
for the units not receiving RA or similar tenant subsidy.
    (b) Rental assistance. The Agency may provide rental assistance 
with multi-family housing loans participating with other sources of 
funding under the following conditions:
    (1) The Agency's loan equals at least 25 percent of the housing's 
total development cost.
    (2) The rental assistance is provided only to those rental units 
where the basic rents do not exceed what basic rents would have been 
had the Agency provided full financing.
    (3) The provisions of subpart F of this part are met.
    (c) Security requirements. The security requirements of Sec.  
3560.61 must be met for all Agency-financed multi-family housing 
participating with other sources of funding.
    (d) Reserve requirements. Reserve account requirements 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 account is consistent with the 
requirements of Sec.  3560.65. Reserve requirements and procedures for 
reserve account withdrawals must be agreed upon by all lenders and 
included in the intercreditor or participation agreement.
    (e) Design requirements. Housing and related facilities must be 
planned and constructed in accordance with 7 CFR part 1924, subparts A 
and C. Agency loan funds may only be used for common facilities such as 
those described in Sec.  3560.53(g). If housing includes common 
facilities other than those listed in Sec.  3560.53(g), the following 
conditions must be met:
    (1) The non-Agency-financed common facility's operating and 
maintenance costs must be paid through collection of a user fee from 
residents who use the facility;
    (2) The non-Agency-financed common facility must be designed and 
operated with appropriate safeguards for the health and safety of 
tenants; and
    (3) The facility must be fully available and accessible to all 
tenants.


Sec.  3560.67  Rates and terms for section 515 loans.

    Rates and terms for farm labor housing loans are found in subpart L 
for Off-Farm and subpart M for On-Farm.
    (a) Interest. Loans will be closed at the lower of the interest 
rate in effect at the time of loan approval or the interest rate that 
is in effect at time of loan closing.
    (b) Interest credit. The Agency will provide interest credit to 
subsidize the interest on the Agency loan to a payment rate of 1 
percent for all of the Agency's initial and subsequent loans.
    (c) Amortization period and term.
    (1) Except for manufactured housing, loans will be amortized over a 
period not to exceed the lesser of the economic life of the housing 
being financed or 50 years and paid over a term not to exceed 30 years 
from the date of loan. The Agency may make a loan to the borrower to 
finance the final payment of a loan in accordance with Sec.  3560.74.
    (2) Loans for manufactured housing will be amortized and paid over 
a term not to exceed 30 years as specified in Sec.  3560.70(c).


Sec.  3560.68  Permitted return on investment (ROI).

    (a) Permitted return. Borrowers operating on a limited profit basis 
will be permitted a return not to exceed 8 percent of their required 
initial investment determined at the time of loan approval in 
accordance with Sec.  3560.63(c).

[[Page 32902]]

    (b) Calculation of permitted return. The permitted return will be 
based on the borrower's contributions from their own resources, which, 
when added to the Agency loan amount and all sources of funding or 
financing, do not exceed the security value of the multi-family housing 
project as specified in Sec.  3560.63(a).
    (1) Proceeds received by the borrower from the syndication of low-
income housing tax credit and contributed to the multi-family housing 
project may be considered funds from the borrower's own resources for 
the portion of the proceeds which exceeds:
    (i) The allowable developer's fee determined by the state agency 
administering the low-income housing tax credit, and
    (ii) The borrower's expected contribution to the transaction, as 
determined by the state agency administering the low-income housing tax 
credit.
    (2) A building site contributed by the borrower will be appraised 
by the Agency to determine its value. A return may not be allowed on 
the amount above the equity contribution required by Sec.  3560.63(c) 
if the value as determined by the Agency, when added to the loan and 
grant amounts from all sources, exceeds the security value of the 
multi-family housing project as specified in Sec.  3560.63(a).
    (c) Return on additional investment. The initial investment may 
exceed the equity contribution required by Sec.  3560.63(c) and a 
return allowed on the investment if the additional return does not 
increase basic rents and rental assistance costs above what basic rents 
and rental assistance costs would have been with the Agency financing 
95 or 97 percent of the total development cost.


Sec.  3560.69  Supplemental requirements for congregate housing and 
group homes.

    (a) General. Congregate housing and group homes must be planned and 
developed in accordance with 7 CFR part 1924, subparts A and C.
    (b) Design criteria. Congregate housing and group homes must be 
designed to accommodate all special services that will be provided.
    (c) Services. Congregate housing and group home loan applicants, as 
part of their loan request, must submit a plan to make affordable 
services available to residents to assist the residents in living 
independently. The plan must address the availability of this 
assistance from service providers throughout the term of the loan.
    (1) For congregate housing, the resident services plan must address 
how the following services will be provided or made available:
    (i) One cooked meal per day, seven days per week;
    (ii) Transportation to and from the property;
    (iii) Assistance in housekeeping;
    (iv) Personal services;
    (v) Recreational and social activities; and
    (vi) Access to medical services.
    (2) For group homes, the resident services plan must address how 
access to the following services will be provided or made available:
    (i) A common kitchen in which to prepare meals;
    (ii) Transportation;
    (iii) Nearby recreational and social activities which may be 
coordinated by the resident assistant, if applicable; and
    (iv) Medical services as necessary.
    (d) Necessary items. Borrowers must ensure items such as tables, 
chairs, and cookware necessary to furnish common areas are made 
available to congregate housing or group homes. The 2 percent initial 
operating capital may be used to purchase these items.
    (e) Association with other organizations. Congregate housing and 
group homes may coordinate services or training with another 
organization, such as a workshop for the developmentally disabled. 
However, the housing facility must be a separate entity and not 
dependent on the other organization.
    (f) Market feasibility documentation. Market feasibility 
documentation for congregate housing and group homes is subject to the 
following requirements:
    (1) Must address the need for housing with services and include 
information concerning alternative service providers;
    (2) Must contain demographic information pertaining to the 
population that is to be served by the congregate housing or group home 
project; and
    (3) May consider an expanded market area that includes 
nondesignated places, but the facility must be located in a designated 
place.
    (g) Rental assistance for group homes. A unit in a group home 
consists of a space occupied by a specific tenant household, which may 
be an apartment unit, a bedroom, or a part of a bedroom. Agency rental 
assistance will be made available to tenants sharing a unit so long as 
the total rent for the unit does not exceed conventional rents for 
comparable units in the area or a similar area.


Sec.  3560.70  Supplemental requirements for manufactured housing.

    (a) Design requirements. Manufactured housing must meet the 
requirements of 7 CFR part 1924, subpart A applicable to manufactured 
housing.
    (b) Eligible properties. The manufactured housing must include two 
or more housing units. The applicant will become the first owner 
purchasing the manufactured homes for purposes other than resale. The 
following exceptions may be made to this provision:
    (1) A housing proposal may include the purchase of the real 
property with existing manufactured housing which will be redeveloped 
with the placement of new manufactured homes.
    (2) A housing proposal may include the rehabilitation of existing 
manufactured housing only if the units to be rehabilitated are 
currently financed by the Agency. The proposal will include the results 
of the applicant's consultation with the manufacturers to determine if 
the proposed rehabilitation work will affect the structural integrity 
of the unit and, if so, the statement will include an explanation as to 
how.
    (c) Terms. The maximum loan amount will be determined in accordance 
with the requirements of Sec.  3560.63. The amortization period and 
term of loans for manufactured housing will not exceed the lesser of 
the economic life of the housing being financed or 30 years.
    (d) Security. A mortgage or deed of trust will be taken on the 
entire property purchased or improved with the loan. The encumbered 
property must be covered under a standard real estate title insurance 
policy or attorney's title opinion that identifies the housing as real 
property and insures or indemnifies against any loss if the 
manufactured home is determined not to be part of the real property. 
The property must be taxed as real estate by the jurisdiction where the 
housing is located if such taxation is permitted under applicable law 
when the loan is closed.
    (e) Special warranty requirements. The general contractor or 
dealer-contractor, as applicable, must provide a warranty in accordance 
with the provisions of 7 CFR part 1924, subpart A.
    (1) The warranty must establish that the manufactured homes, 
foundations, positioning and anchoring of the units to their permanent 
foundations, and all contracted improvements, are constructed in 
conformity with applicable approved plans and specifications.
    (2) The warranty must include provisions that the manufactured 
homes sustained no hidden damage during transportation and, for double-
wide

[[Page 32903]]

units, that the sections were properly joined and sealed.
    (3) The general contractor or dealer contractor must warrant that 
the manufacturer's warranty is in addition to and does not diminish or 
limit all other warranties, rights, and remedies that the borrower or 
lender may have.
    (4) The seller of the manufactured homes must deliver to the 
borrower the manufacturer's warranty with an additional copy for RHS. 
The warranty must identify the units by serial number.


Sec.  3560.71  Construction financing.

    (a) Construction financing plan. Prior to loan approval, applicants 
must submit to the Agency for its concurrence a plan for the 
construction financing and securitization of the loan.
    (b) Interim financing. Interim financing is required by the Agency 
for any construction, except as noted in paragraph (c) of this section.
    (1) The Agency reserves the right to review and approve the interim 
financing arrangements proposed by the applicant.
    (2) When interim financing is used, the Agency will obligate the 
funds and provide an interim financing letter to the lender that will 
confirm the procedures and conditions for the construction financing. 
The take-out loan will be closed and the interim lender paid off when 
the conditions of the interim financing letter have been met.
    (3) The applicable provisions of 7 CFR part 1924, subpart A will be 
used to monitor the construction.
    (4) An environmental review must be completed in accordance with 7 
CFR part 1940, subpart G, prior to issuance of the interim financing 
letter.
    (c) Multiple advances. When interim financing is not available or 
when it is in the best interest of the Federal Government, the Agency 
may provide for multiple advances of the funds to cover the cost of 
construction.
    (1) The Agency will review and approve the multiple advances 
proposed by the borrower.
    (2) When multiple advances are used, the Agency will close the loan 
prior to any advancement of funds and the relevant provisions of 7 CFR 
part 1924, subpart A will be used to monitor the construction.


Sec.  3560.72  Loan closing.

    (a) Requirements. Loans will be closed in accordance with 7 CFR 
part 1927, subpart B and any state supplements. In all cases, the 
borrower must:
    (1) Provide evidence that an Agency-approved accounting system is 
in place;
    (2) Execute a restrictive-use contract acceptable to the Agency 
that establishes the borrower's obligation to operate the housing for 
program purposes for the term of the Agency loan;
    (3) Provide evidence that construction financing arrangements are 
adequate;
    (4) Provide evidence that all the funds from other sources as 
proposed in the application are available and that there have been no 
changes in the Sources and Uses Comprehensive Evaluation (SAUCE).
    (5) Provide evidence of the title to all security required by the 
Agency;
    (6) Provide a certification that all construction in the case of 
interim financing has been or, in the case of multiple advances, will 
be paid;
    (7) Provide, in the case of interim financing, a dated and signed 
statement from the owner's architect certifying to substantial 
completion of the housing project;
    (8) Provide a certification that all construction in the case of 
interim financing has been or, in the case of multiple advances, will 
be in accordance with the plans and specifications concurred in by the 
Agency;
    (9) Provide evidence, if applicable, that the conditions of the 
interim financing letter have been met; and
    (10) Attend a pre-occupancy conference with the Agency.
    (b) Cost certification. In all cases, the borrower must report 
actual construction costs. Whenever the State Director determines it 
appropriate, and in all situations where there is an identity of 
interest as defined in 7 CFR 1924.4(i), the borrower, contractor and 
any subcontractor, material supplier, or equipment lessor having an 
identity of interest must each provide certification as to the actual 
cost of the work performed in connection with the construction 
contract. The construction costs must also be audited in accordance 
with Governmental Auditing Standards, by a CPA. In some cases, the 
Agency will contract directly with a CPA for the cost certification. 
Funds which were included in the loan for cost certification and which 
are ultimately not needed because Agency contracts for the cost 
certification will be returned on the loan. Agency personnel will 
utilize Exhibit M (7 CFR part 1924, subpart A) to assist in the 
evaluation of the cost certification process.
    (c) Notification of loan cancellation. Loans may be canceled after 
approval and before loan closing. The Agency will notify all parties of 
the cancellation and the reasons for the cancellation in accordance 
with 7 CFR part 1927, subpart B.


Sec.  3560.73  Subsequent loans.

    (a) Applicability. The Agency may make a subsequent loan to a 
borrower to complete, improve, repair, or make modifications to multi-
family housing initially financed by the Agency or for equity for 
preservation purposes. Loan requests to add units to comply with 
accessibility requirements may be processed as a subsequent loan; 
however, loan requests to add units to meet market demand will be 
processed as an initial loan request and must compete under the NOFA.
    (b) Application requirements and processing. Upon receipt of a 
subsequent loan request, the Agency will inform the applicant what 
information is required based on the nature and purpose of the loan 
request. Subsequent loan requests do not have to compete for funding 
against initial loan proposals.
    (c) Amortization and payment period. Subsequent loans will be 
amortized over a period not to exceed the lesser of the economic life 
of the housing being financed or 50 years and paid over a term not to 
exceed the lesser of the economic life of the housing or 30 years from 
the date of the loan.
    (d) Equity contribution. Applicants for subsequent loans must make 
contributions on the loans in the same proportion as outlined in Sec.  
3560.63(c). Loan applicants will not be given consideration for any 
increased equity value that the property may have since the initial 
loan.
    (1) Excess initial investment on an initial loan may be credited 
toward the required investment on a subsequent loan.
    (2) An initial operating capital contribution to the general 
operating account as described in Sec.  3560.64 is required for a 
subsequent loan approved under the conditions set in Sec.  3560.63(f) 
to complete housing construction but is not required for a subsequent 
loan to repair or improve existing housing.
    (e) Environmental requirements. Subsequent loans are subject to the 
completion of an environmental review in accordance with 7 CFR part 
1940, subpart G.
    (f) Design requirements. All improvements, repairs, and 
modifications will be in accordance with 7 CFR part 1924, subparts A 
and C.
    (g) Architectural services. The applicant must obtain architectural 
services when any of the following conditions exist.
    (1) Enclosed space is being added.

[[Page 32904]]

    (2) The improvements involve materials or systems that have an 
impact on the health and safety of the occupants.
    (3) When required by state law.
    (4) When the Agency determines that the work being performed 
requires architectural services.
    (h) Restrictive-use requirements. Subsequent loans are subject to 
restrictive-use provisions as outlined in Sec.  3560.662(a) and 
borrowers must execute a restrictive-use contract in accordance with 
Sec.  3560.72(a)(2).
    (i) Designation changes from rural to nonrural. If the designation 
of an area changes from rural to nonrural after the initial loan is 
made, a subsequent loan may be made only to make necessary improvements 
and repairs to the property or for equity when needed to avert 
prepayment.
    (j) Agency's discretion. The Administrator may approve a subsequent 
loan in a place that is not on the list of designated places as a 
servicing action, for example, to replace units destroyed by a natural 
disaster.


Sec.  3560.74  Loan for final payments.

    (a) Use. The Agency may finance final payments for borrowers 
holding existing loans for which the Agency approved an amortization 
period that exceeded the term of the loan.
    (b) Requirements. The Agency may finance final payments if 
documentation regarding the market area shows that a need for low-
income rental housing still exists for that area and one of the 
following conditions has been met.
    (1) It is more cost efficient and serves the tenant base more 
effectively to maintain existing multi-family housing than to build 
another property in the same location; or
    (2) The multi-family housing has been maintained to such an extent 
that it can be expected to continue providing affordable, decent, safe 
and sanitary housing for 20 years beyond the date of the loan to 
finance a final payment; and
    (3) Funds are available.
    (c) Term. The term of Agency loans to finance final payments will 
not exceed 20 years from the date of the initial loan final payment.


Sec. Sec.  3560.75-3560.99  [Reserved]


Sec.  3560.100  OMB control number. [Reserved]

Subpart C--Borrower Management and Operations Responsibilities


Sec.  3560.101  General.

    This subpart sets forth borrower obligations regarding management 
and operations of multi-family housing projects financed by the Agency. 
As noted in Sec.  3560.6, the borrower requirements listed in this 
subpart must be complied with by the borrower. The borrower may 
designate in writing a person to act as the borrower's authorized 
agent.


Sec.  3560.102  Housing project management.

    (a) General. Borrowers hold final responsibility for housing 
project management and must ensure that operations comply with the 
terms of all loan or grant documents, Agency requirements and 
applicable local, state and federal laws and ordinances.
    (b) Management plan. Borrowers must develop and maintain a 
management plan for each housing project covered by their loan or 
grant. The management plan must establish the systems and procedures 
necessary to ensure that housing project operations comply with Agency 
requirements.
    (1) At a minimum, management plans must address the following 
items:
    (i) Maintenance systems, including procedures for routine 
maintenance, capital item repair and replacement, and effective energy 
conservation practices;
    (ii) Personnel policies, job descriptions, staffing plans, training 
procedures for on-site staff;
    (iii) Front-line management functions to be performed by off-site 
staff.
    (iv) Plans and procedures for providing supplemental services 
including laundry, vending, and security;
    (v) Plans for accounting, record keeping and meeting Agency 
reporting requirements;
    (vi) Procurement procedures;
    (vii) Rent and occupancy charge collection procedures, and 
procedures for requesting and implementing changes in rents, utility 
allowances, or occupancy charges;
    (viii) Plans and procedures for marketing rental units and 
maintaining compliance with the Affirmative Fair Housing Marketing Plan 
in accordance with Sec.  3560.104;
    (ix) Unit leases and leasing policies and procedures, including 
procedures for maintaining and purging waiting lists, determining 
applicant eligibility, certifying and recertifying income, tenant 
selection, and occupancy policies such as security deposit amounts, 
occupancy rules, termination of leases or occupancy agreements and 
eviction;
    (x) Plans for allowing tenant participation in property operations 
and for fostering tenant relationships with management; and
    (xi) Procedures for applicant and tenant appeals.
    (xii) Describe how management will make known to tenants and 
applicants that management will provide reasonable accommodations under 
the Americans with Disabilities Act and regulations implemented 
thereunder at the borrower's expense unless to do so would cause an 
undue financial or administrative burden, how such requests are to be 
made, and who within management will have the authority to approve or 
disapprove a request for an accommodation.
    (2) Loan or grant applicants must submit a management plan before 
the Agency will give final approval to the loan or grant application. 
The plan must address the required items identified in paragraph (b)(1) 
of this section in sufficient detail to enable the Agency to monitor 
housing project performance.
    (3) If the Agency determines that a proposed management plan does 
not address the items in paragraph (b)(1) of this section in sufficient 
detail or contains policies that would violate Agency requirements, 
loan or grant agreements, or applicable local, state and Federal laws 
and ordinances, the Agency will provide written notice to the applicant 
indicating the deficiencies and a time period for submitting an 
acceptable plan. Approval of the management plan does not indicate that 
the Agency has determined the plan complies with state or local 
requirements.
    (c) Management plan effective period. A management plan approved by 
the Agency remains in effect as long as it accurately reflects housing 
project operations and the housing project is in compliance with the 
Agency requirements.
    (1) Borrowers must submit an updated management plan to the Agency 
if operations change or are no longer consistent with the management 
plan on file with the Agency.
    (2) When there are no changes in operations, borrowers must submit 
a certification to the Agency every 3 years stating that operations are 
consistent with the management plan and the plan is adequate to assure 
compliance with the loan and grant documents and Agency requirements or 
applicable local, state and Federal laws.
    (3) If the Agency determines that operations are in compliance with 
Agency requirements, loan or grant agreements, or applicable local, 
state, and Federal laws, but are not consistent with the management 
plan, the Agency will require the borrower to:
    (i) Revise the management plan to accurately reflect housing 
operations;
    (ii) Take actions to ensure the management plan is followed; or
    (iii) Advise the Agency in writing of the action taken.

[[Page 32905]]

    (4) When a housing project is being transferred from one borrower 
to another, the transferee must submit a management plan that addresses 
the required items identified in paragraph (b)(1) of this section in 
sufficient detail to enable the Agency to give final approval of the 
transfer.
    (d) Housing projects with compliance violations. Upon receiving 
notice of compliance violations in accordance with Sec.  3560.354, 
borrowers must submit to the Agency:
    (1) Revisions to the management plan establishing the changes in 
housing operations that will be made to restore compliance; or
    (2) If the borrower determines the compliance violations were due 
to a failure to follow the management plan, the borrower must certify 
to the Agency that the management plan is adequate to assure compliance 
with the applicable requirements of this part and submit a written 
description of the actions they will take to ensure the management plan 
is followed.
    (3) If the Agency discovers continued discrepancies between a 
management plan and housing project operations or compliance 
violations, the Agency may require the borrower to install a different 
management agent acceptable to the Agency as described in paragraph (e) 
of this section.
    (e) Acceptable management agents. Borrowers must obtain Agency 
approval of the agent proposed to manage a housing project prior to 
entering into any formal agreement with the agent and prior to allowing 
the agent to assume responsibility for housing project operations. 
Borrowers that plan to self-manage a housing project also must receive 
Agency approval before assuming responsibility for housing operations.
    (1) Borrowers must submit a written request for Agency approval of 
the proposed management agent at least 45 days prior to the date the 
agent is to assume responsibility for operations. This request must 
include a profile of the proposed management agent that provides 
sufficient information to allow the Agency to evaluate whether the 
agent is acceptable.
    (2) The Agency will deny approval of any proposed management agent 
that cannot provide evidence of at least two years of experience and 
satisfactory performance in directing and overseeing the management of 
similar federally-assisted multi-family housing.
    (3) The Agency may issue approval of a management agent that does 
not meet the requirements of Sec.  3560.102(e)(2) if the management 
agent can provide evidence that indicates the ability to successfully 
manage a multi-family housing project in accordance with Agency 
requirements.
    (4) If a borrower enters into an agreement with a management agent 
or begins to self-manage prior to receiving Agency approval, the Agency 
will place the borrower in non-monetary default status and, if not a 
self-management situation, will require the borrower to immediately 
terminate the contract with the management agent.
    (5) With Agency consent, borrowers may self-manage housing on a 30-
day temporary basis or may enter into a 30-day temporary agreement with 
a management agent if management services are needed to ensure proper 
operation of a housing complex prior to completion of the Agency 
management agent approval process. Such 30 day temporary agreements may 
be renewable for additional 30-day periods with Agency approval.
    (f) Self-management. Borrowers may self-manage a housing project 
but must receive Agency approval before assuming responsibility for 
housing operations. Borrowers that plan to self-manage must meet all 
requirements of Sec.  3560.102, except for paragraph (h).
    (g) Identity-of-interest disclosure. Borrowers and management 
agents must disclose to the Agency all identity-of-interest 
relationships which they have with firms and must receive Agency 
approval to use such firms prior to entering into any contractual 
relationships with such entities that involve Agency funds.
    (1) This disclosure must include any identity-of-interest 
relationships between:
    (i) The borrower and the management agent;
    (ii) The borrower or management agent and the providers of supplies 
and services to the housing project; and
    (iii) The borrower or the management agent and employees of any of 
the above.
    (2) Failure to disclose such relationships may subject the 
borrower, the management agent, and the other firms or employees found 
to have an identity of interest relationship to suspension, debarment, 
or other remedies available to the Agency.
    (3) After disclosure of an identity-of-interest relationship:
    (i) The borrower, management agent, and supplier of goods and 
services must provide documentation proving that use of identity-of-
interest firms is in the best interest of the housing project;
    (ii) Any supplier of goods and services must certify in writing to 
the Agency that the individual or organization has a viable, on-going 
trade or business qualified and licensed, if appropriate, to do the 
work for which a contract is being proposed;
    (iii) The borrower, management agent, and supplier of goods and 
services must agree, in writing, that all records related to the 
housing project will be made available to the Agency, OIG, GAO, or a 
representative of the Agency, upon request; and
    (iv) The Agency will deny the use of an identity-of-interest firm 
when the Agency determines such use is not in the best interest of the 
Federal government or the tenants.
    (h) Management agreement. Borrowers contracting with a management 
agent must execute a management agreement that establishes:
    (1) The management agent's responsibility to comply with Agency 
requirements and local, state, and Federal laws;
    (2) That the management fee is payable out of the housing project's 
general operating account consistent with the requirements of paragraph 
(i) of this section; and
    (3) The Agency's authority to terminate the agreement for failure 
to operate the housing project in accordance with Agency requirements 
or local, state, or Federal laws.
    (i) Management fees. Management fees will be an allowable expense 
to be paid from the housing project's general operating account only if 
the fee is approved by the Agency as a reasonable cost to the housing 
project and documented on the management certification. Management fees 
must be developed in accordance with the following:
    (1) The management fee may compensate the management entity only 
for the specifically identified bundle of services to be provided to 
the housing project.
    (2) Management fees may consist of a base per occupied unit fee, 
add-on fees for specific housing project characteristics, and incentive 
fees to encourage superior performance. Management entities may be 
eligible to receive the full base per occupied unit fee for any month 
or part of a month during which the unit is occupied.
    (i) Periodically, the Agency will develop and publish for public 
comment a range of base per occupied unit fees that will be paid in 
each state. The Agency will develop the fees based on a review of 
housing industry data. The final base for occupied unit fees for each 
state will be made available to all borrowers.
    (ii) Periodically, the Agency will develop and publish for public 
comment the amount and qualifications

[[Page 32906]]

to receive add-on fees and incentive fees. The final set of 
qualifications will be made available to all borrowers.
    (j) Management certification.
    (1) As a condition of approval of the management agent and the 
management fee, the borrower and the management agents must execute an 
Agency-approved certification establishing an allowable management fee 
to be paid out of the housing project's general operating account and 
certifying that:
    (i) The borrower and management agent agree to operate the housing 
project in accordance with the Agency-approved management plan;
    (ii) The borrower and the management agent will comply with Agency 
requirements, loan or grant agreements, applicable local, state and 
Federal laws and ordinances, and contract obligations, will certify 
that no payments have been made to anyone in return for awarding the 
management contract to the management agent, and will agree that such 
payments will not be made in the future;
    (iii) The borrower and the management agent will comply with Agency 
notices or other policy directives that relate to the management of the 
housing project;
    (iv) The management agreement between the borrower and management 
agent complies with the requirements of this section;
    (v) The borrower and the management agent will comply with Agency 
requirements regarding management fees as specified in paragraph (i) of 
this section, and allocation of management costs between the management 
fee and the housing project financial accounts specified in Sec.  
3560.302(c)(3);
    (vi) The borrower and the management agent will not purchase goods 
and services from entities that have an identity-of-interest (IOI) with 
the borrower or the management agent until the IOI relationship has 
been disclosed to the Agency according to paragraph (g) of this 
section, not denied by the Agency under paragraph (d)(3) of this 
section, and it has been determined that the costs are as low as or 
lower than arms-length, open-market purchases; and
    (vii) The borrower and the management agent agree that all records 
related to the housing project are the property of the housing project 
and that the Agency, OIG, or GAO may inspect the housing records and 
the records of the borrower, management agent, and suppliers of goods 
and services having an identity-of-interest with the borrower or with a 
management agent acting as an agent of the borrower upon demand.
    (2) A certification will be executed each time a management agent 
is proposed and a management agreement is executed or renewed. Any 
amendment to a management certification must be approved by the Agency 
and the borrower.
    (k) Procurement. The borrower and the agents of the borrower must 
obtain contracts, materials, supplies, utilities, and services at a 
reasonable cost and seek the most advantageous terms to the housing 
project. Any discounts, rebates, fees, proceeds, or commissions 
obtainable with respect to purchases, service contracts, or other 
transactions must be credited to the housing project.


Sec.  3560.103  Maintaining housing projects.

    (a) Physical maintenance.
    (1) The purposes of physical maintenance are the following:
    (i) Provide decent, safe, and sanitary housing; and
    (ii) Maintain the security of the property.
    (2) Borrowers are responsible for the long-term, cost-effective 
preservation of the housing project.
    (3) At all times, borrowers must maintain housing projects in 
compliance with local, state and federal laws and regulations and 
according to the following Agency requirements for affordable, decent, 
safe, and sanitary housing. Agency design requirements are discussed in 
Sec.  3560.60.
    (i) Utilities. The housing project must have an adequate and safe 
water supply, a functional and safe waste disposal system, and must be 
free of hazardous waste material.
    (ii) Drainage and erosion control. The housing project must have 
drainage that effectively protects the housing project from water 
damage from standing water and erosion. Units, basements or crawl 
spaces must be free of water seepage.
    (iii) Landscaping and grounds. The housing project must be 
landscaped attractively. Lawns, plants and shrubs must be maintained 
and must allow air to windows, vents and sills. Recreation areas must 
be maintained in a safe and clean manner and trash collection areas 
must be adequately sized, screened, and maintained.
    (iv) Drives, parking services and walks. The housing project must 
have drives, parking lots, and walks that are free of holes and 
deterioration. Walks with changes in height between slabs of 
approximately 1/2 inch or greater will be considered unacceptable.
    (v) Exterior signage. All signs at the housing project, including 
those related to the housing project name, buildings, parking spaces, 
unit numbers and other informational directions must be visible and 
well-kept. Sign requirements must conform to Sec.  3560.104(d).
    (vi) Fences and retaining walls. The housing project must have 
fence lines that are free of trash, weeds, vines, and other vegetation. 
Fences must be free of holes and damaged or loose sections. The bases 
of all retaining walls must be erosion free and drainage weep holes 
must be cleaned out to prevent excessive pressure behind the retaining 
wall.
    (vii) Debris and graffiti. The housing project, including common 
areas, must be free of trash, litter, and debris. Public walkways, 
walls of buildings and common areas must be free of graffiti.
    (viii) Lighting. The housing project must have functional exterior 
lighting and functional interior lighting in common areas which permits 
safe access and security.
    (ix) Foundation. The housing project must have a foundation that is 
free of evidence of structural failure, such as uneven settlement 
indicated by horizontal cracks or severe bowing of the foundation wall. 
Structural members must not have evidence of rot or insect or rodent 
infestation.
    (x) Exterior walls and siding. The housing project must have walls 
that are free from deterioration which allows elements to infiltrate 
the structure, eaves, gables, and window trim that are free from 
deterioration, exterior wall coverings that are intact, securely 
attached, and in good condition. Brick veneers must be free of missing 
mortar or bricks.
    (xi) Roofs, flashing, and gutters. The housing project must have 
gutters and downspouts that are securely attached, clean, and finished 
or painted properly with splash blocks or extenders that direct water 
flow away from the building. The housing project must have a roof that 
is free of leaks, defective covering, curled or missing shingles and 
which is not sagging or buckling. Fascia and soffits must be intact.
    (xii) Windows, doors, and exterior structures. The housing project 
must have screens that are free of tears, breaks and rips and windows 
that are unbroken. Window thermopane seals must be unbroken and 
caulking on the exterior of windows and doors must be continuous and 
free of cracks. Doors must be weather tight, free of holes, and provide 
security with functional locks. Porches, balconies and exterior stairs 
must be free of broken, missing, or rotting components.
    (xiii) Common area accessibility. The housing project must have 
accessible, designated handicapped parking spaces with handicapped 
space signs properly posted. Common areas must be

[[Page 32907]]

accessible through walks, ramps, porches, and thresholds. The laundry 
room must have accessible appliances and mailboxes must be at an 
accessible level. Elevators or mechanical lifts must be functional and 
kept in good repair.
    (xiv) Common area signage. The following must be posted in common 
areas: ``Justice for All'' poster, equal housing opportunity poster, 
current affirmative fair housing marketing plan, the tenant grievance 
and appeal procedure, housing project occupancy rules, office hours and 
phone number, and emergency hours and phone number.
    (xv) Flooring. If a housing project has carpeting, the carpet must 
be clean, without excessive wear, and seams that are secure and 
stretched properly. If the housing project has resilient flooring, the 
flooring must be clean, unstained, free of tears and breaks, and seams 
that are secure.
    (xvi) Walls, floors, and ceilings. The housing project must have 
walls, floors, and ceilings that are free of holes, evidence of current 
water leaks, and free of material that appears in danger of falling. 
The housing project must have wallboard joints that are secure and free 
of cracks.
    (xvii) Doors and windows. The housing project must have doors that 
are free of holes, secure, unbroken and easily operable hardware, 
deadbolt locks which are in place and secure, and, if doors are metal, 
free of rust. The housing project must have windows which are easily 
operated, free of bent blinds or torn curtains, and window interiors 
must be free of evidence of moisture damage.
    (xviii) Electrical, air conditioning and heating. The housing 
project must have heating and cooling units that are free of bare wires 
and which are functioning properly, including thermostats. The housing 
project must not have uncovered outlets or other evident safety 
hazards, switches which work improperly, or light fixtures which are 
broken and inoperable.
    (xix) Water heaters. The housing project must have water heaters 
which are operating properly, free of leaks, supply adequate hot water, 
and are fitted with temperature and pressure relief valves.
    (xx) Smoke alarms. The housing project must have smoke alarms which 
are properly located according to local code and which operate 
properly.
    (xxi) Emergency call system. If a housing project has an emergency 
call system, the switches must be located in the bathroom and bedroom, 
furnished with a pull cord, with the down position set to ``ON'', and 
must operate properly.
    (xxii) Insect or vermin infestation. The housing project must have 
all units free of visible signs of insects or rodents and must be free 
of signs of insect or rodent damage.
    (xxiii) Range and range hood. The housing project must have range 
units in which all elements are operable, electrical connections are 
secure and insulated, doors and drawers which are secure, control knobs 
and handles which are in place and secure, and housing which is sound 
and the finish is free of chips, damage or signs of rust. The range 
hood fan and light must be operable.
    (xiv) Refrigerator. The housing project must have refrigerators in 
which the cooler and freezer are operating properly, the shelves and 
door containers are secure and free of rust, door gaskets are in good 
condition and functioning properly, and the housing is sound and the 
finish is free of chips, damage, or signs of rust.
    (xv) Sinks. The housing project must have sinks in which the 
fittings work properly and are free of leaks, plumbing connections 
under the cabinet which are free of leaks, the finish is free of chips, 
damage or signs of rust, the strainer is in good condition and in 
place, and which are secured to a wall, counter or vanity top.
    (xvi) Cabinets. The housing project must have cabinets and vanities 
which are secure to walls or floor and have faces, doors and drawer 
fronts that are in good condition and free of breaks and peeling. 
Shelving must be in place, fastened securely and free of warps. The 
housing project must have counter tops which are secure and free of 
burn marks or chips, bottoms under sinks which are free of evidence of 
warping, breaks, or being water soaked. Kitchen counter, vanity tops, 
and back splashes must be properly caulked.
    (xvii) Water closets. The housing project must have the base of the 
water closets at the floor properly caulked. The tanks must be free of 
cracks or leaks and have a lid which fits and is in good condition. The 
seats must be secure and in good condition, and the flushing mechanisms 
must be in good condition and operating properly. The stools must be 
free of cracks and breaks and be securely fastened to the floor.
    (xviii) Bathtub and shower stalls. The housing project must have 
tubs or shower stalls which are free of cracks, breaks, and leaks, and 
a strainer in good condition and in place. The housing project must 
have walls and floors of the bathtubs which are properly caulked, tops 
and sides of shower stalls must be properly caulked, and the finish is 
free of chips, damage or signs of rust.
    (4) Borrowers must correct or repair any conditions that do not 
meet these standards, including any deficiencies identified by the 
Agency as a result of monitoring activities. Failure to make such 
corrections or repairs constitutes a non-monetary default under Sec.  
3560.452(c).
    (b) Maintenance systems. Borrowers must establish the following 
maintenance systems and must describe these systems in their management 
plan.
    (1) A system for routine maintenance, including:
    (i) Regular maintenance tasks that can be prescheduled or planned; 
and
    (ii) Tasks performed on a regular basis to maintain compliance with 
the standards established in paragraph (a)(3) of this section.
    (2) A system for responsive maintenance including:
    (i) A process for responding to requests for maintenance from 
tenants;
    (ii) A process for responding to unexpected malfunctions of 
equipment or damages to building systems such as a furnace breakdown or 
a water leak; and
    (iii) A ``work order'' process for managing and tracking responses 
to maintenance requests and the performance of maintenance tasks.
    (3) A system for preventive maintenance including:
    (i) Maintenance of mechanical systems, building exteriors, 
elevators, and heating and cooling systems which require specially 
trained personnel; and
    (ii) Maintenance that supports energy-efficient operation of the 
housing project.
    (4) A system for correcting deficiencies identified by periodic 
inspections, which must include:
    (i) A move-in inspection;
    (ii) A move-out inspection; and
    (iii) An annual inspection of occupied units.
    (c) Capital budgeting and planning.
    (1) Borrowers must develop a capital budget as part of their annual 
housing project budget required under Sec.  3560.303. The capital 
budget must include anticipated expenditures on the long-term capital 
needs of the housing project to assure adequate maintenance and 
replacement of capital items.
    (2) Borrowers must prepare and submit a capital needs assessment to 
reflect anticipated ``life-cycle'' needs of the housing project for 
replacement of capital equipment and systems. The cost for preparation 
of a capital needs assessment will be approved by the Agency as an 
eligible housing project expense provided the capital needs

[[Page 32908]]

assessment is reasonable in cost and meets Agency requirements.
    (3) Borrowers must also prepare and submit capital needs assessment 
to the Agency for approval as a part of a request to:
    (i) Transfer ownership of a housing project;
    (ii) Reamortize an Agency loan;
    (iii) Write-down an Agency loan;
    (iv) Substantially rehabilitate a housing project;
    (v) Significantly change housing project operations; or
    (vi) Receive a preservation incentive.
    (4) As a part of the annual budget process, borrowers may request 
an increase in the amount to be contributed and held in the housing 
project reserve account to fund the needs identified in an Agency-
approved capital needs assessment.
    (5) At any time, borrowers may request and the Agency may approve 
amendments to loan or grant documents to increase the amount of funds 
to be contributed and held in a reserve account to cover the cost of 
capital improvements based on the needs identified in an Agency 
approved capital needs assessment. Borrowers must assure improvements 
are performed as specified in the capital needs assessment.


Sec.  3560.104  Fair housing.

    (a) General. Borrowers must comply with the requirements of the 
Fair Housing Amendments Act of 1988, and this section to meet their 
fair housing responsibilities.
    (b) Affirmative Fair Housing Marketing Plan.
    (1) Borrowers with housing projects that have four or more rental 
units must prepare and maintain an Affirmative Fair Housing Marketing 
Plan (AFHMP) as defined in 24 CFR part 200, subpart M.
    (2) Loan or grant applicants must submit an AFHMP for Agency 
approval prior to loan closing or grant approval. Plans must be updated 
by the borrower whenever components of the plan change.
    (3) Borrowers must post the approved AFHMP for public inspection at 
the housing project site, rental office, or at any other location where 
tenant applications are received.
    (4) When developing the plan, the following items must be 
considered by the borrower:
    (i) Direction of marketing activities. The plan should be designed 
to attract applications for occupancy from all potentially eligible 
groups of people in the housing marketing area, regardless of race, 
color, religion, sex, age, familial status, national origin, or 
disability. The plan must show which efforts will be made to reach very 
low-income or low-income groups who would least likely be expected to 
apply without special outreach efforts.
    (ii) Marketing program. The applicant or borrower should determine 
which methods of marketing such as radio, newspaper, TV, signs, etc., 
are best suited to reach those very low-income or low-income groups who 
are in the market area but who are least likely to apply for occupancy. 
Marketing must not rely on ``word of mouth'' advertising.
    (A) Advertising.
    (1) Frequency. The borrower should advertise availability of 
housing units in advance of their availability to allow time to receive 
and process applications. Advertising by newsprint or electronic media 
should occur at least annually to promote project visibility, even if 
there is an adequate waiting list.
    (2) Posters, brochures, etc. Any radio, TV or newspaper 
advertisement, pamphlets, or brochures used must identify that the 
complex is operated on an equal housing opportunity basis. This must be 
done through the use of the equal housing opportunity statement, 
slogan, or logo type. Copies of the proposed material must be sent when 
requesting approval of the plan.
    (B) Community contacts. Community leaders and special interest 
groups such as community, public interest, religious organizations for 
the disabled must be contacted. Owners and managers of projects with 
fully accessible apartments must adopt suitable means to ensure that 
information regarding the availability of accessible units reaches 
eligible persons with disabilities. In addition, owners and managers of 
elderly housing must ensure that information regarding eligibility 
reaches people who are less than 62 years old but who are eligible 
because they are disabled. Appropriate contacts are with physical 
rehabilitation centers, hospitals, workshops for the disabled, 
commissions on aging, and veterans organizations.
    (C) Rental staff. All staff persons responsible for renting the 
units must have had training provided on Federal, state, and local fair 
housing laws and regulations and in the requirements of fair housing 
marketing and in those actions necessary to carry out the marketing 
plan. Copies of instructions to the staff regarding fair housing and a 
summary of the training they have received must be attached to the plan 
when requesting approval.
    (iii) Marketing records. Records must be maintained by the borrower 
reflecting efforts to fulfill the plan. These records will be reviewed 
by the Agency during civil rights compliance reviews. Plans will be 
updated as needed.
    (c) Accommodations and communication. The borrower must take 
appropriate steps to ensure effective communication with applicants, 
tenants, and members of the public with disabilities. At a minimum, the 
following steps must be taken.
    (1) Furnish appropriate auxiliary aids (electronic, mechanical, or 
personal assistance) where necessary, to afford an individual with 
disabilities an equal opportunity to participate in and enjoy the 
benefits of Agency financed housing.
    (i) In determining what auxiliary aids are necessary, the borrower 
must give primary consideration to the requests of individuals with 
disabilities.
    (ii) The borrower is not required to provide individually 
prescribed devices, readers for personal use or study, or other devices 
of a personal nature.
    (2) Where a borrower communicates with applicants and tenants by 
telephone, telecommunication devices for deaf persons or equally 
effective communication systems must be available for use.
    (3) The borrower must implement procedures to ensure that 
interested persons, including persons with impaired vision or hearing, 
can obtain information concerning the existence and location of 
accessible services, activities, and facilities in the housing project 
and community.
    (4) The borrower is required to provide reasonable accommodations 
at the borrower's expense unless doing so would cause an undue 
financial or administrative burden. Examples of reasonable 
accommodations may include such items as the installation of grab bars, 
ramps, and roll-in showers. Reasonable accommodations may also include 
the modification of rules or policies such as permitting a disabled 
tenant to have a two-bedroom unit to accommodate a resident assistant 
or to permit a disabled tenant to have a companion animal. The decision 
whether the requested accommodation is reasonable or unreasonable or 
whether to provide the accommodation would cause an undue financial or 
administrative burden lies with the borrower and would be for the 
borrower to defend should a complaint subsequently be filed. Borrowers 
may wish to consult with their legal counsel prior to denying a 
request. If the borrower takes the position that providing an 
accommodation would cause an undue financial or

[[Page 32909]]

administrative burden, the borrower must permit the tenant to make 
reasonable modifications at the tenant's expense. Requests for 
reasonable accommodations must be handled in accordance with the 
management plan.
    (d) Housing sign requirements.
    (1) A permanent sign identifying the housing project is required 
for all housing projects approved on or after September 13, 1977. 
Permanent signs are recommended for all housing projects approved prior 
to September 13, 1977. The sign must meet the following requirements:
    (i) Must be located at the primary site entrance and be readable 
and recognizable from the roadside;
    (ii) Must be located near the site manager's office when the 
housing project has multiple sites. Portable signs must be placed where 
vacancies exist at other site locations of a ``scattered site'' housing 
project;
    (iii) May be of any shape;
    (iv) Must be not less than 16 square feet of area for housing 
projects with 8 or more rental units (smaller housing projects may have 
smaller signs);
    (v) Must be made of durable material including its supports;
    (vi) Must include the housing project name;
    (vii) Must show rental contact information including but not 
limited to the office location of the housing project and a telephone 
number where applicant inquiries may be made;
    (viii) Must show either the equal housing opportunity logotype (the 
house and equal sign, with the words equal housing opportunity 
underneath the house); the equal housing opportunity slogan ``equal 
housing opportunity'; or the equal housing opportunity statement, ``We 
are pledged to the letter and spirit of U.S. policy for the achievement 
of equal housing opportunity throughout the nation. We encourage and 
support an affirmative advertising and marketing program in which there 
are no barriers to obtaining housing because of race, color, religion, 
sex, handicap, familial status, or national origin.'' If the logotype 
is used, the size of the logo must be no less than 5 percent of the 
total size of the project sign.
    (ix) May display the Agency or Department logotype; and
    (x) Must comply with state and local codes.
    (2) Accessible parking spaces must be reserved for individuals with 
disabilities by a sign showing the international symbol of 
accessibility. The sign must be mounted on a post at a height that is 
readily visible from an occupied vehicle. In snow areas, the sign must 
be visible above piled snow. If there is an office, the designated 
parking space must be van accessible.
    (3) When the continuous unobstructed ingress or egress disabled 
accessibility route to a primary building entrance is other than the 
usual or obvious route, the alternate route for disabled accessibility 
must be clearly marked with international accessibility symbols and 
directional signs to aid a disabled person's ingress or egress to the 
building, through an accessible entrance, and to the accessible common 
use and public and living areas.


Sec.  3560.105  Insurance and taxes.

    (a) General. Borrowers must purchase and maintain property 
insurance on all buildings included as security for an Agency loan. 
Also, borrowers must furnish fidelity coverage, liability insurance, 
and any other insurance coverage required by the Agency in accordance 
with this paragraph to protect the security of the asset. Failure to 
maintain adequate insurance coverage or pay taxes may lead to a non-
monetary default under Sec.  3560.452(c).
    (b) General insurance requirements. All insurance policies must 
meet the requirements established by the loan documents and this 
section.
    (1) At loan closing, prior to loan approval, applicants must 
provide documentary evidence that insurance requirements have been met 
and must maintain such evidence throughout the life of the loan or 
terms of the grant.
    (2) Insurance companies must meet the requirements of paragraph (e) 
of this section.
    (3) Insurance coverage amount, terms, and conditions must meet the 
requirements of paragraph (f) of this section.
    (4) The borrower must maintain insurance in accordance with 
requirements of their loan or grant documents and this section until 
the loan is repaid or the terms of the grant expire.
    (5) The Agency must be named as co-payee on all property insurance 
policies.
    (c) Borrower failure or inability to meet insurance requirements. 
The Agency will take the following actions in cases where a borrower is 
unwilling or unable to meet the Agency's insurance requirements.
    (1) The Agency will obtain insurance for Agency financed property 
if the borrower fails to do so. If borrowers refuse to pay the 
insurance premium, the Agency will pay the insurance premium and charge 
the premium payment amount and all costs associated with procurement of 
the required insurance to the borrower's Agency account and will place 
the borrower in default as described in Sec.  3560.452(c).
    (2) If borrowers habitually fail to pay premiums in a timely 
manner, the Agency will require borrowers to escrow amounts appropriate 
to pay insurance premiums.
    (3) If insurance that meets the Agency's specified requirements is 
not available (e.g. flood or hurricane insurance), the Agency may 
accept the insurance policy that most nearly conforms to established 
requirements.
    (4) If the best insurance policy a borrower can obtain at the time 
the borrower receives the loan or grant contains a loss deductible 
clause greater than that allowed by paragraph (f)(8) of this section, 
the insurance policy and an explanation of the reasons why more 
adequate insurance is not available must be submitted to the Agency 
prior to loan or grant approval.
    (d) Credits, refunds, or rebates. Borrowers must credit any refund 
or rebate from an insurance company to the project's general operating 
account or reserve account.
    (e) Insurance company requirements. All insurers, insurance agents, 
and brokers must meet the following requirements:
    (1) Be licensed or authorized to do business in the state or 
jurisdiction where the housing project is located;
    (2) Be deemed reputable and financially sound as determined by the 
Agency; and
    (3) Not have any identity-of-interest relationships with the 
borrower, management agent, or partners, directors or officers of the 
borrower entity.
    (f) Property insurance. The following conditions apply to property 
insurance purchased for Agency-financed housing projects.
    (1) At a minimum, borrowers must obtain the following types of 
property insurance.
    (i) Hazard insurance. A policy which generally covers loss or 
damage by fire, smoke, lightning, windstorms, hail, earthquake, 
explosion, riot, civil commotion, aircraft, and vehicles. These 
policies may also be known as ``Fire and Extended Coverage,'' 
``Homeowners,'' ``All Physical Loss,'' or ``Broad Form'' policies.
    (ii) Flood insurance. This coverage is required for properties 
located in Special Flood Hazard Areas (SFHA) as defined in 44 CFR part 
65, as determined by the Federal Emergency Management Agency (FEMA).

[[Page 32910]]

    (iii) Builder's risk insurance. A policy which insures dwellings 
under construction.
    (iv) Elevators, boiler, and machinery coverage. This coverage is 
required for properties that operate elevators, steam boilers, 
turbines, engines, or other pressure vessels.
    (2) For property insurance, the minimum coverage amount must equal 
the ``Total Estimated Reproduction Cost of New Improvements,'' as 
reflected in the housing project's most recent appraisal. At a minimum, 
property insurance coverage must be adequate to cover the lesser of the 
depreciated replacement value of essential buildings or the unpaid 
balance of all secured debt, unless such coverage is financially 
unfeasible for the housing project.
    (i) If the cost of the minimum level of property insurance coverage 
exceeds what the housing project can reasonably afford, the borrower, 
with Agency concurrence, must obtain the maximum amount of property 
insurance coverage that the housing project can afford.
    (ii) If the coverage amount is less than the depreciated 
replacement value of all essential buildings, borrowers must obtain 
coverage on one or more of the most essential buildings, as determined 
by the Agency.
    (iii) When required, the coverage amount for flood insurance must 
equal the outstanding loan balance or the maximum coverage allowed by 
FEMA's ``National Flood Insurance Program.''
    (3) Except for flood insurance, property insurance is not required 
if the housing project:
    (i) Has a depreciated replacement value of $2,500 or less; or
    (ii) Is in a condition which the Agency determines makes insurance 
coverage not economical.
    (4) Policies for several buildings or properties located on 
noncontiguous sites are acceptable if the insurer provides proof that 
each secured building or property related to the housing project is as 
fully protected as if a separate policy were issued.
    (5) Borrowers must notify the Agency and their insurance company 
agents of any loss or damage to insured property and collect the amount 
of the loss.
    (6) When the Agency is in the first lien position and an insurance 
settlement represents a satisfactory adjustment of a loss, the 
insurance settlement will be deposited in the housing project's general 
operating account unless the settlement exceeds $5,000. If the 
settlement exceeds $5,000, the funds will be placed in the reserve 
account for the housing project.
    (i) Insurance settlement funds which remain after all repairs, 
replacements, and other authorized disbursements have been made retain 
their status as housing project funds.
    (ii) If the indebtedness secured by the insured property has been 
paid in full or the insurance settlement is in payment for loss of 
property on which the Agency has no claim; a loss draft which includes 
the Agency as co-payee may be endorsed by the Agency without recourse 
and delivered to the borrower.
    (7) When the Agency is not in the first lien position and the 
insurance settlement represents satisfactory adjustment of the loss, 
the Agency will release the settlement funds to the primary mortgagee 
upon agreement of all parties to the provisions contained in agreements 
between the Agency and the primary lienholder.
    (8) Deductible clause amounts must be accounted for in the reserve 
account unless the deductible amount does not exceed:
    (i) $1,000 on any housing project with an insurable value under 
$200,000; or
    (ii) One-half of one percent (0.0050) of the insurable value, up to 
$5,000 on housing project with insurance values over $200,000.
    (g) Liability insurance. The borrower must carry comprehensive 
general liability insurance with coverage amounts that meet or exceed 
Agency requirements. This coverage must insure all common areas, 
commercial space, and public ways in the security premises. Coverage 
may also include borrower exposure to certain risks such as errors and 
omissions, environmental damages, or protection against discrimination 
claims. The insurer's limit of liability per occurrence for personal 
injury, bodily injury, or property damage under the terms of coverage 
must be at least $1 million.
    (h) Fidelity coverage. Borrowers must provide fidelity coverage on 
any personnel entrusted with the receipt, custody, and disbursement of 
any housing monies, securities, or readily salable property other than 
money or securities. Borrowers must have fidelity coverage in force as 
soon as there are assets within the organization and it must be 
obtained before any loan funds or interim financing funds are made 
available to the borrower. In addition, the following conditions apply 
to fidelity insurance.
    (1) Fidelity insurance coverage must be documented on a bond form 
acceptable to the Agency.
    (2) Fidelity coverage policies must declare in the insuring 
agreements that the insurance company will provide protection to the 
insured against the loss of money, securities, and property other than 
money and securities, through any criminal or dishonest act or acts 
committed by any employee, whether acting alone or in collusion with 
others, not to exceed the amount of indemnity stated in the declaration 
of coverage. The fidelity insurance policy, at a minimum, must include 
an insuring agreement that covers employee dishonesty.
    (3) Blanket crime insurance coverage or fidelity bonds are 
acceptable types of fidelity coverage.
    (4) At a minimum, borrowers must provide an endorsement, listing 
all of the borrower's Agency financed properties and their locations 
covered under the policy or bond as evidence of required fidelity 
insurance. The policy or bond may also include properties or operations 
other than Agency financed properties on separate endorsement listings.
    (5) Individual or organizational borrowers must have fidelity 
coverage when they have employees with access to the multi-family 
housing complex assets. Borrowers who use a management agent with 
exclusive access to housing assets must require the agent to have 
fidelity coverage on all principals and employees with access to the 
housing assets. If active management reverts to the borrower, the 
borrower must obtain fidelity coverage, as a first course of business.
    (6) Fidelity coverage is not required under the following 
circumstances.
    (i) The borrower is an individual or a general partnership and the 
individual or general partner will be responsible for the financial 
activities of the housing project.
    (ii) In the case of a land trust where the beneficiary is 
responsible for management, the beneficiary will be treated as an 
individual.
    (iii) A limited partnership (or its general partners) unless one or 
more of its general partners perform financial acts within the scope of 
the usual duties of an ``employee.''
    (7) The premium for fidelity coverage of employees and general 
partners at a housing project is an eligible operating account expense.
    (i) The premium of a management agent's fidelity coverage for the 
agent's principals and employees will be the management agent's 
business expense (i.e., it is included within the management fee).
    (ii) When a housing project employee is covered under the 
``umbrella'' of the management agent's fidelity coverage, the portion 
of the premium covering the employee must be reflected in the 
management plan.
    (8) Borrowers must review fidelity coverage annually and adjust it 
as

[[Page 32911]]

necessary to comply with the requirements of this section.
    (i) Taxes. The borrower is responsible for paying all taxes and 
assessments on a housing project before they become delinquent. 
Annually, borrowers must certify to the Agency that all taxes are 
current.
    (1) An exception to the above may be made if the borrower has 
formally contested the amount of the property assessment and escrowed 
the amount of taxes in question in a manner approved by the Agency.
    (2) Failure to pay taxes and assessments when due will be 
considered a default. If a borrower fails to pay outstanding taxes and 
assessments, the Agency will pay the outstanding balance and charge the 
tax or assessment amount, assessed penalties, and any additional 
incurred costs to the borrower's Agency account.
    (3) The Agency will require borrowers who have demonstrated an 
inability to pay taxes in a timely manner to escrow amounts sufficient 
to pay taxes.


Sec. Sec.  3560.106-3560.149  [Reserved]


Sec.  3560.150  OMB control number. [Reserved]

Subpart D--Multi-Family Housing Occupancy


Sec.  3560.151  General.

    This subpart contains borrower and tenant requirements and Agency 
responsibilities related to occupancy of Agency-financed multi-family 
housing projects. Occupancy eligibility requirements apply to the 
following:
    (a) Family housing projects, including farm labor housing;
    (b) Elderly housing projects;
    (c) Mixed housing projects for both family and elderly households; 
and
    (d) Congregate housing or group homes for persons with special 
needs.


Sec.  3560.152  Tenant eligibility.

    (a) General requirements. Except as specified in paragraph (b) of 
this section, households eligible for occupancy in Agency-financed 
housing must either:
    (1) Be a United States citizen or legal or qualified alien as 
defined in Sec.  3560.11, and either.
    (2) Qualify as a very low-, low-, or moderate-income household; or
    (3) Be eligible under the requirements established to qualify for 
housing benefits provided by sources other than the Agency, such as HUD 
Section 8 assistance or LIHTCs, when a household receives such housing 
benefits.
    (b) Exception. Households with incomes above the moderate-income 
level may occupy housing projects with an Agency loan approved prior to 
1968 with a loan agreement that does not restrict occupancy by income.
    (c) Requirements for elderly housing, elderly units in mixed 
housing, congregate housing, and group homes. In addition to the 
requirements of paragraph (a) of this section, the following occupancy 
requirements apply to elderly housing, elderly units in mixed housing, 
and congregate housing or group homes.
    (1) For elderly housing, elderly units in mixed housing, and 
congregate housing the following provisions apply.
    (i) Households must meet the definition of an elderly household in 
Sec.  3560.11 to be eligible for occupancy in elderly or congregate 
housing.
    (ii) If non-elderly persons are members of a household where the 
tenant or co-tenant is an elderly person, the non-elderly persons are 
eligible for occupancy in the tenant's or co-tenant's rental unit.
    (iii) Applicants who will agree to participate in the services 
provided by a congregate housing project may be given occupancy 
priority.
    (2) For group homes, the following provisions apply.
    (i) Occupancy may be limited to a specific group of tenants, such 
as elderly persons or persons with developmental disabilities, or 
mental impairments, if such an occupancy limitation is contained in the 
borrower's management plan.
    (ii) Tenants must meet the requirements of paragraph (a) of this 
section and must be able to demonstrate a need for the special services 
provided by the group home.
    (iii) Tenants cannot be required to be a part of an ongoing 
training or rehabilitation program.
    (iv) Tenants must be selected from the market area prior to 
considering applicants from other areas.
    (d) Ineligible tenant waiver. The Agency may authorize the borrower 
in writing, upon receiving the borrower's written request with the 
necessary documentation, to rent vacant units to ineligible persons for 
temporary periods to protect the financial interest of the Government. 
Likewise, this provision may extend to a cooperative. This authority 
will be for the entire project for periods not to exceed 1 year. Within 
the period of the lease, the tenant may not be required to move to 
allow an eligible applicant to obtain occupancy, should one become 
available. The Agency must make the following determinations.
    (1) There are no eligible persons on a waiting list.
    (2) The borrower provided documentation that a diligent but 
unsuccessful effort to rent any vacant units to an eligible tenant 
household has been made. Such documentation may consist of 
advertisements in appropriate publications, posting notices in several 
public places, and other places where persons seeking rental housing 
would likely make contact; holding open houses, making appropriate 
contacts with public housing agencies and organizations, Chambers of 
Commerce, and real estate agencies.
    (3) The borrower agrees to publish a notice in the local newspaper 
to inform the public of the borrower's intent to temporarily rent 
apartments to all persons without regard to age or income restrictions.
    (4) The borrower agrees to continue with aggressive efforts to 
locate eligible tenants and submit monthly reports of their marketing 
efforts to the Agency.
    (5) The borrower is temporarily unable to achieve or maintain a 
level of occupancy sufficient to prevent financial default and 
foreclosure and the Agency's approval of the waiver will be for a 
limited duration.
    (6) That the lease agreement will not be more than 12 months and at 
its expiration will convert to a month-to-month lease. The monthly 
lease will require that the unit be vacated upon 30 days notice when an 
eligible applicant is available.
    (7) Tenants residing in RRH units who are ineligible because their 
adjusted annual income exceeds the maximum for the RRH project will be 
charged the RHS approved note rate rental rate for the size of unit 
occupied in a Plan II RRH project. In projects operated under Plan I, 
ineligible tenants will be charged rental surcharge of 25 percent of 
the approved note rate rental rate.
    (8) Tenants residing in off-farm LH units who are ineligible 
because their adjusted annual income exceeds the maximum for the area 
will be charged the lesser of the LH project's note rate rent or the 
prevailing market rent rate for the project. For on-farm tenants, rent 
determination may be subject to local discretion within limitations 
contained in subpart L of this part. Excess rent shall be remitted to 
the Agency for credit to the Rural Housing Insurance Fund.
    (e) Tenant certification and verification. Tenants and borrowers 
must execute an Agency-approved tenant certification form establishing 
the tenant's eligibility prior to occupancy. In addition, tenant 
households must be recertified and must execute a tenant certification 
form at least annually or whenever a change in household status

[[Page 32912]]

results in a net tenant contribution change that is greater than $25 
per month. Borrowers must make modifications to tenant certifications 
for changes with a $25 or less impact on the net tenant contribution, 
if the tenant requests that such a change be made.
    (1) Tenant requirements.
    (i) Tenants must provide borrowers with the necessary income and 
other household information required by the Agency to determine 
eligibility.
    (ii) Tenants must authorize borrowers to verify information 
provided to establish their eligibility or determination of tenant 
contribution.
    (iii) Tenants must report all changes in household status that may 
affect their eligibility to borrowers.
    (iv) Tenants who fail to comply with tenant certification and 
recertification requirements will be considered ineligible for 
occupancy and will be subject to unauthorized assistance claims, if 
applicable, as specified in subpart O of this part.
    (2) Borrower requirements.
    (i) Borrowers must verify household income and other information 
necessary to establish tenant eligibility for the requested rental unit 
type, in a format approved by the Agency, prior to a tenant's initial 
occupancy and prior to annual or other recertifications.
    (ii) Borrowers must review all reported changes in household status 
and assess the impact of these changes on the tenant's eligibility or 
net tenant contribution.
    (iii) Borrowers must submit initial or updated tenant certification 
forms to the Agency within 10 days of the effective date of an initial 
certification or any changes in a tenant's status. The effective date 
of an initial or updated tenant certification form will always be a 
first day of the month.
    (iv) Since tenant certifications are used to document interest 
credit and rental assistance eligibility and are a basic responsibility 
of the borrower under the loan documents, borrowers who fail to submit 
annual or updated tenant certification forms within the time period 
specified in paragraph (e)(2)(iii) of this section will be charged 
overage, as specified in Sec.  3560.203(c). Unauthorized assistance, if 
any, will be handled in accordance with subpart O of this part.
    (v) Borrowers must submit tenant certification forms to the Agency 
using a format approved by the Agency.
    (vi) Borrowers must retain executed tenant certification forms and 
any supporting documentation in the tenant file for at least 3 years or 
until the next Agency monitoring visit or compliance review, whichever 
is longer.
    (3) The Agency maintains the right to independently verify tenant 
eligibility information.


Sec.  3560.153  Calculation of household income and assets.

    (a) Annual income will be calculated in accordance with 24 CFR part 
5.
    (b) Adjusted income will be calculated in accordance with 24 CFR 
part 5.
    (c) Net assets will be calculated in accordance with 24 CFR part 5.


Sec.  3560.154  Tenant selection.

    (a) Application for occupancy. Borrowers must use tenant 
application forms that collect sufficient information to properly 
determine household eligibility and to enable the Agency to monitor 
compliance with the Fair Housing Act and title VI of the Civil Rights 
Act of 1964 during compliance reviews. At a minimum, borrowers must use 
application forms that collect the following information:
    (1) Name of the applicant and present address;
    (2) Number of household members and their ages;
    (3) Annual income information calculated in accordance with Sec.  
3560.153(a);
    (4) Adjustments to income calculated in accordance with Sec.  
3560.153(b);
    (5) Net assets calculated in accordance with Sec.  3560.153(c);
    (6) Indication of a need for a unit accessible to individuals with 
disabilities and any disability adjustments to income;
    (7) Certification by the applicant that the unit will serve as the 
household's primary residence, and a certification that the applicant 
is a U.S. citizen or a legal or qualified alien as defined in Sec.  
3560.11; and
    (8) Signature of the applicant and date.
    (9) Race, ethnicity, and sex designation. This designation shall be 
placed on the application form beneath the signature and date section. 
The following disclosure notice shall be used (verbatim) and the race, 
ethnicity, and sex designation shall be collected in the following 
manner on the application form:

    The information regarding race, ethnicity, and sex designation 
solicited on this application is requested in order to assure the 
Federal Government, acting through the Rural Housing Service, that 
the Federal laws prohibiting discrimination against tenant 
applications on the basis of race, color, national origin, religion, 
sex, familial status, age, and disability are complied with. You are 
not required to furnish this information, but are encouraged to do 
so. This information will not be used in evaluating your application 
or to discriminate against you in any way. However, if you choose 
not to furnish it, the owner is required to note the race, 
ethnicity, and sex of individual applicants on the basis of visual 
observation or surname.
    Please identify your ethnicity, your race and your sex as 
follows:

List the Race and Ethnicity Categories as Found on the Agency Tenant 
Certification Form

    (10) Taxpayer identification number.
    (b) Additional information. Applicants are to be provided a list of 
any additional information that must be submitted with the application 
for the application to be considered complete (an application will be 
considered complete without verification of the applicant information).
    (c) Application submission. Borrowers must establish and maintain a 
specific place and time when tenant applications may be submitted. 
Information on the place and times for tenant application submission 
must be documented in the housing project's management plan and 
Affirmative Fair Housing Marketing Plan.
    (d) Selection of eligible applicants. Applicants may be determined 
ineligible for occupancy based on selection criteria other than Agency 
requirements only if such criteria is contained in the borrower's 
Agency approved management plan. Borrower established selection 
criteria may not contain arbitrary or discriminatory rejection 
criteria, but may consider an applicant's past rental and credit 
history and relations with other tenants.
    (e) Recordkeeping. Borrowers must retain all tenant application 
forms for at least 3 years. The Agency may require borrowers to submit 
application information for Agency review.
    (f) Waiting lists.
    (1) When an applicant has submitted an application form the 
borrower must place the applicant on the waiting list. All 
applications, whether complete, eligible, or ineligible, will be placed 
on the list. The waiting list will document the final disposition of 
all applications (rejected, withdrawn, or placed in a unit).
    (2) The date and time a complete application was submitted will be 
recorded on the waiting list and will establish priority for selection 
from the list. If an applicant submits an incomplete application (see 
paragraph (a)(8) of this section), they must be notified in writing 
within 10 days of the items that are needed for the application to be 
considered complete and that priority will not be established until the 
additional items are received.

[[Page 32913]]

    (3) The race and the ethnicity of each applicant shall be recorded 
on the waiting list. This information shall be collected for 
statistical purposes only and must not be used when making eligibility 
determinations or in any other discriminatory manner. The information 
shall be recorded using the race and ethnicity codes that are utilized 
on the Agency tenant certification form available in the servicing 
office.
    (4) Selections from the waiting list shall be made in the following 
priority order:
    (i) Very low-income applicants;
    (ii) Low-income applicants; and
    (iii) Moderate-income applicants.
    (g) Priorities and preferences for admission.
    (1) Eligible applicants that meet the following conditions must be 
given priority for occupancy over all other tenants regardless of 
income. Such applicants, however, will be ranked among themselves by 
income level, giving priority first to very low-income households, then 
to low-income households, and finally to moderate-income households.
    (i) Persons who require the special design features of a unit 
accessible to individuals with disabilities will have priority only for 
units with these features.
    (ii) In congregate housing facilities, persons who agree to use the 
services provided by the facility will have priority over other 
applicants.
    (2) Eligible applicants that meet any of the following conditions 
must be given priority over other applicants in their same income 
category.
    (i) The applicant has a Letter of Priority Entitlement (LOPE) 
issued in accordance with Sec.  3560.660(d).
    (ii) The applicant was displaced from Agency-financed housing but 
was not issued a LOPE.
    (iii) The applicant was displaced in a Federally declared disaster 
area.
    (3) Borrowers receiving Section 8 project-based assistance may 
establish preferences in accordance with HUD regulations. The use of 
such preferences must be documented in the project's management plan.
    (h) Notices of ineligibility or rejection. Borrowers must provide 
written notification to applicants who are determined to be ineligible 
or who are rejected for occupancy. Notices of ineligibility or 
rejection must give specific reasons for the ineligibility 
determination or rejection and, in accordance with Sec.  3560.160, the 
notice must advise the applicant of ``the right to respond to the 
notice within ten calendar days after receipt'' and of ``the right to a 
hearing in accordance with Sec.  3560.160 which is available upon 
request.'' When an applicant is rejected based on the information from 
a credit bureau report, the source of the credit bureau report must be 
revealed to the applicant in accordance with the Fair Credit Reporting 
Act.
    (i) Purging waiting list. Procedures used by borrowers to purge 
waiting list must be documented in the project's management plan and 
must be based on the length of the waiting list or the extent of time 
an applicant will be expected to wait for housing.
    (j) Criminal activity. Borrowers may deny admission for criminal 
activity or alcohol abuse by household members in accordance with the 
provisions of 24 CFR 884.216(b).


Sec.  3560.155  Assignment of rental units and occupancy policies.

    (a) General. Available rental units are assigned in accordance with 
the requirements of this section and the priorities and preferences 
outlined in Sec.  3560.154.
    (b) Rental units accessible to individuals with disabilities. If a 
rental unit accessible to individuals with disabilities is available 
and there are no applicants that require the features of the unit, 
borrowers may rent the unit to a non-disabled tenant subject to the 
inclusion of a lease provision that requires the tenant to vacate the 
unit within 30 days of notification from management that an eligible 
individual with disabilities requires the unit and provided:
    (1) The accessible unit has been marketed as an accessible unit,
    (2) Outreach has been made to organizations representing the 
disabled, and
    (3) Marketing of the unit as an accessible unit continues after it 
has been rented to a tenant who is not in need of the special design 
features.
    (c) Transfer of existing tenants within a housing project. When a 
rental unit becomes available for occupancy and an eligible tenant in 
the housing project is either over housed or under housed as provided 
for in paragraph (e) of this section, the borrower must use the 
available unit for the over housed or under housed tenant, if suitable, 
prior to selecting an eligible applicant from the waiting list.
    (d) Applicant placement. When a specific rental unit type becomes 
available for occupancy, borrowers must select eligible applicants 
suitable for the available unit according to the priorities established 
in Sec.  3560.154.
    (e) Occupancy policies. Borrowers must establish occupancy policies 
for each housing project. The borrower's occupancy policies must 
establish a minimum threshold of one person per bedroom for each rental 
unit. Households living in a rental unit with more bedrooms than 
persons in the household will be considered over housed and must be 
relocated in accordance with paragraph (c) of this section. Households 
under housed as defined by the project's occupancy standards must be 
relocated in accordance with paragraph (c) of this section. Borrowers 
with no one-bedroom units in a housing project may make an exception to 
this requirement in their occupancy policies. In addition, a borrower's 
occupancy policies must establish:
    (1) Reasonable standards for determining when a tenant household is 
considered under housed. The standards will describe the maximum number 
of persons that may occupy units of a given size based on occupancy 
guidelines provided by the Agency or another governmental source; and
    (2) The order in which eligible applicants and existing tenants 
will be housed or rehoused.
    (f) Agency concurrence. The Agency must concur with a borrower's 
occupancy rules prior to initial occupancy of the housing project. All 
modifications to occupancy rules must be posted for tenant comment in 
accordance with Sec.  3560.160 and receive Agency concurrence prior to 
implementation.


Sec.  3560.156  Lease requirements.

    (a) Agency concurrence. Borrowers must use a lease approved by the 
Agency. The lease must be consistent with Agency requirements and the 
requirements of all programs participating in the housing project. 
Prior to submitting the lease to the Agency for approval, borrowers 
must have their attorney certify that the lease complies with state and 
local laws, Agency requirements, and the requirements of all programs 
participating in the housing project. If there are conflicting 
requirements the borrower shall notify the Agency of the conflict and 
request guidance. Borrowers must execute their Agency approved lease 
with each tenant household prior to tenant occupancy of a rental unit.
    (b) Lease requirements.
    (1) All leases must be in writing.
    (2) Initial leases must be for a 1-year period.
    (3) If the tenant is not subject to occupancy termination according 
to Sec.  3560.158 and Sec.  3560.159, a renewal

[[Page 32914]]

lease or lease extension must be for a 1-year period.
    (4) In areas with a concentration of non-English speaking 
populations, leases (including the occupancy rules) must be available 
in both English and the non-English language.
    (5) Leases must give the address of the management agent to which 
tenants may direct complaints.
    (6) Leases must include a statement of the terms and conditions for 
modifying the lease.
    (c) Required items and provisions.
    (1) Leases must include the following clauses:
    (i) A requirement that tenants move out of the housing project 
within 30 days of being notified by the borrower that they are no 
longer eligible for occupancy unless the conditions cited in Sec.  
3560.158(c) exist;
    (ii) A requirement that tenants notify borrowers regarding changes 
in their income or assets, their qualifications for adjustments to 
income, their citizenship status, or the number of persons living in 
the unit;
    (iii) A requirement that tenants notify borrowers of extended 
tenant absences, typically four weeks or more;
    (iv) A requirement that tenants make restitution when unauthorized 
assistance is received and a statement advising tenants that submission 
of false information could result in legal action.
    (v) A requirement that tenants agree to fulfill the tenant income 
verification and certification requirements established under Sec.  
3560.152; and
    (vi) A requirement that, during acceleration and foreclosure 
proceedings, the tenant contribution will remain as if any interest 
credit and rental subsidy in effect prior to acceleration were still in 
place and available and the terms of the lease remain in effect until 
the date the acceleration or foreclosure action is resolved.
    (2) Leases for tenants who hold a LOPE issued according to Sec.  
3560.655(d) and are temporarily occupying a unit for which they are not 
eligible must include a clause establishing the tenant's responsibility 
to move when a suitable unit becomes available in the housing project.
    (3) Leases must contain a clause permitting escalation in the 
tenant contribution when there is an Agency-approved change in basic or 
note rate rents prior to the expiration of the lease. The escalation 
clause also must specify that the tenant contribution may be changed 
prior to expiration of the lease if the change is due to changes in 
tenant status, as documented on the tenant certification form, or the 
tenant's failure to properly recertify.
    (4) Leases must specify that no change in the tenant contribution 
will occur due to monetary or non-monetary default, loan prepayment, or 
when rental assistance or interest credit, other than Federal 
assistance, is suspended, canceled, or terminated due to the borrower's 
fault.
    (5) Leases must include a statement that the housing project is 
financed by the Agency and that the Agency has the right to further 
verify information provided by the applicant.
    (6) Leases must state that the housing project is subject to:
    (i) Title VI of the Civil Rights Act of 1964;
    (ii) Title VIII of the Fair Housing Act;
    (iii) Section 504 of the Rehabilitation Act of 1973;
    (iv) The Age Discrimination Act of 1975; and
    (v) The Americans with Disabilities Act.
    (7) Leases must establish the tenant's responsibility according to 
the housing project's occupancy rules to move to the next available 
appropriately sized rental unit if the household becomes over housed or 
under housed in the unit they occupy.
    (8) Leases must include provisions that establish when a guest will 
be considered a member of the household and be required to be added to 
the tenant certification.
    (9) Leases must include a provision stating that tenancy continues 
until the tenant's possessions are removed from the housing either 
voluntarily or by legal means, subject to state and local law.
    (10) Leases for rental units receiving rental assistance must 
include clauses that specify that the tenant's monthly tenant 
contribution and a description of the circumstances under which the 
tenant's contribution may change.
    (11) Leases for tenants living in Plan II interest credit rental 
units must include provisions establishing the net monthly tenant 
contribution.
    (12) Leases, including renewals, must include the following 
language.

    It is understood that the use, or possession, manufacture, sale, 
or distribution of an illegal controlled substance (as defined by 
local, state, or Federal law) while in or on any part of this 
apartment complex or cooperative is an illegal act. It is further 
understood that such action is a material lease violation. Such 
violations (hereafter called a ``drug violation'') may be evidenced 
upon the admission to or conviction of the use, possession, 
manufacture, sale, or distribution of a controlled substance (as 
defined by local, state, or Federal law) in any local, state, or 
Federal court.
    The landlord may require any lessee or other adult member of the 
tenant household occupying the unit (or other adult or non-adult 
person outside the tenant household who is using the unit) who 
commits a drug violation to vacate the leased unit permanently, 
within timeframes set by the landlord, and not thereafter to enter 
upon the landlord's premises or the lessee's unit without the 
landlord's prior consent as a condition for continued occupancy by 
the remaining members of the tenant's household. The landlord may 
deny consent for entry unless the person agrees to not commit a drug 
violation in the future and is either actively participating in a 
counseling or recovery program, complying with court orders related 
to a drug violation, or has successfully completed a counseling or 
recovery program.
    The landlord may require any lessee to show evidence that any 
non-adult member of the tenant household occupying the unit, who 
committed a drug violation, agrees not to commit a drug violation in 
the future, and to show evidence that the person is either actively 
seeking or receiving assistance through a counseling or recovery 
program, complying with court orders related to a drug violation, or 
has successfully completed a counseling or recovery program within 
timeframes specified by the landlord as a condition for continued 
occupancy in the unit. Should a further drug violation be committed 
by any non-adult person occupying the unit the landlord may require 
the person to be severed from tenancy as a condition for continued 
occupancy by the lessee.
    If a person vacating the unit, as a result of the above 
policies, is one of the lessees, the person shall be severed from 
the tenancy and the lease shall continue among any other remaining 
lessees and the landlord. The landlord may also, at the option of 
the landlord, permit another adult member of the household to be a 
lessee.
    Should any of the above provisions governing a drug violation be 
found to violate any of the laws of the land the remaining 
enforceable provisions shall remain in effect. The provisions set 
out above do not supplant any rights of tenants afforded by law.

    (13) Leases for rental units accessible to individuals with 
disabilities occupied by those not needing the accessibility features 
must establish the tenant's responsibility to move to another unit when 
an appropriate unit becomes available or when the unit is needed by an 
eligible individual with disabilities. Additionally, the lease clause 
must require the borrower to provide tenants written notification of 
the date by which they must move to another unit in the project.
    (14) If loan prepayment occurs and the housing project is subject 
to restrictive use provisions, leases and renewals must be amended to 
include a clause specifying the tenant protections required under 
subpart N of this part.
    (15) All leases must contain the following information and 
provisions:

[[Page 32915]]

    (i) The name of the tenant, any co-tenants, and all members of the 
household residing in the rental unit;
    (ii) The identification of the rental unit;
    (iii) The amount and due date of monthly net tenant contributions, 
any late payment penalties, and security deposit amounts;
    (iv) The utilities, services, and equipment to be provided for the 
tenant;
    (v) The tenant's utility payment responsibility;
    (vi) The certification process for determining tenant occupancy 
eligibility and contribution;
    (vii) The limitations of the tenant's right to use or occupancy of 
the dwelling;
    (viii) The tenant's responsibilities regarding maintenance and 
consequences if the tenant fails to fulfill these responsibilities;
    (ix) The agreement of the borrower to accept the tenant net 
contribution prior to payment of other charges that the tenant owes and 
a statement that borrowers may seek legal remedy for collecting other 
charges accrued by the tenant;
    (x) The maintenance responsibilities of the borrower in buildings 
and common areas, according to state and local codes, Agency 
regulations, and Federal fair housing requirements;
    (xi) The responsibility of the borrowers at move-in and move-out to 
provide the tenant with a written statement of rental unit's condition 
and provisions for tenant participation in inspection;
    (xii) The provision for periodic inspections by the borrower and 
other circumstances under which the borrower may enter the premises 
while a tenant is renting;
    (xiii) The tenant's responsibility to notify the borrower of an 
extended absence, typically four consecutive weeks or more;
    (xiv) A provision that tenants may not assign the lease or sublet 
the property;
    (xv) A provision regarding transfer of the lease if the housing 
project is sold to an Agency-approved buyer;
    (xvi) The procedures that must be followed by the borrower and the 
tenant in giving notices required under terms of the lease including 
lease violation notices;
    (xvii) The good-cause circumstances under which the borrower may 
terminate the lease and the length of notice required;
    (xviii) The disposition of the lease if the housing project becomes 
uninhabitable due to fire or other disaster, including rights of the 
borrower to repair building or terminate the lease;
    (xix) The procedures for resolution of tenant grievances consistent 
with the requirements of Sec.  3560.160;
    (xx) The terms under which a tenant may, for good cause, terminate 
their lease, with 30 days notice, prior to lease expiration (e.g., when 
a tenant is required to move to another location for employment or due 
to a job loss, severe illness, death of spouse, or other reasons 
customary or mandatory in the community, or when a tenant has received 
notification that a borrower will be prepaying an Agency loan); and
    (xxi) The signature and date clause indicating that the lease has 
been executed by the borrower and the tenant.
    (d) Prohibited provisions. Borrowers are prohibited from including 
any of the following clauses in the lease:
    (1) Clauses prohibiting families with children under 18;
    (2) Clauses requiring prior consent by tenant to any lawsuit that 
borrowers may bring against the tenant in connection with the lease;
    (3) Clauses authorizing borrowers to hold any of a tenant's 
property until the tenant fulfills an obligation;
    (4) Clauses in which tenants agree not to hold borrowers liable for 
anything they may do or fail to do;
    (5) Clauses in which tenants agree that borrowers may bring suit 
against the tenant without notice;
    (6) Clauses in which tenants agree that borrowers may evict the 
tenant or sell their possessions whenever borrowers determine that a 
breach or default has occurred;
    (7) Clauses authorizing the borrower's attorneys to appear in court 
on behalf of the tenant, and to waive the tenant's right to a trial by 
jury;
    (8) Clauses authorizing the borrower's attorney to waive the 
tenant's right to appeal or to file suit; and
    (9) Clauses requiring the tenant to agree to pay legal fees and 
court costs whenever the borrower takes action against the tenant, even 
if the court finds in favor of the tenant.
    (e) Housing projects and units receiving HUD assistance.
    (1) In housing projects receiving Section 8 project-based 
assistance, borrowers may use the HUD model lease.
    (2) For units occupied by Section 8 certificate and voucher 
holders, borrowers may use:
    (i) A standard HUD-approved lease;
    (ii) A HUD-approved lease that includes a number of modifications 
from the standard HUD-approved lease; or
    (iii) An Agency-approved lease may be used if acceptable by HUD or 
the local housing authority.
    (f) State and local requirements. Borrowers must use a lease that 
is consistent with state and local requirements.
    (1) If any lease provision is in violation of state or local law, 
the lease may be modified to the extent needed to comply with the law, 
but any changes must be consistent with the provisions established in 
paragraph (c) of this section.
    (2) Leases must include a procedure for handling tenant's abandoned 
property, as provided by state or local law.


Sec.  3560.157  Occupancy rules.

    (a) General. The purpose of a borrower's occupancy rules is to 
outline the basis for the tenant and management relationship. Prior to 
Agency approval of occupancy rules, borrowers must provide written 
certification from their attorney that the housing project's occupancy 
rules are consistent with applicable federal, state, and local laws, as 
well as Agency requirements, and the requirements of all programs 
participating in the housing project. Borrowers must obtain Agency 
approval of the occupancy rules prior to initial occupancy and obtain 
Agency approval prior to the implementation date of any subsequent 
modifications to the rules.
    (b) Requirements. The occupancy rules must be in writing and posted 
for easy tenant access. A copy of these rules must be attached to the 
tenant's lease upon initial occupancy. At a minimum, the occupancy 
rules must address:
    (1) The tenant's rights and responsibilities under the lease or 
occupancy agreement;
    (2) The rent payment or occupancy charge policies;
    (3) The policies regarding periodic inspection of units;
    (4) The system for responding to tenant complaints;
    (5) The maintenance request and work order procedures;
    (6) The housing services and facilities available to tenants or 
members;
    (7) The office locations, hours, and emergency telephone numbers;
    (8) The restrictions on storage and prohibitions on non-functional 
vehicles in the housing project area;
    (9) Other requirements related to a subsidy provided to a tenant 
from non-Agency sources; and
    (10) When a guest becomes a member of the tenant household.
    (c) Modification of occupancy rules. The Agency must concur with 
any modification to the occupancy rules prior to implementation. Proper 
notice must be given to each tenant at least 30 days in advance of 
implementation of

[[Page 32916]]

such rules in accordance with Sec.  3560.160.
    (d) Federal, state and local requirements. The occupancy rules must 
be consistent with federal, state and local law.
    (e) Pets. All housing projects should establish reasonable written 
pet rules. No rules may be promulgated that would prevent occupancy by 
a household member who requires a service or companion animal. In 
elderly housing, borrowers must not prohibit tenants from keeping 
domestic animals in their rental units as pets.
    (f) Tenant organizations. Borrowers must not infringe on the rights 
of tenants to organize an association of tenants. Borrowers (or a 
designated management representative) should be available and willing 
to work with a tenant organization.
    (g) Community rooms. Borrowers may not place unreasonable 
restrictions on tenants that desire to use a community room.


Sec.  3560.158  Changes in tenant eligibility.

    (a) General requirements. Tenants must continue to meet the 
requirements of Sec.  3560.152 to remain eligible for occupancy.
    (b) Tenants no longer eligible. Tenants who are no longer eligible 
for occupancy under the housing project's occupancy rules or Agency 
requirements must vacate the property within 30 days of being notified 
by the borrower that they are no longer eligible for occupancy or at 
the expiration of their lease, whichever is greater, unless the 
conditions specified in paragraph (c) of this section exist.
    (c) Temporary continuation of tenancy. If conditions described in 
Sec.  3560.454(b) or the following conditions exist, borrowers may 
permit tenants who are no longer eligible for occupancy to continue to 
reside at the housing project with prior approval of the Agency.
    (1) The waiting list for the specific rental unit type has no 
eligible applicants; or
    (2) The required time period for vacating the rental unit would 
create a hardship on the tenant household.
    (d) Surviving and remaining household members.
    (1) Members of a household may continue to reside in a housing 
project after the departure or death of the tenant or co-tenant, 
provided that:
    (i) They are eligible with respect to adjusted income;
    (ii) They occupied a rental unit in the housing project at the time 
of the departure or death of the tenant or co-tenant;
    (iii) They execute a tenant certification form establishing their 
own tenancy; and,
    (iv) They have the legal ability to sign a lease for the rental 
unit, except where a legal guardian may sign when the tenant or member 
is otherwise eligible.
    (2) Surviving or remaining members of the household may remain in 
the housing project, taking into consideration the conditions of 
paragraph (d)(1) of this section, but must move to a suitably sized 
rental unit within 30 days of its availability.
    (3) After the death of a tenant or co-tenant in elderly housing, 
the surviving members of the household, regardless of age but taking 
into consideration the conditions of paragraph (d)(1) of this section, 
may remain in the rental unit in which they were residing at the time 
of the tenant's or co-tenant's death, even if the household is over 
housed according to the housing project's occupancy rules as follows:
    (i) Continued occupancy of the rental unit will not be allowed when 
in either situation of paragraph (d)(1) or (d)(3) of this section, the 
rental unit has accessibility features for individuals with 
disabilities, the household no longer has a need for such accessibility 
features, and the housing project has a tenant application from an 
individual with a need for the accessibility features;
    (ii) If the housing project does not have a tenant application from 
an individual with a need for the accessibility features, the household 
may remain in the rental unit with such features until the housing 
project receives an application from an individual with a need for 
accessibility features and shall be required to move within 30 days of 
the housing project's receipt of a tenant application requiring 
accessibility features; and
    (iii) If a suitably sized unit is not available in the project 
within 30 days, the tenant may remain in the unit with accessibility 
features until the first available unit in the project becomes 
available and then must move within 30 days.


Sec.  3560.159  Termination of occupancy.

    (a) Tenants in violation of lease. Borrowers, in accordance with 
lease agreements, may terminate or refuse to renew a tenant's lease 
only for material non-compliance with the lease provisions, material 
non-compliance with the occupancy rules, or other good causes. Such 
terminations may only occur when the incidences related to the 
termination are documented and there is documentation that the tenant 
was given notice prior to the initiation of the termination action that 
their activities would result in occupancy termination.
    (1) Material non-compliance with lease provisions or occupancy 
rules, for purposes of occupancy termination by a borrower, includes 
actions such as:
    (i) Violations of lease provisions or occupancy rules which are 
substantial and repeated;
    (ii) Non-payment or repeated late payment of rent or other 
financial obligations due under the lease or occupancy rules beyond 
agreed to grace periods; or
    (iii) Admission to or conviction for use, attempted use, 
possession, manufacture, selling, or distribution of an illegal 
controlled substance when such activity occurred on the housing 
project's premises by the tenant, a member of the tenant's household, 
or any other person under the tenant's control at the time of the 
activity.
    (2) Good causes, for purposes of occupancy terminations by a 
borrower, include actions such as:
    (i) Actions by the tenant or a member of the tenant's household 
which disrupt the livability of the housing by threatening the health 
and safety of other persons or the right of other persons to enjoyment 
of the premises and related facilities; or
    (ii) Actions by the tenant or a member of the tenant's household 
which result in substantial physical damage causing an adverse 
financial effect on the housing or the property of other persons.
    (b) Lease expiration or tenant eligibility. A tenant's occupancy in 
an Agency-financed housing project may not be terminated by a borrower 
when the lease agreement expires unless the tenant's actions meet the 
conditions described in paragraph (a) of this section, or the tenant is 
no longer eligible for occupancy in the housing. Borrowers must handle 
terminations of occupancy due to a change in tenant eligibility status 
in accordance with Sec.  3560.158. At a minimum, the occupancy 
termination notice must include the following information:
    (1) A specific date by which lease termination will occur;
    (2) A statement of the basis for lease termination with specific 
reference to the provisions of the lease or occupancy rules that, in 
the borrower's judgment, have been violated by the tenant in a manner 
constituting material non-compliance or good cause.
    (3) A statement detailing the nature and frequency of the 
violations with adequate information to allow the tenant to respond 
with contrary evidence or with a corrective action plan;

[[Page 32917]]

    (4) A statement specifying where and when, prior to the lease 
termination date, a tenant may meet with the borrower to present 
contrary evidence or to develop a corrective action agreement; and
    (5) A statement explaining the conditions under which the borrower 
may initiate judicial action to enforce the lease termination notice.
    (c) Other terminations. If occupancy is terminated due to 
conditions which are beyond the control of the tenant, such as a 
condition related to required repair or rehabilitation of the building, 
or a natural disaster, the tenants who are affected by such a 
circumstance may request a Letter of Priority Entitlement (LOPE) from 
the Agency. If tenants need additional time to secure replacement 
housing, the Agency may, at the tenant's request, extend the LOPE 
entitlement period.
    (d) Criminal activity. Borrowers may terminate tenancy for criminal 
activity or alcohol abuse by household members in accordance with the 
provisions of 24 CFR 884.216(b).


Sec.  3560.160  Tenant grievances.

    (a) General.
    (1) The requirements established in this section are designed to 
ensure that there is a fair and equitable process for addressing tenant 
or prospective tenant concerns in the event that an action or inaction 
by a borrower, including anyone designated to act for a borrower, 
adversely affects the tenants of a housing project.
    (2) Any tenant or prospective tenant seeking occupancy in or use of 
a housing project for which a loan or grant has been provided by the 
Agency and who believes they are being discriminated against because of 
age, race, color, religion, sex, marital status, familial status, 
disability, sexual preference or national origin may complain to the 
Secretary of Agriculture, U.S. Department of Agriculture, Washington, 
DC 20250 or the Secretary of Housing and Urban Development, U. S. 
Department of Housing and Urban Development, Washington, DC 20410.
    (b) Applicability.
    (1) The requirements of this section apply to a borrower action 
regarding housing project operations, or the failure to act, that 
adversely affects tenants or prospective tenants.
    (2) This section does not apply to the following situations:
    (i) Rent changes authorized by the Agency in accordance with the 
requirements of Sec.  3560.203(a);
    (ii) Complaints involving discrimination which must be handled in 
accordance with Sec.  3560.2(b) and paragraph (a)(2) of this section;
    (iii) Housing projects where an association of all tenants has been 
duly formed and the association and the borrower have agreed to an 
alternative method of settling grievances;
    (iv) Changes required by the Agency in occupancy rules or other 
operational or management practices in which proper notice and 
opportunity have been given according to law and the provisions of the 
lease;
    (v) Lease violations by the tenant that would result in the 
termination of tenancy and eviction;
    (vi) Disputes between tenants not involving the borrower; and
    (vii) Displacement or other adverse actions against tenant as a 
result of loan prepayment handled according to subpart N of this part.
    (c) Borrower responsibilities. Borrowers must permanently post 
tenant grievance procedures that meet the requirements of this section 
in a conspicuous place at the housing project. Borrowers also must 
maintain copies of the tenant grievance procedure at the housing 
project's management office for inspection by the tenants and the 
Agency upon request. Each tenant must receive an Agency summary of 
tenant's rights when a lease agreement is signed. If a housing project 
is located in an area with a concentration of non-English speaking 
individuals, the borrower must provide grievance procedures in both 
English and the non-English language.
    (d) Reasons for grievance. Tenants or prospective tenants may file 
a grievance with the borrower in response to a borrower action, or 
failure to act, in accordance with the lease or Agency regulations that 
results in a denial, significant reduction, or termination of benefits 
or when a tenant or prospective tenant contests a borrower's notice of 
proposed adverse action as provided in paragraph (e) of this section. 
Acceptable reasons for filing a grievance may include:
    (1) Failure to maintain the premises in such a manner that provides 
decent, safe, sanitary, and affordable housing in accordance with Sec.  
3560.103 and applicable state and local laws;
    (2) Borrower violation of lease provisions or occupancy rules;
    (3) Modification of the lease;
    (4) Occupancy rule changes;
    (5) Rent changes not authorized by the Agency according to Sec.  
3560.205; or
    (6) Denial of approval for occupancy.
    (e) Notice of adverse action. In the case of a proposed action that 
may have adverse consequences for tenants or prospective tenants such 
as denial of admission to occupancy and changes in the occupancy rules 
or lease, the borrower must notify the tenant or prospective tenant in 
writing. The notice must give specific reasons for the proposed action. 
The notice must also advise the tenant or prospective tenant of ``the 
right to respond to the notice within ten calendar days after date of 
the notice'' and of ``the right to a hearing in accordance with Sec.  
3560.160 (f), which is available upon request.'' For housing projects 
in areas with a concentration of non-English speaking individuals, the 
notice must be in English and the non-English language.
    (f) Grievances and responses to notice of adverse action. The 
following procedures must be followed by tenants, prospective tenants, 
or borrowers involved in a grievance or a response to an adverse 
action.
    (1) The tenant or prospective tenant must communicate to the 
borrower any grievance or response to a notice within 10 calendar days 
after occurrence of the adverse action or receipt of a notice of intent 
to take an adverse action.
    (2) Borrowers must offer to meet with tenants to discuss the 
grievance within five calendar days of receiving the grievance. The 
Agency encourages borrowers and tenants or prospective tenants to make 
an effort to reach a mutually satisfactory resolution to the grievance 
at the meeting.
    (3) If the grievance is not resolved during an informal meeting to 
the tenant or prospective tenant's satisfaction, the borrower must 
prepare a summary of the problem and submit the summary to the tenant 
or prospective tenant and the Agency. The tenant also may submit a 
summary of the problem to the Agency.
    (g) Hearing process. The following procedures apply to a hearing 
process.
    (1) Request for hearing. If the tenant or prospective tenant 
desires a hearing, a written request for a hearing must be submitted to 
the borrower within 10 calendar days after the receipt of the summary 
of any informal meeting.
    (2) Selection of hearing officer or hearing panel. In order to 
properly evaluate grievances and appeals, the borrower and tenant must 
select a hearing officer or hearing panel. If the borrower and the 
tenant cannot agree on a hearing officer, then they must each appoint a 
member to a hearing panel and the members selected must appoint a third 
member. If within 30 days from the date of the request for a hearing 
the tenant and borrower have not agreed upon the selection of a hearing 
officer or hearing panel, the borrower must notify the Agency by mail 
of the situation. The Agency will appoint a

[[Page 32918]]

person to serve as the sole hearing officer.
    (3) Standing hearing panel. In lieu of the procedure contained in 
paragraph (g)(2) of this section for each grievance or appeal 
presented, a borrower may ask the Agency to approve a standing hearing 
panel for the housing project.
    (4) Examination of records. The borrower must allow the tenant the 
opportunity, at a reasonable time before a hearing and at the expense 
of the tenant, to examine or copy all documents, records, and policies 
of the borrower that the borrower intends to use at a hearing unless 
otherwise prohibited by law or confidentiality agreements.
    (5) Scheduling of hearing. If a standing hearing panel has been 
approved, a hearing will be scheduled within 15 calendar days after 
receipt of the tenant's or prospective tenant's request for a hearing. 
If a hearing officer or hearing panel must be selected, a hearing will 
be scheduled within 15 days after the selection or appointment of a 
hearing panel or a hearing officer. All hearings will be held at a time 
and place mutually convenient to both parties. If the parties cannot 
agree on a meeting place or time, the hearing officer or hearing panel 
will designate the place and time.
    (6) Escrow deposits. If a grievance involves a rent increase not 
authorized by the Agency, or a situation where a borrower fails to 
maintain the property in a decent, safe, and sanitary manner, rental 
payments may be deposited by the tenant into an escrow account, 
provided the tenant's rental payments are otherwise current.
    (i) The escrow account deposits must continue until the complaint 
is resolved through informal discussion or by the hearing officer or 
panel.
    (ii) The escrow account must be in a federally-insured institution 
or with a bonded independent agent.
    (iii) Failure to make timely rent payments into the escrow account 
will result in a termination of the tenant grievance and appeals 
procedure and all sums will immediately become due and payable under 
the lease.
    (iv) Receipts of escrow account deposits must be available for 
examination by the borrower.
    (7) Failure to request a hearing. If the tenant or prospective 
tenant does not request a hearing within the time provided by paragraph 
(f)(1) of this section, the borrower's disposition of the grievance or 
appeal will become final.
    (h) Requirements governing the hearing. The following requirements 
will govern the hearing process.
    (1) Subject to paragraph (f)(2) of this section, the hearing will 
proceed before a hearing officer or hearing panel at which evidence may 
be received without regard to whether that evidence could be used in 
judicial proceedings.
    (2) The hearing must be structured so as to provide basic due 
process safeguards for both the borrower and the tenants or prospective 
tenants, which must protect:
    (i) The right of both parties to be represented by counsel or 
another person chosen as their representative;
    (ii) The right of the tenant or prospective tenant to a private 
hearing unless a public hearing is requested;
    (iii) The right of the tenant or prospective tenant to present oral 
or written evidence and arguments in support of their grievance or 
appeal and to refute the evidence of all witnesses on whose testimony 
or information the borrower relies; and
    (iv) The right of the borrower to present oral and written evidence 
and arguments in support of the decision, to refute evidence relied 
upon by the tenant or prospective tenant, and to confront and cross-
examine all witnesses in whose testimony or information the tenant or 
prospective tenant relies.
    (3) At the hearing, the tenant or prospective tenant must present 
evidence that they are entitled to the relief sought, and the borrower 
must present evidence showing the basis for action or failure to act 
against that which the grievance or appeal is directed.
    (4) The hearing officer or hearing panel must require that the 
borrower, the tenant or prospective tenant, counsel, and other 
participants or spectators conduct themselves in an orderly manner. 
Failure to comply may result in exclusion from the proceedings or in a 
decision adverse to the interests of the disorderly party and granting 
or denial of the relief sought, as appropriate.
    (5) If either party or their representative fails to appear at a 
scheduled hearing, the hearing officer or hearing panel may make a 
determination to postpone the hearing for no more than five days or may 
make a determination that the absent party has waived their right to a 
hearing under this subpart. If the determination is made that the 
absent party has waived their rights, the hearing officer or hearing 
panel will make a decision on the grievance. Both the tenant or 
prospective tenant and the borrower must be notified of the 
determination of the hearing officer or hearing panel.
    (i) Decision. Hearing decisions must be issued in accordance with 
the following requirements.
    (1) The hearing officer or hearing panel has the authority to 
affirm or reverse a borrower's decision.
    (2) The hearing officer or hearing panel must prepare a written 
decision, together with the reasons thereof based solely and 
exclusively upon the facts presented at the hearing within 10 calendar 
days after the hearing. The notice must state that the decision is not 
effective for 10 days to allow time for an Agency review as specified 
in paragraph (i)(3) of this section.
    (3) The hearing officer or hearing panel must send a copy of the 
decision to the tenant, prospective tenant, borrower, and the Agency.
    (4) The decision of the hearing officer or hearing panel shall be 
binding upon the parties to the hearing unless the parties to the 
hearing are notified within 10 calendar days by the Agency that the 
decision is not in compliance with Agency regulations.
    (5) Upon receipt of written notification from the hearing officer 
or hearing panel, the borrower and tenant must take the necessary 
action, or refrain from any actions, specified in the decision.


Sec. Sec.  3560.161-3560.199  [Reserved]


Sec.  3560.200  OMB control number. [Reserved]

Subpart E--Rents


Sec.  3560.201  General.

    This subpart sets forth the requirements for establishing and 
collecting rents charged to occupants of multi-family housing projects 
financed by the Agency.


Sec.  3560.202  Establishing rents and utility allowances.

    (a) General. Rents and utility allowances for rental units in 
Agency-financed housing projects are set by the borrower and must be 
based on the operating and management expenses and other costs related 
to the housing project including loan payment amounts due to the 
Agency.
    (b) Agency approval. All rents and utility allowances set by 
borrowers are subject to Agency approval.
    (c) Rents. As applicable, borrowers must establish the following 
rents.
    (1) Note rent. The borrower must establish a note rent to cover 
expenses in the housing project's approved budget and the required loan 
payment set at the interest rate shown in the promissory note.
    (2) Basic rent. The borrower must establish a basic rent to cover 
expenses

[[Page 32919]]

in the housing project's approved budget and the required loan payment 
set in the promissory note reduced by the interest credit agreement.
    (3) HUD contract rents. For housing receiving project-based Section 
8 rental subsidies, the HUD contract rent will be established in 
accordance with 24 CFR part 880 or part 884, as applicable, available 
at any Agency servicing office.
    (4) Low-income housing tax credit (LIHTC) rents. Borrowers who 
receive LIHTCs may establish rents in accordance with LIHTC 
requirements. However, borrowers are obligated to ensure that 
sufficient annual funds are available to cover expenses in the housing 
project's approved budget including the required payments on borrower's 
Agency loan. Borrowers must not use housing project funds to make up 
any difference between rents required under Agency program requirements 
and the maximum allowed rents under the LIHTC program.
    (d) Utility allowances. In projects where tenants pay the 
utilities, borrowers must establish utility allowances for each size 
and type of rental unit in the housing project based on estimated 
utility costs. Borrowers must review utility allowances annually, 
adjust for accuracy, and submit any utility allowance changes to the 
Agency for approval. If no changes are needed, the borrower must notify 
the Agency that no changes were made. Documentation to justify utility 
allowances must be maintained in the housing project files.
    (e) Funds contributed to reduce rents. If borrowers use funds 
contributed from sources other than the Agency (e.g., state or local 
grants, private contributions) to reduce general operating and 
management expenses, housing project rents must be reduced to reflect 
the funding being used to offset housing project expenses. When funds 
contributed from sources other than the Agency are used for housing 
project expenses, the borrower must certify to the Agency, in writing, 
that the funds provided will not need to be repaid with Agency funds.
    (f) Rents for resident manager, caretaker, or owner-occupied unit.
    (1) If approved as a part of a management plan, a borrower may 
occupy a rental unit in a housing project when they are acting as a 
management agent or resident manager as specified in Sec.  3560.102(e).
    (2) If the rental unit being occupied by a borrower or resident 
manager is designated as a revenue-producing unit, borrowers must 
calculate the rental charge to the borrower or resident manager in the 
same manner as tenant contributions.
    (3) If the rental unit being occupied by a borrower or resident 
manager is designated as a non-revenue producing unit, borrowers must 
treat the cost of providing the unit the same as other non-revenue 
producing portions of the housing project.


Sec.  3560.203  Tenant contributions.

    (a) Tenant contributions. A tenant's contribution to rent charged 
for a rental unit in an Agency financed housing project is based on the 
tenant's income, as calculated on the Agency's tenant certification 
forms, and the availability of Agency or non-Agency rental subsidies.
    (1) Gross tenant contributions. Borrowers must set gross tenant 
contributions to rent at the highest of the following standards but 
never more than the note rent:
    (i) Thirty percent of monthly adjusted income;
    (ii) Ten percent of gross monthly income;
    (iii) An amount equal to the portion of an assistance payment 
specifically designated to meet the household's shelter costs if the 
household is receiving assistance payments from a public agency; or
    (iv) The basic rent, unless RHS rental assistance is provided to 
the household.
    (2) Net tenant contributions. Borrowers must set net tenant 
contributions to rent at an amount equal to the gross tenant 
contribution less any utility allowance assigned to the rental unit 
occupied by the tenant.
    (3) Tenant contribution surcharge. Tenants in a Plan I housing 
project with incomes above the eligibility standards set in Sec.  
3560.152(a)(1) must pay a 25 percent surcharge in addition to note 
rent.
    (b) Adjustment of net tenant contribution. Borrowers must adjust 
gross tenant contribution whenever there is a change in tenant 
household status or income sufficient to generate a revised tenant 
certification in accordance with Sec.  3560.152(e) or an Agency 
approved rent or utility allowance change that affects the net tenant 
contribution amount.
    (c) Overage. If a tenant's net tenant contribution is higher than 
basic rent, borrowers must remit to the Agency the rent collected in 
excess of the basic rent and up to the note rent.


Sec.  3560.204  Security deposits and membership fees.

    (a) General. Borrowers may collect security deposits when it is 
reasonable and customary for the area in which the housing is located. 
Borrowers must hold security deposits in a separate bank or bookkeeping 
account in accordance with Sec.  3560.302(c)(3).
    (b) Allowable amounts. Borrowers may charge security deposits that 
are typical for the area in which the housing is located, as long as 
the security deposit charged a tenant does not exceed that tenant's net 
contribution for one month's rent or basic rent, whichever is greater.
    (1) As noted in Sec.  3560.102(b)(1)(viii) and Sec.  
3560.156(c)(15)(iii), borrowers must specify in the housing project's 
management plan how the amount to be charged as a security deposit will 
be established and must specify the amount to be charged to individual 
tenants in the lease to be signed by the tenant.
    (2) Borrowers may charge security deposits to households receiving 
HUD assistance in accordance with HUD requirements.
    (3) Members of a cooperative shall be required to pay a membership 
fee no greater than one month's occupancy charge.
    (4) Additional security deposits for pets may be charged as long as 
the additional deposit is not greater than basic rent for 1 month. No 
additional security deposit for pets is allowed where a service animal 
is necessary for the normal function of a household member.
    (5) Borrowers must not charge additional security deposits based on 
disabilities of tenants or other personal characteristics.
    (c) Payment plans. Borrowers must offer, for persons who are 
eligible for rental assistance or Section 8 assistance, the option of 
paying the security deposit on an installment payment plan. Should 
installments not be met, the total charge may become due and payable in 
full.
    (d) Charges for damage or loss. Borrowers may charge tenants for 
damage or loss caused or allowed by the tenant equal to the cost of the 
damage or loss.
    (1) Borrowers must consider routine turnover expenses a normal 
operating expense and must not charge tenants a fee or withhold 
security deposits to pay for such costs.
    (2) Borrowers may withhold security deposits and may charge tenants 
for damage or loss costs above security deposit amounts.
    (e) State and local security deposit requirements. Borrowers must 
follow all state and local laws and other requirements governing the 
handling and disposition of security deposits.

[[Page 32920]]

    (1) Resolution of any security deposit disputes must be handled in 
accordance with state and local law.
    (2) Any interest earned on security deposits will accrue in 
accordance with state law.
    (f) Unclaimed security deposits. Any funds in the housing project's 
security deposit account unclaimed by a tenant must be deposited into 
the housing project's general operating account.


Sec.  3560.205  Rent and utility allowance changes.

    (a) General. Borrowers must fully document that changes to rents 
and utility allowances are necessary to cover housing or utility costs 
allowed under the approved budget for the housing. Any changes must 
apply to all similar units in the housing project.
    (b) Agency approval. Borrowers must submit a fully documented 
request to the Agency to effect any rent or utility allowance change.
    (1) Borrowers must obtain written consent or approval from the 
Agency as specified in paragraph (e) of this section before 
implementing any changes in the rents or utility allowances.
    (2) If a borrower implements an unauthorized rent or utility 
allowance charge, the Agency will require the borrower to roll back 
rents to the last authorized rent charge, and the borrower must 
reimburse tenants for any unauthorized rents collected.
    (c) Timing of request for changes. Borrowers must submit rent and 
utility allowance change requests in conjunction with the annual budget 
submission as required under Sec.  3560.303(d). The effective dates of 
any approved changes will coincide with the start of the housing 
project's fiscal year or the start of the season for seasonally 
occupied farm labor housing. However, the Agency will accept borrower 
requests for rent or utility allowance changes anytime during the year 
if a change is necessary to preserve the financial integrity of the 
housing complex and the financial distress is due to circumstances 
beyond the borrower's control.
    (d) Tenant notification. Borrowers must notify tenants and solicit 
their comments to proposed rent or utility allowance change requests 
that are submitted to the Agency at the same time that the initial 
request is made to the Agency.
    (1) Tenants will be given 20 calendar days to provide their 
comments to the borrower or to the Agency.
    (2) Borrowers must deliver the proposed rent or utility allowance 
change request notice to each tenant and post at least one copy of the 
notice at the housing project site in a visible location frequented by 
tenants.
    (3) Within 5 calendar days following the end of the 20-day tenant 
comment period, the borrower must send the Agency a summary of the 
tenant comments received by the borrower along with any changes the 
borrower proposes to make to the initial request for a rent change.
    (e) Approval. If the Agency approves a rent or utility allowance 
increase request on which the comments were solicited, the borrower 
will deliver a notice announcing the rent or utility allowance change 
to the tenants to be effective 30 calendar days from the date of the 
notification.
    (f) Denial of change request. The Agency may deny a rent or utility 
allowance increase request in the following circumstances.
    (1) The Agency determines that housing operating costs in the 
proposed budget exceed reasonable costs.
    (2) The borrower is out of compliance with Agency requirements 
including any corrective action requirements agreed to in a workout 
agreement developed according to subpart J of this part.
    (3) Sufficient funds are being collected under existing rents to 
meet approved expenses.
    (4) Basic rents in Plan II housing or note rate rents in Plan I or 
full profit housing would exceed conventional rents for comparable 
units in the area or a similar area.
    (g) Notice of denial. If the rent change will not be approved as 
requested, the Agency will notify the borrower of the denial in 
accordance with Sec.  3560.303(d).


Sec.  3560.206  Conversion to Plan II (Interest Credit).

    The Agency encourages any borrower not on Plan II to convert to 
Plan II to provide more favorable rent costs to very-low, low, and 
moderate-income households.


Sec.  3560.207  Annual adjustment factors for Section 8 units.

    (a) General. For rental units receiving project-based Section 8 
assistance, the Agency will review rents annually without regard to 
HUD's automatic annual adjustment.
    (b) Establishing rents in housing with HUD rent assistance. 
Borrowers will set note and basic rents for housing receiving HUD 
project based Section 8 assistance, as specified in Sec.  
3560.202(c)(3).
    (1) Borrowers must notify the Agency of any HUD rent changes.
    (2) If allowed by the interest credit agreement, the borrower will 
remit the amount collected in excess of the basic rent up to the note 
rent to the Agency as overage.
    (3) When HUD contract rents exceed note rents, borrowers must 
deposit HUD funds equal to the difference between the Agency approved 
note rent and the HUD approved rent into the reserve account for the 
housing project.
    (c) Excess HUD rents. When permitted by the Agency interest credit 
agreement, the Agency may reduce or cancel the interest credit on the 
housing, if excess HUD rents deposited in the reserve account result in 
the reserve account being funded beyond the fully funded level approved 
by the Agency.


Sec.  3560.208  Rents during eviction or failure to recertify.

    (a) Rents during eviction. Tenants being evicted for lease 
violation must pay the rent established in their lease until their 
lease is terminated. If the tenant is appealing the eviction and the 
borrower refuses to accept rent payment during the appeal of the 
eviction, the tenant must escrow required rent payments to safeguard 
their occupancy.
    (b) Rents when tenants fail to recertify. If a borrower can 
document that a tenant received a notice specifying a tenant 
recertification date and the tenant fails to comply by the specified 
date or fails to cooperate with verification or other procedures 
related to the tenant's recertification so that the tenant 
recertification cannot be completed by the recertification date, the 
borrower, within 10 days of the recertification date, shall give the 
tenant and the Agency written notification that:
    (1) Eviction proceedings are being initiated;
    (2) Rental assistance and interest credit benefits being suspended; 
and
    (3) The tenant will be charged note rent until their lease is 
terminated.
    (c) Unauthorized assistance due to tenant recertification failure. 
Any unauthorized assistance received because of the tenant's failure to 
be recertified will be collected in accordance with the provisions of 
subpart O of this part.
    (d) Rents when borrowers fail to recertify tenants. If a borrower 
cannot document that a tenant received a recertification notice, and a 
tenant is not recertified within 12 months of the most recently 
executed tenant certification, tenants shall continue to make net 
tenant contributions to rent based on their most recent tenant 
certification and the borrower must remit to the Agency full overage as 
if the tenant was paying the note rent until the tenant is recertified.

[[Page 32921]]

    (e) Unauthorized assistance due to borrower recertification 
failure. Any unauthorized assistance received as a result of the 
borrower's failure to recertify a tenant will be collected from the 
borrower in accordance with the provisions of subpart O of this part 
and may not be paid from housing project funds or funds collected from 
the tenant.


Sec.  3560.209  Rent collection.

    (a) General. Borrowers must collect rents on a monthly basis and 
maintain a system for collecting and tracking rents.
    (b) Fees for late rent payments. Borrowers may adopt a late fee 
schedule for overdue rental payments. Late fee schedules must be 
submitted to the Agency for approval as part of the housing project's 
management plan, be in accordance with state and local law, and 
consistent with the following requirements.
    (1) A grace period of 10 days from the rental payment due date must 
be allowed for all tenants.
    (2) The late fee must not exceed the higher of $10 or an amount 
equal to 5 percent of the tenant's gross tenant contribution.
    (3) Tenants receiving housing benefits from sources other than the 
Agency may be subject to the late rent fee requirements of the other 
funding sources.
    (c) Improperly advanced rents. Improperly advanced interest credit 
or rental assistance is considered unauthorized assistance and is 
subject to recapture in accordance with subpart O of this part.


Sec.  3560.210  Special servicing note rate rents (SNRs).

    When a Plan II housing project is experiencing severe vacancies due 
to market conditions, the Agency may allow the borrower to charge a 
servicing note rent (SNR), which is less than note rent but higher than 
basic rent, to attract or retain tenants whose income level would 
require them to pay note rent. The requirements for requesting and 
receiving an SNR are established under Sec.  3560.454.


Sec. Sec.  3560.211-3560.249  [Reserved]


Sec.  3560.250  OMB control number. [Reserved]

Subpart F--Rental Subsidies


Sec.  3560.251  General.

    This subpart contains policies for borrower administration and 
tenant use of rental subsidies in Agency financed multi-family housing 
projects.


Sec.  3560.252  Authorized rental subsidies.

    (a) General. The purpose of rental subsidies is to reduce amounts 
paid by tenants for rent. Rental subsidies equal the difference between 
the approved shelter costs and tenant contributions as calculated in 
accordance with Sec.  3560.203(a)(1).
    (b) Forms of rental subsidies.
    (1) Rental subsidies may be in the form of:
    (i) Agency rental assistance;
    (ii) HUD section 8 assistance, including project-based, vouchers, 
and certificates;
    (iii) Private rental subsidies; or,
    (iv) State or local government rental subsidies.
    (c) Multiple rent subsidies.
    (1) Multiple types of rent subsidies may be used in the same multi-
family housing project.
    (2) Tenants with subsidies from sources other than the Agency may 
be eligible for Agency rental assistance if the following conditions 
are met.
    (i) The tenant qualifies for Agency rental assistance.
    (ii) The rental subsidy the tenant is receiving is not a HUD 
voucher or certificate.
    (iii) The rental subsidy being received by the tenant is less than 
the full amount of Agency rental assistance for which the tenant would 
qualify. In such cases, the Agency may provide the difference between 
the subsidy received by the tenant and the amount of Agency rental 
assistance for which the tenant qualifies.
    (d) Agency rental assistance (RA). Agency RA is obligated to multi-
family housing projects on a rental unit basis. The obligation is 
composed of a number of rental units and associated dollar amounts of 
RA specified in a RA agreement with a borrower. The following types of 
Agency RA may be obligated to a housing project.
    (1) Renewal units. RA may be assigned to a housing project to 
replace existing rental unit obligations because funds associated with 
the units have been fully disbursed.
    (2) New construction units. RA may be provided in conjunction with 
initial Agency loans for construction or substantial rehabilitation of 
multi-family housing projects.
    (3) Servicing units. Additional RA may be provided to operational 
multi-family housing projects as a part of the Agency's general loan 
servicing or preservation activities.


Sec.  3560.253  Allocation and prioritization of Agency rental 
assistance.

    (a) Allocation of rental assistance. The Agency will establish 
priorities for use, allocation and distribution of rental assistance in 
7 CFR part 1940, subpart L.
    (b) Priorities for rental assistance. In the absence of priorities 
under 7 CFR part 1940, subpart L, the Agency will allocate its rental 
assistance according to the following priorities:
    (1) Renewal units;
    (2) New construction units; and
    (3) Servicing units.


Sec.  3560.254  Eligibility for rental assistance.

    (a) Eligible housing. Housing projects eligible for Agency RA 
include the following types of projects.
    (1) Housing projects that operate under an Interest Credit Plan II 
RA agreement.
    (2) Housing projects financed with an Agency off-farm labor housing 
loan or grant.
    (3) Housing projects financed with a direct or insured Rural Rental 
Housing loan approved prior to August 1,1968, and operated under an 
interest credit agreement that identifies the housing project as a Plan 
RA project.
    (4) Housing projects financed from Agency and other sources if the 
conditions of Sec.  3560.66 are met.
    (b) Eligible units. Borrowers may not request RA for rental units 
that are not habitable in accordance with Sec.  3560.103.
    (c) Eligible households. Households eligible for rental assistance 
are those:
    (1) With very low- or low-incomes who are eligible to live in 
multi-family housing;
    (2) whose net tenant contribution to rent determined in accordance 
with Sec.  3560.203(a)(2) is less than the basic rent for the unit;
    (3) whose head of the household is a United States citizen or a 
legal alien as defined in Sec.  3560.11;
    (4) who meet the occupancy rules established by the borrower in 
accordance with Sec.  3560.155(e); and,
    (5) who have a signed, unexpired tenant certification form on file 
with the borrower.


Sec.  3560.255  Requesting rental assistance.

    (a) Submitting requests. Borrowers seeking an allocation of rental 
assistance for multi-family housing must request the rental assistance 
from the Agency as follows.
    (1) Renewal rental assistance. To the extent sufficient funds are 
available, the Agency will automatically renew expiring rental 
assistance agreements at the existing number of units.
    (2) New construction units. Loan applicants proposing to use Agency 
rental assistance must include their request for rental assistance in 
their loan proposal in accordance with Sec.  3560.56.

[[Page 32922]]

    (3) Servicing units. Borrowers requesting rental assistance must 
have tenants or eligible tenant applicants on a waiting list who are RA 
eligible.
    (b) Denial of requests.
    (1) If a rental assistance request is denied due to the loan 
applicant's or borrower's ineligibility, the Agency will send the loan 
applicant or borrower written notification of the decision with an 
explanation of the denial.
    (2) If a rental assistance request to renew expiring rental 
assistance agreements is denied because funding is not available, the 
Agency will notify the borrower and the borrower must notify the 
tenants of rent increases in accordance with their lease and state and 
local law. Tenants losing rental assistance due to a lack of Agency 
funding may quit the lease and vacate the housing without penalty in 
accordance with the terms of their lease.
    (3) Loan applicants or borrowers determined to be eligible for RA 
as a result of an appeal or funding review will receive RA, if RA 
funding is available, beginning with the month following the date of 
the appeal or funding review decision or beginning in the first month 
that RA funding becomes available.


Sec.  3560.256  Rental assistance payments.

    (a) Borrower submission requirements. The borrower must submit 
monthly requests for RA payments to the Agency based on occupancy as of 
the first day of the month previous to the month in which the request 
is being made.
    (b) Basis of RA requests. Borrower requests for RA payments must be 
based on the difference between the basic rent plus utility allowances 
for each rental unit eligible for RA and the net tenant contribution of 
the tenant.
    (c) Payments to borrower. Prior to making RA payments to a 
borrower, the Agency will deduct from the approved RA payment amount 
any unpaid loan payments, late fees, and other amounts which the 
borrower owes to the Agency.
    (d) Utility payments to tenants. The borrower must pay tenants the 
difference between the utility allowance and the tenant's net 
contribution to rent when a tenant receiving RA is billed directly for 
utilities and the utility allowance exceeds the net tenant contribution 
to rent. Such utility payments to tenants must be made on a monthly 
basis.
    (e) Administrative errors. Borrowers are responsible for correcting 
borrower errors made in regard to RA requests for payments. In 
accordance with subpart O of this part, borrowers will be required to 
repay the Agency for any unauthorized RA received or any unauthorized 
use of RA except in cases of tenant error or fraud.


Sec.  3560.257  Assigning rental assistance.

    (a) Priorities for rental assistance.
    (1) Borrowers must use the following priorities when assigning 
available rental assistance.
    (i) First priority is to eligible very low-income tenants paying 
the highest percentage of their adjusted annual income for Agency 
approved shelter costs.
    (ii) Second priority, if the housing project has vacant rental 
units, is to very low-income applicants on the waiting list.
    (iii) Third priority is to eligible low-income tenants paying the 
highest percentage of their adjusted annual income for Agency approved 
shelter costs.
    (iv) Fourth priority, if the housing project has vacant rental 
units, is to eligible low-income applicants on the waiting list.
    (v) Fifth priority is to households which are residing in a rental 
unit for which they do not qualify on the basis of an occupancy waiver 
or other special approval situations.
    (2) In order to provide rental assistance to the third, fourth, and 
fifth priority categories, a borrower must fully document either that 
there are no very low-income households on the housing project's 
waiting list or that occupancy by low-income households is limited as 
follows:
    (i) For housing occupied on or after November 30, 1983, no more 
than 5 percent of the units in the housing are occupied by low-income 
households; or
    (ii) For housing occupied before November 30, 1983, no more than 25 
percent of the units in the housing are occupied by low-income 
households.
    (b) Continued eligibility. Tenants receiving rental assistance may 
continue to do so as long as they remain eligible for occupancy and for 
rental assistance under Sec.  3560.254(c), and as long as rental 
assistance units are available.
    (c) Assignment of rental assistance. Except as provided in Sec.  
3560.454(c) and using the priorities given in paragraph (a) of this 
section, borrowers must assign available rental assistance units as 
soon as rental assistance units become available.
    (1) When a rental assistance unit is assigned to an eligible 
existing tenant on a day other than the first day of a month, the 
Agency will not provide the borrower rental assistance for the newly 
assigned existing tenant and the tenant will not pay reduced rental 
charges until the first of the month following the assignment of the 
rental assistance.
    (2) When an eligible applicant moves into a rental assistance unit 
on a day other than the first day of a month, they will pay a prorated 
rent based on the number of days they occupy the rental assistance unit 
and the amount of rental assistance they will be receiving.
    (d) Incorrectly assigned rental assistance. Incorrectly assigned 
rental assistance is viewed as unauthorized assistance and handled in 
accordance with subpart O of this part.


Sec.  3560.258  Terms of agreement.

    (a) Term of agreement. Rental assistance agreements will be 
consistent with available funding. Rental assistance agreements expire 
when the funds obligated for rental assistance units are fully 
disbursed in accordance with the conditions of the agreement.
    (b) Replacing expiring obligations. To the extent funds are 
available for replacement units, the Agency will renew rental 
assistance agreements for a 5 year obligation period.


Sec.  3560.259  Transferring rental assistance.

    (a) Agency authority. The Agency may transfer rental assistance in 
the following instances:
    (1) To accompany the transfer of a housing project to a different 
borrower;
    (2) After a voluntary conveyance or a foreclosure sale;
    (3) After a liquidation or prepayment;
    (4) When some or all rental assistance units have not been used for 
a 4-month period; and,
    (5) Due to an unclosable loan.
    (b) Transferring rental assistance for displaced tenants. The 
Agency may transfer rental assistance from one housing project to 
another eligible housing project to which a tenant is moving due to 
displacement as a result of prepayment, liquidation, or a natural 
disaster for that tenant's use. The tenant must begin using the rental 
assistance within 4 months of the transfer or the RA will become 
available for use by the next rental assistance eligible tenant in the 
housing project.


Sec.  3560.260  Rental subsidies from non-Agency sources.

    (a) General. The Agency may authorize the use of rental subsidies 
from sources other than the Agency in Agency financed housing projects. 
The Agency will make no commitment to providing Agency rental 
assistance at the expiration of the rental subsidies from other 
sources.
    (b) HUD vouchers and certificates. When tenants receive rental 
subsidies through section 8 vouchers or certifications issued by the 
U.S. Department of Housing and Urban

[[Page 32923]]

Development (HUD), borrowers operating under Plan II must set rental 
unit rents as follows.
    (1) HUD certificates. For tenants with HUD certificates, the 
borrower must set the rental unit rent at the basic rent or the net 
tenant contribution, whichever is higher. The public housing authority 
distributing the section 8 subsidy may set the utility allowance.
    (2) HUD vouchers. For tenants with HUD vouchers, the borrower must 
set the rental unit rent at the basic rent or the rent standard set by 
the public housing authority, whichever is higher. The value of the 
voucher exceeding basic rent up to the note rent will be remitted to 
the Agency. The public housing authority distributing the HUD vouchers 
may set the utility allowance.
    (c) Loan proposals using non-Agency rental subsidy. Loan applicants 
or borrowers proposing to use rental subsidy from sources other than 
the Agency must provide:
    (1) Documentation demonstrating that a market exists for households 
eligible for the subsidy and the households are at income levels that 
would benefit from the amount of rental subsidy that will be provided;
    (2) A plan describing actions to be taken when the rental subsidy 
expires to minimize the impact on tenants losing the rental assistance 
and to avoid displacement; and
    (3) A copy of the project-based rental assistance agreement to be 
signed by the borrower and the provider of the rental assistance.
    (d) Rental subsidy agreement. The borrower and the provider of 
rental subsidies from sources other than the Agency must execute a 
rental subsidy agreement and submit a copy of the agreement to the 
Agency. At a minimum, the rental subsidy agreement between the borrower 
and the source of the rental subsidy must include the following 
provisions:
    (1) A description of how the subsidy will be paid. The rental 
subsidy payments may be paid directly to the tenants, to the borrower 
on behalf of the tenants, or deposited to a separate account 
established for the subsidy. The tenants must be advised of the amount 
and source of the subsidy through the lease or a supplement to the 
lease.
    (2) The life of a project-based rental subsidy agreement with a 
non-Agency source must be at least 5 years and sufficient funds must be 
set aside to assure availability of the rental subsidy for this term. 
The method of supplying the funds must be clearly established.


Sec.  3560.261  Improperly advanced rental assistance.

    Improperly advanced RHS rental assistance resulting from tenant or 
borrower error or fraud constitutes unauthorized assistance and the 
provisions of subpart O of this part apply.


Sec. Sec.  3560.262-3560.299  [Reserved]


Sec.  3560.300   OMB control number. [Reserved]

Subpart G--Financial Management


Sec.  3560.301  General.

    This subpart contains requirements for the financial management of 
Agency-financed multi-family housing projects, including accounts, 
budgets, reports, and engagements. Financial management systems and 
procedures must cover all housing operations and provide adequate 
documentation to ensure that program objectives are met.


Sec.  3560.302  Accounting, bookkeeping, budgeting, and financial 
management systems.

    (a) General. Borrowers must establish the accounting, bookkeeping, 
budgeting and financial management procedures necessary to conduct 
housing project operations in a financially safe and sound manner. 
Borrowers must maintain records in a manner suitable for an audit or 
engagement and must be able to report accurate operational results to 
the Agency from these accounts and records.
    (b) Acceptable methods of accounting.
    (1) Borrowers may use a cash, accrual, or modified accrual method 
of accounting, bookkeeping, and budget preparations.
    (2) Borrowers must describe their accounting, bookkeeping, budget 
preparation, and financial reporting procedures, including Agency-
approved engagements, in their management plan.
    (3) Borrowers must notify the Agency of any changes in their 
accounting, bookkeeping, budget preparation, and financial management 
reporting systems through a revision of their management plan.
    (c) Account requirements.
    (1) As used in this paragraph, the term account is used 
interchangeably to mean a bookkeeping account (ledger), or a bank 
account.
    (2) At a minimum, borrowers must maintain the accounts required by 
their loan agreement or resolution.
    (3) The following list identifies the financial accounts that are 
required for each housing project. Accounts are to be funded in the 
following priority order, except that paragraphs (c)(3)(iv) and (v) of 
this section are funded directly by tenant security deposits or patron 
capital receipts respectively:
    (i) General operating account;
    (ii) Real estate tax and insurance account (if not part of the 
general operating account);
    (iii) Reserve account;
    (iv) Tenant security deposit account;
    (v) Membership fee account for cooperative housing; and
    (vi) For cooperative housing only, a patron capital account.
    (4) Amounts escrowed for taxes and insurance may be kept in the 
general operating account as long as the accounting system reflects the 
amount escrowed.
    (5) Regardless of the number or types of accounts established, the 
borrower must meet the following requirements.
    (i) All housing project funds must be held only in financial 
institution accounts insured by an agency of the Federal Government, 
backed by collateral provided by the bank, or held in securities 
meeting the conditions in this subpart.
    (ii) Funds maintained in an institution may not exceed the limit 
established for federal deposit insurance. If funds exceed the amount 
covered by federal deposit insurance, borrowers must obtain a 
collateral pledge from the institution to cover all funds or must move 
funds to an institution that will insure the funds.
    (iii) All funds and proceeds in any account must be used only for 
authorized purposes as described in Agency's regulations, loan or grant 
documents and management plan regulations. Use of funds for non-program 
purposes may constitute non-monetary default as described in Sec.  
3560.452(c).
    (iv) All funds received and held in any account, except the tenant 
security deposit, membership fee, and patron capital accounts, must be 
held in trust by the borrower for the loan obligation until used and 
serve as security for the Agency loan or grant.
    (v) Borrowers must be able to account for housing project funds 
with accounting methods or practices that maintain the proprietary 
identity of the funds for each project.
    (vi) Each borrower must have access to at least one demand deposit 
or checking account.
    (vii) Housing project funds may not be pledged as collateral for 
debts without Agency approval. If such a need arises for an eligible 
program purpose, the borrower must obtain prior Agency approval.
    (6) Tenant security deposits. Tenant security deposit accounts or

[[Page 32924]]

membership fee accounts and patron capital accounts must be maintained 
in a separate account in trust for the tenants or members and handled 
in a manner consistent with State and local laws.
    (d) Documentation of separate accountability. Housing project funds 
may be combined in one or more bank accounts for two or more housing 
projects as long as the borrower's accounting system segregates and 
tracks funds for each project separately.
    (1) When borrowers request Agency approval of an accounting system 
that combines funds from two or more housing projects, they must 
demonstrate to the Agency that the accounting systems are structured to 
segregate and maintain separate accountability for each housing 
project. Such demonstration must include a statement issued by a 
Certified Public Accountant stating that the accounting system is 
structured to meet this principle of separate accountability.
    (2) The accounting system and management plan must document the 
method for prorating revenue and expenses that are not clearly 
identifiable as being associated with a particular housing project.
    (3) Funds for housing projects managed by the same management 
company must not be co-mingled.
    (e) Records.
    (1) Borrowers must retain all housing project financial records, 
books, and supporting material for three years after the issuance of 
the audit or engagement and financial reports. Upon request, these 
materials will immediately be made available to the Agency, its 
representatives, the USDA Office of Inspector General (OIG), or the 
General Accounting Office (GAO).
    (2) Borrower accounts and records will be kept or made available in 
a location with reasonable access for inspection, review, and copying 
by the Agency, other authorized representatives of the USDA, OIG, or 
GAO.
    (3) Automated records may be used if they meet the conditions of 
paragraph (f) of this section.
    (f) Forms generated by automated systems.
    (1) The forms and formats approved for use by borrowers may be 
prepared on automated systems when they meet the requirements of this 
paragraph.
    (2) Forms may be automated if they meet the following requirements.
    (i) The identical wording and nomenclature of an official form must 
be included in the automated version of the form, including the Office 
of Management and Budget (OMB) approval number.
    (ii) The logic or mathematical calculation of an official form must 
be the same in an automated version of the form.
    (iii) The name or logo of the source of the automated form must be 
visible on each output of the automated form.
    (iv) Output size must be 8\1/2\ x 11 inches.
    (v) Nominal spacing adjustment and colored paper are allowed.
    (g) Farm Labor Housing. Borrowers with on-farm labor housing units 
will be considered in compliance with this section by virtue of 
completing the record keeping and reporting requirements outlined in 
subpart M of this part.


Sec.  3560.303  Housing project budgets.

    (a) General requirements.
    (1) Using an Agency-approved format, borrowers must submit to the 
Agency for approval a proposed annual housing project budget prior to 
the start of the housing project's fiscal year. The capital budget 
section of the annual project budget must include anticipated 
expenditures on the project's long-term capital needs as specified in 
Sec.  3560.103(c).
    (2) Budget projections regarding income, expenses, vacancies, and 
contingencies must be realistic given the housing project's history, 
current circumstances, and market conditions.
    (3) Borrowers must document that the operating expenses included in 
the budget accurately reflect reasonable and necessary costs to operate 
the housing project in a manner consistent with the objectives of the 
loan and in accordance with the applicable Agency requirements.
    (4) Borrower must submit supporting evidence to justify housing 
project utility allowances.
    (5) Upon Agency request, borrowers must submit any additional 
documentation necessary to establish that applicable Agency 
requirements have been met.
    (b) Allowable and unallowable project expenses.
    (1) Allowable expenses. Allowable expenses include those expenses 
that are directly attributable to housing project operations and are 
necessary to carry out successful operations.
    (i) Housing project expenses must not duplicate expenses included 
in the management fee.
    (ii) With prior Agency approval, cooperatives and nonprofit 
organizations may use housing project funds to asset management 
expenses directly attributable to ownership responsibilities. Such 
expenses may include:
    (A) Errors and omissions insurance policy for the Board of 
Directors.
    (B) Board of Director review and approval of proposed RHS annual 
operating budgets, including proposed repair and replacement outlays 
and accruals.
    (C) Board of Director review and approval of capital expenditures, 
audited financial statements, and consideration of any management 
comments noted.
    (D) Long-term asset management reviews.
    (2) Unallowable expenses. Housing project funds may not be used for 
any of the following:
    (i) Equity skimming as defined by title V of the Housing Act of 
1949, section 543(a), 42 U.S.C.
    (ii) Purposes unrelated to the housing project.
    (iii) Reimbursement of inaccurate or false claims.
    (iv) Settlement agreements, court ordered decrees, legal fees, or 
other costs that result from the filing of civil rights complaints or 
legal action alleging the borrower, or a representative of the 
borrower, has committed a civil rights violation.
    (v) Fines, penalties, and legal fees where the borrower or a 
borrower's representative has been found guilty of violating laws, 
including, but not limited to, civil rights, evictions, and building 
codes.
    (c) Priorities. The priority order of planned and actual budget 
expenditures will be:
    (1) Critical operating and maintenance expenses, including taxes 
and insurance;
    (2) Agency debt payments;
    (3) Reserve account requirements;
    (4) Other authorized expenditures; and
    (5) Return on owner investment.
    (d) Agency review and approval.
    (1) The Agency will only approve housing project budgets that meet 
the requirements of paragraphs (a), (b) and (c) of this section.
    (2) If no rent increase is requested, borrowers must submit budget 
documents for Agency approval 60 calendar days prior to the start of 
the housing project's fiscal year.
    (i) The Agency will notify borrowers if the budget submission is 
incomplete.
    (ii) The Agency will notify the borrower if the budget does not 
meet the requirements of paragraphs (a), (b), or (c) of this section.
    (3) If a rent increase is requested, the borrower must submit 
budget documents to the Agency and notify

[[Page 32925]]

tenants of the requested rent increase at least 105 calendar days prior 
to the start of the housing project's fiscal year.
    (i) The Agency will notify borrowers if the budget submission is 
incomplete.
    (ii) The Agency will notify the borrower if the budget does not 
meet the requirements of paragraphs (a), (b), or (c) of this section or 
if the rent and utility allowance request has been denied in accordance 
with Sec.  3560.205(f).
    (iii) The rent increase is not approved until the Agency issues a 
written approval.
    (4) If the Agency denies the budget approval, the Agency will 
notify the borrower in writing and indicate the deficiencies in the 
budget submission.
    (5) Upon notification of the deficiencies, borrowers will have 10 
calendar days to submit additional documentation. The Agency will 
notify the borrower if the budget has been accepted or rejected.
    (6) If budget approval is denied, the borrower shall continue to 
operate the housing project on the basis of the most recently approved 
budget.


Sec.  3560.304  Initial operating capital.

    (a) Purpose. To provide a source of capital for start-up costs, 
such as the purchase of equipment, operating, maintenance, and debt 
service expenses, borrowers are required to make an initial operating 
capital contribution to the general operating account as described in 
Sec.  3560.64.
    (b) Authorized uses of initial operating capital. Initial operating 
capital may be used only to pay for approved budgeted expenses.
    (c) Withdrawal of initial operating capital. Initial operating 
capital funds may be withdrawn by a borrower if:
    (1) The initial operating capital was provided from the borrower's 
own funds;
    (2) The borrower requests the withdrawal after the second year of 
housing project operations and prior to the 13th year of operations;
    (3) The housing project has had a 90 percent occupancy rate for a 
period of 12 months prior to the withdrawal request;
    (4) The withdrawal will not affect the financial viability of the 
housing project;
    (5) Contributions to the reserve account are at authorized levels;
    (6) The withdrawal request will not result in rent increases; and
    (7) There are no outstanding deficiencies in management's physical 
maintenance of the housing project.


Sec.  3560.305  Return on investment.

    (a) Borrower's return on investment. Borrowers may receive a return 
on their investment (ROI) in accordance with the terms of their loan 
agreement and the following:
    (1) If there is a positive net cash flow in housing project 
operations, the ROI may be taken by the borrower immediately after the 
housing project's fiscal year, provided that the balance of the reserve 
account is equal to or greater than required deposits minus authorized 
withdrawals. If the annual financial reports indicate that an ROI 
should not have been taken, borrowers will be required to return any 
unauthorized ROI.
    (2) If there is negative cash flow in housing project operations, 
the Agency may authorize the borrower to take the ROI only after the 
Agency has reviewed the housing project's annual financial reports and 
determines:
    (i) Surplus cash exists in either the general operating account as 
defined in Sec.  3560.306(d)(2) or the reserve account, if the balance 
is greater than the required deposits minus authorized withdrawals.
    (ii) The housing project has sufficient funds to address identified 
capital or operational needs.
    (b) Unpaid return on investment. An earned, but unpaid ROI for any 
previous year may be requested by the borrower and authorized by the 
Agency under the provisions of Sec.  3560.305(a)(2) provided the 
current year's ROI has been paid first and a rent increase is not 
required to generate funds to pay the unpaid ROI.


Sec.  3560.306  Reserve account.

    (a) Purpose. To meet the major capital expense needs of a housing 
project, borrowers must establish and maintain a reserve account.
    (b) Financial management of the reserve account. Borrower 
management of the reserve account is subject to the requirements of 7 
CFR part 1902, subpart A regarding supervised bank accounts.
    (c) Funding of the reserve account. Borrowers must make monthly 
payments to the reserve account in the amount established in loan 
documents, beginning with the first loan payment or a date specified in 
loan documents. Borrowers must continue these payments until the 
account reaches the total amount specified in the loan documents.
    (d) Transfer of surplus general operating account funds.
    (1) The general operating account will be deemed to contain surplus 
funds when the balance at the end of the housing project's fiscal year, 
after all payables, exceeds 10 percent of the operating and maintenance 
expenses, including debt service to the Agency, transfers to reserves, 
and a return to the borrower, including repayment of the borrower's 
contribution to initial operating capital, if it has not been repaid. 
If the borrower is escrowing taxes and insurance premiums, include the 
amount that should be escrowed by year end and subtract such tax and 
insurance premiums from operating and maintenance expenses used to 
calculate 10 percent of the operating and maintenance expenses.
    (2) If a housing project's general operating account has surplus 
funds at the end of the housing project's fiscal year, the Agency may 
require the borrower to reduce rents in the following year, use the 
surplus funds to address capital needs, reduce the debt service on the 
borrower's loan, or make a deposit in the housing project's reserve 
account, if the reserve account is not fully funded.
    (3) At the end of the borrower's fiscal year, if the borrower is 
required to transfer surplus funds in the general operating account to 
the reserve account, the transfer does not change the required 
contributions to the reserve account in the following year. Funds 
transferred to the reserve in this manner may be counted towards the 
required contribution for the following year or years depending on the 
amount of the required transfer of surplus funds.
    (e) Resumption of payments. When the account balance falls below 
the total amount specified in the loan or grant documents, borrowers 
must resume making monthly payments to the reserve account and continue 
until the required balance has been restored.
    (f) Account requirements. Borrowers must establish and maintain the 
reserve account according to Sec.  3560.64, Sec.  3560.302(c)(6), and 
the following requirements.
    (1) Reserve accounts must be deposited in interest-bearing accounts 
or securities with rates equal to or greater than passbook savings or 
checking accounts.
    (2) Reserve accounts must be supervised accounts that require 
Agency countersignatures on all withdrawals.
    (g) Funds invested in securities. In addition to the requirements 
specified in Sec.  3560.305(f), the following requirements apply when 
reserve funds are invested in securities.
    (1) Any securities in which reserves are invested must be backed by 
the federal or state government, or an Agency of the federal or state 
government, or be triple A rated tax-exempt bonds.
    (2) The borrower must record the price actually paid for the 
securities. When designated as a reserve deposit,

[[Page 32926]]

the price paid must equal the required contribution to reserves.
    (3) Investors must be knowledgeable about industry practices and 
consider the impact of typical fees and charges for purchases, sales 
and maintenance of an account, when making investment decisions. Such 
fees may be paid for out of reserves, only with the consent of the 
Agency. Housing project funds may not be used to pay for a financial 
advisor.
    (h) Use of the reserve account.
    (1) Borrowers must request Agency approval of reserve account 
withdrawals prior to the withdrawal.
    (2) Borrowers must inform the Agency of planned uses of reserve 
accounts in their annual capital budget if known at budget planning 
time.
    (3) The Agency will indicate any conditions governing withdrawals 
from a reserve account at the time it approves the withdrawal.
    (4) In emergency situations, the Agency may specify special 
procedures to provide an expedited approval process for the use of the 
reserve account.
    (5) The Agency may ``post-approve'' the use of reserve funds only 
under extraordinary circumstances and only if the funds were used for 
authorized purposes and their expenditure would have been approved by 
the Agency had a request been submitted prior to the withdrawal.
    (6) The Agency may approve the use of reserve funds for operating 
costs when circumstances that are determined by the Agency to be beyond 
the borrower's control have resulted in a shortfall in the housing 
project's general operating account.
    (i) Allowable uses. Allowable uses of reserve funds include the 
following.
    (1) Major capital improvements and replacements.
    (2) Housing project operating expenses provided the requirement of 
paragraph (h)(6) of this section has been met, including:
    (i) Payments due on the loan, or
    (ii) Payment of a return on investment at the end of the borrower's 
fiscal year.
    (3) With Agency approval, borrowers operating on a for-profit or a 
limited profit basis may make an annual withdrawal from the reserve 
account, equal to no more than 25 percent of the amounts earned on a 
reserve account during the prior year.
    (4) For other purposes, which in the judgment of the Agency will 
promote the loan purposes, strengthen the security or facilitate, 
improve, or maintain the housing and the orderly collection of the loan 
without jeopardizing the loan or impairing the adequacy of the 
security.
    (j) Records. Borrowers must maintain records documenting all 
expenses which were paid by withdrawals from the reserve account.
    (k) Changes to reserve requirements.
    (1) At a borrower's request, the Agency may permit the loan 
agreement or loan resolution to be amended to adjust the required 
funding of the reserve account to meet anticipated ``life-cycle'' 
capital needs, including equipment and facility replacement costs. Such 
a request may be based on a capital needs assessment performed in 
response to Sec.  3560.103(c)(2).
    (2) Borrowers may use an Agency approved capital needs assessment 
as the basis for requesting adjustments to the reserve account.
    (3) The Agency may approve a change in the reserve account funding 
level based on the findings of an approved capital needs assessment. 
The approval to increase reserve account funding levels will take into 
consideration the housing project's approved budget and the housing 
project's ability to support increased reserve account deposits without 
causing basic rents to exceed conventional rents for comparable units 
in the area.
    (l) Excess reserves. Amounts in the reserve account which exceed 
the total required by the loan or grant agreement must be used, at the 
direction of the Agency, to:
    (1) Pay for expenses specified in a long-term capital plan;
    (2) Make payments on the Agency loan;
    (3) Reduce rents by a transfer to the general operating account;
    (4) Fund preservation incentives authorized in subpart N of this 
part; or
    (5) Cover other expenditures determined to be related to the 
purpose of the housing project and in the best interest of the Federal 
Government.
    (m) Procurement. The requirements of Sec.  3560.102(c), (d) and 
(i), and all other Agency requirements relating to procurement, 
bidding, identity-of-interest, cost-reasonableness, and construction 
management apply to any work or services paid out of reserve funds. 
Structural repairs and other significant work on major building systems 
such as heating or air conditioning must be done in accordance with the 
requirements of 7 CFR part 1924, subpart A.


Sec.  3560.307  Reports.

    (a) Required reports. Borrowers must submit required reports using 
Agency-approved formats.
    (b) Quarterly and monthly reports. The Agency may require quarterly 
or monthly reports to monitor financial progress when closer 
supervision is warranted.


Sec.  3560.308  Annual financial reports.

    (a) General. Borrowers must submit annual financial reports that 
meet the requirements of this section. The annual financial reports to 
be submitted are the Multi-Family Housing (MFH) Project Budget with 
actual expenditures and the MFH Balance Sheet. Annual financial reports 
are due to the Agency within 90 days of the end of the borrower's 
fiscal year.
    (1) Borrowers with 16 or more units in their housing project must 
base their annual financial reports on an engagement report completed 
according to agreed upon procedures established by the Agency as 
specified in paragraph (c) of this section. Borrowers must include the 
engagement report with their annual financial reports submitted to the 
Agency.
    (2) Borrowers with less than 16 units in their housing project must 
submit annual financial reports using Agency-approved formats and 
certify that the housing meets the performance standards established in 
paragraph (d) of this section. Borrowers may use a CPA to prepare this 
report.
    (b) Housing projects with common management. In housing projects 
managed by a common management entity, operate under a common 
accounting system and procedures, and have a common managing general 
partner, the Agency may designate a sample of the housing projects for 
annual financial reports that meet the requirements of paragraph (a)(1) 
of this section. For the housing projects not included in the sample, 
the borrower must submit annual financial reports that meet the 
requirements of paragraph (a)(2) of this section.
    (c) Engagement requirements. Borrowers required to submit annual 
financial reports based on an engagement performed by a CPA must meet 
the following requirements.
    (1) Borrowers must submit the results of an engagement that 
examines specific records using agreed upon procedures established by 
the Agency and that describes the borrower's performance in meeting the 
standards described in paragraph (d) of this section.
    (2) The engagement will be initiated by the borrower using the 
Agency's engagement letter, which will specify the engagement program 
and establish the reporting requirements for the engagement.
    (3) The engagement must be conducted by a Certified Public 
Accountant (CPA) in accordance with American Institute of Certified 
Public

[[Page 32927]]

Accountant (AICPA) Standards and Agency requirements.
    (4) All engagement reports must be prepared for use by the Agency.
    (d) Performance standards. Borrowers must ensure that:
    (1) Required accounts are properly maintained and tracked 
separately;
    (2) Payments from operating accounts are disclosed and accurately 
represented on financial reports;
    (3) The reserve amount is at the authorized level and there are no 
encumbrances;
    (4) Tenant security deposit accounts are fully-funded and are 
maintained in separate accounts and meet State and local requirements;
    (5) Payment of owner return was consistent with the terms of the 
applicable loan agreement;
    (6) The borrower has maintained proper insurance in accordance with 
the requirements of Sec.  3560.105(b); and
    (7) All financial records are adequate and suitable for 
examination.
    (e) Other financial reports.
    (1) Nonprofit and public borrower entities must submit audits in 
accordance with 7 CFR part 3052.
    (2) The Agency may require additional opinions of financial 
condition and compliance, such as audits, to assure the security of the 
asset, determine whether the housing project is being operated at a 
reasonable cost, or to detect fraud, waste, or abuse.
    (3) Any audits independently obtained by the borrower also must be 
submitted to the Agency for review.
    (f) Full audit expense approval. For 2 years from the effective 
date of these regulations, the Agency will approve as a housing project 
expense, additional reasonable costs of obtaining a full audit.


Sec. Sec.  3560.309-3560.349  [Reserved]


Sec.  3560.350 OMB control number.  [Reserved]

Subpart H--Agency Monitoring


Sec.  3560.351  General.

    This subpart contains policies for Agency monitoring of operations 
and management at multi-family housing projects.


Sec.  3560.352  Agency monitoring scope, purpose, and borrower 
responsibilities.

    (a) Scope of Agency monitoring activities. The Agency will review 
reports, records, and other materials related to the housing project, 
including borrower financial reports, housing project records, and 
other communications. The Agency also will review material related to a 
housing project submitted by a tenant or other source. To assess 
conditions such as a housing project's physical condition, record 
keeping procedures, and operations and management activities, including 
borrower compliance with Federal, state, and local laws and Agency 
requirements, the Agency will conduct periodic on-site monitoring 
reviews of a housing project.
    (b) Purpose of Agency monitoring activities. Agency monitoring 
activities are designed to assess borrower and tenant compliance with 
Agency requirements, and to:
    (1) Ensure housing projects are managed in accordance with the 
goals and objectives of the Agency's multi-family housing programs and 
are maintained in accordance with Agency requirements for affordable, 
decent, safe, and sanitary housing;
    (2) Preserve the value of the Agency-financed housing projects;
    (3) Detect waste, fraud, and abuse in housing project operations or 
management and to ensure the cost of operations and management are 
necessary and reasonable costs;
    (4) Verify compliance with Affirmative Fair Housing Marketing 
requirements, title VI of the Civil Rights Act of 1964, the Civil 
Rights Act of 1968, as amended, section 504 of the Rehabilitation Act 
of 1973, the Fair Housing Amendments Act of 1988, the Age 
Discrimination Act of 1975, Americans with Disabilities Act, other 
applicable Federal laws, and Agency requirements related to occupancy 
and tenant eligibility.
    (c) Borrower responsibilities. The borrower is responsible for 
cooperating fully and promptly with Agency monitoring activities. 
Agency monitoring activities do not diminish borrower operation and 
management responsibilities and do not relieve borrowers from any 
Agency requirements including, but not limited to, borrower 
requirements to comply with:
    (1) The terms of all agreements with the Agency, including the loan 
or grant agreement, assurance agreement, loan resolution, promissory 
note, mortgage, interest credit agreement, rental assistance agreement, 
mitigation measures contained in the environmental review document, and 
workout agreement;
    (2) The requirements contained in this part;
    (3) The requirements of title VI of the Civil Rights Act of 1964, 
the Civil Rights Act of 1968, as amended; section 504 of the 
Rehabilitation Act of 1973, the Fair Housing Amendments Act of 1988, 
the Age Discrimination Act of 1975, Americans with Disabilities Act, 
and
    (4) Applicable federal, state, and local laws.


Sec.  3560.353  Scheduling of on-site monitoring reviews.

    Generally, the Agency will provide the borrower prior notice of an 
on-site monitoring review and will conduct the on-site monitoring 
review in the presence of the borrower. However, the Agency may visit a 
housing project, without prior notice, to observe physical conditions, 
operations and management activities, or other borrower or tenant 
activities. In addition, the Agency may conduct on-site reviews without 
the presence of the borrower, the management agent, or other designated 
representative of the borrower.


Sec.  3560.354  Borrower response to monitoring review notifications.

    The Agency will notify borrowers, in writing, whenever Agency 
monitoring activities result in deficiency findings or compliance 
violation. The monitoring review notification will describe the 
deficiencies findings or compliance violations and will specify a time 
period by which corrective action must be taken by the borrower. The 
notification will offer borrowers an opportunity to discuss the 
reported deficiency findings or compliance violations with the Agency 
and will explain enforcement actions that the Agency may take if 
corrective action is not taken within the time period specified in the 
monitoring review notification. When civil rights non-compliance is 
found, the State Civil Rights Coordinator or Manager (SCRC/M) will be 
notified. If voluntary compliance cannot be obtained, appropriate 
enforcement or remedial action will be taken.


Sec. Sec.  3560.355-3560.399  [Reserved]


Sec.  3560.400 OMB control number.  [Reserved]

Subpart I--Servicing


Sec.  3560.401  General.

    (a) Purpose. This subpart contains actions the Agency may take to 
service and collect loans or other debts owed by multi-family housing 
borrowers. The loan servicing and other actions set forth are designed 
to protect Agency and tenant interests and assist borrowers in meeting 
program objectives.
    (b) General servicing policies. Borrowers must repay loans or other 
amounts due to the Agency according to provisions specified in 
promissory notes, loan agreements and resolutions, mortgages, deeds-of-
trust, assumption agreements, reamortization agreements,

[[Page 32928]]

or other agreements executed between the borrower and the Agency.
    (c) Special servicing actions. The Agency will not agree to any 
proposal for loan servicing or debt collection action other than 
actions consistent with this section, debt instruments, and other 
agreements. When payments due to the Agency from a borrower are more 
than 30 days past due, the Agency may initiate the special servicing 
actions described in subpart J of this part.


Sec.  3560.402  Loan payment processing.

    (a) Predetermined Amortization Schedule System (PASS) requirements. 
All loans, except the loans specified in paragraph (c) of this section, 
must be closed and serviced using the Predetermined Amortization 
Schedule System (PASS).
    (b) Required conversion to PASS. Borrowers with Daily Interest 
Accrual System (DIAS) accounts must convert to PASS whenever a loan 
servicing action on the account involves a change in the loan rates or 
terms or whenever a subsequent loan to the borrower is closed.
    (c) Exceptions. Seasonal farm labor housing loans and on-farm labor 
housing loans may be closed on DIAS, monthly, or annual payment 
schedules.


Sec.  3560.403  Account servicing.

    (a) Payment due dates. Loan or other payments due to the Agency are 
due on the first day of each month unless otherwise established in the 
debt instrument or other agreement executed with the Agency.
    (b) Payment application order. Loan payments will be applied to the 
borrower's account in the following order of priority.
    (1) Amortized audit receivables. (i.e., amounts due to the Agency, 
over a period of time, as a result of a finding from an audit or other 
monitoring activity.)
    (2) Unamortized audit receivables. (i.e., amounts due to the 
Agency, in a lump sum payment, as a result of a finding from an audit 
or other monitoring activity.)
    (3) Late fees. (i.e., amounts due to the Agency as a result of late 
payments.)
    (4) Amortized recoverable costs. (i.e., amounts due to the Agency, 
over a period of time, as a result of Agency payments made on behalf of 
a borrower for housing project related expenses such as taxes or 
insurance premiums.)
    (5) Unamortized recoverable costs. (i.e., amounts due to the 
Agency, in a lump sum payment, as a result of Agency payments made on 
behalf of a borrower for housing project related expenses such as taxes 
or insurance premiums.)
    (6) Overage. (i.e., amounts due to the Agency as a result of a 
tenant's net tenant contribution being higher than basic rent.)
    (7) Interest. (i.e., amounts due to the Agency as a result of 
scheduled interest on a loan and as a result of interest charged on 
unpaid delinquent principal amounts.)
    (8) Principal. (i.e., amounts due to the Agency as the loan 
principal.)
    (9) Advance payments. (Any funds remaining after disbursement of a 
payment to all other payment priorities will be applied to the 
borrower's account as an advance regular payment unless a borrower 
specifically designates, in writing, another application.)
    (c) Late fees. If payments on a borrower's account, under PASS, are 
more than $15 delinquent after the close of business on the 10th day 
after the payment due date, a late fee will be charged to the 
borrower's account.
    (1) Late fees charged to a borrower's account will equal 6 percent 
of the total regular payments due as specified in any promissory notes, 
assumption agreements, or reamortization agreements related to the 
borrower's account.
    (2) Late fees are a borrower expense and must not be paid from 
housing project funds.
    (3) The Agency may waive late fees for circumstances beyond a 
borrower's control and when a waiver is determined by the Agency to be 
in the best financial interest of the Federal government.
    (d) Interest on unpaid overdue principal. On the first day of the 
month following a payment due date, the Agency will charge interest at 
the note rate on any unpaid principal payment due according to the 
loan's amortization schedule (i.e., interest will be charged on 
delinquent principal). The interest charged on the unpaid principal 
payment due will be charged to the borrower in addition to the 
scheduled interest due on payments according to the loan's amortization 
schedule.


Sec.  3560.404  Final loan payments.

    (a) Payoff statements. At the borrower's request, the Agency will 
provide a statement indicating the pay off amount necessary to pay the 
borrower's account in full.
    (b) Final payments. A borrower's final loan payment must include 
repayment of all outstanding obligations to the Agency.
    (1) Any supervised funds being held by the Agency will be applied 
to the borrower's account or, at the borrower's option, will be 
returned to the borrower following acceptance of final payment on all 
outstanding obligations.
    (2) If a balance due remains on a borrower's account after Agency 
acceptance of a final payment, due to borrower error or fraud or Agency 
error, the Agency will initiate collection action in accordance with 
the unauthorized assistance collection procedures described in subpart 
O of this part.
    (c) Final payment loans. Borrowers with loans for which the Agency 
approved an amortization period that exceeded the term of the loan may 
request a loan to finance the final payment in accordance with the 
requirements of Sec.  3560.73.
    (d) Loan prepayment requests. If prepayment of an Agency loan is 
requested, the applicable preservation requirements of subpart N of 
this part, including the execution of any appropriate restrictive-use 
agreements, must be met prior to the Agency's acceptance of a final 
loan payment under the prepayment request.
    (e) Payment forms. Final payments may be made by cashier's check, 
certified check, money order, bank draft, or other withdrawal 
instruments approved by the Agency.
    (1) If borrowers use forms of payment requiring special handling, 
the borrower is responsible for the cost of the special handling.
    (2) When payment is provided in a form that is not the equivalent 
of cash, the Agency will consider the payment to be received at the 
time the payment has been converted to cash and funds have been 
transferred to the Agency.
    (f) Release of security instruments. The Agency will release 
security instruments, subject to applicable restrictive-use agreements 
referenced in subpart N of this part, when full payment of all 
outstanding obligations to the Agency has been received, accepted, and 
the funds have been transferred to the Agency.
    (1) If the Agency and the borrower agree to settle an account for 
less than the full amount owed, the Agency will release security 
instruments when the borrower has paid in full all agreed upon 
obligations.
    (2) Recording costs for the release of the security instruments 
will be the responsibility of the borrower, except where state law 
requires the mortgagee to record or file the satisfaction.
    (g) Special circumstances--Refund of entire principal. If the 
entire principal of the loan is refunded after the loan is closed, the 
borrower must pay interest from the date of the note to the date of 
receipt of the refund.

[[Page 32929]]

Sec.  3560.405  Borrower organizational structure or ownership interest 
changes.

    (a) General. The requirements of this section apply to changes in a 
borrower entity's organizational structure or to a change in a borrower 
entity's controlling interest.
    (1) If 100 percent of a borrower entity's ownership interest is 
transferred, within a 12-month period, the change will be considered a 
housing project transfer and the provisions of Sec.  3560.406, which 
covers transfers or sales of housing projects, will apply.
    (2) Persons who exercise substantial influence over the oversight 
or operations of a multi-family housing project, regardless of their 
ownership status have a controlling interest in the housing project.
    (b) Agency requirements. Borrowers must notify the Agency prior to 
the implementation of any changes in a borrower entity's organizational 
structure. The Agency must give its consent prior to the implementation 
of changes in a borrower entity's controlling interest.
    (1) Borrowers must submit written requests for Agency consent to 
the Agency at least 45 days prior to the anticipated effective date of 
the proposed organizational change. The request must document that the 
proposed changes will not adversely affect the program purposes or 
security interest of the Agency and will not adversely affect tenants.
    (2) If the controlling interest change involves a transfer of 
interest to an entity not previously holding an ownership interest in 
the borrower entity, the request for consent must include a written 
certification, executed by the party receiving the ownership interest, 
certifying that the recipient of the ownership interest agrees to 
assume responsibilities and obligations required of a borrower as 
established in Agency program requirements including requirements in 
the promissory note, loan agreement, or other document related to 
Agency loans held by the borrower entity.
    (3) The Agency will not take a consent request for a controlling 
interest change under consideration if the borrower's request fails to 
meet the requirements specified in paragraph (b)(2) of this section.
    (c) Documentation of organizational structures and ownership 
interest. Borrowers must annually document their organizational 
structure and ownership.
    (1) Documentation must be submitted with the annual financial 
reports required by Sec.  3560.307 and must reflect any changes made 
during the 12-month period preceding the submission of the annual 
financial reports.
    (2) If no changes in a borrower entity's organizational structure 
or ownership were made during the 12-month period prior to submission 
of the annual financial reports, borrowers are not required to submit 
documentation, but must submit a statement certifying that no changes 
have been made in the documents on file with the Agency.
    (3) Organizational structure and ownership documentation must 
include the following items:
    (i) A current organization description reflecting all approved 
changes in the organizational structure of the borrower entity and 
listing the names, addresses, and tax identification numbers of all 
parties with an ownership interest in the borrower entity; and
    (ii) A written statement by the borrower certifying that the 
changes in the borrower entity's organizational structure or ownership 
interests were completed in compliance with state and local laws and in 
accordance with organizational requirements of the borrower entity.


Sec.  3560.406  Multi-family housing ownership transfers or sales.

    (a) General. The provisions of this section apply to ownership 
transfers or sales (e.g., title transfers) involving an Agency financed 
housing project. The provisions cover situations where Agency loans are 
being assumed as a part of a housing project transfer or sale.
    (b) Agency consent requirements. Agency consent must be obtained 
prior to an ownership transfer or sale and Agency consent will only be 
given when the transfer or sale is in the best interest of the Federal 
Government. Any ownership transfer or sale without the consent of the 
Agency will be considered a default and will be handled in accordance 
with subpart J of this part.
    (1) Priority consideration will be given to ownership transfers or 
sales needed to remove a hardship to the borrower that was caused by 
circumstances beyond the borrower's control.
    (2) Ownership transfers or sales with an assumption of debt at an 
amount less than the borrower's debt amount will only be approved by 
the Agency when all persons in the borrower entity who are transferring 
their ownership interest or are involved in the selling of the property 
are not part of the transferee organization.
    (c) Consent request requirements. Borrowers must submit written 
requests for Agency consent to an ownership transfer or sale of a 
housing project to the Agency at least 45 days prior to proposed 
ownership transfer or sale date. The consent request must document that 
the proposed transfer or sale meets the requirements of paragraph (d) 
of this section and must include the following items.
    (1) A statement disclosing any identity-of-interest between the 
borrower and the party to which the housing project ownership is being 
transferred or sold.
    (2) A statement certifying that the housing project's financial 
accounts are funded at required levels, less authorized withdrawals, 
and that payments due for operation and maintenance expenses, tax 
assessments, insurance premiums, any required tenant security deposit 
accounts, and other obligations incurred as a part of the housing 
project operations are paid in full with no overdue balances or a 
statement explaining the housing project's financial situation and the 
reasons for overdue payments or under funded accounts.
    (3) A proposed housing project budget covering the partial year, if 
applicable, and first full year operation following the ownership 
transfer or housing project sale.
    (4) A written statement, signed by the proposed transferee or 
buyer, certifying that the transferee or buyer will assume the borrower 
responsibilities and obligations specified in Agency program 
requirements including requirements in a promissory note, loan 
agreement or other documents related to Agency loans held by the 
borrower entity.
    (5) A certification from the borrower and the proposed transferee 
or buyer that the borrower does not and will not have a reversionary 
interest in the housing project.
    (d) Requirements for ownership transfers or sales. An ownership 
transfer or sale of a housing project with an assumption of Agency 
loans by the transferee or buyer must comply with the following 
conditions.
    (1) The transferee or buyer must be an eligible borrower under the 
requirements established by subpart B of this part.
    (2) The transferee or buyer must agree to set basic rents at the 
housing project covered by the assumed loans at levels that do not 
exceed conventional rents for comparable units in the area.
    (3) The value of the housing project covered by the loans to be 
assumed, at the time of an ownership transfer or sale, must be 
sufficient to ensure that all Agency loans being assumed and all 
subsequent loans being offered as a part of the transfer or sale can be 
secured to

[[Page 32930]]

a level that fully protects the Agency's interest.
    (i) If the total value of the loans being offered as a part of an 
ownership transfer or sale is $100,000 or less, the value of the 
housing may be determined through either: An Agency review of 
monitoring reports conducted in accordance with the requirements in 
subpart H of this part or an ``as-improved'' value-in-use appraisal 
paid for by the borrower and conducted in accordance with subpart P of 
this part.
    (ii) If the total value of the loans being offered as a part of an 
ownership transfer or sale exceeds $100,000, the value of the housing 
project must be determined through an ``as-improved'' value-in-use 
appraisal obtained by the Agency and conducted in accordance with 
subpart P of this part.
    (iii) The Agency may approve a loan write-down, in accordance with 
Sec.  3560.455, prior to an ownership transfer or sale to reduce the 
amount of debt being assumed by the transferee or buyer.
    (4) Prior to Agency approval of an ownership transfer or sale, an 
environmental review, as required under the National Environmental 
Policy Act and in accordance with 7 CFR part 1940, subpart G, must be 
conducted on all property related to the ownership transfer or sale. If 
contamination from hazardous substances or petroleum products is found 
on the property, the finding must be disclosed to the Agency and the 
transferee or buyer and must be taken into consideration in the 
determination of the housing project's value.
    (5) The reserve requirements for the housing project will be 
reviewed by the Agency and adjusted, if necessary, to adequately cover 
the capital needs of the property based on a life cycle cost analysis 
provided the requirements of Sec.  3560.303 are met.
    (6) The borrower and transferee must disclose to the Agency all 
terms, conditions, or other considerations related to the ownership 
transfer or sale. All side or other agreements must be disclosed and 
all sources and uses of funds related to the ownership transfer or sale 
must be disclosed.
    (7) An agreement must be signed between the borrower and the 
transferee listing all repairs known by the borrower to be necessary to 
bring the housing project into compliance with Agency requirements for 
decent, safe, and sanitary housing as listed in subpart C of this part.
    (i) The agreement must include repairs required to correct 
compliance violations cited in a compliance violation notice issued by 
the Agency.
    (ii) The agreement must specify whether each repair listed will be 
completed by the borrower prior to the ownership transfer or by the 
transferee in accordance with a workout agreement developed in 
accordance with the requirements of Sec.  3560.453 and executed between 
the transferee or buyer and the Agency.
    (8) A civil rights compliance review, as required by 7 CFR part 
1901, subpart E, will be conducted by the Agency prior to the ownership 
transfer or sale.
    (9) A transferee must ensure that tenant certifications in 
compliance with subpart D of this part for all occupied rental units 
are on file with the Agency.
    (10) A transferee must comply with insurance and bonding 
requirements established in subpart C of this part at the time of the 
transfer.
    (11) A transferee must agree to submit financial reports to the 
Agency according to subpart G of this part.
    (12) A transferee must establish that there are no liens, 
judgments, or other claims against the housing project other than those 
by the Agency and those to which the Agency has previously agreed.
    (e) Equity payments. The Agency will withhold any equity payment 
due to the borrower, as part of a ownership transfer or sale, if any of 
the following conditions exist.
    (1) The borrower's indebtedness to the Agency has not been paid in 
full or is not being assumed by the transferee. The Agency will require 
that all or part of an equity payment be applied against other Agency 
loans owed by the borrower if payments on the other loans are not 
current.
    (2) Any non-Agency prior liens against a housing project are not 
paid in full.
    (3) Any housing project financial accounts are not funded at 
required levels, less authorized withdrawals, or any payments due for 
operation and maintenance expenses, tax assessments, insurance 
premiums, tenant security deposits or other obligations incurred as a 
part of housing project operations are not paid in full.
    (4) Any management deficiencies cited in a compliance violation 
notice issued by the Agency to the borrower have not been corrected or 
the housing project is not operating under an approved management plan 
or, if applicable, an approved management agreement.
    (5) Any operation and maintenance deficiencies cited in compliance 
violation notices issued by the Agency have not been corrected or are 
not scheduled for correction in a workout agreement developed in 
accordance with the requirements of Sec.  3560.453.
    (6) The borrower entity is, at the time of the ownership transfer 
or sale, cited by the Agency or other federal, state, or local agencies 
for violations of Fair Housing or Equal Opportunity requirements.
    (7) The borrower entity is, at the time of the ownership transfer 
or sale, cited by the Agency or any other entity involved in the 
financing of the housing project for misappropriation of funds.
    (f) Equity payment funding sources. If a full equity payment to the 
transferor is not paid at the time of the ownership transfer or sale or 
has not been paid through an Agency equity loan to the borrower, the 
transferee must certify that equity payments due to the borrower will 
be paid from sources other than housing project funds and must identify 
the sources of such payments.
    (g) Restrictive-use requirement. Transferees assuming Agency loans, 
including loans approved prior to December 21, 1979, will be required 
to execute a restrictive-use agreement that contains the language 
specified in Sec.  3560.662(b) or (c). The restrictive-use agreement 
will require the housing project to be used for program purposes for a 
specified period of time beyond the date that the ownership transfer or 
sale is closed. When an equity loan is involved at the time of 
transfer, the restrictions will be for 30 years.
    (h) Subsequent loans. The Agency may approve a subsequent loan in 
conjunction with an ownership transfer or sale of a housing project.
    (1) Subsequent loans on a housing project proposed in conjunction 
with an ownership transfer or sale must be requested and processed in 
accordance with the Agency loan origination requirements in subpart B 
of this part.
    (2) The Agency may amortize the subsequent loan over a period not 
to exceed the remaining economic life of the housing or 50 years, 
whichever is less.
    (3) The Agency may extend the term of the existing loan to a period 
not to exceed 30 years or the remaining economic life of the housing, 
whichever is less.
    (i) Loan assumption interest rates. The interest rate for Agency 
loans assumed in conjunction with an ownership transfer or sale will be 
determined as follows.
    (1) The interest rate for all loans, except farm labor housing 
loans, will be set at the lower of:
    (i) The note rate of the existing Agency loan;

[[Page 32931]]

    (ii) The Agency note rate on the day the transfer is approved; or,
    (iii) The Agency note rate on the day the transfer is closed.
    (2) The interest rate on farm labor housing loans will be the rate 
specified in the note, except that loans transferred to public bodies, 
nonprofit organizations of farm workers, and broadly-based nonprofit 
corporations for farm labor housing purposes may be at a one percent 
interest rate regardless of the rate specified in the note if the 
Agency determines that such a reduction is necessary to maintain 
affordable rental rates for tenants.
    (j) Loan assumption terms. The amount of the loan balance that may 
be assumed through an ownership transfer or sale must not exceed the 
market value of the housing project determined according to Sec.  
3560.406(d)(3)(i).
    (1) The Agency may reamortize a loan assumed through an ownership 
transfer or sale over a period not to exceed the remaining economic 
life of the housing or 50 years, whichever is less.
    (2) The Agency may extend the term of the loan to a period not to 
exceed 30 years or the remaining economic life of the housing, 
whichever is less.
    (3) When loans assumed through an ownership transfer or sale are 
amortized on an annual payment basis, the loans will be converted, at 
the time of the transfer or sale, to a monthly payment amortization and 
will be made subject to PASS. When on- or off-farm labor housing 
projects are involved in an ownership transfer or sale, the related 
loans may be transferred on a DIAS basis or converted to PASS if the 
Agency determines that such a conversion will not be detrimental to the 
operation of the farm labor housing.
    (k) Processing ownership transfers or sales.
    (1) At the time of the transfer, the Agency will require the 
borrower to transfer all equipment, related facilities, and housing 
project financial accounts to the transferee including the operation 
and maintenance account, reserve account, tenant security deposit 
account, tax and insurance escrow accounts.
    (i) Any funds remaining in a rental assistance contract not 
dispersed by the transferor will be assigned to the transferee unless 
the rental assistance is not needed for tenants or another form of 
rental subsidy is to be used.
    (ii) Any rental assistance determined to be unnecessary will be 
reassigned to other housing projects in accordance with the provisions 
of subpart F of this part.
    (2) The Agency will require that appropriate loan documents are 
executed by the transferee. The Agency may require such documents to be 
referenced in security instruments (e.g., mortgage or deed of trust).
    (3) If all of a borrower's outstanding Agency debt is not assumed 
or paid off at the time of the transfer or sale, the Agency will not 
release a borrower from liability unless the Agency determines that the 
borrower is unable to pay the remaining debt from assets taken as 
security through the debt settlement procedure in accordance with Sec.  
3560.457.
    (l) Ownership transfers or sales under special rates, terms, and 
conditions. Housing projects may be transferred or sold to entities 
that do not meet borrower eligibility requirements for the type of 
loans being assumed. However, such a transfer or sale will only be 
considered when it is determined by the Agency to be in the best 
interest of the Federal government and the objectives of the original 
loan can no longer be met. The following special rates, terms, and 
conditions will apply to such situations.
    (1) The transferee makes a down payment of at least 10 percent of 
the remaining loan balance to be assumed.
    (2) The transferee has the ability to pay the Agency debt.
    (3) The balance of Agency indebtedness assumed will be scheduled 
for repayment for no more than 15 years.
    (4) Monthly or annual installments will be amortized over the term 
of the loan and the interest rate will be at a rate of interest at 
least one percent higher than the interest rate offered to eligible 
borrowers as specified in paragraphs (i)(1) or (2) of this section.


Sec.  3560.407  Sales or other disposition of security property.

    (a) General. Borrowers must obtain Agency approval prior to selling 
or exchanging all or a part of, or an interest in, property serving as 
security for Agency loans. Agency approval also must be requested and 
received prior to the granting or conveyance of rights-of-way through 
property serving as security property. An environmental review must be 
completed in accordance with 7 CFR part 1940, subpart G, before the 
Agency approves all such sales or other dispositions of security 
property.
    (b) Request requirements. Requests for Agency approval of 
transactions related to security property must document that the 
following conditions will be met.
    (1) The borrower's ability to repay the Agency debt will not be 
impaired;
    (2) The transaction will not interfere with the successful 
operation of the housing project or prevent the borrower from carrying 
out the purpose for which the loan was made.
    (3) The monetary or other consideration offered in the transaction 
is equal to or greater than the market value of the security property 
being disposed of or the rights being granted, except that right-of-way 
easements may be granted or conveyed with minimal or no consideration 
being offered if:
    (i) The value of the security property will not be reduced;
    (ii) The suitability of the security property for the intended 
purpose will not be impaired; and
    (iii) The easement is granted to allow the borrower to develop 
additional lots or units that will be integrated into the housing 
project or for enhancement of streets, utilities or other services 
provided by a public body.
    (4) The property that will remain as security for Agency loans, 
after any transaction related to security property, will fully secure 
the borrower's debt to the Agency.
    (5) Borrowers must report to the Agency the total of all proceeds 
derived from the sale or other disposition of property serving as 
security for Agency loans. The proceeds from the disposition of the 
security property will be used for purposes approved by the Agency.


Sec.  3560.408  Lease of security property.

    (a) General. Borrowers must obtain Agency approval prior to 
entering into a lease agreement related to any property serving as 
security for Agency loans. An environmental review must be completed in 
accordance with 7 CFR part 1940, subpart G, before the Agency can give 
lease approval for real property serving as security for Agency loans.
    (b) Leases to public housing authorities. Borrowers may not lease 
all or part of their housing facilities to a housing authority. Lease 
agreements in place prior to the effective date of this regulation may 
be continued provided that leases are in a form acceptable to the 
housing authority and are on terms that will enable the borrower to 
comply with Agency program requirements, to meet Agency program 
objectives, and make loan and other required payments to the Agency on 
an Agency approved schedule.
    (c) Lease of a portion of the security property. The Agency may, 
subject to the applicable provisions governing loan purposes found in 
of Sec.  3560.53, Sec.  3560.553 and Sec.  3560.603, approve the 
leasing of facilities related to a housing project (e.g., central 
kitchens, recreation facilities, laundry rooms, and community rooms) 
when the borrower

[[Page 32932]]

will continue to operate the facilities for the purposes for which the 
loan was made. Agency approval is not required for leases with a term 
of less than 30 days. The Agency will only approve a lease with a term 
over 30 days if the following conditions are met.
    (1) The lease is in the best interest of the borrower, the tenants, 
and the Federal Government.
    (2) The amount of the consideration agreed to in the lease is 
adequate to pay all prorated operating and maintenance expenses, a 
prorated share of the annual reserve deposit, and the prorated part of 
the loan amortization at the note rate of interest.
    (3) All compensation and considerations, whether payments, a share 
of proceeds, or improvements to the property paid for by the lessee, 
must be disclosed to the Agency. No payments or compensation for 
entering into a lease shall flow to the borrower or any identity-of-
interest related to the borrower.
    (4) The lease provides at its termination for the restoration of 
the leased space to its original condition or a condition acceptable to 
the owner and the Federal Government.
    (5) Consent to the lease will not exceed 3 years at a time unless 
the Agency determines that a longer lease is advantageous to the 
borrower, the tenants, and the Federal Government.
    (6) When another lienholder's mortgage requires that lienholder's 
consent to a lease, the borrower must obtain written consent from the 
lienholder before the Agency will consider approving the lease.
    (d) Mineral leases. The Agency will handle mineral leases according 
to the requirements of 7 CFR part 3550.


Sec.  3560.409  Subordinations or junior liens against security 
property.

    (a) General. Borrowers must obtain Agency consent prior to entering 
into any financial transaction that will require a subordination of the 
Agency security interest in the property (i.e., granting of a prior 
interest to another lender.) An environmental review must be completed 
in accordance with 7 CFR part 1940, subpart G, before the Agency can 
consent to a subordination or junior lien against the property.
    (1) If a lien is placed against property serving as security for an 
Agency loan without prior Agency consent, the Agency will declare the 
borrower to be in default and will pursue liquidation of the borrower's 
loans in accordance with the procedures specified in Sec.  3560.457, 
unless an agreement can be reached between the borrower and the Agency 
to work out removal of the lien or post approve the lien.
    (2) Subordinations or junior liens need not encompass the entire 
site, (e.g., a subordination or junior lien requested to permit an 
interim lender to advance construction funds may only cover the portion 
of the site proposed for construction.)
    (3) The subordination or junior lien must be for a specific amount.
    (4) The subordination or junior lien must not adversely impact the 
Agency's ability to service the loan according to the requirements of 
this part.
    (b) Consent request requirements. Borrowers proposing to have the 
Agency subordinate its interest to another lender or to give a creditor 
a junior lien against property serving as security for an Agency loan 
must submit a consent request to the Agency. The consent request must 
document the following.
    (1) The action will enable the borrower to obtain financial 
resources for improvements or repairs on the security property that are 
consistent with the purposes of the Agency loan secured by the 
property.
    (2) The action will not adversely impact the borrower's financial 
condition and the borrower's ability to repay the Agency loan being 
secured by the property.
    (3) The action will not result in basic rents at the security 
property that exceed conventional rents for comparable units in the 
area.
    (4) The terms and conditions of the credit to be secured by the 
subordination or junior lien are not expected to adversely affect the 
borrowers ability to meet the terms and conditions of the Agency loan 
secured by the property.
    (5) The proposed use of the funds obtained through the granting of 
a subordination or junior lien will not adversely affect the borrower's 
ability to meet Agency program requirements or to operate and manage 
the housing project in a manner consistent with program objectives.
    (6) The creditor receiving the ``subordination'' of interest in the 
property or the junior lien will agree that a foreclosure or acceptance 
of a deed-in-lieu of foreclosure will not be initiated without at least 
30 days prior notice to the Agency.
    (7) The subordination or junior lien is not being secured with any 
funding from housing project financial accounts.
    (8) The ``subordination'' of interest or junior lien will not cause 
the debt from all sources to exceed the value of the security property.
    (9) The transaction related to the placement of a ``subordination'' 
of interest or junior lien against the property serving as security for 
an Agency loan is in the best interest of the Federal Government.
    (c) Required conditions for subordinations and junior liens. 
Subordinations of interest in or junior liens against property serving 
as security for an Agency loan may be approved by the Agency only if 
they improve a borrower's financial condition and allow for 
improvements or repairs that are consistent with the purposes of the 
Agency loan secured by the property.
    (1) Farm Labor Housing loans on farm tracts may be subordinated for 
essential farm improvements and operations.
    (2) Any proposed development must be planned and performed 
according to 7 CFR part 1924, subpart A, or in a manner directed by the 
other lienholder that meets the objectives of 7 CFR part 1924, subpart 
A.
    (d) Other liens against a property or other assets.
    (1) Borrowers must not enter into any agreements to place a lien on 
a housing project or any equipment related to a housing project without 
prior Agency approval and unless the following conditions are met:
    (i) The transaction will not adversely affect the Agency's security 
position;
    (ii) The lien is not related to a non-program eligible action;
    (iii) The items to be acquired by the funding related to the lien 
is needed for the operation of the property; and
    (iv) The financing arrangements are otherwise sound.
    (2) In cases where the above criteria are met, borrowers must 
complete and provide the Agency a copy of the financing statement, loan 
document, or contract, as applicable, as well as a security agreement 
acceptable to the Agency.


Sec.  3560.410  Consolidations.

    (a) General. With Agency approval, loans, loan agreements, or loan 
resolutions may be consolidated to reduce the administrative burden 
(i.e., record keeping, budgeting), to improve the cost effectiveness 
and efficiencies of housing project operations, and to effectively 
utilize facilities common to housing projects.
    (b) Loan consolidations. Loan consolidations will only be 
considered when
    (1) Multiple loans to the one borrower entity are being transferred 
to a different borrower entity in accordance with Sec.  3560.406, or
    (2) One borrower entity has an initial loan and one or more 
subsequent loans for the same housing project and all the

[[Page 32933]]

loans were closed on the same date and with the same rates and terms.
    (c) Loan agreement or loan resolution consolidations. Loan 
agreements or loan resolutions may be consolidated, even if the loans 
related to the agreement or resolution are not consolidated, to allow 
borrowers to comply with reporting, accounting, and other Agency 
requirements as a single housing project.
    (1) The loan agreements or loan resolutions may only be 
consolidated when they are related to loans made for the same purposes, 
to the same borrower, and operating under the same type of interest 
credit, if applicable.
    (2) All of a borrower's loan accounts must be current after the 
loan agreement or loan resolution consolidation is processed, unless 
otherwise approved by the Agency.


Sec. Sec.  3560.411-3560.449  [Reserved]


Sec.  3560.450  OMB control number. [Reserved]

Subpart J--Special Servicing, Enforcement, Liquidation, and Other 
Actions


Sec.  3560.451  General.

    This subpart contains special servicing, enforcement, liquidation, 
and other actions which the borrower may request or the Agency may 
implement when compliance violations, monetary defaults, or non-
monetary defaults cannot be resolved through regular servicing.
    (a) Agency obligations. The Agency is under no obligation to offer 
or agree to any special servicing actions.
    (b) Relationship to workout agreements. Special servicing actions 
may be implemented either as a part of a workout agreement, developed 
in accordance with Sec.  3560.453, or as an action approved by the 
Agency separate from a workout agreement unless indicated otherwise in 
this subpart.


Sec.  3560.452  Monetary and non-monetary defaults.

    (a) General. Borrowers are in default when they have received a 
compliance violation notice, issued in accordance with Sec.  3560.354, 
and have failed to correct the compliance violation identified in the 
compliance violation notice within the time period specified in the 
notice. Compliance violations include, but are not limited to, 
violations of promissory note provisions, loan or grant agreement 
provisions, regulatory, or other Agency requirements, including 
requirements imposed on a borrower through a workout agreement 
developed in accordance with Sec.  3560.453.
    (b) Monetary defaults. A monetary default exists when any amount 
due to the Agency under a promissory note, loan or grant agreement, 
workout agreement, or other agreement is past due.
    (c) Nonmonetary defaults. A nonmonetary default exists when a 
borrower fails to correct a compliance violation, other than a monetary 
amount past due, within the time period specified in a compliance 
violation notice issued in accordance with Sec.  3560.354. Nonmonetary 
defaults include, but are not limited to, failure to:
    (1) Operate and manage a housing project in accordance with the 
Agency approved management plan or Agency requirements;
    (2) Maintain the physical condition of a housing project in a 
decent, safe, and sanitary manner and in accordance with Agency 
requirements;
    (3) Keep general operating expense, reserve, and other financial 
accounts related to a housing project at required funding levels;
    (4) Occupy rental units with eligible tenants, unless granted an 
exception by the Agency;
    (5) Charge correct rents or to correctly calculate net tenant 
contributions, utility allowances, or rental assistance payments or to 
properly administer the Agency rental assistance assigned to the 
housing project;
    (6) Submit required annual financial reports to the Agency within 
time periods specified in Sec.  3560.308;
    (7) Submit management plans, leases, occupancy rules, and other 
required materials to the Agency in accordance with Agency 
requirements; and,
    (8) Comply with applicable Federal laws including laws related to 
civil rights, fair housing, disabilities, and environmental conditions.
    (d) Default notice. When borrowers are in default, the Agency will 
notify borrowers, in writing, that they are in default. The default 
notice will identify the compliance violation that led to the default, 
will specify actions necessary to cure the default, and will establish 
a date by which the default must be cured to preclude Agency initiation 
of enforcement actions, liquidation, or other actions.
    (e) Agency action. If a borrower fails to cure a default within the 
time period specified in the default notice, the Agency may initiate 
the enforcement actions described in Sec.  3560.456 or liquidation as 
described in Sec.  3560.457. Also, Agency compliance violation notices 
and related default notices may be referred to Federal, state, and 
local agencies with jurisdictions related to the violations for 
handling, in accordance with their requirements.


Sec.  3560.453  Workout agreements.

    (a) General.
    (1) Prevention or resolution of compliance violations or default 
cures are a borrower's responsibility.
    (2) A borrower may develop and submit to the Agency for approval a 
workout agreement that proposes actions to be taken over a period of 
time to prevent or correct a compliance violation or to cure a monetary 
or non-monetary default.
    (3) A borrower developed workout agreement may propose, but is not 
limited to, the following actions:
    (i) A combination of one or more of the special servicing actions 
outlined in Sec. Sec.  3560.454 and 3560.455;
    (ii) A change in operations and management at a housing project; or
    (iii) A commitment of additional financial resources to the housing 
project with the amount and source of the additional resources to be 
committed to the housing project specifically identified.
    (b) Workout agreement approval.
    (1) The Agency is under no obligation to approve a workout 
agreement as submitted by a borrower or to act with forbearance when a 
housing project is in monetary or non-monetary default.
    (2) Borrower developed workout agreements may not be implemented 
until the borrower receives written approval from the Agency.
    (3) The Agency will only approve a workout agreement if the Agency 
determines that the actions proposed are likely to prevent or correct 
compliance violations or cure a default and approval is in the best 
interest of the Federal Government and tenants.
    (4) The Agency will only approve a workout agreement if the 
proposed actions are consistent with the borrower's management plan. If 
proposed actions are not consistent with the borrower's management 
plan, applicable revisions to the borrower's management plan must be 
approved before approval of the workout agreement is given.
    (c) Workout agreement required content.
    (1) Workout agreements submitted to the Agency for approval must be 
in writing and signed by the borrower. Workout agreements must describe 
proposed actions in sufficient detail to demonstrate the likelihood of 
the actions to prevent or correct compliance violations or cure 
defaults.
    (2) At a minimum, workout agreements must include the following.

[[Page 32934]]

    (i) The name and address of the housing project, project number, 
borrower's tax identification number, and other information necessary 
to identify the housing project.
    (ii) A description of the potential or actual compliance violation 
or default situation, including an explanation of related causes, such 
as cash flow concerns, budget revisions, deferred maintenance, 
vacancies, or violations of statutes.
    (iii) A definition and description of the housing project's market 
area, including information on housing availability, rents, and vacancy 
rates in the market area.
    (iv) A description of the proposed actions to prevent or correct 
compliance violations or to cure defaults along with a date specific 
schedule indicating when interim and final actions will be taken to 
correct the compliance violation or cure the default.
    (v) A description of financial and other resources necessary to 
prevent or correct the compliance violation or cure the default 
including an identification of the sources for such resources.
    (d) Workout agreement budgets. Budget revisions submitted as a part 
of a workout agreement for a housing project experiencing cash flow 
problems must prioritize cash disbursements in the following order:
    (1) Health and safety violations;
    (2) Critical operating needs, such as utilities, taxes, and 
insurance;
    (3) Debt service payments to the Agency;
    (4) Reserve account requirements;
    (5) Other authorized expenditures; and
    (6) Return on owner investment.
    (e) Workout agreement terms and cancellation.
    (1) Workout agreements shall be in effect for no longer than a 2-
year time period, beginning on the date of Agency approval. If an 
approved workout agreement calls for actions that extend beyond a 2-
year period, borrowers must submit an updated and, if necessary, 
revised workout agreement to the Agency for approval. The updated 
workout agreement must be submitted to the Agency, 30 days prior to the 
expiration of the workout agreement in effect.
    (2) The Agency may cancel a workout agreement at any time if the 
borrower fails to comply with the terms of the agreement.


Sec.  3560.454  Special servicing actions related to housing 
operations.

    (a) Changing rents or revising budgets. The Agency may approve a 
borrower request for a rent change, rent incentives, or a revised 
budget, at any time during a housing project's fiscal year.
    (b) Occupancy waivers. If the Agency determines that a housing 
project with high vacancies could be kept operationally and financially 
viable by allowing the borrower to accept as tenants persons with 
incomes above the income eligibility standards specified in Sec.  
3560.152(a), the Agency, in writing, may grant the borrower an 
occupancy waiver to allow such persons as tenants. Occupancy waivers 
will be in effect only during the time period specified by the Agency 
when the waiver is granted. In addition, borrowers must rent to all 
eligible applicants on the housing projects waiting list prior to 
accepting persons with incomes above the Agency standards as tenants.
    (c) Additional rental assistance (RA). If the Agency determines 
that a housing project with high vacancies could be kept operationally 
and financially viable by increasing the amount of RA allocated to the 
housing project, the Agency, subject to available funds, may offer the 
housing project RA as a means of preventing or correcting compliance 
violation or curing a default.
    (d) Servicing Note Rate (SNR) rents. When a Plan II housing project 
is experiencing severe vacancies due to market conditions, the Agency 
may approve a rent less than the note rate rent to attract and keep 
tenants whose incomes, according to the formula in Sec.  3560.203, 
would require them to pay the note rate rent. The reduced rent is 
called a Servicing Note Rent (SNR) and, as noted in Sec.  3560.210, 
approval of a SNR may affect approvals of loan proposals submitted to 
the Agency for the market area where the SNR is in effect.
    (1) A SNR rent may only be requested as a part of a proposed 
workout agreement and must include documentation of market conditions, 
the housing project's vacancy rates, evidence of marketing efforts, and 
other concerns necessitating the request for an SNR.
    (2) Borrowers must forego the annual return to owner for each 
housing project's fiscal year that a SNR is in effect for all or part 
of a fiscal year at a housing project.
    (3) SNR's may be increased, decreased, or terminated any time 
during a housing project's fiscal year when market conditions, vacancy 
rates, or other concerns that necessitated the SNR warrant a change.
    (4) In addition to any state lease law requirements that might be 
related to the implementation of a SNR, the borrower must notify each 
tenant of any change in rents or utility allowances that result from 
approval of an SNR, in accordance with Sec.  3560.205(c) and must 
submit the appropriate budget changes to the Agency for approval.
    (e) Termination of management agreement. If the Agency determines 
that a compliance violation or loan default was caused, in full or in 
part, by actions or inactions of the housing project's management 
agent, the Agency will require the borrower to terminate the management 
agreement with that agent, or in the case of a borrower managed housing 
project, to enter an agreement with a third-party non-identity of 
interest management agent, unless the borrower and the Agency agree on 
a written plan to prevent reoccurrence of the violation. Housing 
project funds may not be used to pay a management fee to a management 
agent after the Agency has directed the borrower to terminate a 
management agreement with that agent, except during an Agency approved 
transition period.


Sec.  3560.455  Special servicing actions related to loan accounts.

    (a) General. To prevent or correct a compliance violation or to 
prevent or cure a default in a situation that cannot be resolved 
through regular servicing, the Agency may approve a deferral of loan 
payments or a loan restructuring. Nothing herein precludes the Agency 
from initiating appropriate legal action to correct a compliance 
violation if the Agency determines such action is more in the 
Government's interest than entering into a special servicing agreement 
as provided for in this section.
    (1) Loan payment deferrals. As part of a workout agreement, the 
Agency may agree to accept less than full monthly payment installments 
due on an Agency loan for a specified period of time, not to exceed the 
effective period of the workout agreement.
    (2) Loan restructuring. Methods of restructuring a loan may include 
reamortizations or writedowns. If a loan restructuring results in a 
larger principal balance from the inclusion of cost items or interest, 
borrowers must execute a restrictive-use agreement, in accordance with 
Sec.  3560.662, regardless of whether the restructuring is with or 
without revised rates and terms.
    (b) Loan reamortizations. A loan reamortization is a restructuring 
of loan terms and conditions over a period of time which does not 
exceed the remaining useful life of the housing project.
    (1) Loan reamortizations will only be approved when they are in the 
best

[[Page 32935]]

interest of the Federal Government and tenants and when the following 
conditions are met.
    (i) The Agency determines that the borrower will be unable to meet 
their obligations without a reduction in monthly payment installments; 
and
    (ii) The Agency is satisfied that the security, including the 
potential income for debt service, will be adequate to protect the 
Agency's interest over the term of the reamortization and that the 
reamortization will not adversely affect the Federal Government's lien 
priority.
    (2) When the reamortization will extend the term of the repayment 
period more than 5 years beyond the scheduled final payment date, the 
borrower must obtain an ``as-is'' value-in-use appraisal of the housing 
project conducted in accordance with subpart P of this part. The Agency 
will not approve a reamortization unless the appraisal indicates the 
security is adequate for the principal and interest being reamortized.
    (3) The Agency may approve reamortization of a loan at the existing 
note rate, or the current interest rate at the time of reamortization 
closing or approval, whichever is less.
    (4) Loan reamortization may be used to:
    (i) Restructure loan repayments to prevent or correct a compliance 
violation or cure a default caused by circumstances beyond the 
borrower's control in situations where the borrower is otherwise in 
compliance with Agency requirements;
    (ii) Repay principal, outstanding interest, overage, and advances 
made by the Agency for recoverable cost items when less than full 
payments were authorized under the provisions of an Agency approved 
workout agreement;
    (iii) Restructure a borrower's loan payments in conjunction with an 
incentive package developed in accordance with Sec.  3560.656 to 
prevent prepayment of the loan;
    (iv) Restructure an existing loan in conjunction with a subsequent 
loan for rehabilitation;
    (v) Bring a delinquent account current in the case of a loan 
transfer and assumption when all equity available has been used to pay 
delinquent amounts and a delinquency balance remains; or,
    (vi) Restructure remaining debt when a portion of the property 
serving as loan security is sold and there is a need to reestablish the 
financial stability of the housing project.
    (c) Loan writedowns. A loan writedown is a reduction of a 
borrower's debt approved by the Agency.
    (1) Loan writedowns will only be approved when they are in the best 
interest of the Federal Government and when the following conditions 
exist:
    (i) Sound management of the housing project is evident or unsound 
management practices are proposed for correction in accordance with an 
Agency approved workout agreement;
    (ii) The housing project's financial stability is being affected by 
conditions beyond the borrower's control, such as market weaknesses, 
unforeseen site problems, or natural disasters; and
    (iii) There are no previous writedowns of indebtedness associated 
with the housing project.
    (2) Prior to Agency approval for a loan writedown, the borrower 
must obtain an ``as-is'' value-in-use appraisal of the housing project 
conducted in accordance with subpart P of this part. The Agency will 
not approve a loan write-down unless the appraisal indicates the 
Federal Government's interests are secured at the proposed writedown 
level.
    (3) Loan writedowns may be used to allow for a loan transfer and 
assumption for less than the total amount of outstanding debt.


Sec.  3560.456  Liquidation.

    Prior to any servicing action which might lead to the acquisition 
of real property by the Agency, the Agency must complete a due 
diligence report to assess any potential contamination of the property 
from hazardous substances, hazardous wastes, or petroleum products. The 
borrower must cooperate with the Agency in the development of this 
report.
    (a) Acceleration. When a borrower is in monetary or non-monetary 
default, the Agency will accelerate the loan unless the Agency decides 
other enforcement measures are more appropriate.
    (1) If the borrower does not pay the full account balance and meet 
the other terms of the acceleration notice within in the time period 
set forth in the acceleration notice, the Agency will foreclose or 
acquire the security property through deed in lieu of foreclosure.
    (2) The Agency will suspend interest credit and rental assistance 
immediately following the issuance of an acceleration notice.
    (3) The Agency will not accept partial payment of an accelerated 
loan unless required by state law.
    (b) Voluntary liquidation. After acceleration, borrowers may 
voluntarily liquidate through either of the following mechanisms:
    (1) The Agency will accept a deed in lieu of foreclosure to the 
security property when it is in the best interest of the Federal 
Government.
    (2) Prior to an acceptance of a deed in lieu of foreclosure, the 
borrower must satisfy all junior liens on the property and pay all real 
estate taxes or assessments which are or will become a lien on the 
property. If the borrower provides the Agency with evidence that 
borrower has insufficient funds to satisfy the junior liens and pay 
taxes and assessments, the Agency will pay what cannot be paid by the 
borrower if it is in the best interest of the Federal Government.
    (3) If a junior lienholder makes an offer in the amount of at least 
the net recovery value, the Agency may assign the note and mortgage to 
such lienholder after all appeal rights have expired.
    (4) The borrower is responsible for all expenses associated with 
liquidation and acquisition and will not be released from liability 
until the account is satisfied in full.
    (c) Foreclosure.
    (1) The Agency will initiate foreclosure when a borrower is in 
monetary or non-monetary default and foreclosure is in the best 
interest of the Federal Government.
    (2) When a junior lienholder foreclosure does not result in payment 
in full of the Agency debt but the property is sold subject to the 
Agency lien, the Agency will liquidate the account as an unauthorized 
transfer.
    (d) Acquisition of chattel properties.
    (1) The Agency will accept voluntary conveyance of chattel property 
only when the borrower can convey ownership free of other liens and the 
Agency has agreed to release the borrower from further liability on the 
account.
    (2) If the Agency decides to accept an offer of voluntary 
conveyance of chattel property, the borrower must provide an itemized 
listing of each chattel property item being conveyed and provide title 
to vehicles or other equipment, where applicable.


Sec.  3560.457  Negotiated debt settlement.

    (a) Borrower proposals to settle debt. A borrower who cannot pay 
the full amount of loan payments may propose an offer to settle an 
outstanding debt for less than the full amount of that debt. The Agency 
may approve a negotiated debt settlement only in cases where a default 
is evident and doing so is in the best interest of the Federal 
Government and tenants.
    (b) Required information. Borrowers requesting debt settlement must 
submit

[[Page 32936]]

complete and accurate information from which a full determination of 
financial condition can be made. Debt settlement offers will not be 
approved by the Agency unless the financial information submitted by 
the borrower indicates that the borrower will be able to make the debt 
settlement payments as proposed.
    (c) Effective date of approval. Debt settlement offers will be not 
be accepted until the borrower receives written approval from the 
Agency.
    (d) Appraisal requirement. No debt settlement offer will be 
accepted for less than the net liquidation value of the security as 
determined by a licensed appraiser or other qualified official, and 
concurred in by the Agency's qualified appraisal review official or 
other qualified official.
    (e) Rejected offers. Offers that are rejected will be returned to 
the borrower with Agency comments on potential points of negotiation 
and may be resubmitted to the Agency at any time.
    (f) Disposition of security prior to offer. Borrowers are not 
required to dispose of security prior to making a debt settlement 
offer. However, if a borrower has disposed of security prior to making 
a debt settlement offer, the proceeds from the disposed security must 
be applied to the borrower's account prior to any negotiations on the 
debt settlement offer.
    (g) Final release condition. Upon full payment of the approved debt 
settlement, the Agency will release the borrower from liability.


Sec.  3560.458  Special property circumstances.

    (a) Abandonment. When the Agency determines that a borrower has 
abandoned security for a loan under this part, the Agency will take the 
steps necessary to protect the Federal Government's security interest 
in the security. Costs associated with managing abandoned property are 
the responsibility of the borrower and will be charged to the 
borrower's account until liquidation is completed and the title has 
been transferred to the Agency.
    (b) Other security. The Agency will service security such as 
collateral assignments, assignments of rents, Housing Assistance 
Payments Contracts, and notices of lienholder interest according to 
acceptable practices in the respective states.
    (c) Taking of additional security to protect Agency interests. The 
Agency may require borrowers to provide additional security in the form 
of real estate, cash reserves, letters of credit, or other security 
when needed to improve the chances that the Agency will not suffer a 
loss, and when:
    (1) The account is in default; or
    (2) The property has not been properly managed or maintained; and
    (d) Due diligence. When the Agency has completed an environmental 
review in accordance with 7 CFR part 1940, subpart G, and decides not 
to acquire security property through liquidation action or chooses to 
abandon its security interest in real property, whether due in whole or 
in part, to the presence of contamination from hazardous substances, 
hazardous wastes, or petroleum products, the Agency will provide the 
appropriate environmental authorities with a copy of its due diligence 
report.


Sec.  3560.459  Special borrower circumstances.

    (a) Deceased borrower, bankruptcy, insolvency, and divorce actions. 
The Agency will address borrower accounts affected by special 
circumstances such as death, bankruptcy, insolvency, and divorce on a 
case-by-case basis. The Agency will make servicing decisions in such 
cases on the basis of best interest to the Federal Government and 
tenants. In order for the Agency to make servicing decisions in such 
cases, the borrower or the borrower's representative will provide to 
the agency:
    (1) The status of the health of the borrowers and the members of 
the borrowers' family or key members of the borrower organization, if 
applicable;
    (2) The financial status of the borrower and any member pledging 
additional security for the debt;
    (3) The status of the security property; and
    (4) The impact of the identified actions on the operation of the 
project.
    (b) Membership liability agreements. If a borrower's note is 
endorsed by individuals other than the borrower or a borrower has 
security agreements with members of the organization for the purchase 
of shares of stock or for the payment of a pro rata share of the loan 
in the event of default, or has individual liability agreements, which 
are usually assigned to and held by the Agency as additional security 
for the loan, the security and liability agreements must be adequate to 
protect the Agency's interest.
    (c) Security issues in participation loans. When a multi-family 
housing project is receiving financing or a subsidy from sources other 
than the Agency, the Agency will service the account in accordance with 
the participation agreements made with the Agency and the other funding 
sources under Sec.  3560.65.


Sec. Sec.  3560.460-3560.499  [Reserved]


Sec.  3560.500 OMB control number.  [Reserved]

Subpart K--Management and Disposition of Real Estate Owned (REO) 
Properties


Sec.  3560.501  General.

    This subpart contains Agency procedures and other policies related 
to the management and disposition of multi-family housing projects in 
the Agency's inventory (Real Estate Owned (REO) property.) Housing 
projects will not be accepted into the Agency's inventory unless one of 
the following has occurred.
    (a) The borrower has abandoned the housing project and the Agency 
has performed the required steps to take the housing project into 
custody.
    (b) The housing project title has been transferred to the Agency as 
a result of foreclosure, conveyance, redemption, or other action.


Sec.  3560.502  Tenant notifications and assistance.

    Each tenant in an REO property designated to be sold as a non-
program property will be notified by the Agency, in writing, of the 
housing projects' non-program designation and will be given an 
opportunity to obtain a LOPE as specified in Sec.  3560.159(c).


Sec.  3560.503  Disposition of REO property.

    Preference will be given to purchase offers that allow REO property 
designated to be sold as program property to remain in the program 
under which the property was operating when the property came into the 
Agency's REO property inventory. However, REO property may be sold 
under whatever Agency program is most appropriate for the property and 
the community needs regardless of the program under which the property 
was originally financed or whether the property was being used to 
secure loans under more than one Agency program.


Sec.  3560.504  Sales price and bidding process.

    (a) The loan documents related to REO property sold for program 
purposes must contain the restrictive-use language specified in Sec.  
3560.662(a).
    (b) Entities bidding on REO property designated to be sold as 
program property must submit a loan application package that meets the 
requirements specified in subpart B of this part.
    (1) Bidders on REO property designated to be sold as program 
property must meet the eligibility requirements established under Sec.  
3560.55.

[[Page 32937]]

    (2) Bidders determined by the Agency to be ineligible to purchase 
REO property designated to be sold as program property will be notified 
in writing. The bidding process will continue regardless of pending 
appeals.
    (3) All offers from bidders determined to be eligible to purchase 
REO property designated to be sold as program property will be 
considered in the bidding process and must provide evidence of 
financial stability and credit worthiness.
    (c) The Agency will determine the successful bidder on REO property 
designated to be sold as program property by conducting a drawing of 
sealed bids.
    (1) All sealed bids meeting the terms and conditions set forth in 
the sale notice will be part of the drawing. Award will be made to the 
first offer drawn. Offers drawn after the first bid will be considered 
back-up offers. Bidders who do not want their bids held as back-up 
offers must notify the Agency prior to the drawing. The Agency will 
notify all bidders of the public drawing outcome in writing.
    (2) Bidders who desire to withdraw their bids must do so prior to 
the drawing date.
    (d) Property designated to be sold as non-program property may be 
sold to entities that do not meet the Agency's eligible borrower 
requirements specified in Sec.  3560.55, and must be sold for cash or 
on terms approved by the Agency. Cash sales will be given first 
preference and will be drawn before any sales on terms.


Sec.  3560.505  Agency loans to finance purchases of REO property.

    (a) Agency loans to finance the purchase of REO property designated 
to be sold as program property must meet the same requirements as 
specified in subparts A and B of this part. In addition, the following 
provisions apply.
    (1) At the borrower's option, the interest rate will be the 
prevailing rate at the time of loan approval or the prevailing rate at 
loan closing.
    (2) Purchasers may pay closing costs from their own funds or, if 
allowable under subparts B, L, or M of this part, as applicable, may 
finance such costs as part of the Agency loan.
    (b) Agency loans to finance the purchase of REO property designated 
to be sold as non-program property must meet the following terms.
    (1) A down payment of not less than 10 percent of the purchase 
price is required at closing.
    (2) The interest rate will equal the lesser of the prevailing 
interest rate at the time of loan approval or loan closing for multi-
family housing loans plus one-half percent.
    (3) The note amount will be amortized over a period not to exceed 
10 years. If the Agency determines that more favorable terms are 
necessary to facilitate the sale, the note amount may be amortized 
using a 30-year factor with payment in full due no later than 10 years 
from the date of closing (balloon payment). In no case will the term be 
longer than the useful life of the property.
    (4) Agency loans to finance the purchase of non-program REO 
property is subject to the availability of funds.
    (c) Loan limits and allowable uses of loan funds specified in 
subparts B, L, and M of this part, as applicable, are applicable to any 
Agency-financed (credit) sale of REO property.
    (d) Title clearance and loan closing for an Agency financed sale 
and any subsequent loan to be closed simultaneously with the sale must 
meet the requirements in subpart B of this part for an initial loan, 
with the following exceptions:
    (1) A ``Quit Claim'' or other non-warranty deed will be used; and
    (2) The buyer must pay attorney's fees, insurance costs, recording 
fees and other customary fees unless they are included in a subsequent 
loan and the subsequent loan is for purposes other than closing costs 
and fees.
    (e) After approval of an Agency-financed sale of occupied REO 
property designated to be sold as program property, but prior to 
closing, the purchaser must prepare a budget for housing operations in 
accordance with subpart B of this part. If a rent increase is 
necessary, procedures specified in subparts E and F of this part for 
calculating rents, net tenant contributions, and rental assistance will 
be followed by the borrower.


Sec.  3560.506  Conversion of single family type REO property to multi-
family housing use.

    Single family type REO property may be sold for conversion to 
multi-family housing program use under the following conditions.
    (a) The Agency will allow nonprofit organizations, public bodies, 
or for-profit entities to purchase single family type REO property for 
conversion to multi-family housing program use. When the Agency 
finances the sale of single family-type REO property for conversion to 
rural rental housing program use (i.e., multi-family housing including 
group homes and homes for the elderly or disabled, farm labor housing, 
or rural cooperative housing), the sale price will be the lesser of the 
Federal Government's investment or an amount based on the ``as-is'' 
market value of the housing project as determined by an appraisal 
conducted in accordance with subpart P of this part.
    (b) The Agency will only accept written offers to purchase two or 
more single family type REO properties for conversion to rural rental 
housing from nonprofit organizations, public bodies, or for-profit 
entities with a good record of providing housing under the Agency's 
multi-family housing programs. The single family type properties are 
not required to be contiguous, however, they must be located in close 
enough proximity so that management capabilities are not diminished 
because of distance.


Sec. Sec.  3560.507-3560.549  [Reserved]


Sec.  3560.550  OMB control number. [Reserved]

Subpart L--Off-Farm Labor Housing


Sec.  3560.551  General.

    This subpart establishes the requirements for making loans and 
grants for off-farm labor housing and for ongoing operations of this 
housing. Unless otherwise specified in this subpart, the requirements 
of subparts A through K, O, and P of this part will apply in addition 
to the requirements in this subpart.


Sec.  3560.552  Program objectives.

    In addition to the objectives stated in Sec.  3560.52, off-farm 
labor housing loan and grant funds will be used to increase:
    (a) The supply of affordable housing for farm labor; and
    (b) The ability of communities to attract farm labor by providing 
housing which is affordable, decent, safe and sanitary.


Sec.  3560.553  Loan and grant purposes.

    In addition to the purposes stated in Sec.  3560.53, off-farm labor 
housing loan and grant funds may be used to provide facilities for 
seasonal or temporary use with appropriate furnishings and equipment.


Sec.  3560.554  Use of funds restrictions.

    Off-farm labor housing loan and grant funds may not be used for any 
purpose prohibited by Sec.  3560.54 except Sec.  3560.54(a)(1). Off-
farm labor housing may be used to serve migrant farmworkers.


Sec.  3560.555  Eligibility requirements for off-farm labor housing 
loans and grants.

    (a) Eligibility for loans. Applicants for off-farm labor housing 
loans must be:

[[Page 32938]]

    (1) A local nonprofit organization, a nonprofit organization of 
farmworkers, federally recognized Indian tribe, or an agency or 
political subdivision of State or local government, and must meet the 
requirements of Sec.  3560.55(a) and (b), except that the board of a 
nonprofit organization which is an association of farm workers is not 
required to reflect the demographics of the community. Instead, a 
nonprofit association of farmworkers must have representation on the 
board from the area where the housing is located. Directors may be 
elected who are not members of the organization, but are experienced in 
such fields as real estate management, finance, or related businesses 
provided member directors represent a majority of the board; or
    (2) A limited partnership with a non-profit general partner which 
meets the requirements of Sec.  3560.55(d).
    (b) Eligibility for grants. To be eligible for off-farm labor 
housing grants, applicants must:
    (1) Meet the requirements in Sec.  3560.55(a), excluding 
subparagraph (6);
    (2) Meet the requirements of Sec.  3560.55(b) if the grant 
applicant has an outstanding Agency loan or grant;
    (3) Meet the requirements in Sec.  3560.55(c) with the exception 
specified for off-farm labor housing loan applicants specified in 
paragraph (a)(1) of this section;
    (4) Be able to contribute at least one-tenth of the total farm 
labor housing development cost from its own or other resources. The 
applicant's contribution must be available at the time of grant 
closing. An off-farm labor housing loan financed by RHS may be used to 
meet this requirement.
    (5) Limited partnerships eligible under paragraph (a)(2) of this 
section are not eligible for farm labor housing grants.


Sec.  3560.556  Application requirements and processing.

    Off-farm loans and grants will be available under a Notice of 
Funding Availability (NOFA) that will be published in the Federal 
Register each fiscal year.


Sec.  3560.557  [Reserved]


Sec.  3560.558  Site requirements.

    The requirements established in Sec.  3560.58 apply to all 
applications for off-farm labor housing loans and grants except that 
off-farm labor housing are not limited to rural areas.


Sec.  3560.559  Design and construction requirements.

    (a) General. The requirements established in Sec.  3560.60 apply to 
all applications for off-farm labor housing loans and grants except 
that seasonal off-farm labor housing that will be occupied for eight 
months or less per year by migrant farmworkers while they are away from 
their residence, will be constructed in accordance with Exhibit I of 7 
CFR part 1924, subpart A.
    (b) Additional requirements. In addition to the requirements 
established in Sec.  3560.60, the design of off-farm labor housing must 
incorporate exterior washing facilities as necessary to protect the 
resident and the asset from excess dirt and chemical exposure.
    (c) Davis-Bacon wage requirements. For housing developed with grant 
funds, the borrower must not pay less than the wages prevailing in the 
locality as predetermined by the Secretary of Labor pursuant to the 
Davis-Bacon Act (40 U.S.C. 276(a)-276(a)(b)), to all laborers and 
mechanics employed in the development of any part of the housing.


Sec.  3560.560  Security.

    The security requirements established in Sec.  3560.61 will apply 
to all applications for off-farm labor housing loans.


Sec.  3560.561  Technical, legal, insurance and other services.

    The requirements established under Sec.  3560.62 apply to all 
applications for off-farm labor housing loans and grants.


Sec.  3560.562  Loan and grant limits.

    (a) Determining the security value. The requirements established 
under Sec.  3560.63(a) apply to loans or combination loans and grants.
    (b) Maximum amount of loan. The requirements established in Sec.  
3560.63(c)(1) and (2), regarding borrower equity contribution apply to 
all applications for off-farm labor housing loans. (For applicants 
eligible under Sec.  3560.555(a)(2), the amount of Agency financing for 
the housing will not exceed 95 percent of the total development cost or 
95 percent of the security value available for the Agency loan, 
whichever is lower.) In determining the amount of the loan, the Agency 
will also review the capacity of the applicant to amortize such loan, 
considering any rental assistance provided for use in the housing, and 
any rents anticipated to be paid by farmworkers expected to occupy the 
housing.
    (c) Maximum amount of grant. The amount of any off-farm labor 
housing grant must not exceed the lesser of:
    (1) Ninety percent of the total development cost, or 90 percent of 
security value, whichever is less; or
    (2) That portion of the total development cost which exceeds the 
sum of any amount provided by the applicant from their own resources 
plus the amount of any loans approved for the applicant, considering 
the capacity of the applicant to amortize the loan.


Sec.  3560.563  Initial operating capital.

    The requirements for Sec.  3560.64 apply to all applications for 
off-farm labor housing loans and grants.


Sec.  3560.564  Reserve accounts.

    The requirements for Sec.  3560.65 apply to all applications for 
off-farm labor housing loans and grants.


Sec.  3560.565  Participation with other funding or financing sources.

    (a) General. The requirements established in Sec.  3560.66 apply to 
all applications for off-farm labor housing loans and grants.
    (b) Additional requirements. In addition to the requirements 
established in Sec.  3560.66, the following policies will also apply.
    (1) Where Agency rental assistance is requested, Agency financial 
participation must equal or exceed 10 percent of the total development 
cost with a minimum of 5 percent of the total development cost in the 
form of off-farm labor housing loan.
    (2) When the combined debt service for housing financed by the 
Agency and other sources is equal to or less than what the debt service 
would be for a 95 percent loan for total development cost of the entire 
housing provided solely by the Agency, the Agency will provide 100 
percent rental assistance to an off-farm labor housing project.
    (3) When the combined debt service for housing financed by the 
Agency and other sources exceeds what the debt service would be for a 
100 percent loan for total development cost of the entire housing 
provided solely by the Agency, the Agency will provide less than 100 
percent rental assistance as specified in Sec.  3560.66.


Sec.  3560.566  Loan and grant rates and terms.

    (a) Amortization period. The loan will be amortized over a period 
not to exceed 33 years. The amortization schedule will take into 
account the depreciation of the security and ensure that the loan will 
be adequately secured.
    (b) Interest rate. The effective interest rate will be 1 percent.
    (c) Term of grant agreement. The grant agreement will remain in 
effect for

[[Page 32939]]

50 years from the date of signature of all the parties.


Sec.  3560.567  Establishing the profit base on initial investment.

    The requirements established under Sec.  3560.67 apply to 
applicants eligible under Sec.  3560.555(a)(2) and operating as a 
limited partnership with a nonprofit general partner.


Sec.  3560.568  Supplemental requirements for seasonal off-farm labor 
housing.

    For off-farm labor housing operating on a seasonal basis, the 
management plan must establish specific opening and closing dates. 
During the off-season, off-farm labor housing may be used as defined in 
subpart A of this part under short-term lease provisions. Where rents 
are charged on a per-unit basis and family income qualifies the 
household for rental assistance, rental assistance may be used.


Sec.  3560.569  Supplemental requirements for manufactured housing.

    The requirements established in Sec.  3560.70 apply to all 
applications for off-farm labor housing loans and grants.


Sec.  3560.570  Construction financing.

    The requirements established in Sec.  3560.71 apply to all 
applications involving off-farm labor housing loans and grants. In 
addition, the following requirements apply.
    (a) If the Agency is providing grant only assistance, the Agency 
will provide grant funds as part of the take out of construction 
financing.
    (b) If construction is financed with a Labor Housing grant, it is 
subject to the provisions of the Davis-Bacon Act (published in the 
Department of Labor regulations (29 CFR parts 1, 3, and 5)).
    (c) If the Agency is providing both loan and grant funds, loan 
funds must be fully released and expended prior to the release of grant 
funds from the Agency.


Sec.  3560.571  Loan and grant closing.

    The requirements established in Sec.  3560.72 apply to all 
applications for off-farm labor housing loans and grants. In addition, 
the following requirements apply.
    (a) For loans, a nonprofit organization will have its Board of 
Directors adopt an Agency-approved loan resolution and furnish a 
certified copy for the loan docket before loan approval. All other loan 
applicants will execute an Agency-approved loan agreement.
    (b) For grants, an Agency approved grant agreement, must be 
executed by the applicant on the date of grant closing. Also, a 
nonprofit organization will have its Board of Directors adopt a 
resolution containing provisions authorizing the Agency to prescribe 
requirements regarding housing and related facilities' operations and 
other provisions including the following provisions.
    (1) The rents charged domestic farm labor must not exceed the rents 
approved by the Agency after considering the income of the occupants, 
Agency and non-Agency rental assistance available and the necessary 
costs of operation, debt service, and adequate maintenance of the 
housing.
    (2) The housing must be maintained at all times in a safe and 
sanitary condition in accordance with standards prescribed by state and 
local law, and Agency requirements.
    (3) When making occupancy decisions, domestic farm labor applicants 
will always receive priority.
    (c) The obligations incurred by the applicant, as a condition of 
accepting the grant, will be in accordance with the off-farm labor 
housing grant agreement.
    (d) All off-farm labor housing loans and grants are subject to the 
restrictive use provisions established by subpart N of this part. Such 
restrictions must be included in the mortgage, deed of trust or grant 
agreement. The term of the restricted use provision for the off-farm 
labor housing grants is 50 years with or without a loan.


Sec.  3560.572  Subsequent loans.

    The requirements established in Sec.  3560.73 will apply to all 
applications for subsequent off-farm labor housing loans.


Sec.  3560.573  Rental assistance.

    (a) Rental assistance may be provided to income eligible tenants 
living in off-farm labor housing in accordance with subpart F of this 
part. The requirements established in Sec.  3560.252 apply to all 
tenants receiving rental assistance.
    (b) For dormitory style facilities operating on a per bed basis, 
rental assistance will be made available to the housing on a per unit 
basis, but may be pro-rated to tenants on a per bed basis. However, 
total rent charged for a unit must not exceed conventional rent for 
comparable units in the area or a similar area and per bed rents must 
be comparable to per bed rents in the market.


Sec.  3560.574  Rental structure and changes.

    Off-farm labor housing is subject to the tenant contribution and 
rental unit rent requirements for Plan II housing established under 
subpart E of this part, except where seasonal housing will be occupied 
for less than a 3-month period. In such instances the best available 
and practical income verification methods may be used with prior 
approval of the Agency.


Sec.  3560.575  Occupancy restrictions.

    (a) Restrictions on conditions of occupancy.
    (1) No nonprofit organizational borrower, other than an association 
of farmers or family farm corporation or partnership, will be permitted 
to require that an occupant work on any particular farm or for any 
particular owner or interest as a condition of occupancy of the 
housing.
    (2) Tenant selection should be in accordance with the loan 
agreement, subpart D of this part and Sec.  3560.576.
    (3) No borrower will discriminate, or permit discrimination by any 
agent, lessee, or other operator in the use or occupancy of the housing 
or related facilities because of race, color, religion, sex, age, 
handicap, marital or familial status, or national origin.
    (b) Eligible households. To be eligible for occupancy in off-farm 
labor housing, households must meet the following requirements.
    (1) Occupational. An eligible household must include a domestic 
tenant or co-tenant farm laborer, a retired domestic farm laborer, a 
domestic farm laborer with a farm labor-related disability, or must be 
a surviving household of a deceased domestic farm laborer.
    (2) Income. The household must meet the definition of income 
eligible as established in Sec.  3560.152 and the tenant or co-tenant 
must receive a substantial portion of income from farm labor 
employment. To determine if a substantial portion of income is from 
farm labor employment, the following measures will be used.
    (i) For housing rented to farm laborers and owned by public bodies 
and public or private nonprofit organizations when charging rent.
    (A) Actual dollars earned from farm labor by domestic farm laborers 
other than migrant farmworkers must equal at least 65 percent of the 
annual income limits published by the Agency. For migrant farmworkers 
living in seasonal housing the actual dollars earned from farm labor by 
a domestic farm laborer must equal at least 50 percent of published 
annual income limits.
    (B) An alternate measure for determining substantial portion of 
income when actual earnings are not available may be the duration of 
time a farm laborer worked on a farm or other farming enterprise as a 
domestic farmworker during the preceding 12 months. In order to be 
considered as

[[Page 32940]]

substantial the farm laborer must have worked at least 110 whole days 
in farm work. For purposes of this section one whole day is the 
equivalent of at least 7 hours. When using a period of more than 1 
year, a yearly average must amount to at least 110 days per year.
    (ii) For housing owned by a farmer, family-farm partnership, 
family-farm corporation, or an association of farmers which was 
initially provided on a non-rental basis, a substantial portion of 
income is earned when housing is provided by the owner as part of 
employment compensation for farm labor.
    (iii) When a natural disaster has occurred, such as a drought, 
flood, freeze, etc., figures for the 12 months preceding such disaster 
will be used to determine substantial portion of income under paragraph 
(b)(2) of this section.
    (iv) The tenant who qualifies as a domestic farm laborer residing 
in a property with a nonrestrictive farm labor clause in the mortgage 
covenants must not have adjusted income which exceeds the moderate 
income limit for the appropriate household size and appropriate 
geographical area.
    (3) Occupancy. The household must remain in compliance with the 
borrower's occupancy policy as established in Sec.  3560.155.
    (c) Ineligible tenants. Tenants who, at any time, fail to meet all 
the requirements in paragraph (b) of this section will be deemed 
ineligible for occupancy in off-farm labor housing. Ineligible tenants 
in off farm labor housing will be addressed in accordance with the 
requirements of Sec.  3560.158.
    (d) Non-farm laborer tenants. When there are no persons or families 
in the above categories in need of housing, units in off-farm labor 
housing complexes may be made available to persons or families eligible 
for occupancy under Sec.  3560.152. Eligible tenants under this section 
may occupy the labor housing until such time the units are again needed 
by persons or families eligible under paragraph (b) of this section. 
The procedures specified in Sec.  3560.158 shall be followed when 
tenants are required to vacate housing to allow for occupancy by 
persons eligible under paragraph (b) of this section.


Sec.  3560.576  Tenant priorities for labor housing.

    Tenant occupancy in off-farm labor housing is based on eligible 
farm labor certified through the income certification process required 
by Sec.  3560.152 and is prioritized in the following order.
    (a) First priority is to be given to eligible active farm laborer 
households based upon percent of total earnings from farm labor in the 
following ranked categories: 71-100 percent; 51-70 percent; 26-50 
percent; and less than 25 percent.
    (1) For off-farm labor housing units without rental assistance, 
occupancy priority within each ranking category is according to the 
household's income with first priority going to very low-income 
households, next priority to low-income households, and last priority 
to moderate-income households.
    (2) For off-farm labor housing units with rental assistance, tenant 
occupancy priority is given to all eligible very low-income farm worker 
households by ranked category, then to low-income farm worker 
households by ranked category as listed in paragraph (a) of this 
section. Moderate-income farm workers may be served without rental 
assistance, when there are no very low- or low-income eligible farm 
workers on the waiting lists, again by ranked category.
    (b) Second priority is given to retired domestic farm laborer 
households or to a household with a domestic farm laborer with a farm-
labor related disability and the domestic farm laborer was in the local 
farm market area at the time of retirement or disability. Occupancy 
priority will be by paragraph (a)(1) or (2) of this section without the 
application of the ranking category.
    (c) Third priority is to be given to retired domestic farm laborer 
households or a household with a domestic farm laborer with a farm 
labor related disability that was not in the local area at the time of 
retirement or disability. Occupancy priority will be by paragraph 
(a)(1) or (2) of this section without the application of the ranking 
category.
    (d) Fourth priority is to be given to surviving households of a 
deceased domestic farm laborer.
    (1) The surviving member may continue to occupy the unit after the 
death of the original tenant and be eligible with respect to income and 
either the co-tenant or member of the household will have legal 
capacity to sign and assume the lease; or
    (2) The surviving member occupied the unit at the time that the 
original tenant died, and will be able to meet tenant eligibility 
requirements of a domestic farm laborer.


Sec.  3560.577  Financial management of labor housing.

    The requirements established in subpart G of this part will apply 
to all off-farm labor housing.


Sec.  3560.578  Servicing off-farm labor housing.

    The requirements established in subparts I and J of this part will 
apply to all off-farm labor housing. Servicing according to subparts I 
and J of this part shall apply throughout the term of the loan or 
grant, whichever is longer.


Sec. Sec.  3560.579-3560.599  [Reserved]


Sec.  3560.600  OMB control number. [Reserved]

Subpart M--On-Farm Labor Housing


Sec.  3560.601  General.

    This subpart contains the requirements for making loans for on-farm 
labor housing and for ongoing operation and management of on-farm labor 
housing. Unless otherwise specified in this subpart, the requirements 
of subparts A through K, N, and O of this part will apply in addition 
to requirements given in this subpart.


Sec.  3560.602  Program objectives.

    In addition to the objectives stated in Sec.  3560.52, on-farm 
labor housing funds will be used to increase:
    (a) The supply of affordable housing for farm labor; and
    (b) The ability of the farmer to provide affordable, decent, safe 
and sanitary housing for farm workers.


Sec.  3560.603  Loan purposes.

    On-farm labor housing loans may be made only for the purposes 
established in Sec.  3560.553. Grants are not available for on-farm 
labor housing.


Sec.  3560.604  Restrictions on use of funds.

    On-farm labor housing loans may not be used for any purpose 
prohibited by Sec.  3560.554 except Sec.  3560.54(a)(1). On-farm labor 
housing may be used to serve migrant workers. In addition, on-farm 
labor housing loan funds may not be used to provide housing for members 
of the immediate family of the applicant when the applicant is an 
individual farm owner, family farm corporation, family farm 
partnership, or a member of an association of farmers. Immediate family 
includes mother, father, brothers, sisters, sons and daughters of the 
applicant and spouse.


Sec.  3560.605  Eligibility requirements.

    (a) To be eligible for an on-farm labor housing loan, the applicant 
must meet the requirements of Sec.  3560.55(a) with the exception of 
Sec.  3560.55(a)(5) and (6) and the following requirements.
    (1) The applicant must be a farm owner, family farm partnership, 
family farm corporation, or an association of farmers engaged in 
agricultural or

[[Page 32941]]

aquacultural farming operations whose farming operations demonstrate a 
need for on-farm labor housing and who will own the housing and operate 
it on a nonprofit basis.
    (2) The applicant must agree to use the labor housing to engage in 
the farming operations of the individual farm owner applicant, or in 
the farming operations of its members if it is a family farm 
corporation or partnership, or an association of farmers.
    (3) The applicant must, as determined by the Agency, be unable to 
provide the resources necessary to provide for on-farm labor housing 
from assets unrelated to the farming operation.
    (b) The Agency may make an exception to the requirement that an 
individual farm owner, family farm corporation, family farm partnership 
or an association of farmers be unable to obtain the necessary credit 
elsewhere when all of the following conditions exist:
    (1) There is a housing need in the area for domestic farmworkers 
who are migrants and the applicant will provide such housing; and
    (2) There are no qualified state or political subdivisions or 
public or private nonprofit organizations available, or likely to 
become available within 12 months of the application, that are willing 
and able to provide the housing.
    (c) When an applicant is determined eligible under paragraph (b) of 
this section, the interest rate for such loans will be determined in 
accordance with 7 CFR part 1810, subpart A.


Sec.  3560.606  Application requirements and processing.

    (a) On-farm labor housing loan applications will be processed 
according to 7 CFR part 1940, subpart L. Applicants must submit an 
application in an Agency-approved format that adequately documents the 
need for the housing and the eligibility of the applicant.
    (b) The applicant must certify that the farm workers for which the 
housing is intended are or will be involved in the applicant's 
agricultural or aquacultural farming operations.
    (c) The applicant must certify that housing operations will be 
conducted in a non-profit manner such that income from the housing does 
not exceed eligible expenses associated with the housing. Eligible 
expenditures for the housing include, but are not limited to housing 
repairs and upkeep, payment of installments on the loan, taxes, 
insurance and reserves and other essential uses needed for success of 
the operations.


Sec.  3560.607  [Reserved]


Sec.  3560.608  Site and construction requirements.

    (a) General. Cost and development standards for on-farm labor 
housing will be consistent with the requirements, standards, and cost 
limits specified in subpart B of this part, if the housing is a multi-
family housing type structure, or consistent with section 502 of the 
Housing Act of 1949, if the housing is a single family type structure.
    (b) Permanent units. On-farm labor housing occupied for 8 months or 
more of the year will be required to meet the following requirements.
    (1) Housing may be multi-family or single family in type and may be 
located on the farm away from farm service buildings, or in the nearby 
community. Single-family type housing is defined as an individual or a 
group of individual single family detached dwelling units. All sites 
shall be planned and constructed in accordance with 7 CFR part 1924, 
subparts A and C.
    (2) Sites must provide access to road frontage, when feasible.
    (c) Seasonal units. On-farm labor housing occupied for less than 8 
months of the year will be considered seasonal housing. Such housing 
must meet the following requirements.
    (1) Housing designed for seasonal occupancy may be either single 
family or multi-family.
    (2) Housing must be suitable to allow for conversion to full-year 
occupancy if the need for migrant farmworkers in the area declines.
    (3) Seasonal housing will be constructed in accordance with Exhibit 
I of 7 CFR part 1924, subpart A.


Sec.  3560.609  [Reserved]


Sec.  3560.610  Security.

    (a) Security instruments must meet the requirements established 
under Sec.  3560.560.
    (b) The on-farm labor housing must be located on a tract of land 
that is surveyed such that, for security purposes, it is considered 
separate and distinct from the farm. The security for the loan must 
include a first lien on the tract of land where the on-farm labor 
housing is located.
    (c) The Agency will determine the value of the security for the 
loan if the entire farm is used as security or in accordance with 
section 502 of the Housing Act of 1949, if only the on-farm labor 
housing and related land is used for security.
    (d) If necessary to provide adequate security for the loan, the 
Agency may require that any household furnishings purchased with loan 
funds also be secured.
    (e) Personal liability and recourse will be required of all 
borrowers, including the individual members, stockholders or partners 
of an association of farmers, family farm corporations or partnerships, 
respectively.


Sec.  3560.611  Technical, legal, insurance and other services.

    When technical, legal, insurance, or services are required for 
development of on-farm labor housing, applicants must comply with the 
applicable requirements of Sec.  3560.62. Regarding insurance coverage, 
the requirements of Sec.  3560.62(d) apply to on-farm labor housing.


Sec.  3560.612  Loan limits.

    The maximum loan amount will be 100 percent of the allowable total 
development costs of on-farm labor housing and related facilities 
subject to Sec. Sec.  3560.603, 3560.604 and 3560.608.


Sec.  3560.613  [Reserved]


Sec.  3560.614  Reserve accounts.

    When on-farm labor housing operations include five or more units, 
the Agency will require such properties to comply with the reserve 
account requirements in Sec.  3560.65.


Sec.  3560.615  Participation with other funding sources.

    The Agency encourages the use of other funding sources in 
conjunction with on-farm labor housing loans. Use of such financing in 
conjunction with an on-farm labor housing loan is subject to the 
approval of the Agency and must comply with the requirements of Sec.  
3560.66.


Sec.  3560.616  Rates and terms.

    (a) The interest rate for on-farm labor housing loans will be 1 
percent.
    (b) The term of the on-farm labor housing loan will not exceed 33 
years.
    (c) Loan amortization for on-farm labor housing may be on a monthly 
or an annual basis.


Sec.  3560.617  [Reserved]


Sec.  3560.618  Supplemental requirements for on-farm labor housing.

    The management plan for on-farm labor housing operated on a 
seasonal basis must have specific opening and closing dates. During the 
off-season, on-farm labor housing may be used under short-term lease 
provisions.


Sec.  3560.619  Supplemental requirements for manufactured housing.

    On-farm labor housing loan funds used for manufactured housing must

[[Page 32942]]

comply with Sec.  3560.70. Manufactured housing located on-farm may 
consist of an individual unit.


Sec.  3560.620  Construction financing.

    The requirements established in Sec.  3560.71 apply to all 
applications involving on-farm labor housing loans.


Sec.  3560.621  Loan closing.

    Applicants for on-farm labor housing loan funds must execute an 
Agency-approved loan agreement.


Sec.  3560.622  Subsequent loans.

    The requirements established in Sec.  3560.572 apply to all 
applications for on-farm labor housing subsequent loans.


Sec.  3560.623  Housing management and operations.

    Borrowers with on-farm labor housing loans must:
    (a) Develop and submit to the Agency a management plan in a format 
specified by the Agency. At a minimum, the management plan will detail 
the borrower's operational and occupancy policies, how the borrower 
will deal with resident complaints, and how repairs will be completed; 
and
    (b) Maintain a lease or employment contract with each tenant 
specifying employment with the borrower as a condition for continued 
occupancy.


Sec.  3560.624  Occupancy restrictions.

    (a) The immediate relatives of the borrowers are ineligible 
occupants for on-farm labor housing.
    (b) Occupancy of on-farm labor housing is restricted to employees 
of the borrower unless otherwise approved by the Agency.


Sec.  3560.625  Maintaining the physical asset.

    On-farm labor housing must meet state and local building and 
occupancy codes.


Sec.  3560.626  Affirmative Fair Housing Marketing Plan.

    On-farm labor housing must meet the requirements of Sec.  3560.104.


Sec.  3560.627  Response to resident complaints.

    The management plan submitted in accordance with Sec.  3560.623 (a) 
will include a provision for dealing with resident complaints.


Sec.  3560.628  Establishing and modifying rental charges.

    If it becomes necessary to establish or modify a shelter cost, the 
borrower must obtain Agency approval by as specified in subpart E of 
this part.


Sec.  3560.629  Security deposits.

    Borrowers that require security deposits to be paid by the tenants 
will be required to comply with the requirements of Sec.  3560.204.


Sec.  3560.630  Financial management.

    Financial information must be submitted in an Agency-approved 
format and will show operation of the housing in a non-profit manner.


Sec.  3560.631  Agency monitoring.

    A compliance review and physical inspection will be conducted by 
the Agency at least once every 3 years. The purpose of this review will 
be to inspect:
    (a) Tenant eligibility documentation;
    (b) Financial information on the operation and management of the 
labor housing, including relevant borrower financial materials;
    (c) Payment of taxes, insurance and hazard insurance;
    (d) Compliance with the security deposit requirements;
    (e) Compliance with the operating plan;
    (f) Compliance with the loan agreement; and
    (g) Compliance with Agency requirements for affordable, decent, 
safe, and sanitary housing.


Sec. Sec.  3560.632-3560.649  [Reserved]


Sec.  3560.650 OMB control number.  [Reserved]

Subpart N--Housing Preservation


Sec.  3560.651  General.

    (a) This subpart contains the Rural Housing Service's housing 
preservation requirements as related to prepayment requests and 
restrictive-use provisions. The requirements of this subpart support 
the Rural Housing Service's commitment to the preservation of decent, 
safe, sanitary, and affordable multi-family housing for very-low, low, 
and moderate-income households.
    (b) The Rural Housing Service will coordinate, direct, and monitor 
the Rural Housing Service's multi-family housing preservation 
activities from the National Office level.


Sec.  3560.652  Prepayment and restrictive-use categories.

    (a) Loans with prepayment prohibitions include:
    (1) Initial loans made on or after December 15, 1989, and
    (2) Subsequent loans made on or after December 15, 1989, for 
additional rental units.
    (b) Loans without prepayment prohibitions but with restrictive-use 
provisions include:
    (1) All loans made after December 21, 1979, but prior to December 
15, 1989; or,
    (2) Subsequent loans made on or after December 15, 1989, for 
purposes other than additional rental units.
    (3) Loans subsequently restricted by servicing actions including 
transfers and reamortizations.
    (c) Loans without prepayment prohibitions or restrictive-use 
provisions include all loans made on or before December 21, 1979 or 
loans that had restrictive-use provisions that have expired. Such loans 
are subject to the preservation provisions of this subpart.
    (d) Loans may be prepaid if another loan or grant from the Rural 
Housing Service imposes the same or more stringent restrictive-use 
provisions on the housing project covered by the loan being prepaid.


Sec.  3560.653  Prepayment requests.

    (a) Borrowers seeking to prepay a Rural Housing Service loan must 
submit a written prepayment request to the Rural Housing Service at 
least 180 days in advance of the anticipated prepayment date and must 
obtain Rural Housing Service approval before the Rural Housing Service 
will accept prepayment.
    (b) Prior to submitting a prepayment request, borrowers must take 
whatever actions are necessary to provide the following items:
    (1) A clear description of the loan to be prepaid, the housing 
project covered by the loan being prepaid, and the requested date of 
prepayment.
    (2) A statement documenting the borrower's ability to prepay under 
the terms specified.
    (3) A certification that the borrower will comply with any federal, 
state, or local laws or regulations (e.g., Department of Housing and 
Urban Development (HUD) prepayment procedures or requirements, HUD or 
state housing authorities that provide rental subsidy) which may relate 
to the prepayment request and a statement of actions needed to assure 
such compliance.
    (4) A copy of the housing project's waiting list and a current 
signed multi-family housing balance sheet.
    (5) A copy of lease language to be used during the period between 
the submission date and the final resolution of the prepayment request 
notifying tenant applicants that the housing project has submitted a 
prepayment request to the Rural Housing Service and explaining the 
potential affect of the request on the lease.
    (6) A certification that the borrower has notified all governmental 
entities and all nonprofit and public bodies other than the Rural 
Housing Service involved in providing affordable

[[Page 32943]]

housing and financial assistance to tenants in the project, of the 
prepayment request and a statement specifying how long financial 
assistance from such parties will be provided to tenants after 
prepayment.
    (7) A certification that the housing project covered by the loan 
being prepaid will continue to be administered in accordance with the 
Fair Housing Act.
    (8) A description of the proposed use of the property after 
prepayment with documentation supporting the feasibility of the 
proposed use and a budget showing anticipated costs and resources 
available to cover costs of transition to and operation of the property 
as proposed for 3 years.
    (9) A market study that addresses assisted and conventional 
housing, community demographics, and economic activity in the market 
area where the housing project covered by the loan being prepaid is 
located and the feasibility of the proposed use of the housing project 
in the market.
    (c) If a prepayment request lacks full and complete information on 
any item, the Rural Housing Service will return the prepayment request 
to the borrower with a letter citing the deficiencies in the prepayment 
request. The Rural Housing Service will offer borrowers an opportunity, 
within 30 days following the date of the return, to address the reasons 
given by the Rural Housing Service for the return of the prepayment 
request and will allow the borrower to submit a revised prepayment 
request.
    (d) The Rural Housing Service will review complete requests to 
determine if:
    (1) The loan is eligible for prepayment;
    (2) The borrower has the ability to prepay;
    (3) The borrower has complied or has the ability to comply with 
applicable federal, state, and local laws related to the prepayment 
request;
    (4) The borrower's proposed use of the property after prepayment is 
likely to be achieved; and,
    (5) The proposed use of the property after prepayment will allow 
for compliance with any restrictive-use provisions, which may apply to 
the property after prepayment.
    (e) If the Rural Housing Service determines that the prepayment 
request appropriately satisfies all the conditions listed in paragraph 
(d) of this section, the Rural Housing Service will process the 
prepayment request and make a reasonable effort to enter into a new 
restrictive-use agreement with the borrower in accordance with Sec.  
3560.662. If the Rural Housing Service determines that a loan is 
ineligible for prepayment or the borrower does not have the ability to 
prepay, to convert the housing to the proposed use, or to comply with 
any applicable restrictive-use provisions, the Rural Housing Service 
will return the prepayment request to the borrower with a written 
explanation of the Rural Housing Service's determinations.


Sec.  3560.654  Tenant notification requirements.

    (a) Within 30 calendar days of receiving a complete prepayment 
request, the Rural Housing Service will send a prepayment request 
notice to each tenant in the housing project. Borrowers must post the 
Rural Housing Service's prepayment request notice in public areas 
throughout the housing project from the date of the notice until the 
final resolution of the prepayment request. The prepayment request 
notice will establish a date and place where tenants may meet with the 
Rural Housing Service to discuss the prepayment request and will advise 
tenants that:
    (1) They may review all information submitted with the prepayment 
request except financial information regarding the borrower entity, 
which the Rural Housing Service will withhold from tenant review unless 
given written permission for the release of the information from the 
borrower; and,
    (2) They have 30 days from the date of the prepayment request 
notice to give the Rural Housing Service comments on the prepayment 
request.
    (b) Borrowers may provide a prepayment request notice of their own 
directly to tenants and may establish a date and place where tenants 
may meet with the borrower to discuss the prepayment request. The Rural 
Housing Service and other providers of housing assistance for very-low, 
low, and moderate-income households may attend a borrower's prepayment 
request meeting with tenants.
    (c) If the Rural Housing Service agrees to accept prepayment on a 
loan, the Rural Housing Service will send a prepayment acceptance 
notice to each tenant in the housing project at least 60 days prior to 
the prepayment date. Borrowers must post copies of the Rural Housing 
Service's prepayment acceptance notice in public areas throughout the 
housing project until prepayment is made. If the prepayment acceptance 
was based on a borrower's agreement to comply with restrictive-use 
provisions, the notice will describe the restrictive-use provisions 
that will apply to the housing project after prepayment and the 
tenant's rights to enforcement of the provisions.
    (d) If the Rural Housing Service does not agree to accept a 
prepayment request or the borrower withdraws the prepayment request, 
the Rural Housing Service will provide a prepayment request 
cancellation notice to each tenant in the housing project. Borrowers 
must post copies of the prepayment request cancellation notice in the 
public areas throughout the housing project for a period of 60 days 
following the date of the prepayment request cancellation notice.
    (e) If the borrower agrees to accept incentives and restrictive-use 
provisions, the Rural Housing Service will notify each tenant, in 
writing, of the agreement and a description of the restrictive-use 
provision.
    (f) If a borrower agrees to sell a housing project involved in a 
prepayment request to a nonprofit organization or public body, the 
Rural Housing Service will notify each tenant, in writing, of the 
proposed sale to a nonprofit organization or public body and will 
explain the timeframes involved with the proposed sale, any potential 
impact on tenants, and the actions tenants may take to alleviate 
adverse impact if any. Borrowers must post copies of the Rural Housing 
Service's proposed sale notice in public areas throughout the housing 
project until the housing project is sold or the offer to sell is 
withdrawn.
    (g) If a borrower is unable to sell a housing project involved in a 
prepayment request to a nonprofit organization or public body within 
180 days as specified in Sec.  3560.659, the Rural Housing Service will 
send a notice to each tenant in the housing project explaining the 
potential impact of the borrower's inability to sell the housing 
project on tenants and the actions tenants may take to alleviate any 
adverse impact. Borrowers must post the Rural Housing Service's notice 
in public areas throughout the housing project for a period of 60 days 
following the date of the notice. If a tenant applicant signs a lease 
in a housing project for which a prepayment request has been submitted, 
the borrower must provide the tenant with copies of all notifications 
provided to tenants by the Rural Housing Service or the borrower prior 
to the tenant's occupancy in the housing project.


Sec.  3560.655  Rural Housing Service requested extension.

    Before accepting an offer to prepay from a borrower with a 
restricted loan, the Rural Housing Service must first make a reasonable 
effort to enter into a new restrictive-use agreement with the borrower. 
Under this agreement, the

[[Page 32944]]

borrower would make a binding commitment to extend the low-income use 
of the housing and related facilities for not less than 15 years for 
loans without interest credit and 20 years for loans with interest 
credit, beginning on the date on which the new agreement is executed. 
If the borrower is unwilling to enter into a new restrictive-use 
provision and restrictive-use agreement, the Rural Housing Service 
should document this fact in writing and proceed to take the actions 
described in Sec.  3560.658.


Sec.  3560.656  Incentive offers.

    (a) The Rural Housing Service will offer a borrower, who submits a 
prepayment request meeting the conditions of Sec.  3560.653(d), 
incentives to agree to the restrictive-use period in Sec.  3560.662 if 
the following conditions are met:
    (1) The Rural Housing Service determines that the prepayment will 
result in an adverse impact on the availability and affordability of 
housing for program-eligible households.
    (2) For loan agreements approved after December 21, 1979, but prior 
to December 15, 1989, the restrictive-use period has expired.
    (b) Specific incentives offered will be based on the Rural Housing 
Service's assessment of:
    (1) The value of the housing project as determined by Rural Housing 
Service obtained ``as-is'' market value appraisal conducted in 
accordance with subpart P of this part.
    (2) An incentive amount that will provide a fair return to the 
borrower;
    (3) An incentive amount that will not cause basic rents at the 
housing project to exceed conventional rents for comparable units; and
    (4) An incentive amount that will be the least costly alternative 
for the Federal Government while being consistent with the Rural 
Housing Service's commitment to the preservation of housing for very-
low, low, and moderate income households in rural areas.
    (c) The Rural Housing Service may offer the following incentives.
    (1) The Rural Housing Service may increase the borrower's annual 
return on investment by one of the following two methods. The actual 
withdrawal of the return remains subject to conditions specified in 
subpart G of this part.
    (i) The Rural Housing Service may recognize the borrower's current 
equity in the housing project. The equity will be determined using a 
Rural Housing Service accepted appraisal based on the housing project's 
value as unsubsidized conventional housing.
    (ii) The Rural Housing Service may recognize the borrower's current 
equity in the housing project at the higher of the original rate of 
return or the current 30-year Treasury bond rate plus 2 percent rounded 
to the nearest one-quarter percent. The equity will be determined using 
the most recent Rural Housing Service accepted appraisal, which will 
include a determination of long-term repair or deferred maintenance, of 
the housing project prior to receiving the prepayment request.
    (2) The Rural Housing Service may agree to convert projects without 
interest credit or with Plan I interest credit to Plan II interest 
credit or increase the interest credit subsidy for loans with Section 8 
assistance to lower the interest rate on the loan and make basic rents 
more financially feasible.
    (3) The Rural Housing Service may offer additional rental 
assistance, or an increase in assistance provided under existing 
contracts under sections 521(a)(2), 521(a)(5) or section 8 of the 
United States Housing Act of 1937 (42 U.S.C. 1437f).
    (4) The Rural Housing Service may make an equity loan to the 
borrower. The equity loan must not adversely affect the borrower's 
ability to repay other Rural Housing Service loans held by the borrower 
and must be made in conformance with the following requirements.
    (i) The equity loan must not exceed the difference between the 
current unpaid loan balance and 90 percent of the housing project's 
value as determined by an ``as-is'' market value appraisal conducted in 
accordance with subpart P of this part.
    (ii) Borrowers with farm labor housing loans are not eligible to 
receive equity loans as incentives.
    (iii) If an incentive offer for an equity loan is accepted, the 
equity loan may be processed and closed with the borrower or any 
eligible transferee.
    (iv) Excess reserve funds will be used to reduce the amount of an 
equity loan offered to a borrower.
    (v) Equity loans may not be offered unless the Rural Housing 
Service determines that other incentives are not adequate to provide a 
fair return on the investment of the borrower to prevent prepayment of 
the loan or to prevent displacement of project tenants.
    (5) The Rural Housing Service will offer rental assistance to 
protect tenants from rent overburden caused by any rent increase as a 
result of a borrower's acceptance of an incentive offer or tenants who 
are currently overburdened.
    (6) In housing projects with project-based Section 8 assistance, 
the Rural Housing Service may permit the borrower to receive rents in 
excess of the amounts determined necessary by the Rural Housing Service 
to defray the cost of long-term repair or maintenance of such a 
project.
    (d) The Rural Housing Service will determine that the combination 
of assistance provided is necessary to provide a fair return on the 
investment of the borrower and is the least costly alternative for the 
Federal Government.
    (e) At the time the incentive is developed, the Rural Housing 
Service must take into consideration the costs of any deferred 
maintenance items in the housing project's operating budget and any 
expected long-term repair or replacement costs based on a capital needs 
assessment developed in accordance with Sec.  3560.103(c). The amount 
required for the reserve account to be considered fully funded will be 
adjusted accordingly. To determine if basic rents exceed conventional 
rents for comparable units in the area, monthly contributions necessary 
to obtain the adjusted fully funded reserve account will be included in 
the calculation of basic rents. Deferred maintenance or any 
deficiencies identified in project compliance with section 504 of the 
Rehabilitation Act of 1973 must be addressed prior to the receipt of 
any incentive.
    (f) Existing loans must be consolidated, provided consolidation 
retains the Rural Housing Service's lien position, and reamortized in 
accordance with subparts I and J of this part, unless consolidation is 
not necessary to maintain feasibility of the housing for the tenants or 
to reduce the debt service or the level of monthly rental assistance.
    (g) The borrower must accept or reject the incentive offer within 
30 days. If no answer to the offer is received within 30 days, the 
Rural Housing Service may void the prepayment request.
    (h) If the borrower accepts the incentive offer, procedures 
outlined in Sec.  3560.657 must be followed.
    (i) If the borrower rejects the incentive offer, the borrower must 
comply with requirements listed in Sec.  3560.658.


Sec.  3560.657  Processing and closing incentive offers.

    (a) Borrower responsibilities. If a borrower accepts the Rural 
Housing Service's offer of incentives, the borrower must complete the 
actions listed below. The Rural Housing Service will not negotiate an 
incentive offer once it has been accepted.
    (1) The borrower must insert the restrictive-use language specified 
in

[[Page 32945]]

Sec.  3560.662 into the housing project's loan documents, deeds, and 
rental assistance agreements.
    (2) If the incentive offer accepted includes an equity loan, the 
borrower must complete an application for the equity loan, and the 
borrower must continue to qualify as an eligible borrower or transferee 
in accordance with subpart B of this part.
    (3) If the incentive offer accepted includes rent increases, the 
borrower must follow the rent increase requirements established in 
subpart E of this part.
    (b) Notification. The Rural Housing Service will notify each 
tenant, in writing, of the restrictive-use agreement in accordance with 
Sec.  3560.654(e).
    (c) Waiting lists. If funds for components of incentive offers are 
limited, the Rural Housing Service will establish a waiting list of 
accepted incentive offers for funding in the date order that the 
complete prepayment request was received.
    (d) Unfunded incentive offers. If the borrower accepts the 
incentive offer but the Rural Housing Service is unable to fund the 
incentive within 15 months, the borrower may choose one of the 
following actions.
    (1) The borrower may offer to sell the housing project in 
accordance with Sec.  3650.659. In this case the borrower will be 
removed from the list of borrowers awaiting incentives.
    (2) The borrower may stay on the list of borrowers awaiting 
incentives until the borrower's incentive offer is funded. The Rural 
Housing Service will not negotiate the incentive offer; but, at a 
borrower's request, may adjust the incentive amount to reflect an 
updated appraisal, loan balance, and terms of third party financing.
    (3) The borrower may withdraw the prepayment request and be removed 
from the list of borrowers awaiting incentives and continue operating 
the housing project for program purposes and in accordance with Rural 
Housing Service requirements. If the borrower chooses this option, the 
borrower may resubmit an updated prepayment request, at any time, and 
repeat the prepayment process in accordance within this subpart.


Sec.  3560.658  Borrower rejection of the incentive offer.

    (a) If a borrower rejects the incentive package offered by the 
Rural Housing Service or a Rural Housing Service request to extended 
restrictive-use provisions, made in accordance with Sec.  3560.662, the 
loan will only be prepaid if the borrower agrees to the following:
    (1) The borrower agrees to sign restrictive-use provisions to 
extend restrictive-use by 10 years from the date of prepayment, and at 
the end of the restrictive-use period offer to sell the housing to a 
qualified nonprofit organization or public body in accordance with 
Sec.  3560.659.
    (2) If restrictive-use provisions are in place, the borrower will 
agree to sign the restrictive-use provisions, as determined by the 
Rural Housing Service, and at the end of the restrictive-use period 
offer to sell the housing to a qualified nonprofit organization or 
public body in accordance with Sec.  3560.659.
    (3) If restrictive-use provisions are not in place prior to 
prepayment, the borrower will offer to sell the housing to a qualified 
nonprofit organization or public body in accordance with Sec.  
3560.659, or
    (b) The Rural Housing Service will assess the impact of prepayment 
on two factors: housing opportunities for minorities and the supply of 
decent, safe, sanitary, and affordable housing in the market area. If 
the Rural Housing Service determines that the prepayment will not have 
an adverse effect on housing opportunities for minorities but there is 
not an adequate supply of decent, safe, and sanitary rental housing 
affordable to program eligible tenant households in the market area, 
the loan may be prepaid only if the borrower agrees to sign 
restrictive-use provisions, as determined by the Rural Housing Service, 
to protect tenants at the time of prepayment.
    (c) If the borrower agrees to the restrictive-use provisions, as 
determined by the Rural Housing Service, the applicable language must 
be included in the release documents and the borrower must execute a 
restrictive-use agreement acceptable to the Rural Housing Service and a 
deed restriction.
    (d) If the borrower will not agree to applicable restrictive-use 
provisions, as determined by the Rural Housing Service, the borrower 
must offer to sell to a nonprofit or public body in accordance with 
Sec.  3560.659.


Sec.  3560.659  Sale or transfer to nonprofit organizations and public 
bodies.

    (a) Sales price. For the purposes of establishing a sales price 
when a borrower is required to sell a housing project to a nonprofit 
organization or public body, two independent ``as is'' market value 
appraisals will be completed, in accordance with subpart P of this 
part.
    (1) The Rural Housing Service will also prepare the appropriate 
level of environmental review under the National Environmental Policy 
Act to be completed in accordance with 7 CFR part 1940, subpart G prior 
to Rural Housing Service approval of a sale or transfer.
    (2) The expense of the borrower's appraisal shall be borne by the 
borrower. The appraiser selected may not have an identity of interest 
with the borrower.
    (3) If the two appraisers fail to agree on the fair market value, 
the Rural Housing Service and the borrower will jointly select an 
appraiser whose appraisal will be binding on the Rural Housing Service 
and the borrower. The Rural Housing Service and the borrower shall 
jointly fund the cost of the appraisal.
    (b) Marketing to nonprofit organizations and public bodies. If a 
borrower must offer the property for sale to a nonprofit organization 
or public body under this paragraph, the borrower must take the 
following actions to inform appropriate entities of the sale.
    (1) The borrower must advertise and offer to sell the project for a 
minimum of 180 days. The borrower may choose to suspend advertising and 
other sales efforts while eligibility of an interested purchaser is 
determined. If the purchaser is determined to be ineligible, the 
borrower must resume advertising for the balance of the required 180 
days.
    (2) The borrower must contact all nonprofit organizations and 
public bodies on a list maintained by the Rural Housing Service and may 
contact other nonprofit organizations and public bodies.
    (3) The borrower must provide the nonprofit organizations and 
public bodies contacted with sufficient information regarding the 
housing project and its operations for interested purchasers to make an 
informed decision. The information provided must include the minimum 
value of the housing project based on the market value determined in 
accordance with paragraph (a) of this section.
    (4) If an interested purchaser requests additional information 
concerning the housing project, the borrower must promptly provide the 
requested materials.
    (c) Preference for local nonprofit and public bodies. Local 
nonprofit organizations and public bodies have priority over regional 
and national nonprofit organizations and public bodies. The borrower 
may not accept an offer from other than local nonprofit organizations 
or public bodies during the first 60 days that the property is 
advertised. If no offer from a local nonprofit organization or public 
body is received in the first 60 days, the

[[Page 32946]]

borrower may accept an offer from a regional or national nonprofit 
organization or public body.
    (d) Eligible nonprofit organizations. To be eligible to purchase 
properties under the conditions of this subpart, nonprofit 
organizations may not have among its officers or directorate any 
persons or parties with an identity-of-interest (or any persons or 
parties related to any person with identity-of-interest) in loans 
financed under section 515 that have been prepaid or have requested 
prepayment. In addition to local nonprofit organizations, eligible 
nonprofit organizations include regional or national nonprofit 
organizations or public bodies provided no part of the net earnings of 
which accrue to the benefit of any member, founder, contributor or 
individual.
    (e) Requirements for nonprofit organizations and public bodies. To 
purchase and operate a housing project, a nonprofit organization or 
public body must meet the following requirements.
    (1) The purchaser must agree to maintain the housing project for 
very low- and low-income families or persons for the remaining useful 
life of the housing and related facilities. However, currently eligible 
moderate-income tenants will not be required to move.
    (2) The purchaser must agree that no subsequent transfer of the 
housing project will be permitted for the remaining useful life of the 
housing project unless the Rural Housing Service determines that the 
transfer will further the provision of housing for low-income 
households, or there is no longer a need for the housing project. 
Language to be included in the deed, conveyance instrument, loan 
resolution, and assumption agreement (as applicable) is provided in 
Sec.  3560.662.
    (3) The purchaser must demonstrate financial feasibility of the 
housing project including anticipated funding.
    (4) The purchaser must certify to the Rural Housing Service that no 
identity-of-interest relationships exist in accordance with Sec.  
3560.102(g). The purchaser must not have any identity of interest with 
the seller or any borrower that has previously prepaid or requested 
prepayment of a Rural Housing Service MFH loan.
    (5) The purchaser must complete a Rural Housing Service approved 
application and obtain Rural Housing Service approval in accordance 
with subpart B of this part.
    (6) The purchaser must make a bona fide offer taking into 
consideration the value of the housing project as determined in 
accordance with paragraph (a) of this section.
    (f) Selection priorities. If more than one qualified nonprofit 
organization or public body submits an offer to purchase the project at 
the same time, priority will be given to local nonprofit organizations 
and public bodies over regional and national nonprofit organizations or 
public bodies. When selecting between offers equally meeting all other 
criteria:
    The borrower will first consider the success of the nonprofit 
organization's or public body's previous experience in developing and 
maintaining subsidized housing, with preference given to the most 
successful. If the offers continue to be equal, the borrower will then 
consider the number of years experience that the nonprofit organization 
or public body has had in developing and maintaining subsidized 
housing, with preference given to the greater number of years.
    (g) Loans made by the Rural Housing Service or other sources to 
nonprofit organizations and public bodies. Rural Housing Service loans 
to nonprofit organizations or public bodies may be made for the 
purposes described in paragraphs (g)(1) and (2) of this section. Rural 
Housing Service loans will be processed in accordance with subpart B of 
this part. Loans from other sources will be approved by the Rural 
Housing Service in accordance with subpart I of this part.
    (1) Rural Housing Service loans to nonprofit organizations or 
public bodies for the purchase of a housing project will be based on 
the appraised value determined in accordance with paragraph (a) of this 
section.
    (2) With proper justification, a Rural Housing Service loan may be 
made to help the nonprofit organization or public body meet the housing 
project's first year operating expenses if there are insufficient funds 
in the housing project's general operating and expense account to meet 
such expenses. A Rural Housing Service loan, for the purpose of 
covering first year operating expenses, may not exceed 2 percent of the 
housing project's appraised value determined in accordance with 
paragraph (c) of this section.
    (h) Advances for nonprofit organizations and public bodies. The 
Rural Housing Service may make advances, in accordance with section 
502(c)(5)(c)(i), not in excess of $20,000 to nonprofit organizations or 
public bodies that are purchasing housing under this subpart. Grant 
funds may be used to cover any direct costs other than the purchase 
price, incurred by nonprofit organizations or public bodies in 
purchasing and assuming responsibility for the housing project.


Sec.  3560.660  Acceptance of prepayments.

    (a) The Rural Housing Service may accept prepayment if any of the 
following circumstances exist:
    (1) Prepayment will be accepted if the Rural Housing Service 
determines that prepayment will not have an adverse impact on 
minorities; adequate, safe, decent and affordable housing is available; 
and tenants in the housing project will not experience a negative 
impact such as a change in rent or use, which results in increased net 
tenant contributions, displacements, or involuntary relocations.
    (2) Prepayment may be accepted if the Rural Housing Service 
determines that prepayment will have an adverse impact on the tenants 
in the housing project, but;
    (i) The borrower agreed to comply with restrictive-use provisions, 
as determined by the Rural Housing Service, after prepayment; or,
    (ii) The borrower agreed to offer the housing project for sale to a 
nonprofit organization or public body in accordance with Sec.  3560.659 
and no bona fide offer was received within 180 days from the date that 
the housing project was advertised for sale to a nonprofit organization 
or public body, or a bona fide offer was received within 180 days from 
the advertisement date but the offeror was unable to fulfill the terms 
of the offer within 24 months of the offer date.
    (b) When the Rural Housing Service agrees to accept prepayment, the 
Rural Housing Service will notify borrowers, in writing, of the 
conditions under which the Rural Housing Service will accept prepayment 
including the specific restrictive-use provisions to which the borrower 
has agreed and the date by which the borrower must make the prepayment.
    (1) Prepayment must be made 180 days from the date of the Rural 
Housing Service's prepayment acceptance notice to the borrower.
    (2) If the borrower's prepayment is not received within 180 days of 
the prepayment acceptance notice and the Rural Housing Service has not 
agreed to an alternative date based on a written request from the 
borrower, the Rural Housing Service may cancel the prepayment 
acceptance agreement.
    (c) Tenants will be notified of the prepayment acceptance agreement 
in accordance with Sec.  3560.654(c).
    (d) If a prepayment is anticipated to result in increased net 
tenant contributions, displacements or involuntary relocations, the 
tenants, who are affected by such a circumstance, may request a Letter 
Of Priority Entitlement (LOPE) in

[[Page 32947]]

accordance with Sec.  3560.159(c). Tenants must request a LOPE within 
30 days of the prepayment acceptance notice date.


Sec.  3560.661  Sale or transfers.

    (a) If a sale or transfer is to take place simultaneously with the 
Rural Housing Service incentive offer, the sale or transfer must comply 
with the provisions of subpart I of this part.
    (b) If a proposed transferee is determined not to be eligible for 
the transfer and assumption, the borrower will be given an additional 
45 days to find another transferee.
    (c) In cases where the existing owner is in program non-compliance 
or default, the Rural Housing Service may make an offer of incentives 
contingent on the successful transfer of the housing to an acceptable 
purchaser. The Rural Housing Service may offer a smaller incentive or 
no incentive if the borrower does not agree to transfer the project to 
an acceptable purchaser, or if the transfer does not take place.


Sec.  3560.662  Restrictive-use provisions and agreements.

    (a) Clauses required for active borrowers with housing projects 
subject to restrictive-use provisions as a result of a loan making or 
servicing actions. The restrictive-use provisions must be contained in 
the loan documents or security instruments. The restrictions are 
applicable for a term of 20 years. All loans or servicing actions 
meeting the criteria described in paragraphs (a)(1), (2), and (3) of 
this section, must include the following clause in loan documents.

    The borrower and any successors in interest agree to use the 
housing project for the purpose of housing people eligible for 
occupancy as provided in section 514 or section 515 of title V of 
the Housing Act of 1949, and Rural Housing Service regulations then 
in existence during this 20-year period beginning (the date the last 
loan on the housing project is obligated or the date the housing 
project was last made subject to the prepayment restrictive-use 
provisions as a result of servicing actions or an incentive 
agreement, authorized under this subpart). Until (date), no eligible 
person occupying the housing project shall be required to vacate, or 
any eligible person wishing to occupy shall be denied occupancy 
without cause. The borrower will be released from these obligations 
before that date only when the Rural Housing Service determines that 
there is no longer a need for such housing or that such other 
financial assistance provided the residents of such housing will no 
longer be provided due to no fault, action, or lack of action on the 
part of the borrower. A tenant or individual wishing to occupy the 
housing, as well as the Rural Housing Service, may seek enforcement 
of this provision.

    (1) All loans approved after December 21, 1979, but prior to 
December 15, 1989.
    (2) Subsequent loans not made to build or acquire new units 
approved on or after December 15, 1989.
    (3) Any loan approved prior to December 21, 1979, and subsequently 
made subject to restrictive-use provisions due to a servicing action in 
accordance with in subparts I and J of this part, or an incentive to 
accept restrictive-use provisions in accordance with in this subpart.
    (b) Clauses required for active borrowers with housing projects 
subject to restrictive-use provisions as a result of a loan making or 
servicing actions when the loan is transferred to a limited 
partnership. The restrictive-use provisions must be contained in the 
loan documents or security instruments. The restrictions are applicable 
for a term of 30 years. All loans or servicing actions meeting the 
criteria described in paragraphs (b)(1), (2), and (3) of this section, 
must include the following clause in loan documents.

    The borrower and any successors in interest agree to use the 
housing project for the purpose of housing people eligible for 
occupancy as provided in section 514 or section 515 of title V of 
the Housing Act of 1949, and Rural Housing Service regulations then 
in existence during this 30-year period beginning (the date the last 
loan on the housing project is obligated or the date the housing 
project was last made subject to the prepayment restrictive-use 
provisions as a result of servicing actions or an incentive 
agreement, authorized under this subpart). Until (date), no eligible 
person occupying the housing project shall be required to vacate, or 
any eligible person wishing to occupy shall be denied occupancy 
without cause. The borrower will be released from these obligations 
before that date only when the Rural Housing Service determines that 
there is no longer a need for such housing or that such other 
financial assistance provided the residents of such housing will no 
longer be provided due to no fault, action, or lack of action on the 
part of the borrower. A tenant or individual wishing to occupy the 
housing, as well as the Rural Housing Service, may seek enforcement 
of this provision.

    (1) All loans approved after December 21, 1979, but prior to 
December 15, 1989.
    (2) Subsequent loans not made to build or acquire new units 
approved on or after December 15, 1989.
    (3) Any loans approved prior to December 21, 1979, and subsequently 
made subject to restrictive-use provisions due to a servicing action in 
accordance with in subparts I and J of this part, or an incentive to 
accept restrictive-use provisions in accordance with in this subpart.
    (c) Clauses required for housing projects made subject to 
restrictive-use provisions when a loan is transferred to a nonprofit 
organization or public body. (1) For housing projects being made 
subject to restrictive-use provisions because of a transfer to a 
nonprofit or public body, in accordance with in Sec.  3560.659, the 
following clause must be inserted in the deed, conveyance instrument, 
loan resolution and assumption agreement, as applicable.

    The borrower and any successors in interest agree to use the 
housing project for the purpose of housing very low- and low-income 
people eligible for occupancy as provided in Rural Housing Service 
regulations then in existence during the remaining useful life of 
the housing project. A tenant or person wishing to occupy the 
housing project, as well as the Rural Housing Service, may seek 
enforcement of this provision. Throughout the remaining useful life 
of this housing project, no eligible person occupying or wishing to 
occupy the housing project shall be required to vacate or be denied 
occupancy without cause. Rents, other charges, and conditions of 
occupancy will be set to meet these conditions. The borrower will be 
released during such period from these obligations only when the 
Rural Housing Service determines that there is no longer a need for 
such housing. Further, the borrower will be released if other 
financial assistance provided to the residents of such housing will 
no longer be provided due to no fault, action or lack of action on 
the part of the borrower.

    (2) The restrictions are intended to protect only very low- and 
low-income people for the remaining useful life of the project, unless 
the Rural Housing Service subsidy is removed without cause or it is 
determined there is no longer a need for the housing. These 
restrictions will not be superceded by new restrictions imposed by 
subsequent transfers. Eligible moderate-income tenants living at the 
project at the time of prepayment will not be required to move as a 
result of the restrictions. Moderate-income applicants for the housing 
will continue to retain priority over ineligible applicants for the 
housing.
    (d) Clauses and agreement required for prepaid projects, which were 
subject to restrictive-use provisions prior to the prepayment. (1) 
Housing projects may only be prepaid if the title to the real property 
is made subject to the following restrictive-use provisions and 
incorporated in the security releases. The following Multi-Family 
Housing projects are subject to restrictive-use provisions herein 
contained:
    (i) Any loan on the project obligated between December 21, 1979, 
and December 15, 1989, or subsequent loan not made to build or acquire 
new units approved on or after December 15, 1989.
    (ii) Any loan made subject to restrictive-use provisions as a 
result of a transfer or reamortization as contained in this subpart.

[[Page 32948]]

    (iii) Any loan made subject to restrictive-use provisions as a 
result of accepting an incentive to not prepay as contained in this 
subpart.
    The provisions provide protections to the same categories of 
tenants who were protected while the loan was in effect, to the same 
extent that the tenants were protected prior to the prepayment and for 
the length of time remaining under the restrictions prior to the 
prepayment.

    (Borrower Name), herein referred to as owner, and any successors 
in interest agree that the (Project Name), herein referred to as 
housing, will be used only as authorized under sections 514 and 515 
of title V of the Housing Act of 1949, and Rural Housing Service 
regulations then in existence until (insert date shown on existing 
restrictive-use provisions) for the purpose of housing low- and 
moderate-income people eligible for occupancy. A tenant or applicant 
for occupancy, as well as the Rural Housing Service, may seek 
enforcement of this provision. During the restricted period, no 
eligible person occupying or wishing to occupy the housing shall be 
required to vacate or be denied occupancy without cause. Rents, 
other charges, and conditions of occupancy will be set to meet these 
conditions. The owner also agrees to keep a notice posted at the 
project, and in a visible place available for tenant inspection, for 
the remainder of the restrictive-use period, stating that the 
project is to be used in accordance with sections 514 and 515 of 
title V of the Housing Act of 1949, and that management practices 
and rental rates will be consistent with those necessary to maintain 
the project for (insert ``low- and moderate-income'' or ``very low- 
and low-income'' as shown on existing restrictive-use provisions) 
tenants for the remainder of the restrictive-use period.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of Rural Housing Service regulations specific to tenant 
rights and relations for the duration of the restrictive-use period. 
The owner agrees to be responsible for ensuring that rental 
procedures, verification, and occupancy charges, and termination and 
eviction remain consistent with the 7 CFR part 1930, subpart C, and 
to adhere to applicable local, state, and Federal laws. The owner 
agrees to obtain Rural Housing Service concurrence with any changes 
to the preceding rental procedures that may deviate from those 
approved at the time of prepayment, prior to implementing the 
changes. Any changes proposed must be consistent with the objectives 
of the program and the regulations. Documentation, including annual 
income recertifications, shall be maintained to evidence compliance 
in the event there is a future complaint or audit. The owner must be 
able to document that acceptable waiting lists were maintained, 
units were rented to appropriate tenants, and rents were established 
at appropriate levels. The owner agrees to make the documentation 
available for Rural Housing Service inspection upon request. The 
owner and any successors in interest agree to provide the following 
signed and dated certification to the applicable Rural Housing 
Service Servicing Office or other designated office within 30 days 
of the beginning of each calendar year until (Date restrictive-use 
period ends):
    (Name of Owner) certifies that (Name of Project) is being 
operated in compliance with the restrictive-use provisions contained 
in (Applicable release document) and the Restrictive Use Agreement, 
herewith, which sets forth certain requirements for operation of the 
project for the benefit of low- and moderate-income people in 
conformance with applicable Rural Housing Service regulations. (Name 
of Owner) understands that failure to operate the project in 
conformance with the restrictive-use provisions may cause a tenant 
or the Rural Housing Service to seek enforcement of the provisions.
 Date:-----------------------------------------------------------------
 Owner:----------------------------------------------------------------
 By:-------------------------------------------------------------------
 (Title)

    (e) Clauses and Agreement required for prepaid housing projects, 
which became subject to restrictive-use provisions at the time of 
prepayment. Multi-Family Housing projects that were not subject to 
restrictive-use provisions prior to prepayment may, generally, only be 
prepaid if the title to the real property is made subject to one of the 
following restrictive-use provisions and the provisions are filed with 
the security releases. The restrictive-use provisions apply to all 
loans made prior to December 21, 1979 that were not subsequently made 
subject to restrictive-use provision as a result of servicing actions 
after December 21, 1979. The restrictions will also be used for sales 
of projects at foreclosure for projects not previously subject to 
restrictive-use provisions, provided the project is to remain in the 
section 514 or section 515 program. The conditions for which 
restrictive-use provisions are not required are contained in Sec.  
3560.658. These provisions are used when the owner agrees to 
restrictive-use provisions for a minimum of a 20-year period, and 
agrees to offer to sell the assisted housing and related facilities to 
a qualified nonprofit organization or public Rural Housing Service in 
accordance with Rural Housing Service regulations upon termination of 
the 20-year period. The period is calculated from the date on which the 
last loan for the project was obligated or applicable servicing action 
taken. The borrower will also be required to execute the Restrictive-
Use Agreement herein contained.

    (Owner Name), herein referred to as owner, and any successors in 
interest agree to use the (Project Name), herein referred to as 
housing, as required in 7 CFR 3560, subpart N and other regulations 
then in existence during the 20 year period beginning (date of last 
loan or servicing action) for the purpose of housing low- and 
moderate-income people eligible for occupancy. A tenant or applicant 
for occupancy, as well as the Rural Housing Service may seek 
enforcement of this provision. Prior to (date period ends) no 
eligible person occupying or wishing to occupy the housing project 
shall be required to vacate or be denied occupancy without cause. 
Rents, other charges, and conditions of occupancy will be 
established to meet these conditions such that the effect will not 
differ from what would have been, had the housing remained in the 
Government program. The owner also agrees to keep a notice posted at 
the housing project for the remainder of the restrictive-use period, 
in a visible place available for tenant inspection, stating that the 
housing project is to be used in accordance with sections 514 and 
515 of title V of the Housing Act of 1949, and that management 
practices and rental rates will be consistent with those necessary 
to maintain the housing project for the protected population for the 
remainder of the restrictive-use period. At the expiration of this 
period ending (date), the housing project will be offered for sale 
to a qualified nonprofit organization or public body, as determined 
by the Rural Housing Service.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 1930, subpart C, and specific to tenant 
rights and relations for the duration of the restrictive-use period. 
The owner agrees to be responsible for ensuring that rental 
procedures, verification and certification of income or employment, 
lease agreements, rent or occupancy charges, and termination and 
eviction remain consistent with the provisions contained in 7 CFR 
part 1930, subpart C, and to adhere to applicable local, state, and 
Federal laws. The owner agrees to obtain Rural Housing Service 
concurrence with any changes to the preceding rental procedures that 
may deviate from those approved at the time of prepayment, prior to 
implementing the changes. Any changes proposed must be consistent 
with the objectives of the program and the regulations. 
Documentation, including annual income recertifications, shall be 
maintained to evidence compliance in the event there is a future 
complaint or audit. The owner must be able to document that 
acceptable waiting lists were maintained, units were rented to 
appropriate tenants, and rents were established at appropriate 
levels. The owner agrees to make the documentation available for 
Rural Housing Service inspection upon request. The owner and any 
successors in interest agree to provide the following signed and 
dated certification to the applicable Rural Housing Service 
Servicing Office or other designated office within 30 days of the 
beginning of each calendar year until (insert date restrictive-use 
period ends):
    (Name of Owner) certifies that (Name of Project) is being 
operated in compliance with the restrictive-use provisions contained 
in (applicable release document) and the Restrictive-Use Agreement 
which sets forth certain requirements for operation of the project 
for the benefit of low- and moderate-income people in conformance 
with applicable RHS regulations. (Name of Owner) understands that 
failure to operate the project

[[Page 32949]]

in conformance with the restrictive-use provisions may cause a 
tenant or the United States to seek enforcement of the provisions.

 Date:-----------------------------------------------------------------
 Owner:----------------------------------------------------------------
 By:-------------------------------------------------------------------
 (Title)

    (f) Clauses and Agreement required for housing projects subject to 
restrictive-use provisions at the borrower's election to allow 
prepayment. These provisions are used after the owner rejects 
incentives or declines an additional restrictive-use period, or when 
the owner agrees to restrictive-use provisions for a minimum of a 10-
year period, and agrees to offer to sell the assisted housing and 
related facilities to a qualified nonprofit organization or public 
Rural Housing Service in accordance with Rural Housing Service 
regulations upon termination of the 10-year period. The period is 
calculated from the date on which the last loan for the project was 
obligated or applicable servicing action taken. The borrower will also 
be required to execute the Restrictive-Use Agreement herein contained.

    (Owner Name), herein referred to as owner, and any successors in 
interest agree to use the (Project Name), herein referred to as 
housing, as required in 7 CFR 3560, subpart N and other regulations 
then in existence during the 10 year period beginning (date of last 
loan or servicing action) for the purpose of housing low- and 
moderate-income people eligible for occupancy. A tenant or applicant 
for occupancy, as well as the Rural Housing Service, may seek 
enforcement of this provision. Prior to (date period ends) no 
eligible person occupying or wishing to occupy the housing project 
shall be required to vacate or be denied occupancy without cause. 
Rents, other charges, and conditions of occupancy will be 
established to meet these conditions such that the effect will not 
differ from what would have been, had the housing remained in the 
Rural Housing Service program. The owner also agrees to keep a 
notice posted at the housing project for the remainder of the 
restrictive-use period, in a visible place available for tenant 
inspection, stating that the housing project is to be used in 
accordance with section 514 and 515 of title V of the Housing Act of 
1949, and that management practices and rental rates will be 
consistent with those necessary to maintain the housing project for 
the protected population for the remainder of the restrictive-use 
period. At the expiration of this period ending (date), the housing 
project will be offered for sale to a qualified nonprofit 
organization or public body, as determined by the Rural Housing 
Service.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 1930, subpart C, and specific to tenant 
rights and relations for the duration of the restrictive-use period. 
The owner agrees to be responsible for ensuring that rental 
procedures, verification and certification of income or employment, 
lease agreements, rent or occupancy charges, and termination and 
eviction remain consistent with the provisions contained in 7 CFR 
part 1930, subpart C, and to adhere to applicable local, state, and 
Federal laws. The owner agrees to obtain Rural Housing Service 
concurrence with any changes to the preceding rental procedures that 
may deviate from those approved at the time of prepayment, prior to 
implementing the changes. Any changes proposed must be consistent 
with the objectives of the program and the regulations. 
Documentation, including annual income recertifications, shall be 
maintained to evidence compliance in the event there is a future 
complaint or audit. The owner must be able to document that 
acceptable waiting lists were maintained, units were rented to 
appropriate tenants, and rents were established at appropriate 
levels. The owner agrees to make the documentation available for 
Rural Housing Service inspection upon request. The owner and any 
successors in interest agree to provide the following signed and 
dated certification to the applicable Rural Housing Service 
Servicing Office or other designated office within 30 days of the 
beginning of each calendar year until (insert date restrictive-use 
period ends):
    (Name of Owner) certifies that (Name of Project) is being 
operated in compliance with the restrictive-use provisions contained 
in (applicable release document) and the Restrictive-Use Agreement 
which sets forth certain requirements for operation of the project 
for the benefit of low- and moderate-income people in conformance 
with applicable RHS regulations. (Name of Owner) understands that 
failure to operate the project in conformance with the restrictive-
use provisions may cause a tenant or the United States to seek 
enforcement of the provisions.

 Date:-----------------------------------------------------------------
 Owner:----------------------------------------------------------------
 By:-------------------------------------------------------------------
 (Title)

    (g) Loans with current restrictive-use provisions (all loans were 
obligated and applicable servicing actions took place for the project 
over 20 years prior to prepayment). These provisions are used when the 
loan is currently under restrictive-use provisions and the owner enters 
into an agreement to immediately attempt to offer the project for sale 
to a nonprofit organization or public Rural Housing Service in 
accordance with Sec.  3560.659. The borrower will also be required to 
execute the Restrictive-Use Agreement herein contained. The owners and 
any successors in interest agree to immediately offer to sell the 
housing and related facilities to a qualified nonprofit organization or 
public Rural Housing Service, as determined by the Rural Housing 
Service.
    (Name of Borrower), herein referred to as owner, and any 
successors in interest agree to immediately attempt to sell the 
(Name of Project), herein referred to as housing and related 
facilities to a qualified nonprofit organization or public Rural 
Housing Service, as determined by the Rural Housing Service, in 
accordance with the provisions of 7 CFR part 3560, subpart N. The 
owner agrees to use the housing as required in 7 CFR, part 3560, 
subpart N, or other regulations then in existence during the sales 
period for the purpose of housing low- and moderate-income people 
eligible for occupancy. A tenant or applicant for housing may seek 
enforcement of this provision, as well as the United States. Prior 
to a sale to a nonprofit organization or public Rural Housing 
Service, no eligible person occupying or wishing to occupy the 
housing shall be required to vacate or be denied occupancy without 
cause. Rents, other charges, and conditions of occupancy will be 
established to meet these conditions such that the effect will not 
differ from what would have been had the project remained in the RHS 
program. The owner also agrees to keep a notice posted at the 
housing project in a place available for tenant inspection, for the 
remainder of the sales period, stating that the housing project is 
to be used in accordance with sections 514 and 515 of title V of the 
Housing Act of 1949, and that management practices and rental rates 
for tenants as of the date of the prepayment will be consistent with 
those necessary to maintain the housing project for low- and 
moderate-income tenants. A tenant, as well as the Rural Housing 
Service, may seek enforcement of this provision.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 3560, subpart N, and specific to tenant 
rights and relations for the duration of the sales period. The owner 
agrees to be responsible for ensuring that rental procedures, 
verification and certification of income and employment, lease 
agreements, rent or occupancy charges, and termination and eviction 
remain consistent with the provisions contained in 7 CFR part 1930, 
subpart C, and to adhere to applicable local, state, and Federal 
laws. The owner agrees to obtain Rural Housing Service concurrence 
with any changes to the preceding rental procedures that may deviate 
from those approved at the time of prepayment, prior to implementing 
the changes. Any changes proposed must be consistent with the 
objectives of the program and the regulations. Documentation, 
including annual income recertifications, shall be maintained to 
evidence compliance in the event there is a future complaint or 
audit. The owner must be able to document that acceptable waiting 
lists were maintained, units were rented to appropriate tenants, and 
rents were established at appropriate levels. The owner agrees to 
make the documentation available for Rural Housing Service 
inspection upon request. The owner and any successors in interest 
agree to provide the following signed and dated certification to the 
applicable RHS Servicing Office or other designated office within 30 
days of the beginning of each calendar year until a sale to 
nonprofit organization or public Rural Housing Service takes place:
    (Name of Owner) certifies that (Name of Project) is being 
operated in compliance with the restrictive-use provisions contained 
in (applicable release document) and the

[[Page 32950]]

Restrictive-Use Agreement which sets forth certain requirements for 
operation of the project for the benefit of low- and moderate-income 
people in conformance with applicable Rural Housing Service 
regulations. (Name of Owner) understands that failure to operate the 
project in conformance with the restrictive-use provisions may cause 
a tenant or the United States to seek enforcement of the provisions.

 Date:-----------------------------------------------------------------
 Owner:----------------------------------------------------------------
 By:-------------------------------------------------------------------
(Title)

    (h) Current Tenants Restrictive-Use Provisions. These provisions 
are used when the owner enters into an agreement that no current 
tenants will be displaced due to a change in the use of the housing or 
an increase in rental or other charges, as a result of prepayment, for 
as long as the current tenants wish to remain at the project. The 
provisions may only be used if it is determined by the Rural Housing 
Service that the conditions specified in this subpart, addressing the 
effect of prepayment on minorities, handicapped individuals, and 
families with children in the project and market area, can be met, 
allowing an exception from the requirement to offer the project to sale 
to a nonprofit organization or public body. The borrower will also be 
required to execute the Restrictive-Use Agreement herein contained.

    (Name of Borrower), herein referred to as owner, and any 
successors in interest agree to use the (Name of Project), herein 
referred to as housing, for the purpose of housing low- and 
moderate-income people occupying the project at the time the 
prepayment was accepted, as required in 7 CFR part 3560, subpart N, 
and other applicable Rural Housing Service regulations then in 
existence. No eligible person occupying the housing shall be 
required to vacate prior to the end of the remaining useful life of 
the project without cause. Rents, other charges, and conditions of 
occupancy will be established to meet these conditions for these 
tenants such the effect will not differ from what would have been, 
had the project remained in the Rural Housing Service program. 
Existing tenants are protected to ensure that none experience new or 
increased rent overburden as a result of owner actions until each 
voluntarily moves from the project. The owner also agrees to keep a 
notice posted at the project in a visible place available for tenant 
inspection, for the remaining useful life of the project or until 
the last existing tenant voluntarily vacates. The notice will state 
that the project is to be used in accordance with sections 514 and 
515 of title V of the Housing Act of 1949, and that management 
practices and rental rates will be consistent with those necessary 
to maintain the project for low- and moderate-income tenants. A 
tenant may seek enforcement of this provision, as well as the United 
States.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 1930, subpart C, specific to tenant rights 
and relations for the remaining useful life of the project or until 
the last existing tenant voluntarily vacates the project. The owner 
agrees to be responsible for ensuring that rental procedures, 
verification and certification of income and employment, lease 
agreements, rents or occupancy charges, and termination and eviction 
remain consistent with the provisions contained in 7 CFR part 1930, 
subpart C, and to adhere to applicable local, state, and Federal 
laws. The owner agrees to obtain Rural Housing Service concurrence 
with any changes to the preceding rental procedures that may deviate 
from those approved at the time of prepayment, prior to implementing 
the changes. Any changes proposed must be consistent with the 
objectives of the program and the regulations. Documentation, 
including annual income recertifications, shall be maintained to 
evidence compliance in the event there is a future complaint or 
audit. The owner must be able to document that rents are established 
at appropriate levels. The owner agrees to make the documentation 
available for Rural Housing Service inspection upon request. The 
owner and any successors in interest agree to provide the following 
signed and dated certification to the applicable Rural Housing 
Service Servicing Office or other designated office within 30 days 
of the beginning of each calendar year until the last existing 
tenant voluntarily vacates the project:
    (Name of Owner) certifies that (Name of Project) is being 
operated in compliance with the restrictive-use provisions and the 
Restrictive-Use Agreement (herein contained) which sets forth 
certain requirements for operation of the project for the benefit of 
low- and moderate-income people in conformance with applicable Rural 
Housing Service regulations. (Name of Owner) understands that 
failure to operate the project in conformance with the restrictive-
use provisions may cause a tenant or the United States to seek 
enforcement of the provisions.


Sec.  3560.663  Post-payment responsibilities for loans subject to 
continued restrictive-use provisions.

    (a) If a borrower prepays a loan and the housing project remains 
subject to restrictive-use provisions, the requirements of this section 
apply after prepayment.
    (b) Owners of prepaid housing projects will be responsible for 
ensuring that the restrictive-use provisions agreed to as a condition 
of prepayment are observed.
    (c) Owners must maintain appropriate documentation to demonstrate 
compliance with the restrictive-use provisions and must make the 
documentation and the housing project site available for Federal 
Government inspection upon request.
    (1) Owners must document rent increases in accordance with subpart 
G of this part.
    (2) Owners must document tenant eligibility in accordance with 
Sec.  3560.152.
    (3) In an Agency approved format, owners must provide the agency 
with a signed and dated certification within 30 days of the beginning 
of each calendar year for the full period of the restrictive-use 
provisions establishing that the restrictive-use provisions are being 
met.
    (d) Owners must observe Agency policies on tenant grievances as 
described in Sec.  3560.160.
    (e) The Agency may enforce restrictive-use provisions through 
administrative and legal actions.


Sec. Sec.  3560.664-3560.699  [Reserved]


Sec.  3560.700  OMB control number. [Reserved]

Subpart O--Unauthorized Assistance


Sec.  3560.701  General.

    (a) This subpart contains the policies for recapturing unauthorized 
assistance when the Agency determines that a borrower or tenant was 
ineligible for, or improperly used, assistance received from the 
Agency.
    (b) The Agency may seek repayment of any unauthorized assistance 
provided to a borrower or tenant, plus the cost of collection, 
regardless of whether the unauthorized assistance was due to errors by 
the Agency, the borrower, or the tenant. Borrowers are expected to:
    (1) Request explanations from tenants for any assistance considered 
to be unauthorized because of inaccurate information supplied by the 
tenant.
    (2) Issue demand for repayment of an amount certain by a date 
certain for unauthorized assistance. The demand notice must include the 
right of a tenant to challenge the accuracy of the information relied 
upon. Such challenges will be conducted under the provisions of Sec.  
3560.160.
    (3) Initiate and pursue eviction should tenants not timely 
exercising their right to challenge the accuracy of the information or 
should the borrower determine that the information provided warrants 
recapture of unauthorized assistance and the tenant is unwilling or 
unable to provide timely repayment. The Agency must be timely notified 
of all evictions initiated and the status of such actions.
    (4) Notify the Agency of amounts of unauthorized assistance 
scheduled to be repaid, actually repaid, or refused to be repaid. The 
Agency must be notified of any unauthorized assistance which is not 
being timely repaid by tenants. The Agency reserves the right to pursue 
collection of amounts not timely paid by tenants.

[[Page 32951]]

Sec.  3560.702  Unauthorized assistance sources and situations.

    (a) Unauthorized assistance can be received by a borrower or tenant 
in the form of loans, grants, interest credit, rental assistance, or 
other assistance provided by the Agency including assistance received 
as a result of an incorrect interest rate being applied to an Agency 
loan. Agency officials may pursue identification and recapture of 
unauthorized assistance.
    (b) Unauthorized assistance may result from situations such as:
    (1) Assistance being provided to an ineligible borrower or tenant;
    (2) Assistance to an eligible borrower or tenant being used for an 
unauthorized purpose;
    (3) Assistance being obtained as a result of inaccurate, 
incomplete, or fraudulent information provided by a borrower or tenant; 
or
    (4) Assistance being obtained as a result of errors by the Agency, 
borrower, or tenant.


Sec.  3560.703  Identification of unauthorized assistance.

    (a) The Agency will use all available means to identify 
unauthorized assistance, including Agency monitoring activities, OIG 
reports, GAO reports, and reports from any source, if the information 
provided can be substantiated by the Agency.
    (b) Borrowers have the primary responsibility for identifying and 
pursuing repayment of unauthorized assistance received by tenants.


Sec.  3560.704  Unauthorized assistance determination notice.

    (a) The Agency will notify borrowers, in writing, when a 
determination has been made that unauthorized assistance was received 
by the borrower. Borrowers will notify tenants, in writing, when a 
determination is made that unauthorized assistance was received by the 
tenant and will simultaneously send the Agency a copy of the written 
notice to the tenant. The unauthorized assistance determination notice 
is a preliminary notice, not a demand letter. The unauthorized 
assistance determination notice will:
    (1) Specify the reasons the assistance was determined to be 
unauthorized;
    (2) State the amount of unauthorized assistance to be repaid and 
specify the party responsible for repayment of the unauthorized 
assistance (i.e., the tenant or borrower) according to the provision of 
Sec.  3560.708;
    (3) Establish a place and time when the person receiving the 
unauthorized assistance determination notice may meet with the Agency 
or, in the case of tenants, may meet with the borrower, to discuss 
issues related to the unauthorized assistance notice such as the 
establishment of a repayment schedule; and
    (4) Advise the borrower or tenant that they may present facts, 
figures, written records, or other information which might alter the 
determination that the assistance received was unauthorized.
    (b) Upon request, the Agency or borrower, in the case of tenants, 
will grant additional time for discussions related to an unauthorized 
assistance determination notice. Borrowers must notify the Agency of 
schedule revisions when additional time is granted to a tenant in 
unauthorized assistance claims.


Sec.  3560.705  Recapture of unauthorized assistance.

    (a) The Agency will seek repayment of all unauthorized assistance 
received by a borrower or tenant, plus the cost of collection, to the 
fullest extent permitted by law. Agency efforts to collect unauthorized 
assistance will include offsets and the use of private or public 
collection agents. Agency findings related to unauthorized assistance 
determinations will be referred to credit reporting bureaus and other 
federal, state, or local agencies with jurisdictions related to the 
unauthorized assistance findings for suspension, debarment, civil or 
criminal action to the fullest extent permitted by law.
    (b) If a borrower or tenant agrees to repay unauthorized 
assistance, the amount due will be the amount stated in the 
unauthorized assistance determination notice unless another amount has 
been approved by the Agency.
    (c) If a borrower or tenant agrees to repay unauthorized 
assistance, the borrower or tenant proposed repayment schedule must be 
approved by the Agency prior to implementation. Repayment may be made 
either with a lump sum payment or through payments made over a period 
of time. Agency approval of a repayment schedule will take into 
consideration the best interest of the borrower, the tenant, and the 
Federal Government.
    (d) Borrowers must retain copies of all correspondence and a record 
of all conversations between the borrower and a tenant regarding 
unauthorized assistance received by a tenant.
    (e) When a tenant, who has received unauthorized assistance due to 
tenant error or fraud, moves out of a housing project, the borrower is 
no longer responsible for recapturing the unauthorized assistance 
provided that the borrower notifies the Agency of the tenant's move and 
transfers all records related to the tenant's unauthorized assistance 
to the Agency within 30 days of the tenant's move. The Agency will 
pursue the tenant for recovery of unauthorized assistance when the 
borrower's efforts are unsuccessful or where tenants have been evicted.
    (f) If a borrower refuses to enter into an unauthorized assistance 
repayment schedule with the Agency, the Agency will initiate 
liquidation procedures, in accordance with Sec.  3560.456, or other 
enforcement actions, such as suspension, debarment, civil, or criminal 
penalties. If a tenant refuses to enter into an unauthorized assistance 
repayment schedule, the Agency will initiate recovery actions against 
the tenant household.
    (g) Borrowers may not use housing project funds to pay amounts due 
to the Agency as a result of unauthorized assistance.


Sec.  3560.706  Offsets.

    Offsets will be used by the Agency to recapture unauthorized 
assistance. Guidance concerning use of offsets can be found at 7 CFR 
3550.210.


Sec.  3560.707  Program participation and corrective actions.

    (a) With Agency approval, a borrower or tenant, who has received 
unauthorized assistance, may continue to participate in the Agency's 
programs if they have the legal and financial capabilities to do so. 
Approval considerations for such forbearance are in Sec.  3560.705.
    (b) A borrower or tenant who was responsible for the circumstances 
causing the unauthorized assistance must take appropriate action to 
correct the problem within 90 days of the unauthorized assistance 
determination notice date, unless an alternative date is agreed to by 
the Agency.
    (c) When the interest rate shown in a debt instrument resulted in 
the receipt of unauthorized assistance, the debt instrument will be 
modified to the correct interest rate. All payments made by the 
borrower prior to the determination that the interest rate was 
incorrect will be reapplied at the correct interest rate, and remaining 
payments due on the loan will be recalculated on the basis of the 
correct interest rate, plus any amounts due to the Agency as a result 
of the use of an incorrect interest rate, unless the Agency concurs in 
a borrower request for approval to pay the unauthorized assistance 
amounts due through a separate repayment process.

[[Page 32952]]

Sec.  3560.708  Unauthorized assistance received by tenants.

    (a) Tenant actions that require tenant repayment of unauthorized 
assistance received by tenants include, but are not limited to:
    (1) Knowingly or mistakenly misrepresenting income, assets, 
adjustments to income, or household status to the borrower as required 
under subpart D of this part; or
    (2) Failure to properly report changes in income, assets, 
adjustments to income, or household status to the borrower as required 
in subpart D of this part.
    (b) Borrower actions that require borrower repayment of 
unauthorized assistance received by tenants include, but are not 
limited to:
    (1) Incorrect determination of tenant income or household status by 
the borrower, resulting in rental assistance or interest credit that 
are not allowable under the provisions of subparts D, E, and F of this 
part; or
    (2) Assignment of rental assistance to a household that is 
ineligible under the requirements of subpart F of this part.
    (c) When it is determined that a tenant has received unauthorized 
assistance, the borrower shall notify the tenant and the Agency through 
the procedure specified in Sec.  3560.704.
    (d) Borrowers may not charge tenants for or use housing project 
funds to pay amounts due to the Agency as a result of unauthorized 
assistance to tenants through borrower error.
    (e) Borrowers must notify the Agency of all collections from 
tenants as repayments for unauthorized assistance and must remit or 
credit the amounts collected to applicable housing project accounts.
    (f) When rental assistance was improperly assigned to a tenant, 
whether due to borrower or tenant fraud or borrower or tenant error, 
the rental assistance benefit must be canceled and reassigned.
    (1) Before a borrower notifies a tenant of rental assistance 
cancellation, the borrower must request Agency approval. If the Agency 
determines that the unauthorized rental assistance was received by the 
tenant due to borrower fraud or error, the borrower must give the 
tenant 30 days notice, in writing, that the unit was assigned in error 
and that the rental assistance benefit will be canceled effective on 
date that the next monthly rental payment is due after the end of the 
30-day notice period.
    (2) Tenants also must be notified, in writing, that they may cancel 
their lease without penalty at the time the rental assistance is 
canceled. Tenants must be offered an opportunity to meet with a 
borrower to discuss the rental assistance cancellation.


Sec.  3560.709  Demand letter.

    (a) If a borrower fails to respond to an unauthorized assistance 
determination notice or fails to agree to a repayment schedule, the 
Agency will send the borrower a demand letter specifying:
    (1) The amount of unauthorized assistance to be repaid and the 
basis for the unauthorized assistance determination; and
    (2) The actions to be taken by the Agency if repayment is not made 
by a specified date.
    (b) If a tenant fails to respond to the unauthorized assistance 
determination notice or fails to agree to a repayment schedule, the 
borrower will send the tenant a demand letter specifying:
    (1) The amount of unauthorized assistance to be repaid and the 
basis for the unauthorized assistance determination;
    (2) The actions to be taken if repayment is not made by a specified 
date, including termination of tenancy; and
    (3) The appeal rights of the tenant as specified in Sec.  3560.160.
    (c) A demand letter may be sent to a borrower or tenant, in lieu of 
an unauthorized assistance determination notice, when the evidence 
documenting the unauthorized assistance determination is deemed to be 
conclusive by the Agency in the case of initial demands on a borrower, 
or by the borrower in the case of an initial demand by a borrower on a 
tenant, or by the Agency in the case of demands on a tenant made 
initially by the Agency or upon referral by a borrower for Agency 
collection servicing efforts.


Sec. Sec.  3560.710-3560.749  [Reserved]


Sec.  3560.750  OMB control number. [Reserved]

Subpart P--Appraisals


Sec.  3560.751  General.

    This subpart sets forth appraisal policies for Agency-financed 
multi-family housing consisting of five or more rental units. Agency-
financed housing project's with fewer than five rental units may be 
appraised in accordance with the Agency's single family housing 
appraisal policies established under 7 CFR 3550.62.


Sec.  3560.752  Appraisal use, request, release, and review.

    (a) Appraisal uses. The Agency will use appraisals to determine 
whether the security offered by an applicant or borrower is adequate to 
secure a loan or to determine appropriate servicing or preservation 
decisions. Appraisals used for Agency decision-making may be no more 
than 12 months old unless the Agency and the applicant or borrower 
mutually agree to the use of an appraisal more than 12 months old.
    (b) Appraisal requests. Appraisal requests must be in writing and 
must specify the intended use of the appraisal and the value basis on 
which the housing project and related facilities are to be appraised.
    (1) The appraisal request must indicate whether the housing project 
and related facilities are to be appraised on a ``value-in-use'' basis 
or a ``market value'' basis.
    (i) A request for a ``value-in-use'' appraisal means the appraisal 
will take into consideration any subsidies or use restrictions imposed 
on the property by a financing source. A value-in-use appraisal will 
take into consideration any interest credits, tax credits, tax rebates, 
rent subsidies, grant funds, or other forms of assistance related to 
the housing, including subsidies or use restrictions imposed by the 
Agency or any other government or non-government source.
    (ii) A request for a ``market value'' appraisal means the appraisal 
will take into consideration the price which a property should sell for 
in a competitive and open market with no subsidies or use restrictions. 
The appraisal will assume a fair sale with the buyer and seller each 
acting prudently and knowledgeably and assuming the price is not 
affected by undue stimulus such as a foreclosure or other legal action 
that forced a sale of the property. Implicit in this definition is the 
consummation of a sale as of a specified date and the passing of title 
from seller to buyer under conditions whereby:
    (A) Both parties are well informed or well advised and acting in 
what they consider their best interest;
    (B) A reasonable time is allowed for exposure in the open market;
    (C) Payment is made in terms of cash in United States dollars or in 
terms of financial arrangements comparable thereto; and,
    (D) The price represents consideration for the property sold 
unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (2) The appraisal request must indicate whether the ``as-is'' or 
the ``as-improved'' value of the housing is to be calculated.
    (i) As-is value means the value of the housing and the related 
facilities in the condition in which the housing exists at the time the 
appraisal is conducted. If

[[Page 32953]]

the property is to be appraised as Agency financed housing, the ``as-
is'' value should take into consideration anticipated expenses to bring 
the housing into compliance with Agency requirements, vacancy rate 
expectations, anticipated tenant turn over rates, and estimated 
operation and maintenance expenses taking into consideration the 
property's condition.
    (ii) As-improved value means the value of the housing and the 
related facilities in the condition in which the housing will exist 
after specified improvements are made. If the property is to be 
appraised as Agency financed housing the ``as-improved'' value should 
take into consideration vacancy rates, tenant turn over rates, and 
operations and maintenance costs as expected after improvements.
    (3) Section 8 project-based assistance. Depending on the purpose 
and use of the appraisal, the Agency will specify whether or not 
section 8 project-based assistance will be considered in the 
calculation of the housing's estimate of value. The remaining term of 
the section 8 contract and the probability of subsequent renewal terms 
being authorized will be taken into consideration when making this 
determination.
    (4) Low-Income Housing Tax Credit (LIHTC) and other financing 
sources. Depending on the purpose and use of the appraisal, the Agency 
will specify whether or not LIHTC's and other financing sources 
involved in the housing will be considered in the calculation of the 
housing's estimate of value.
    (c) Release of appraisals. Appraisals procured by the Agency for 
internal decision-making processes will not be released for purposes 
unrelated to the decision for which the appraisal was procured.


Sec.  3560.753  Agency appraisal standards and requirements.

    (a) General. The Agency recognizes the Uniform Standards of 
Professional Appraisal Practice (USPAP) as the basic standards for 
appraisals. Appraisals completed by independent appraisers must comply 
with USPAP standards and this part.
    (b) Appraisers. Appraisals prepared for the Agency will be 
conducted by Agency staff who have met the educational requirements of 
the State's appraisal licensing board in the state where the duty 
station of the Agency staff or independent fee appraisers who meet the 
licensing requirements of the state where the property is located.
    (c) Appraisal report. Appraisal report format may be a form 
appraisal or a narrative appraisal. The Agency will specify the 
appraisal format that best addresses the circumstances of the housing 
project being appraised when the appraisal is requested.
    (1) Form appraisal reports. The Agency will accept form appraisal 
reports that meet generally accepted industry standards and have been 
approved by the Agency.
    (2) Narrative appraisal reports. Narrative appraisal reports must, 
at a minimum, contain the following items:
    (i) Transmittal letter;
    (ii) Factual information about the property;
    (iii) Regional and neighborhood data;
    (iv) Description of the subject property;
    (v) Description of existing and planned improvements;
    (vi) A highest and best use statement;
    (vii) A statement about any environmental issues, including the 
issue of potential contamination of the property from hazardous 
substances, hazardous wastes, or petroleum products;
    (viii) A cost approach analysis;
    (ix) A sales or market approach analysis;
    (x) An income approach to value analysis; and
    (xi) A dated and signed final estimate of value with a 
reconciliation of the cost, sales or market, and income approaches.
    (3) At the time an appraisal is requested, the Agency will specify 
one of the following types of appraisal reports based upon the 
complexity of the appraisal assignment.
    (i) A self-contained report which provides comprehensive details of 
the estimate of value.
    (ii) A summary report which provides a concise presentation of the 
findings that support the estimate of value.
    (iii) A restricted report which provides a presentation of the 
estimate of value with minimal documentation.
    (d) Highest and best use statement and analysis. The principle of 
highest and best use is to be addressed for each site to be used for 
multi-family housing as if the site was ready to be developed. If the 
highest and best use of a site is for something other than housing, the 
appraisal report must provide this information to the Agency for 
consideration in the loan process. The highest and best use statement 
for a multi-family housing site must address whether the proposed use 
of the site is:
    (1) Legally permissible;
    (2) Physically possible;
    (3) Financially feasible; and
    (4) Maximally profitable.
    (e) Valuation methods and variances. The final estimate of value 
presented in an appraisal report must have considered a cost approach, 
a sales approach, and an income approach. If one of these standard 
approaches is not used, or if the variation between the three 
approaches exceeds 10 percent, the reconciliation narrative shall 
provide a full and complete explanation of the variances, or the 
reasons one approach was not used.
    (f) Real estate history. Appraisals must contain a 5-year ownership 
history for the housing project being appraised.
    (g) Reserve accounts. When conducting appraisals in conjunction 
with a prepayment request or a transfer request, funds in the housing 
project's reserve account in excess of repair costs to bring the 
housing into compliance with state and local codes and the physical 
standards established under Sec.  3560.103(a)(3), shall be considered 
as part of the housing's value.
    (h) Escrow accounts. Short-term prepaid escrow accounts for general 
operating expenses such as taxes and insurance, shall not be considered 
during appraisals.
    (i) Rental rates comparison. The appraisal report must document 
whether the housing project's basic rents are less than, equal to, or 
greater than conventional rents for comparable conventional non-
subsidized units in the area where the housing is located.
    (j) Description of housing. The appraisal report must identify and 
describe both the real estate (legal rights) and the real property 
(tangible property) interest being appraised.
    (k) Exclusions of rental units from appraisals. The Agency will 
provide appraisers with instructions on which rental units will not be 
valued in the appraisal report.
    (l) Non-contiguous sites. When a housing project has real property 
located on non-contiguous sites, a separate appraisal must be developed 
for each site.
    (m) Value for energy-saving devices. Appraisal for housing projects 
with energy-saving devices must document the device's estimated annual 
cost savings in present value dollars for each year during the 
manufacturer's useful life projection for the energy-saving device. If 
a device is found to produce a negative savings, then an adjustment for 
obsolescence is to be made to the value of the energy-saving measure.


Sec.  3560.754  Non-completion of appraisal assignment.

    If an appraiser determines that the instructions provided are 
inappropriate or unclear, or the appraiser is unsure of the assignment 
after beginning the appraisal, the appraiser must provide

[[Page 32954]]

written notice to the Agency listing the reasons why the appraisal 
cannot be completed and requesting further instructions.


Sec. Sec.  3560.755--3560.799  [Reserved]


Sec.  3560.800  OMB control number. [Reserved]

    Dated: May 15, 2003.
Thomas C. Dorr,
Under Secretary, Rural Development.
[FR Doc. 03-12761 Filed 5-30-03; 8:45 am]
BILLING CODE 3410-XV-P