[Federal Register Volume 68, Number 111 (Tuesday, June 10, 2003)]
[Proposed Rules]
[Pages 34552-34557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14480]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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 

  Federal Register / Vol. 68, No. 111 / Tuesday, June 10, 2003 / 
Proposed Rules  

[[Page 34552]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3565

RIN 0575-AC28


Guaranteed Rural Rental Housing Program; Secondary Mortgage 
Market Participation

AGENCY: Rural Housing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: The Rural Housing Service (RHS) proposes to amend its 
regulations for the Guaranteed Rural Rental Housing Program (GRRHP). 
Under the GRRHP, RHS guarantees loans for the development of housing 
and related facilities for low or moderate income families in rural 
areas. RHS administers the GRRHP under the authority of the Housing Act 
of 1949. The GRRHP regulations are being amended to allow RHS, in the 
case of a default, to buy back guaranteed loans from investors. Another 
change includes lowering the minimum level of rehabilitation work when 
guaranteed loans are used for acquisition and rehabilitation. These 
regulatory changes are made to increase participation by the secondary 
mortgage market in the GRRHP.

DATES: Written or E-mail comments must be received on or before August 
11, 2003.

ADDRESSES: Written comments may be submitted, in duplicate, to Tracy 
Givelekian, Regulations and Paperwork Management Branch, Rural 
Development, 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 words ``Secondary Mortgage'' in the subject. All 
written comments will be available for public inspection at 300 7th 
Street SW., Washington, DC 20024, during normal working hours.

FOR FURTHER INFORMATION CONTACT: Arlene Nunes, Senior Loan Specialist, 
Multi-Family Housing Processing Division, Rural Housing Service, U.S. 
Department of Agriculture, STOP 0781, 1400 Independence Avenue SW., 
Washington, DC 20250-0781, Telephone (202) 720-1604.

SUPPLEMENTARY INFORMATION:

Classification

    This rule has been determined to be significant for purposes of 
Executive Order 12866 and therefore has been reviewed by the Office of 
Management and Budget (OMB).

Paperwork Reduction Act

    The information collection requirements contained in this 
regulation have been previously approved by OMB under the provisions of 
44 U.S.C. chapter 35 and this regulation has been assigned OMB control 
number 0575-0174, in accordance with the Paperwork Reduction Act of 
1995. There will be a slight increase in the collection requirements 
from those approved by OMB. Those increased requirements will be 
addressed when the rule change is published as a final rule.

Civil Justice Reform

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. In accordance with this rule: (1) All state and local 
laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) administrative proceedings in accordance with 7 CFR part 11 must be 
exhausted before bringing suit in court challenging action taken under 
this rule.

Unfunded Mandates Reform Act

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

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 substantial direct compliance costs on state and local 
governments. Therefore, consultation with the states is not required.

Programs Affected

    The affected program is listed in the Catalog of Federal Domestic 
Assistance under Number 10.438, Section 538 Rural Rental Housing 
Guaranteed Loans.

Intergovernmental Consultation

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

Environmental Impact Statement

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

Regulatory Flexibility Act

    This proposed rule has been reviewed with regard to the 
requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). The 
undersigned has

[[Page 34553]]

determined and certified by signature of 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.

Background

    The Guaranteed Rural Rental Housing Program (GRRHP) is a relatively 
new program that is administered by the Rural Housing Service (RHS). 
The GRRHP was operated as a pilot program in 1996 and 1997, and has 
been a permanent program since 1998. The program has been designed to 
increase the availability of affordable multifamily housing in rural 
America through partnerships between the Agency and lending sources, as 
well as with state and local housing finance agencies and bond issuers. 
During the early stages of the program, barriers were identified that 
have limited the success of the program. One of the primary barriers 
has been the inability of lenders to close loans due to a lack of 
participation by the secondary mortgage market. As a result of this 
poor performance, we consulted industry and governmental experts in the 
loan guarantee field at a December 2000 stakeholders' meeting. Our main 
goal was to learn what we could do to close more loans. The regulatory 
changes herein are the result of meetings with industry stakeholders, 
including input from banks, housing finance agencies, and secondary 
market sectors. The meetings were held to identify program stumbling 
blocks and brainstorm solutions. The purpose of the following changes 
is to make the program more industry friendly while not jeopardizing 
the best interests of the Government.
    Allow for a timely payment to investors. In other Rural Development 
guaranteed programs, the security holder may demand that either the 
lender or the Government buy out the guaranteed portion of the loan 
from the holder if payments are delinquent by at least 60 days, or if 
the lender has failed to remit to the holder its pro rata share of any 
payment made by the borrower within 30 days of its receipt. While the 
holder is effectively taken out prior to liquidation of the loan, the 
lender must continue to meet all of its obligations to the Government 
under the Lender's Agreement and Loan Note Guarantee. This provision is 
important to investors because they do not want to wait for the lender 
to liquidate the collateral to be reimbursed for their investment, 
enabling them to put their money to better use elsewhere. By this rule 
change, the Agency is also adding a definition of the term ``Holder.''
    Define conditions of the guarantee. A common concern found among 
lenders reviewing the GRRHP were the policies on termination or 
reduction of the guarantee due to a performance failure of the lender. 
It was the consensus that these policies needed to be more clearly 
delineated. In addition, it is important for the regulation to make 
clear that the investor will be held harmless unless they are complicit 
with the lender in cases involving fraud, abuse, negligence or 
misrepresentation of fact. This issue has been addressed in the 
revision of Sec.  3565.52.
    Allow the accrual of interest for 90 days after loan default. When 
the lender is liquidating a guaranteed loan and owns any of the 
guaranteed portion of the loan, it may request a tentative loss 
estimate. Upon payment under the current policy, interest accrual 
terminates on the defaulted loan if an estimated payment of loss is 
made. This revision changes this policy to allow interest to accrue for 
90 days after the date the decision is made to liquidate the loan in 
default. This interest accrual policy is consistent with other Agency 
loan guarantee programs. Based on the weight of the factors used to 
calculate the program's subsidy rate, the impact of this interest 
accrual policy would be negligible.
    Lower per unit threshold for acquisition with rehabilitation from 
$15,000 per unit to $6,500 per unit. The purpose of lowering the per 
unit rehabilitation threshold affords new opportunities to preserve 
affordable housing in a rural community.
    Eliminate the timeframe for liquidation, which is currently at 9 
months. Eliminating the liquidation timeframe affords the lender the 
opportunity to sell the property for the highest and best price in 
accordance with market conditions.

List of Subjects in 7 CFR Part 3565

    Banks, Conflict of interests, Credit, Environmental impact 
statements, Fair housing, Hearing and appeal procedures, Low and 
moderate income housing, Mortgages, Real property acquisition.
    Therefore, chapter XXXV, title 7, Code of Federal Regulations is 
proposed to be amended to read as follows:

PART 3565--GUARANTEED RURAL RENTAL HOUSING PROGRAM

    1. The authority citation for part 3565 continues to read as 
follows:

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

Subpart A--General Provisions

    2. Section 3565.3 is amended by adding, in alphabetical order, a 
definition of ``Holder.''


Sec.  3565.3  Definitions.

* * * * *
    Holder. A person or entity, other than the lender, who owns all or 
part of the guaranteed portion of the loan with no servicing 
responsibilities. When the single note option is used and the lender 
assigns a part of the guaranteed note to an assignee, the assignee 
becomes a holder only when the Agency receives notice and the 
transaction is completed through use of an assignment guarantee 
agreement form approved by the Agency.
* * * * *

Subpart B-- Guarantee Requirements

    3. Section 3565.52 is revised to read as follows:


Sec.  3565.52  Conditions of guarantee.

    A loan guarantee under this part will be evidenced by a Loan Note 
Guarantee issued by the Agency. Each lender will execute a Lender's 
Agreement. If a valid Lender's Agreement already exists, it is not 
necessary to execute a new Lender's Agreement with each loan guarantee.
    (a) Rights and liabilities. A Guarantee under this part is backed 
by the full faith and credit of the United States and is incontestable 
except for fraud or misrepresentation of which the lender had knowledge 
at the time the lender acquired the Guarantee, or which a lender 
participates in or condones. The Guarantee will be unenforceable by the 
lender to the extent any loss is occasioned by fraud, misrepresentation 
or abuse, violation of usury laws, negligent servicing or origination 
by the lender, including a failure to acquire required security, or as 
a result of a use of proceeds by the lender for purposes other than 
those authorized by the Agency and permissible under this regulation. 
Negligent servicing or origination is a failure to perform those 
services, which a reasonably prudent lender would perform in servicing 
or originating its own portfolio, and includes not only the failure to 
act, but also the failure to act in a timely manner. These acts 
constitute grounds for the cancellation of the guarantee or refusal to 
make full payment under the guarantee. If in the judgment of the Agency 
these acts or omissions can reasonably be expected to have a material 
adverse effect on the credit

[[Page 34554]]

quality of the Guaranteed Loan or the physical condition of the 
property securing the Guaranteed Loan, the Agency may cancel or modify 
a guarantee to the extent of the potential loss. The Agency shall give 
notice to the lender of the acts or omissions that it considers to 
constitute such grounds and give the lender a reasonable opportunity to 
cure the acts or omissions. Other violations or performance 
deficiencies of the lender may themselves be a basis to bar the lender 
from receiving further Loan Note Guarantees, but will not constitute 
grounds for cancellation or reduction of the guarantee or refusal to 
make a claim payment. When a guaranteed portion of a loan is sold to a 
holder, the holder shall succeed to all rights of the lender under the 
Loan Note Guarantee to the extent of the portion purchased. The lender 
will remain bound to all obligations under the Loan Note Guarantee, 
Lender's Agreement, and the Agency program regulations.
    (b) Liability of the holder. The holder shall not be liable for the 
actions of the lender including negligence, fraud, abuse, 
misrepresentation or misuse of funds, and its rights under the 
guarantee shall be fully enforceable notwithstanding the actions of the 
lender, unless the holder has knowledge of such actions when it becomes 
the holder or condones or participates in such actions.
    (c) Guarantee percentage and payment. Both permanent loans and 
combination construction and permanent loans are eligible for a 
guaranty subject to the following limitations:
    (1) Permanent loans. A minimum level of acceptable occupancy as 
determined by the lender with Agency concurrence must be attained prior 
to the expiration of Form 3565-2 Conditional Commitment, including any 
extensions thereto, and the issuance of a loan guarantee for the 
permanent loan. The maximum guarantee for a permanent loan will be 90 
percent of the unpaid principal and accrued interest 90 days from the 
date the decision is made to liquidate the loan. The Agency may provide 
a lesser guarantee based upon its evaluation of the credit quality of 
the loan. The Agency liability under any guarantee will decrease or 
increase, in proportion to any increase or decrease in the amount of 
the unpaid portion of the loan, up to the maximum amount specified in 
the Loan Note Guarantee.
    (2) Combination construction and permanent loans. For combination 
construction and permanent loans, the Agency will guarantee advances 
during the construction loan period (which cannot exceed 24 months). 
The guarantee of construction loan advances will convert to a permanent 
loan guarantee once the required level of occupancy has been reached. 
The maximum guarantee of construction advances related to a combination 
construction and permanent loan will not at any time exceed the lesser 
of 90 percent of the amount of principal advanced for eligible 
construction expenses or 90 percent of the original principal amount of 
the combination loan. The Agency may provide a lesser guarantee based 
upon its evaluation of the credit quality of the loan. In addition, the 
lender shall require the borrower or the contractor to provide credit 
enhancements to protect the Government's guarantee. Acceptable credit 
enhancements include:
    (i) Surety bonding or performance and payment bonding (the 
preferred credit enhancement);
    (ii) An irrevocable letter of credit acceptable to the Agency; and
    (iii) A pledge by the lender of acceptable collateral.
    (3) Maximum loss payment. The maximum loss payment to a lender or 
holder is as follows:
    (i) To any holder, 100 percent of any loss sustained by the holder 
on the guaranteed portion of the loan and on interest due on such 
portion.
    (ii) To the lender, the lesser of:
    (A) Any loss sustained by the lender on the guaranteed portion, 
including principal and interest evidenced by the notes or assumption 
agreements and secured advances for protection and preservation of 
collateral made with the Agency's authorization; or
    (B) The guaranteed principal advanced to or assumed by the borrower 
and any interest due thereon.

Subpart C--Lender Requirements

    4. Section 3565.102 is amended by revising paragraph (b) to read as 
follows:


Sec.  3565.102  Lender eligibility.

* * * * *
    (b) Meet the qualifications and be approved by Fannie Mae or 
Freddie Mac to make multifamily housing loans that are to be sold to or 
securitized by such corporations;
* * * * *

Subpart E--Loan Requirements

    5. Section 3565.212 is amended by removing the word ``; and'' from 
paragraph (c) and adding a period and by removing paragraph (d).

Subpart F--Property Requirements

    6. Section 3565.252 is revised to read as follows:


Sec.  3565.252  Housing types.

    The property may include new construction or rehabilitated existing 
structures. The units may be attached, detached, semi-detached, row 
houses, modular or manufactured houses, or multifamily structures. 
Manufactured housing must meet Agency requirements contained in 7 CFR 
part 1924, subpart A or a successor regulation. The Agency will 
guarantee proposals for new construction or acquisition with moderate 
or substantial rehabilitation of at least 15 percent of the total 
estimated replacement cost of the project or $6,500 per dwelling unit, 
whichever is greater. The portion of guarantee funds available for 
projects involving acquisition and rehabilitation may be limited in the 
annual Notice of Fund Availability.

Subpart I--Servicing Requirements

    7. Section 3565.403 is amended by redesignating paragraphs (a), 
(b), (c), and (d) as paragraphs (b), (c), (d), and (e), respectively, 
and by adding a new paragraph (a) to read as follows:


Sec.  3565.403  Special servicing.

* * * * *
    (a) Repurchase from holder. For securitized loans, the holder may 
require the lender or Government to repurchase the security in 
accordance with the provisions of Sec.  3565.405.
* * * * *
    8. Section 3565.405 is added to read as follows:


Sec.  3565.405  Repurchase of guaranteed loans.

    (a) Repurchase by lender. A lender has the option to repurchase the 
unpaid guaranteed portion of the loan from a holder within 30 days of 
written demand by the holder when the borrower is in default not less 
than 60 days on principal or interest due on the loan; or the lender 
has failed to remit to the holder its pro rata share of any payment 
made by the borrower within 30 days of the lenders receipt thereof. The 
repurchase by the lender will be for an amount equal to the unpaid 
guaranteed portion of principal and accrued interest less the lender's 
servicing fee. The holder must concurrently send a copy of the demand 
letter to the Agency. The guarantee will not cover the note interest to 
the holder on the guaranteed loan accruing after 90 days from the date 
of the demand letter to the lender requesting the repurchase.

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The lender will accept an assignment without recourse from the holder 
upon repurchase. The lender is encouraged to repurchase the loan to 
facilitate the accounting of funds, resolve the problem, and prevent 
default, where and when reasonable. The lender will notify the holder 
and the Agency of its decision.
    (b) Repurchase by Agency.
    (1) If the lender does not repurchase the unpaid guaranteed portion 
of the loan as provided in paragraph (a) of this section, the Agency 
will purchase from the holder the unpaid principal balance of the 
guaranteed portion together with accrued interest to date of 
repurchase, less the lender's servicing fee, within 30 days after 
written demand to the Agency from the holder. This demand notice is in 
addition to the copy of the written demand on the lender. The guarantee 
will not cover the note interest to the holder on the guaranteed loan 
accruing after 90 days from the date of the original demand letter of 
the holder to the lender requesting the repurchase.
    (2) The holder's demand to the Agency must include a copy of the 
written demand made upon the lender. The holder must also include 
evidence of its right to require payment from the Agency. Such evidence 
will consist of either the original of the Loan Note Guarantee properly 
endorsed to the Agency or the original of the assignment guarantee 
agreement, on a form approved by the Agency, properly assigned to the 
Agency without recourse including all rights, title, and interest in 
the loan. The holder must include in its demand the amount due 
including unpaid principal, unpaid interest to date of demand, and 
interest subsequently accruing from date of demand to proposed payment 
date. The Agency will be subrogated to all rights of the holder.
    (3) The Agency will notify the lender of its receipt of the 
holder's demand for payment. The lender must promptly provide the 
Agency with the information necessary for the Agency to determine the 
appropriate amount due the holder. Upon request by the Agency, the 
lender will furnish a current statement certified by an appropriate 
authorized officer of the lender of the unpaid principal and interest 
then owed by the borrower on the loan and the amount then owed to any 
holder. Any discrepancy between the amount claimed by the holder and 
the information submitted by the lender must be resolved between the 
lender and the holder before payment will be approved. Such conflict 
will suspend the running of the 30 day payment requirement.
    (4) Purchase by the Agency neither changes, alters, nor modifies 
any of the lender's obligations to the Agency arising from the loan or 
guarantee nor does it waive any of Agency's rights against the lender. 
The Agency will have the right to set-off against the lender all rights 
inuring to the Agency as the holder of the instrument against the 
Agency's obligation to the lender under the guarantee.

Subpart J--Assignment, Conveyance, and Claims

    9. Section 3565.452 is amended by revising paragraph (a) to read as 
follows:


Sec.  3565.452  Decision to liquidate.

    (a) A decision to liquidate shall be made when it is determined 
that the default cannot be cured through actions contained in Sec.  
3565.403 or it has been determined that it is in the best interest of 
the Agency and the lender to liquidate. If the loan has not already 
been repurchased when a decision to liquidate is made, provisions will 
be made for repurchase in accordance with Sec.  3565.405.
* * * * *
    10. Section 3565.453 is revised to read as follows:


Sec.  3565.453  Disposition of the property.

    (a) Submission of the liquidation plan. The lender will, within 30 
days after a decision to liquidate, submit to the Agency in writing, 
its proposed detailed plan of liquidation. The Agency will inform the 
lender in writing whether the Agency concurs in the lender's 
liquidation plan. Should the Agency and the lender not agree on the 
liquidation plan, negotiations will take place between the Agency and 
the lender to resolve the disagreement. When the liquidation plan is 
approved by the Agency, the lender will proceed expeditiously with 
liquidation. The liquidation plan submitted to the Agency by the lender 
shall include:
    (1) Such proof as the Agency requires to establish the lender's 
ownership of the guaranteed loan promissory note and related security 
instruments.
    (2) A copy of the payment ledger if available which reflects the 
current loan balance and accrued interest to date and the method of 
computing the interest.
    (3) A full and complete list of all collateral including any 
personal and corporate guarantees.
    (4) The recommended liquidation methods for making the maximum 
collection possible on the indebtedness and the justification for such 
methods, including recommended actions for:
    (i) Obtaining an appraisal of the collateral;
    (ii) Acquiring and disposing of all collateral;
    (iii) Collecting from guarantors;
    (iv) Setting the proposed date of foreclosure; and
    (v) Setting the proposed date of liquidation.
    (5) Necessary steps for protection of the tenants and preservation 
of the collateral.
    (6) Copies of the borrower's latest available financial statements.
    (7) Copies of the guarantor's latest available financial 
statements.
    (8) An itemized list of estimated liquidation expenses expected to 
be incurred along with justification for each expense.
    (9) A schedule to periodically report to the Agency on the progress 
of liquidation.
    (10) Estimated protective advance amounts with justification.
    (11) Proposed protective bid amounts on collateral to be sold at 
auction and a breakdown to show how the amounts were determined.
    (12) If a voluntary conveyance is considered, the proposed amount 
to be credited to the guaranteed debt.
    (13) Any legal opinions supporting the decision to liquidate.
    (14) If the outstanding balance of principal and accrued interest 
is less than $200,000, the lender will obtain an estimate of fair 
market and potential liquidation value of the collateral. If the 
outstanding balance of principal and accrued interest is $200,000 or 
more, the lender will obtain an independent appraisal report on all 
collateral securing the loan, which will reflect the fair market value 
and potential liquidation value, and an examination of the title on the 
collateral. In order to formulate a liquidation plan which maximizes 
recovery, collateral must be evaluated for hazardous substances, 
petroleum products, or other environmental hazards which may adversely 
impact the market value of the collateral.
    (b) A transfer and assumption of the borrower's operation can be 
accomplished before or after the loan goes into liquidation. However, 
if the collateral has been purchased through foreclosure or the 
borrower has conveyed title to the lender, no transfer and assumption 
is permitted.
    (c) A protective bid may be made by the lender, with prior Agency 
written approval, at a foreclosure sale to protect the lender's and the 
Agency's interest. The protective bid will not exceed the amount of the 
loan, including expenses of foreclosure, and should be based on the 
liquidation value considering estimated expenses for holding and

[[Page 34556]]

reselling the property. These expenses include, but are not limited to, 
expenses for resale, interest accrual, length of weatherization, and 
prior liens.
    (d) Filing an estimated loss claim. When the lender is conducting 
the liquidation and owns any or all of the guaranteed portion of the 
loan, the lender will file an estimated loss claim once a decision has 
been made to liquidate if the liquidation will exceed 90 days. The 
estimated loss payment will be based on the outstanding loan amount 
minus the liquidation value of the collateral. For the purpose of 
reporting and loss claim computation, the loss claim will be promptly 
processed in accordance with applicable Agency regulations, as set 
forth in this section.
    (e) Property disposition. Once the liquidation plan has Agency 
approval, the lender must make every effort to liquidate the property 
in a manner that will yield the highest market value consistent with 
the protections afforded to tenants in 7 CFR part 1944, subpart L or 
successor regulation.
    (f) Accounting and reports. When the lender conducts liquidation, 
the lender will account for funds during the period of liquidation and 
provide the Agency with reports at least quarterly on the progress of 
liquidation, including disposition of collateral, resulting costs, and 
additional procedures necessary for successful completion of the 
liquidation.
    (g) Transmitting payments and proceeds to the Agency. When the 
Agency is the holder of a portion of the guaranteed loan, the lender 
will transmit to the Agency its pro rata share of any payments received 
from the borrower, liquidation, or other proceeds.
    11. Section 3565.457 is revised to read as follows:


Sec.  3565.457  Determination of claim amount.

    In all liquidation cases, final settlement will be made with the 
lender after the collateral is liquidated, unless otherwise designated 
as a future recovery or after settlement and compromise of all parties 
has been completed. The Agency will have the right to recover losses 
paid under the guarantee from any party which may be liable.
    (a) Report of loss form. An Agency approved form will be used for 
calculations of all estimated and final loss determinations. Estimated 
loss payments may only be approved by the Agency after the Agency has 
approved a liquidation plan.
    (b) Estimated loss. An estimated loss claim based on liquidation 
appraisal value will be prepared and submitted by the lender.
    (1) The estimated loss payment shall be applied as of the date of 
such payment. The total amount of the loss payment remitted by the 
Agency will be applied by the lender on the loan debt. Such application 
does not release the borrower from liability.
    (2) A protective advance claim will be paid only at the time of the 
final report of loss payment except in certain transfer and assumption 
situations.
    (c) Final loss. Within 30 days after liquidation of all collateral, 
except for certain unsecured personal or corporate guarantees as 
provided for in this section, is completed, a final report of loss must 
be prepared and submitted by the lender to the Agency. The Agency will 
not guarantee interest beyond this 30-day period other than for the 
period of time it takes the Agency to process the loss claim. Before 
approval by the Agency of any final loss report, the lender must 
account for all funds during the period of liquidation, disposition of 
the collateral, all costs incurred, and any other information necessary 
for the successful completion of liquidation. Upon receipt of the final 
accounting and report of loss, the Agency may audit all applicable 
documentation to determine the final loss. The lender will make its 
records available and otherwise assist the Agency in making any 
investigation. The documentation accompanying the report of loss must 
support the amounts shown on the report of loss form.
    (1) A determination must be made regarding the collectibility of 
unsecured personal and corporate guarantees. If reasonably possible, 
such guarantees should be promptly collected or otherwise disposed of 
prior to completion of the final loss report. However, in the event 
that collection from the guarantors appears unlikely or will require a 
prolonged period of time, the report of loss will be filed when all 
other collateral has been liquidated, and unsecured personal or 
corporate guarantees will be treated as a future recovery with the net 
proceeds to be shared on a pro rata basis by the lender and the Agency.
    (2) The lender must document that all of the collateral has been 
accounted for and properly liquidated and that liquidation proceeds 
have been properly accounted for and applied correctly to the loan.
    (3) The lender will show a breakdown of any protective advance 
amount as to the payee, purpose of the expenditure, date paid, and 
evidence that the amount expended was proper and that payment was 
actually made.
    (4) The lender will show a breakdown of liquidation expenses as to 
the payee, purpose of the expenditure, date paid, and evidence that the 
amount expended was proper and that payment was actually made. 
Liquidation expenses are recoverable only from collateral proceeds.
    (5) Accrued interest will be supported by documentation as to how 
the amount was accrued.
    (6) Loss payments will be paid by the Agency within 60 days after 
the receipt of the final loss report and accounting of the collateral.
    (7) Should there be a circumstance where the lender cannot or will 
not sign a final report of loss, the State Director may complete the 
final report of loss and submit it to the Finance Office without the 
lender's signature. Before this action can be taken, all collateral 
must be disposed of or accounted for; there must be no evidence of 
fraud, misrepresentation, or negligent servicing by the lender; and all 
efforts to obtain the cooperation of the lender must have been 
exhausted and documented.
    (d) Maximum guarantee payment. The maximum guarantee payment will 
not exceed the amount of guarantee percentage as contained in the 
guarantee agreement (but in no event more than 90%) times the allowable 
loss amount.
    (e) Rent. Any net rental or other income that has been received by 
the lender from the collateral will be applied on the guaranteed loan 
debt after paying operating expenses of the property.
    (f) Liquidation costs. Liquidation costs will be deducted from the 
proceeds of the disposition of primary collateral. If changed 
circumstances after submission of the liquidation plan require a 
substantial revision of liquidation costs, the lender will procure the 
Agency's written concurrence prior to proceeding with the proposed 
changes.
    (g) Payment. When the Agency finds the final report of loss to be 
proper in all respects, it will approve the form and proceed as 
follows:
    (1) If the loss is greater than any estimated loss payment, the 
Agency will pay the additional amount owed by the Agency to the lender.
    (2) If the loss is less than the estimated loss payment, the lender 
will reimburse the Agency for the overpayment plus interest at the note 
rate from the date of payment.
    (3) If the Agency determines that it is in the Government's best 
interest to take assignment of the loan and conduct liquidation, as 
stipulated in the 538 statute 42 U.S.C. 1490, i(3) Assignment by 
Secretary, the Agency will pay the

[[Page 34557]]

lender in accordance with the Loan Note Guarantee.
    (h) Date of loss. The date of loss is the date on which the 
collateral will be liquidated in the liquidation plan, unless an 
alternative date is approved by the Agency. Where the Agency chooses to 
accept an assignment of the loan or conveyance of title, the date of 
loss will be the date on which the Agency accepts assignment of the 
loan or conveyance of title.
    (i) Allowable claim amount. The allowable claim amount must be 
calculated by:
    (1) Adding to the unpaid principal and interest on the date of 
loss, an amount approved by the Agency for payments made by the lender 
for amounts due and owing on the property, including:
    (i) Property taxes and other protective advances as approved by the 
Agency;
    (ii) Water and sewer charges and other special assessments that are 
liens prior to the guaranteed loan;
    (iii) Insurance of the property; and
    (iv) Reasonable liquidation expenses.
    (2) And by deducting the following items:
    (i) Any amount received by the lender on the account of the 
guaranteed loan after the date of default;
    (ii) Any net income received by the lender from the secured 
property after the date of default; and
    (iii) Any cash items retained by the lender, except any amount 
representing a balance of the guaranteed loan not advanced to the 
borrower. Any loan amount not advanced will be applied by the lender to 
reduce the outstanding principal on the loan.
    (j) Lender certification. The lender must certify that all 
possibilities of collection have been exhausted and that all of the 
items specified in paragraph (c) of this section have been identified 
and reported to the Agency as a condition for payment of claim.

    Dated: March 18, 2003.
Thomas C. Dorr,
Under Secretary, Rural Development.
[FR Doc. 03-14480 Filed 6-9-03; 8:45 am]
BILLING CODE 3410-XV-P