[Federal Register Volume 69, Number 227 (Friday, November 26, 2004)]
[Rules and Regulations]
[Pages 69031-69176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-25599]



[[Page 69031]]

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Part II





Department of Agriculture





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Rural Housing Service



Rural Business--Cooperative Service



Rural Utilities Service



Farm Service Agency



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7 CFR Parts 1806 et al.



Reinvention of the Sections 514, 515, 516, and 521 Multi-Fam

[[Page 69032]]

ily Housing Programs; Interim Rule

  Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / 
Rules and Regulations  
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DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business--Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Parts 1806, 1822, 1902, 1925,1930, 1940, 1942, 1944, 1951, 
1955, 1956, 1965, 3560, and 3565

RIN 0575-AC13


Reinvention of the Sections 514, 515, 516, and 521 Multi-Family 
Housing Programs

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

ACTION: Interim final rule; request for comments.

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SUMMARY: The Rural Housing Service (RHS), formerly Rural Housing seand 
Community Development Service (RHCDS), a successor Agency to the 
Farmers Home Administration (FmHA), is streamlining and reengineering 
its regulations, as well as utilizing several private sector processes 
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 interim final 
rule combines the provisions of the Streamlining and Consolidation of 
the sections 514, 515, 516, and 521 Multi-Family Housing (MFH) Programs 
Proposed Rule published on June 2, 2003, and the Operating Assistance 
for Off-Farm Migrant Farmworker Projects Proposed Rule published on 
November 2, 2000.

EFFECTIVE DATE: February 24, 2005. Written or e-mail comments on this 
interim final rule must be received on or before December 27, 2004.

ADDRESSES: You may submit comments to this rule by any of the following 
methods:
     Agency Web site: http://rdinit.usda.gov/regs/. Follow the 
instructions for submitting comments on the Web Site.
     E-Mail: [email protected]. Include the RIN number (0575-
AC13) in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Submit written comments via Federal Express Mail or 
another mail courier service requiring a street address to the Branch 
Chief, Regulations and Paperwork Management Branch, U.S. Department of 
Agriculture, 300 7th Street, SW., 7th Floor, Suite 701, Washington, DC 
20024.
    All written comments will be available for public inspection during 
regular work hours at the 300 7th Street, SW., address listed above.

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

    The interim final rule has been determined to be significant, but 
not economically significant, and was reviewed by the Office of 
Management and Budget (OMB) under Executive Order 12866.

Authority

    The existing statutory authority for the MFH programs was 
established in title V of the Housing Act of 1949, which gave authority 
to the RHS (then the Farmers Home Administration) to make housing loans 
to farmers. As a result of this Act, the Agency established single-
family and multi-family housing programs. Over time, the sections of 
the Housing Act of 1949 addressing MFH have been amended a number of 
times. Amendments have involved issues such as the provision of 
interest credit, broadening definitions of eligible areas and 
populations to be served, participation of limited-profit entities, 
establishment of a rental assistance program, and imposition of a 
number of restrictive-use provisions and prepayment restrictions.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' RHS has determined that this 
action does not constitute a major Federal action significantly 
affecting the quality of the environment. 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 interim final 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.

Federalism (Executive Order 13132)

    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. This rule does 
not impose substantial direct compliance costs on State and local 
Governments; therefore, consultation with the States is not required.

Civil Justice Reform (Executive Order 12988)

    This rule has been reviewed under Executive Order 12988. In 
accordance with this rule: (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 to 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 in 
court that challenges action taken under this rule.

Unfunded Mandate Reform Act (UMRA)

    Title II of the 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 on 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 1 year. When such a 
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

[[Page 69033]]

provisions of title II of the UMRA) for State, local, and tribal 
Governments or for the private sector. Therefore, this rule is not 
subject to the requirements of sections 202 and 205 of the UMRA.

Paperwork Reduction Act of 1995

    The information collection requirements contained in this 
regulation have been approved by the OMB under the provisions of 44 
U.S.C. chapter 35 and have been assigned OMB control number 0575-0189, 
in accordance with the Paperwork Reduction Act (PRA) of 1995.
    Collectively, 2,191,777 hours of paperwork burden will be made 
obsolete from 12 dockets. The new 3560 regulation imposes 907,389 hours 
of paperwork burden on the public. This is a decrease of 1,284,388 
hours. However, only 111,552 hours of that are due to program changes.

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 Executive Order 12372 
that 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 Rural 
Development office and on the Internet at http://www.rdinit.usda.gov/regs/).

Background Information

An Overview

    Most communities in the rural United States have a scarcity of 
decent rental housing that is affordable to very low-income families. 
In addition, migrant farmworkers 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. In the 
Agency's experience, 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 the rural United States to access 
decent, safe, sanitary, and affordable housing. In many 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 the rural United States. As of February 
2004, the nearly $12 billion portfolio of 463,632 units and more than 
17,100 projects often provides the only decent, affordable rental 
housing available in rural areas. The program provides affordable 
rental housing to very low- and low-income rural families, to disabled 
people, and to elderly residents. The average tenant has an adjusted 
income of $9,452.
    The Agency operates a multifamily rural rental housing direct loan 
program under section 515 and section 514 for farm labor housing. The 
Agency also provides grants under the section 516 farm labor housing 
program. The 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 (LIHTC) proceeds. This program is typically used in conjunction 
with the RHS section 521 Rental Assistance (RA) program, 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 toward their rent 
(including utilities). Some section 515 projects also utilize the U.S. 
Department of Housing and Urban Development's (HUD's) section 8 
project-based assistance, which enables additional very low-income 
families to be served.
    The direct loan and grant programs under sections 514 and 516 
provide low interest loans and grants to provide housing for 
farmworkers. These workers may work either at the borrower's farm 
(``on-farm'') or at the borrower's or any other farm (``off-farm'') so 
long as the tenants meet program eligibility requirements. Section 521 
rental assistance is available for off-farm labor housing, but not on-
farm labor housing. The Agency has decided to not provide RA to on-farm 
labor housing units because of its limited availability.

Goals of the Regulatory Streamlining Process

    This rule results from 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. These 
goals were accomplished through the input and commitment that resulted 
from numerous stakeholder meetings with recognized leaders in the 
multi-family industry, including 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 (OIG) also participated. 
Through these meetings, RHS was able to draw on a vast amount of 
expertise and knowledge to meet the following objectives of multi-
family housing reinvention:
     Assure affordable safe, decent, and sanitary housing for 
very low- and low-income residents in rural communities.
     Consolidate and simplify 14 regulations into one 
regulation for rural rental housing, farm labor housing, and rental 
assistance.
     Develop an efficient loan application process that 
supports the creation of partnerships and leveraging with local, State, 
and other Federal entities.
     Clarify RHS's existing policies and procedures to reflect 
the best practices within the Agency and within the multi-family field.
     Improve efficiency and service to RHS's customers, 
correcting past problems and addressing concerns raised by stakeholders 
so that particularly complex processes, such as preservation, work 
better.
     Make much of the farm labor housing review and approval 
processes the same as those for rural rental housing processes.
     Create a series of handbooks available to field staff and 
to applicants, borrowers, and partners that will give clear guidance on 
policies, such as developing project budget approvals, determining 
project feasibility, and servicing actions.

Streamlining and Consolidation

    RHS is undertaking a major redevelopment and consolidation of Rural 
Development (RD) regulations affecting the sections 514, 515, 516, and 
521 Multi-Family Housing programs. Current customers of these programs 
are affected by 14 separate regulations, but as a result of 
reinvention, the interim final rule revises and consolidates Agency 
regulations affecting the

[[Page 69034]]

sections 514, 515, 516, and 521 Multi-Family Housing programs. This 
rule consolidates the policies outlined in 14 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:
     7 CFR part 1806, subpart A--Real Property Insurance
     7 CFR part 1930, subpart C--Management and Supervision of 
Multi-Family Housing Borrowers and Grant Recipients
     7 CFR part 1944, subpart D--Farm Labor Housing Loan and 
Grant Policies, Procedures, and Authorizations
     7 CFR part 1944, subpart E--Rural Rental and Rural 
Cooperative Housing Loan Policies, Procedures, and Authorizations
     7 CFR part 1944, subpart L--Tenant Grievance and Appeals 
Procedure
     7 CFR part 1951, subpart D--Final Payment on Loans
     7 CFR part 1951, subpart K--Predetermined Amortization 
Schedule System (PASS) Account Servicing
     7 CFR part 1951, subpart N--Servicing Cases Where 
Unauthorized Loan or Other Financial Assistance Was Received--Multi-
Family Housing
     7 CFR part 1955, subpart A--Liquidation of Loans Secured 
by Real Estate and Acquisition of Real and Chattel Property
     7 CFR part 1955, subpart B--Management of Property
     7 CFR part 1955, subpart C--Disposal of Inventory Property
     7 CFR part 1956, subpart B--Debt Settlement Farm Loan 
Programs and Multi-Family Housing
     7 CFR part 1965, subpart B--Security Servicing for 
Multiple Housing Loans
     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 less than 200 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 answers to day-to-day questions in the handbooks' 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 will 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 the 
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 online and through electronic submissions.
    The paperwork burden reduction to the public resulting from this 
rule will be approximately 45 percent. This estimate is derived from 
the Paperwork Burden docket that RHS prepared.

The Handbooks

    As stated above, the Agency is finalizing three separate handbooks 
that present the reader with administrative guidance on loan 
origination, asset management, and project servicing. The Loan 
Origination Handbook instructs the reader on application and processing 
procedures and provides information on matters such as what forms must 
be filed, where to submit loan requests, and the Agency's internal 
processing procedures. It also provides Agency staff with the guidance 
needed to originate loans and grants efficiently and effectively. The 
Asset Management Handbook provides RHS Multi-Family Housing staff with 
guidance about the Agency's procedures for overseeing borrowers' 
performance in meeting their responsibilities under the program. The 
Project Servicing Handbook provides loan servicers with guidance about 
the Agency's procedures for servicing actions involving borrowers that 
receive loans or grants for MFH projects.
    The handbooks are not published in the Federal Register but are 
available to the public at no cost. The public can access the handbooks 
through their local RHS servicing office.

Exhibits

    Many of the exhibits that were part of the expired regulations may 
be found in the three companion handbooks to 7 CFR part 3560: Loan 
Origination, Asset Management, and Project Servicing. As an example, 
exhibit B-1 of 7 CFR part 1930, subpart C, is found in exhibit 3-1 of 
chapter 3 of the Asset Management Handbook.

Discussion of the Interim Final Rule

    This interim final rule combines the provisions of the Streamlining 
and Consolidation of the sections 514, 515, 516, and 521 Multi-Family 
Housing (MFH) Programs Proposed Rule published on June 2, 2003, and the 
Operating Assistance for Off-Farm Migrant Farmworker Projects Proposed 
Rule published on November 2, 2000.
    RHS is issuing this regulation as an interim final rule, with an 
effective date 30 days after publication in the Federal Register, given 
that these regulatory changes are very extensive, affect all aspects of 
the programs, and seek to achieve significant streamlining of the 
programs' regulatory provisions. Delaying implementation of the rule to 
allow more time for further consideration would not be in the best 
interest of the direct MFH program or its recipients. All provisions of 
this regulation are adopted on an interim final basis, are subject to a 
90-day comment period, and will remain in effect until the Agency 
adopts a final rule.

Changes Presented in the 7 CFR Part 3560 Proposed Rule That Remain 
Proposed, but Not Implemented in the Interim Final Rule

Reserve Requirements for Project Improvements

    Current regulations include standards for physical condition, 
maintenance, and reserve levels to address the physical condition of 
the property. These regulations require that borrowers initially 
contribute 1 percent annually of total development costs toward a 
reserve for project 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.
    The proposed rule included language requiring a life-cycle cost 
analysis be used to establish the initial reserve amount needed to meet 
the capital needs of new projects. For existing projects, the proposed 
rule would have required that any servicing action that involves 
additional Agency funds must take into account physical needs of the 
project, based on a capital needs assessment. The regulatory impact 
analysis for the proposed rule indicated that these provisions would 
increase rents and result in additional demand for rental assistance 
payments.

[[Page 69035]]

    Since the proposed rule was published, RHS has undertaken a 
comprehensive property assessment of the properties in the section 515 
portfolio. The preliminary results provided useful information for 
reconsidering the extent of capital reserves that may be necessary to 
meet the capital needs of projects and to explore policy options for 
addressing these needs to be reflected in any necessary budgetary and 
legislative changes. More time is needed to properly address these 
matters. Accordingly, RHS has decided to publish an interim final rule 
that does not include these provisions--specifically Sec.  
3560.103(c)(3) and Sec.  3560.306(k)(1) of the proposed rule--until 
their impacts can be assessed and policy decisions can be made for a 
long-term strategy.
    For the interim final rule, the Agency is continuing the policy 
from the existing regulation 7 CFR part 1930, subpart C. Because 7 CFR 
part 1930, subpart C is being replaced by 7 CFR part 3560 in this 
rulemaking, the relevant language from the previous regulation is being 
carried forward and included in Sec.  3560.306(j)(1) (Changes to 
Reserve Requirements), while the language from Sec.  3560.103(c)(3) is 
removed and the paragraph marked as reserved.

Changes to the Rule With Significant Impact

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 is taxable, rather than project, income.
    This rule makes two changes to address these limitations. First, it 
allows a greater number of investment options, including relatively 
conservative investment vehicles that are used by 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 account 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 by for profit and limited profit 
entities, the rule allows owners, with RHS's approval, to withdraw up 
to 25 percent of the annual interest income earned on the reserve funds 
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 the USDA OIG 
and the American Institute of Certified Public Accountants (AICPA) to 
arrive at the 25 percent figure.

Transferring Surplus Funds

    Prior regulations required that if a property had a surplus in its 
general operating account at the end of the project's fiscal year in 
excess of 10 percent, the amount over 10 percent had to be transferred 
into the property's reserve for replacement account. This policy has 
been changed so that if a project has surplus cash in excess of 20 
percent at the end of the project's fiscal year, the amount over 20 
percent must be transferred to the reserve account. Numerous comments 
to the proposed rule said that the prior policy allows for no 
contingency should the project have an unplanned, extraordinary 
expense. The policy also results in project cash flows that are 
extremely tight. The new policy in the interim final rule should help 
to mitigate these cash flow problems.

Treatment of Surplus Operating Funds Transferred to the Reserve Account

    As stated above, the Agency requires surplus funds in a project's 
operating account to be transferred into the project's reserve account. 
However, there was confusion about whether the amount transferred could 
be deducted from the scheduled contributions to the reserve account. 
This issue is clarified in the interim final rule, which states that 
transfers of surplus funds into the reserve account may not be deducted 
from the scheduled contribution. The surplus funds are to be used for 
addressing a project's capital needs.

Prepayment Policies and Procedures

    The Agency, borrowers, and tenant advocates agreed that the 
prepayment request process is difficult and confusing. 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 stakeholder 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, this 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. This 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.

Alternatives to Acceleration When Needed To Preserve Affordable Units

    The Agency received numerous comments on the proposed rule on the 
preservation process. One issue that was raised repeatedly is that the 
Agency should have alternative means to sanction a borrower for 
monetary or nonmonetary default without accelerating the borrower's 
account. Commenters expressed concern that a borrower could force the 
Agency to accelerate the loan to be able to prepay the loan. The Agency 
cannot prevent such an occurrence in all cases, but has added language 
to the interim final rule to acknowledge this problem and to 
demonstrate its intention to prevent it from occurring. Before 
accelerating a project loan, the Agency will consider the possibility 
that the borrower is forcing an acceleration to circumvent the 
prepayment process. If it is found that this is the borrower's 
motivation, the Agency will consider alternatives to acceleration, such 
as suing for specific performance under loan and

[[Page 69036]]

management documents. Subpart J of the interim final rule provides 
several alternatives to acceleration.

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 interim final 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 to 
eventually prepay if they complete the process involved in offering the 
project for sale and fail to receive a bona fide offer. 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 it does not allow other options to the 
borrowers. 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 will take measures to protect the 
tenants at these properties by providing them with 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 interim final 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, this 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's 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 equity loans must 
be underwritten and reviewed to the same standard as section 515 loans 
to ensure that no project is made financially unfeasible as a result of 
a third-party loan.

Initial Operating Capital

    Under previous regulations, borrowers were required to pay the 
equivalent of 2 percent of the cost of developing a project into an 
account for initial operating costs. They earned no interest on this 
account, which also received funds from other sources, including rental 
income. If within 2 years the project was operating successfully and 
there was sufficient capital in the operating account to maintain the 
financial soundness of the account, borrowers might take out up to the 
full amount of their contribution. While on deposit in the operating 
account, borrowers received no return on investment for the funds. 
After 2 years, any portion of the contribution that remained in the 
account must remain in the account to meet ongoing operating capital 
needs. During the stakeholder meetings, borrowers expressed concern 
that the previous regulation did 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 set due to difficulties in tracking the funds 
within the project's overall budget, and that its new management 
information system, has the capability to provide better tracking and 
disclosure of these funds. Therefore, RHS is extending 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 owners were willing to leave their contribution 
in the account.
    This change allows more borrowers to fully recover the payments 
they make 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 on costs to the 
Government and tenants.

Other Changes to the Rule

Conventional Rents for Comparable Units

    RHS has incorporated the concept of ``conventional rents for 
comparable units'' (CRCU), which is one of the most important policies 
established by the interim final rule. The concept is applicable to 
loan origination, loan servicing, replacement reserve set asides, and 
preservation. In essence, rents are to 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--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, the interim final rule requires that RHS not 
approve project proposals, servicing actions, or prepayment incentives 
that involve rents above the CRCU, except in limited circumstances, 
where such rents are determined to be in the best interest of the 
Government and the tenants of the project. The Agency wants to 
emphasize that the comparison to CRCUs is not used during annual budget 
reviews and requests for rent changes.
    By placing an upper limit on rents, RHS expects to protect the 
Government from investing in projects that may be

[[Page 69037]]

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 rental assistance, and reduce the risk of defaults.
    The interim final rule maintains flexibility for serving areas 
where MFH projects provide the only decent, safe, and sanitary 
affordable rental housing in a local housing market, or where a 
significant amount of the substandard housing rents for less than the 
cost of operating a 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.
    The 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 
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 the 
CRCU, rental assistance costs and loan levels may increase. However, it 
will also ensure ``marketable units'' if the Agency should lose rental 
assistance units.

Cost Reasonableness Basis for the Evaluation of Project Proposals

    The interim final 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 funding. 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.
    Previously, RHS had no process for conducting life-cycle analyses. 
The requirement for a life-cycle cost analysis is to be used for new 
projects. The requirement is intended to assure quality construction, 
as well as the long-term viability of complexes. Under the interim 
final rule, the Agency will 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 the life-cycle cost analysis that is 
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, this 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 require replacement of the 
original siding. Similar buildings that utilized brick as an exterior 
finish or partial finish are not having similar expenses, thereby 
decreasing demands on the reserve accounts. Thermal standards in RHS-
financed projects often exceed local codes. By building RHS projects 
with more energy efficiency, 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 the 
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 upfront 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, thereby 
lowering project rents and 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 previous regulations, RHS needed to approve the management 
agreement between the borrower and the management entity for a project. 
This requirement for Agency approval was designed to ensure that the 
management agent was also accountable for meeting program requirements. 
However, the Agency has found that this policy resulted in a time-
consuming approval process because these agreements varied considerably 
from borrower to borrower, and lacked the consistency necessary to 
implement a national program. Further, the USDA OIG has found that many 
management agreements and plans lack the specificity to accurately 
describe how project and management costs are prorated between expenses 
paid by the project fee and those paid by the management fee.
    The interim final rule eliminates Agency approval of management 
agreements and instead requires borrowers to submit a management 
certification in an Agency-approved format. In submitting this 
document, borrowers certify that their agreement with the project 
management entity 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 the management fee policy, discussed below, allow for a 
more definitive method to differentiate between project and management 
agent expenses.

Management Plan

    Under previous regulations, borrowers were also required to obtain 
RHS's approval of the management plans for their projects. The purpose 
of this policy was to assure the Agency that the borrower and 
management entities would have adequate systems in place to comply with 
program requirements. The requirement to obtain Agency approval for 
updates only added to the burden for both the Agency staff and the 
borrowers. This policy also left

[[Page 69038]]

the Agency in an awkward position when borrowers with sound projects 
changed their operations but did not update their management plan. The 
USDA OIG has reported audit findings where borrowers and management 
agents have not been operating the properties in conformity with the 
executed management plan. While this is true, RHS has found that the 
agent and owner have not engaged in an improper practice; instead, the 
practice is just not documented correctly in the management plan. The 
OIG has agreed that if the practice had been correctly disclosed in the 
management plan, the practice would not have been listed as an audit 
finding. The OIG has worked with RHS during the stakeholder process to 
identify changes in policy and procedures and has addressed this 
particular area of confusion. The result of the change will establish 
clearer borrower and management agent accountability combined with 
procedures that discourage RHS micromanagement of borrower and 
management agent business practices. Additionally, fewer OIG findings 
will result, requiring less OIG and RHS staff time to resolve.
    The interim final rule eliminates Agency approval of project 
management plans and instead requires that borrowers submit a 
management plan that addresses a specified list of operational areas. 
RHS staff will 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

    Previously, program regulations required that management fees for 
projects be reasonable and competitive. However, the USDA 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 the OIG to question whether the 
higher fees found in some instances were reasonable. As with management 
plans, the OIG expressed concern that the 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. 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 services to be 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 the 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 the OIG believe that the change will greatly improve consistency 
among different 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 interim final 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, this rule should improve RHS's ability to document 
that the management fees for projects are reasonable. It should also 
ensure consistency among RHS Field Offices in interpreting the 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

    Previous regulations established borrowers' responsibility to 
maintain their projects in decent, safe, and sanitary condition. 
However, the USDA OIG raised concerns about a lack of consistency in 
how this standard has been implemented.
    The interim final rule establishes specific standards for physical 
conditions that clarify the conditions that constitute decent, safe, 
and 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 of Agency loans.

Recertifications of Tenant Eligibility

    Recertifications are used to document tenants' income for the 
purpose of determining eligibility to live in a multi-family housing 
unit and qualify for rental assistance payments. Previous regulations 
required both an annual recertification and an interim recertification 
whenever tenants' income changes. Stakeholders indicated that the 
recertification process was time consuming for tenants, borrowers, and 
the Agency.
    The interim final rule simplifies the process by eliminating the 
requirements for an interim recertification for tenants' monthly income 
changes of less than $100. RHS arrived at the $100 threshold by 
comparing the cost of recertifying tenants with the benefit either the 
Government or the tenants would receive as a result of increased or 
decreased rent. Based on consultation with industry groups and the OIG, 
RHS determined that the cost to recertify 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. However, after receiving numerous comments that this 
threshold amount was too low, that the amount of increase in tenants' 
contribution toward rent would be minimal, and in consideration of the 
tenant income profile of RHS properties, the Agency decided to increase 
the threshold to $100 per month of income change rather than tenant 
contribution. The regulation also allows tenants to request an interim 
recertification any time between annual recertifications if their 
income changes by $50 or more per month. This provision was included to 
avoid adverse impacts on tenants with the lowest income for whom the 
$50 per month figure may constitute a significant share of their 
income.
    While a detailed analysis of how the impact of the $100 and $50 
thresholds might be distributed between the Government and tenants was 
not completed, recent OIG audits have indicated that the current 
recertification process produces approximately the same amount of rent 
increases as rent

[[Page 69039]]

decreases, thus resulting in little or no overall change in rental 
assistance payments.

Lease Protection

    The interim final rule would require that leases for rental units 
that receive rental assistance include a clause that specifies that 
tenants' contribution to rent will not increase if rental assistance is 
terminated due to actions by the borrower/owner. RHS estimates that 
there have been two to four incidents per year in which borrowers/
owners have attempted to make up for the loss of rental assistance 
payments due to a default on their part by raising tenants' rents. Such 
action usually occurs in a contentious situation, with the borrowers/
owners already in default and uncooperative. Consequently, requiring 
leases to include a clause specifically prohibiting such action may not 
resolve all cases. However, it would provide tenants with a regulatory 
and lease citation that could be used in bringing court proceedings 
against abusive borrowers/owners. Further, it would provide RHS with an 
additional instance of noncompliance with regulations that could be 
used against owners in a liquidation action or in a criminal or civil 
court case. However, it is uncertain whether cases could be resolved 
more quickly at less cost to the Government.
    While the interim final 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 are uncertain. The low 
incidence, however, suggests that the impacts would not be significant 
in value.

Limited English Proficiency (LEP)

    The Agency has issued guidance to clarify the responsibilities of 
recipients and subrecipients of Federal funds from the Agency to assist 
them in fulfilling their responsibilities to LEP persons under title VI 
of the Civil Rights Act, as amended, and implementing regulations. The 
Agency has incorporated language in subparts A and D of the interim 
final rule stating that borrowers and grantees must take steps to 
ensure the meaningful participation in Agency programs and activities 
by LEP persons free of charge.

Application Process for Rental Subsidies

    Rental subsidies provide critical funds for housing very low-income 
tenants. Projects that receive RHS's 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 previous regulations, borrowers were required to 
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.
    The interim final rule states that expiring subsidies will be 
renewed at the existing number of units and to the extent that 
sufficient funds are available. To indicate that rental assistance 
units are needed, borrowers 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 of the burden of 
reviewing the requests. Instead, the review can be accomplished as part 
of the budget approval process. The change has no effect on project or 
program budgets. It does not change the Agency's determination about 
rental subsidies; it simply streamlines the process.

Transferring Rental Assistance

    The Agency has revised the interim final rule to state that the 
Agency will transfer rental assistance from one property to another 
after it has been unused for 6 months. Prior to transferring the RA, 
the Agency must conduct an analysis to determine whether any of the 
current tenants or applicants at the top of the waiting list need RA, 
so that the subsidy is not transferred prematurely. This provision 
should help to ensure that rental assistance stays in or is transferred 
to properties where it is needed the most.

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. Previous regulations required that all budgets be 
reviewed in the same way, regardless of whether they represented no 
real change from the previous year or contained significant and 
potentially controversial changes.
    The interim final rule establishes an expedited review for those 
budgets that are within a certain threshold requiring little or no 
increase in rents. The threshold is based on data to be obtained from 
the MFIS III ADP system on area-wide norms for projects within RHS's 
MFH portfolio, as well as commercially available multifamily income and 
expense surveys. Details on how the threshold will be computed will be 
contained in the program handbooks rather than in the interim final 
rule, which 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 budgets 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 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.

Summary of Tenant Comments

    There was a requirement in the proposed rule stating that when a 
borrower requests a rent increase for a particular Agency-financed MFH 
project, the borrower must provide a summary of all written comments 
from the tenants to the Agency. The Agency determined that this was a 
cumbersome and unnecessary requirement as most tenants provide their 
comments on rent increase proposals directly to the Agency anyway. The 
Agency removed this requirement, resulting in a decrease in the 
borrower's burden.

Project Operating Accounts

    The interim final rule states that rather than maintaining separate 
bank accounts for every property, a borrower or manager of Agency-
financed MFH projects may have one operating account for all properties 
in their portfolio, as long as the borrower, manager, and bank track 
each property's funds separately. With today's enhanced reporting 
technology, banks can divide accounts into subaccounts, to ensure 
accurate reporting of all transactions for each property. In addition, 
this policy is economical, because it helps the borrower and/or manager 
save on bank fees and charges for separate accounts.

[[Page 69040]]

Priorities for Budgeted Expenses

    The priorities for budgeting a property's operating expenses have 
been revised in the interim final rule. In the proposed rule, the first 
priority for budgeted expenditures was critical maintenance and 
operating expenses. Due to comments received by the Agency, the interim 
final rule now lists amounts owed to a prior lienholder as the first 
priority for budgeted expenditures. This new policy reflects the 
current reality that the Agency is not always the primary lienholder on 
Agency-financed projects. The policy also acknowledges the Agency's 
focus on participating with other funding sources.

Annual Financial Reporting

    Under previous regulations, the Agency required that for all 
projects of 25 units or more the owners contracted with a Certified 
Public Accountant (CPA) to perform an audit in accordance with 
Government Auditing Standards (GAS). Because a large percentage of the 
Agency's portfolio consists of projects with between 16 and 24 units, 
annual financial statements have not been prepared for a substantial 
number of projects financed by the Agency. Moreover, certain components 
of GAS-audited financial statements did not address the Agency's need 
for certain information related to specific aspects of project 
performance, and these financial statements are prohibitively expensive 
for a substantial portion of the Agency's portfolio. Finally, the 
previous audit guide did not require the auditor to provide information 
that remains of specific importance to the Agency, such as information 
on identity-of-interest (IOI) transactions.
    Under the interim final rule, owners of MFH projects with 16 or 
more units must base their annual financial reports on an engagement 
report completed according to ``agreed upon procedures'' established by 
the Agency, which will be included in detail in the new Multi-Family 
Housing Engagement Guidelines to be delivered by the Agency. Borrowers 
must include the engagement report with their annual financial reports 
submitted to the Agency. These borrowers will not be required to submit 
a GAS audit prepared by an independent CPA. The new Multi-Family 
Housing Engagement Guidelines will provide specific instructions on how 
the individual preparing the annual financial statements should handle 
compliance issues. The annual financial statements must be completed 
using agreed upon procedures that help meet certain performance 
standards. The engagement must be initiated by borrowers using an 
engagement letter, which will either:
     Reference the Multi-Family Housing Engagement Guidelines, 
which will specify the program compliance issues that the Agency wants 
the preparer to address and the guidelines for testing compliance; or
     State the list of compliance issues that the Agency wants 
the preparer to address.
    Owners of small projects, which are defined as projects with fewer 
than 16 units, must submit annual financial statements that are 
prepared in a manner consistent with the Agency's Engagement Guide 
using a limited scope engagement based on Agency-approved procedures 
and must certify that the housing meets the performance standards 
established in the interim final rule. 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 Engagement Guide.
    In response to USDA OIG concerns, the Agency is implementing these 
changes to the annual financial reporting system to ensure that a 
higher percentage of projects submit annual financial statements to the 
Agency, and that the preparers of these statements are made aware of 
the Agency's specific concerns so that project funds are spent 
appropriately.

Loans From Third Parties

    In its continuing efforts to streamline and facilitate transfers, 
the Agency has included a new provision in the interim final rule that 
specifically allows for loans from a third-party source in conjunction 
with an ownership transfer or sale of a housing project. The loan may 
be in the form of a first mortgage or deed of trust, junior or parity 
lien, or soft second mortgage. This provision should make it easier for 
purchasers to put together more than one source of financing and allow 
for greater leveraging of Agency funds.

Transfers at New Rates and Terms

    Previously, Agency regulations implied that project transfers 
typically occur at the same rates and terms as the original loan. In 
acknowledging the need to streamline and facilitate the transfer 
process, the Agency will allow transfers to occur at new rates and 
terms if the transfer would result in lower rents to the tenants than 
at the original rates and terms. Again, this will help preserve the 
Agency's affordable housing resources without increasing the drain on 
the Agency's budget, and without resulting in higher rents.

Equity Loan at the Time of Transfer

    Previously, the regulation prohibited debt to be added to pay for 
equity to the seller. In an effort to facilitate transfers and provide 
incentives to sellers to assure the project remains as affordable 
rental housing, the new regulations will allow for equity loans from 
the Agency or from third parties at the time of transfer.

Special Servicing, Enforcement, Liquidation, and Other Actions

    In response to stakeholder, USDA OIG, and Agency staff comments, 
the Agency made a number of changes to strengthen Agency servicing. 
None of the changes to the regulations 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 a positive budget impact.
    For example, the interim final rule clarifies the definition of 
``default'' by spelling out specific actions that owners may take or 
fail to take that would cause the Agency to determine that the loan is 
at risk. The 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 in 
addressing servicing issues. These changes allow for swifter and more 
consistent action to address troubled projects--for example, focusing 
action for the Agency and borrowers. 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.

Additional Enforcement Tools

    As a result of the Debt Collection Improvement Act and other 
statutes, the Agency has added some important enforcement provisions to 
the interim final rule. These include provisions allowing the Agency to 
have the U.S. Attorney bring an action in U.S. court to recover project 
assets or income, seek civil monetary penalties and other sanctions 
against borrowers for ``equity skimming,'' and seek legal remedies for 
money laundering and obstruction of Federal audits. These are important 
provisions that shift some of the burden of recovering lost resources 
from the Agency to the rest of the Federal Government and also give the 
Agency

[[Page 69041]]

more effective tools in enforcing its requirements.

Management and Disposition of Real Estate Owned Properties

    The interim final rule consolidates current regulations regarding 
real estate owned (REO) property and clarifies the specific 
requirements that apply to MFH properties. Previous regulations 
addressed many different types of REO properties acquired by USDA, 
including MFH properties. Often, the guidance provided was generic or 
related to non-MFH properties. The interim final rule provides 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. This rule also adds flexibility to the 
Agency's requirements for selling the property; the change allows the 
sale to be conducted while taking into account local market conditions. 
It also provides Field Offices with 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 interim final rule consolidates separate program regulations 
for the Farm Labor Housing loan and grant program along with separate 
regulations for 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, 
which consists of multi-unit housing operated by nonprofit corporations 
or public bodies that receive either loans or loans and grants under 
the sections 514 and 516 programs, and on-farm labor housing, which 
consists of single or small multi-family housing operated by farmers 
who receive only loans. Several statutory changes to the Farm Labor 
Housing loan and grant program have been made over the past 5 years. 
Previous regulations have been modified to incorporate these changes 
prior to drafting this proposed rule. Since the changes are currently 
in place, they are not addressed again in this analysis. No further 
program changes other than regulation consolidation are included.

Technical Assistance Grants to Developers of Off-Farm Labor Housing

    The Agency received numerous comments on the proposed rule with 
regard to technical assistance grants to developers of off-farm labor 
housing. The Farm Labor Housing Technical Assistance Final Rule 
published on October 31, 2002, in the Federal Register (67 FR 66308), 
gives the Agency the authority to award technical assistance grants to 
eligible private and public nonprofit agencies. These grant recipients 
will, in turn, assist other organizations to obtain loans and grants 
for the construction of off-farm labor housing. This information was 
inadvertently not incorporated into the proposed rule. However, the 
requirements for technical assistance grants have been incorporated 
into the interim final rule.

Operating Assistance for Off-Farm Labor Housing

    The Agency published a proposed rule entitled ``Operating 
Assistance for Off-Farm Migrant Farmworker Projects'' on November 2, 
2000, in the Federal Register (65 FR 65790). The requirements for 
operating assistance were not included in the 7 CFR part 3560 proposed 
rule, but have been added to the interim final rule. Operating 
assistance may be used in lieu of tenant-specific rental assistance in 
off-farm labor housing projects financed under section 514 or section 
516 that serve migrant farmworkers. Owners of eligible projects may 
choose tenant-specific rental assistance as described in Sec.  3560.573 
or operating assistance, or a combination of both; however, any tenant 
or unit assisted under this section may not receive rental assistance 
under Sec.  3560.572. The objective of this program is to provide 
assistance toward the cost of operating the project so that rents may 
be set at rates that are affordable to very low- and low-income migrant 
farmworkers.

Priorities for Admitting Applicants to Off-Farm Labor Housing

    The previous regulations contained an elaborate and complicated 
priority system for admitting applicants into off-farm labor housing 
projects. The Agency received numerous comments on the proposed rule 
stating that the priority system was cumbersome and confusing. The 
previous regulations had four priorities, two of which had two 
subpriorities. These priorities have been streamlined into three simple 
categories in the interim final rule. This change will result in 
waiting lists that are simpler to create and maintain and should 
promote greater adherence to the Agency's admission criteria.

Income Limits for Off-Farm Labor Housing

    Off-farm labor housing applicants and tenants must demonstrate that 
they earn a certain portion of their annual household income from farm 
labor. The prior regulation, 7 CFR part 1944, subpart D, exhibit J, 
provided income thresholds for applicants of off-farm labor housing 
projects. Borrowers applied these percentages to the income threshold 
for their particular region of the country. The income thresholds 
established de facto income floors for farm labor housing projects. 
Exhibit J, however, had not been updated since 1986 and reflected 
average income figures for farmworkers from 1983. Therefore, the Agency 
conducted research on average farmworker earnings based on the 2000 
U.S. Census and will include an updated version of exhibit J in the 
Asset Management Handbook. The interim final rule has been revised to 
state: ``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 indicated for the standard Federal regions 
as published by the Agency for their particular region of the country. 
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 annual income limits indicated for the standard Federal 
regions, as published by the Agency.'' While imposing these new income 
limits may result in an increased number of applicants to be ineligible 
for occupancy in off-farm labor housing, the Agency anticipates that 
this increase will be extremely small, given the concomitant increase 
in average farmworker wages during the past 20 years.

Office of Rental Housing Preservation

    Changes to the Housing Act of 1949 required the establishment of an 
Office of Rental Housing Preservation within RHS for handling matters 
related the preservation of affordable rental housing in the Agency's 
MFH portfolio. RHS established this office within its Multi-Family 
Housing Portfolio Management Division.
    The Office of Rental Housing Preservation has already taken steps 
to enhance the Agency's consistency in reviewing prepayment requests 
and offering incentives by making a single entity responsible for 
coordinating all preservation actions. The interim final rule 
recognizes the establishment of this office and defines its 
responsibility to

[[Page 69042]]

coordinate, direct, and monitor the RHS's MFH 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 
previous regulations, much of this responsibility was put on project 
owners. The process was 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 outweighed the funds collected.
    Recognizing these circumstances, the interim final rule relieves 
project owners of the responsibility of recovering unauthorized 
assistance due to tenant error once tenants have moved. It also 
provides for RHS to determine whether 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 to relieve project owners of the burden of pursuing 
tenants who no longer live in their projects. This 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.

Market Value, Subject to Restricted Rents

    In the past, the process for determining the security value of 
Agency-financed MFH projects has been overly complicated and a source 
of confusion because of the various methods of valuation that the 
Agency used, some of which were not those typically used and understood 
by the appraisal industry. Therefore, the interim final rule now 
clarifies that appraisals must include the ``market value'' of the 
property, or the ``market value, subject to restricted rents.'' The 
term ``market value'' is defined in Sec.  3560.752. ``Market value, 
subject to restricted rents'' means that the appraisal will take into 
consideration any rent limits, rent subsidies, expense abatements, or 
restrictive-use conditions that will affect the property as a result of 
an agreement with the Agency or any other funding source. ``Market 
value, subject to restricted rents'' refers only to the value of the 
subject real property, as restricted, and excludes the value of any 
favorable financing. When this value type is part of an appraisal 
assignment, all favorable financing in place at the time of the 
appraisal must also be valued, but separately from the real property. 
The specification and definition of value types will help to ensure 
that applicants, borrowers, and the Agency receive appraisals that are 
more accurate and complete.

Conformance With the Appraisal Industry

    Subpart P of the interim final rule has been revised substantially 
so that the Agency's requirements for multi-family housing appraisals 
conform to appraisal industry standards. In addition to the 
specification and definition of value types described above, subpart P 
establishes new guidelines for appraisal scope, procurement, review, 
and release. These new requirements should facilitate the appraisal 
process, as certified general appraisers will be familiar with the 
terminology and procedures of the revised subpart.

Changes in Definitions

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 handicap'' is taken from the 
Fair Housing Act. Other civil rights laws, such as the Americans with 
Disabilities Act (ADA) and section 504 of the Rehabilitation Act of 
1973, use 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 people meet either the Housing Act of 1949's 
definition of handicap or the Fair Housing Act's definition of 
handicap, they will be considered disabled.

Nonprofit Organization

    The Agency has streamlined its definition of ``nonprofit'' and has 
made it less prescriptive so that more nonprofit organizations are 
eligible for participation in the Agency's multi-family direct loan 
programs. Most notably, the aspects of the definition that describe 
local and regional nonprofit organizations have been broadened. This 
will result in increased participation by a wider pool of nonprofit 
organizations in the construction, transfer, and preservation of 
Agency-financed multi-family projects. There are additional 
requirements for what constitutes a nonprofit organization for purposes 
of farm labor housing and preservation, and these are described in 
subparts A, L, M, and N.

Additional Definitions

    As a result of comments received on the proposed rule from the 
public, the Agency has added several definitions to the interim final 
rule. The addition of these definitions should help to clarify the 
Agency's policies on a variety of issues. The new definitions and their 
significance are as follows:
     Applicant: Clarifies the distinction between the applicant 
and the borrower.
     Appraisal: Provides the industry definition that the 
Agency uses.
     Capital needs assessment: Explains how the Agency uses 
this term.
     Disabled domestic farm laborer: Explains this category of 
tenant, so that the farm labor housing priorities for admission are 
more easily understood.
     Farm: Clarifies what the Agency considers an eligible 
farm, which is particularly helpful in the discussion of farm labor 
housing.
     Manufactured housing: Clarifies what constitutes this type 
of housing for purposes of interpreting the regulation and handbooks.
     Market rent: Provides the industry definition of the term 
that the Agency uses.
     Off-farm labor housing: Distinguishes this type of farm 
labor housing from on-farm labor housing.
     On-farm labor housing: Distinguishes this type of farm 
labor housing from off-farm labor housing.

Participation With Other Funding or Financing Sources

    The provisions of 7 CFR 3560.66 were revised to encourage 
participation from public and private sources. The Agency made a number 
of changes in the proposed rule to provide greater flexibility in the 
program to allow program financing to be more readily combined with 
other sources. However, the existing 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 retained. The 
Agency recognizes that because it is delivering financing at 1 percent, 
this provision will be difficult for an applicant to meet under the 
most aggressive leveraging or other low-interest loan funds financing 
package.

[[Page 69043]]

However, the Agency is also responsible for ensuring the efficient, 
prudent use of rental assistance funding. Without this standard, RHS 
would face even greater growth in the demand for rental assistance 
funding over and above the already significant funding levels. For this 
reason, RHS made the decision to continue this policy.

30-Year Term and 50-Year Amortization Period

    Though not a new issue or policy, this rule requires that new loans 
have a 30-year term with a 50-year amortization schedule. This rule 
will clarify that, at the end of 30 years, borrowers have 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 previous 50-year use restriction, 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 LIHTCs or 
another affordable housing program. Tenants' income and assets will be 
calculated in accordance with 24 CFR 813.106 and 102, which are 
regulations published by HUD.

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

    This proposed rule was published in the Federal Register on June 2, 
2003 (68 FR 32872), with a 60-day comment period that ended August 1, 
2003. Comments were received from 146 commenters yielding nearly 3,000 
individual comments about the language in the proposed rule. Commenters 
included Rural Development personnel, housing advocacy groups, 
developers, builders, property managers, attorneys, housing 
organizations, and others with an interest in these housing programs.
    Many of the comments focused on areas currently published in the 
CFR, which were not a part of the proposed rule. As discussed, part of 
the intent behind the reengineering and reinvention of these 
regulations was to remove much of the administrative guidance from the 
CFR and incorporate this guidance into the program handbooks, which 
would not be published in the CFR. As discussed above, the handbooks 
provide the Agency with flexibility in the Agency's administration of 
program procedures in response to changing circumstances without 
entering into a rule-making process.
    The responses to many comments have indicated that the guidance 
requested by a commenter is administrative and contained in the 
applicable handbooks. RHS sincerely appreciates the time and effort of 
all commenters. Comments, by subpart, from the proposed rule are 
discussed below.

Subpart A--General Provisions and Definitions

    Topic: Regarding civil rights (e.g., limited English proficiency, 
fair housing compliance, reasonable accommodations, domestic violence), 
several commenters stated that the Agency did not fully address the 
requirements of section 504 of the Rehabilitation Act of 1973.
    Response: The Agency appreciates these comments and has specific 
references to section 504 requirements in Sec.  3560.2 and Sec.  
3560.11 of the interim final rule.
    Topic: Other commenters were concerned with the sufficiency of the 
Agency's proposed language with respect to the civil rights 
responsibilities of borrowers and the protections the language in the 
proposed rule would offer the applicants to and residents of RHS 
housing.
    Response: The Agency has ensured that the civil rights requirements 
of borrowers are clearly described in the interim rule and internal 
Agency procedures.
    Topic: Several commenters addressed the protected classes included 
in the proposed rule. One commenter believed that age and marital 
status classes are added under the proposed language and disagreed with 
this amendment to the regulation. Another commenter believed that 
sexual orientation should be added. Yet another commenter thought that 
age and disability are important to take into account.
    Response: The Agency appreciates these comments and has removed 
marital status from Sec.  3560.2 because it is not a status 
specifically protected by civil rights statutes. Age was retained 
because it is protected by statute. However, the Agency wants to 
clarify that when age is established by statute as a program 
eligibility factor, then it needs to be considered when determining 
eligibility for occupancy, but only for that determination. Sexual 
orientation is not a status specifically protected by civil rights 
statutes, and therefore was not added.
    Topic: Several commenters identified an occurrence of 
``accommodation'' in the civil rights section, which is not preceded by 
``reasonable.'' The commenters urged the Agency to revise this error.
    Response: The Agency thanks the commenters and has revised the 
interim final rule at Sec.  3560.2(a)(1).
    Topic: One commenter suggested that a single point of contact at 
USDA be established to receive complaints.
    Response: The Agency acknowledges the comment and has revised Sec.  
3560.2(c) in response to this suggestion.
    Topic: One commenter urged the Agency to remove requirements that 
owners and agents collect ethnicity and racial information from 
applicants.
    Response: The Agency thanks the commenter for highlighting this 
important issue. The Agency has modified Sec.  3560.2 to include a 
disclosure statement about the use of race and ethnicity information 
that must appear on all applications for housing under sections 514, 
515, and 516.
    Topic: One commenter suggested revising proposed Sec.  3560.2(a)(1) 
to read: ``To refuse to make reasonable accommodations * * *.''
    Response: The Agency appreciates the commenters' suggestion and has 
revised the interim final rule accordingly.
    Topic: Commenters also addressed CRCU. Several commenters expressed 
confusion about the implementation of CRCU.
    Response: The Agency has added additional information on the 
circumstances under which CRCU applies. Specific references to the CRCU 
applicability can be found at Sec. Sec.  3560.60(c), 3560.69(g), 
3560.406(d), 3560.409(b)(3), and 3560.656(e)(1) in the final interim 
rule.
    Topic: Several commenters were concerned that capping rents at CRCU 
will keep rents artificially low in some cases and not address cases in 
which the costs of operating assisted housing are higher than those for 
conventional housing.
    Response: The Agency has addressed this concern by allowing 
exceptions to the CRCU cap to allow for certain market conditions--
extraordinary circumstances when it is in the best interest of the 
Government as a means to preserve affordable housing

[[Page 69044]]

resources. See the references noted above for discussions concerning 
CRCU.
    Topic: The Agency received many comments regarding the definition 
of CRCU. Several commenters believed that the definition in proposed 
Sec.  3560.11 should refer to the market area, not to the geographic 
area.
    Response: The Agency thanks the commenters for this suggestion, but 
has made no change to the interim final rule. There are regions in the 
country where the market is small and where Agency-financed multi-
family properties comprise the market. By expanding the definition to 
include the geographic area, this increases the likelihood that there 
will be compatible rents by which to measure these Agency-financed 
properties.
    Topic: One commenter suggested that CRCU should not be used in any 
county where the median income is lower than the statewide median 
income.
    Response: The Agency thanks the commenter for this suggestion but 
has made no change to the interim final rule. CRCU is designed to work 
within ``market areas'' which may cross county lines and is not 
designed to work within the strictures of a county basis.
    Topic: One commenter believed that the Annual Financial Report 
requirement places an additional burden on small projects that is 
further exacerbated by the CRCU restrictions.
    Response: The Agency thanks the commenter for this suggestion but 
has made no change to the interim final rule. Based on the findings of 
the OIG, the Agency is adding this requirement for smaller projects to 
address the potential misuse of funds.
    Topic: Concern was expressed with respect to authority measures, 
specifically the delegation of authority, as well as exception 
authority.
    Response: The Agency understands that commenters are concerned that 
its requirements be implemented consistently and that the chain of 
command remain clear when authority is delegated. The interim final 
rule was designed to maximize consistency in implementing Agency 
requirements nationwide.
    Topic: Commenters were concerned that the interim final rule 
imposes too many restrictions on granting exceptions. Several 
commenters stated that the proposed rule allows exceptions only when 
the action is in the best financial interest of the Government.
    Response: The Agency appreciates these comments and has revised 
Sec.  3560.8 to read ``The RHS Administrator may make an exception to 
any provision of this part or address any omissions provided that the 
exception (1) is consistent with the applicable statute, (2) does not 
adversely affect the interest of the Federal Government, and (3) does 
not adversely affect the accomplishment of the purposes of the Multi-
Family Housing programs, or application of the requirement would result 
in undue hardship on the tenants.''
    Topic: One commenter recommended that the USDA hire a national firm 
to evaluate preservation projects to ensure they are economically 
beneficial to the Government and, therefore, to tenants.
    Response: The Agency acknowledges this suggestion but has made no 
change to the interim final rule. The Agency has an established process 
and internal procedures and staffing to evaluate the economic benefits 
of preservation transactions.
    Topic: One commenter believed that Rural Development employees find 
it easier to disallow exceptions than to perform the necessary steps to 
execute an exception.
    Response: The Agency respectfully disagrees with the commenter's 
interpretation. Exceptions are evaluated thoroughly on a case-by-case 
basis and only granted rarely.
    Topic: One commenter believed that Agency regulations should 
acknowledge that other financing programs (e.g., tax-exempt bonds, 
State financing programs, HOME Investment Partnership Funds) may 
dictate rent levels in addition to the rents dictated by LIHTCs.
    Response: The Agency appreciates the comment. The Agency has 
acknowledged these other programs in its descriptions of financial 
leveraging, third-party financing, and subordination of Agency debt. 
Numerous commenters raised concerns about some of the definitions 
provided in Sec.  3560.11, which are described below: Administrative 
appeals
    Topic: Several commenters stated that the rule does not contain 
enough information on when appeals are allowable, to whom appeals 
should be made, and what are the tenant grievance procedures.
    Response: The Agency wishes to clarify that the requirements for 
appeals for all actions, unless otherwise noted in the interim final 
rule, are found at 7 CFR part 11. The tenant grievance process is 
described in detail in subpart D and in internal Agency procedures.
    Topic: One commenter objected to the use of handbooks, notices, or 
other issuances being a program requirement. The commenter believed 
that practice subverts the public comment and appeals period otherwise 
required for regulatory changes.
    Response: The Agency appreciates the commenter's interest in 
ensuring a free and open public discussion of public policy but 
disagrees with the assertion. The regulatory and burden issues are 
discussed in the interim final rule. Handbooks are useful for providing 
guidance and establishing internal Agency procedure.
    Topic: One commenter addressed the issue of environmental reviews. 
First, with respect to ``practicable alternatives,'' the commenter 
suggested that the location of a site in relation to flooding, along 
with the additional cost for insurance and potential development costs, 
must be addressed in the appraisal. Second, the commenter addressed 
Sec.  3560.4(e) and noted that lead-based paint requirements are no 
longer located in 7 CFR part 1924, subpart A; the correct reference is 
24 CFR part 35, subparts A-D, J, and R, which are regulations published 
by HUD.
    Response: The Agency thanks the commenter for the updated 
regulatory citations and has updated these references in the interim 
final rule. However, the Agency has made no change to Sec.  3560.3 of 
the interim final rule. The suggestion was not adopted because of the 
existing environmental regulations at 7 CFR part 1940, subpart G.
    Numerous commenters raised concerns about some of the definitions 
provided in Sec.  3560.11, which are described below:
Applicant
    Topic: One commenter suggested that proposed Sec.  3560.55(b) 
refers to the ``applicant,'' but that ``applicant'' is not defined.
    Response: The Agency thanks the commenter for the suggestion and 
has added a definition for ``applicant'' to the interim final rule.
Asset Management Fee
    Topic: A commenter believed that the Agency should add a definition 
for ``asset management fee,'' asking it be defined as a fee allowed to 
nonprofit organizations or public bodies for the effective ownership of 
RHS-assisted multi-family housing properties.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. This issue is covered under Sec.  
3560.303(b)(1)(ii) and includes a list of expenses that would commonly 
be charged as an asset management fee.
Basic Rent
    Topic: Several commenters agreed with the change in definition of 
``basic rent'' but were concerned that CRCU

[[Page 69045]]

would impose a restriction on the amount of basic rent that borrowers 
can charge that could adversely affect some properties. Several 
commenters recommended additional components to be included in the 
calculation of basic rent.
    Response: As stated previously, CRCU only applies in certain 
instances, and the Agency may make CRCU exceptions on a case-by-case 
basis. CRCU is a concept that the Agency uses to evaluate rent levels. 
It is not considered the established ``rent'' or basic rent.
    Topic: A commenter suggested that in the definition of ``basic 
rent,'' the Agency should change the last word ``agreement'' to 
``subsidy.''
    Response: The Agency appreciates this suggestion; however, the 
interest credit agreement is the instrument by which any reduction is 
made.
Caretaker
    Topic: One commenter believed that the definition of ``caretaker'' 
should be expanded to state that caretakers may also serve as a site 
manager, with either an onsite or offsite work location.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. Borrowers may use caretakers or site manager 
as they see fit, as long as staffing duties and responsibilities are 
clearly spelled out in the Management Plan.
Congregate Housing
    Topic: One commenter thought that the definition for ``congregate 
housing'' should state that such a facility could not be a licensed 
healthcare facility.
    Response: The Agency appreciates the comment and has adopted that 
change in the interim final rule.
Current Appraisal
    Topic: A commenter believed that the definition for ``current 
appraisal'' be revised because an appraisal report could be 14 months 
old and still be a current appraisal report.
    Response: The Agency thanks the commenter for the suggestion and 
has revised the interim final rule to state that the appraisal report 
date should be no more than 1 year old.
Default
    Topic: Several commenters thought that the definition of 
``default'' raised a concern that the Agency could consider a borrower 
to be in default for minor, insignificant items.
    Response: The Agency appreciates these comments and has revised the 
definition to state that default is the failure ``by a borrower to meet 
significant monetary or non-monetary obligations.''
Disability
    Topic: One commenter believed that the definition of ``disability'' 
is a helpful change, while another commenter believed that the 
definition is inappropriate.
    Response: The Agency thanks the commenter for their concurrence on 
this issue and has clarified the definition in the interim final rule 
by providing the specific regulatory citations.
    Topic: One commenter recommended changes to the definition of 
``disability.'' The commenter believed that the Agency should either 
delete the list of examples of a disability, or at least make it 
clearer that the lists of examples are in no way intended to be 
exclusive.
    Response: The Agency appreciates the comment but made no change to 
the interim final rule because the definition is statutory.
    Topic: One commenter suggested that the term ``handicapped'' be 
replaced by ``disabled'' or ``accessible'' whenever appropriate. In 
limited instances, the use of ``handicapped'' is acceptable, but the 
term should be limited.
    Response: The Agency thanks the commenter for the suggestion and 
has revised the text as appropriate in the interim final rule.
Domestic Farm Laborer
    Topic: Five comments were received concerning the definition of 
domestic farm laborer and the proposed rule's elimination of the 
requirement that aliens be admitted for permanent residence. The 
majority were in support of the change. One of the commenters contended 
that Congress has expressed its intent for broader eligibility 
standards.
    Response: The requirement that aliens be admitted for permanent 
residence has been reinserted in the definition. This is required by 
the authorizing statute, 42 U.S.C. 1484(f)(3)(A). The language 
concerning the eligibility of a family member was also rewritten to be 
more consistent with statutory language in 42 U.S.C. 1484(f)(3).
Elderly Person
    Topic: Numerous commenters were concerned that the definition of an 
``elderly person'' includes persons with a disability, and that these 
persons could be any age. They thought that allowing non-elderly 
persons to reside in properties designed for the elderly causes social 
and project management problems.
    Response: The Agency appreciates these comments but has made no 
change to the definition because it is statutory.
Engagement
    Topic: One commenter suggested that because the costs of CPA audits 
are based on the scope of work, the requirements for such engagements 
must be provided to owners in enough time for the owner to obtain cost 
estimates from the CPAs and to include the costs in proposed budgets.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. The Agency will provide guidance for 
borrowers in the MFH Engagement Guidelines to be issued separately.
Familial Status
    Topic: Regarding the definition of ``familial status,'' the 
commenter recommended that RHS adopt the same definition used in the 
Fair Housing Act.
    Response: The Agency thanks the commenter for raising this issue. 
The Agency is adopting the same definition of ``familial status'' as 
used under the Fair Housing Act.
Family Farm Corporation or Partnership
    Topic: One commenter questioned the definition for ``family farm 
corporation or partnership.'' The commenter asked whether this 
definition is consistent with other rural development definitions of 
family farm, particularly the Rural Business-Cooperative Service 
Business and Industry Cooperative Stock Purchase Program.
    Response: The Agency thanks the commenter for the suggestion but 
has made no change to the interim final rule because the definitions 
are consistent within Rural Development.
Farm Labor
    Topic: The Agency received several comments concerning the 
definition of ``farm labor.'' Each commenter raised questions about the 
term ``unprocessed stage.''
    Response: The Agency has used this term in the proposed rule 
instead of the term ``manufactured state'' in the previous regulation 
to make the term more consistent with statutory language.
    Topic: One commenter asked the Agency to include the statutory 
phase ``without respect to the source of employment'' in the definition 
and to provide examples of what is considered to be farm labor in the 
handbooks.
    Response: The Agency has added the statutory phase to the 
definition, and the Agency intends to include examples of farm labor in 
the program handbooks.
Farmer and Farm Owner
    Topic: For the definitions of ``farmer'' and ``farm owner,'' one 
commenter found the added reference to 7 CFR

[[Page 69046]]

1941.4, which brings in the concept that a farmer must be a ``family-
size farm,'' to be a very limiting and improper restriction. This 
commenter believed that farm laborers should be able to occupy farm 
labor housing regardless of whether the farm they work for is ``family 
size.''
    Response: The Agency thanks the commenter and has deleted the 
reference to 7 CFR 1941.4 from the interim final rule.
General Overhead
    Topic: Two commenters asked whether RHS imposes maximum limits for 
general overhead.
    Response: There is a maximum limit on general overhead. This 
maximum limit is 4 percent of the construction cost. RHS establishes a 
maximum limit that is similar to the standards used by other government 
lenders. This upper limit can vary with the types of financing used for 
a project or due to changes in market conditions. The ceiling only 
serves as an upper limit to help ensure cost reasonableness and can 
vary across circumstances and over time.
    Topic: The Agency received a comment stating that the proposed rule 
should require documentation to ensure that the resident assistant is 
truly needed for the well-being and care of the tenant.
    Response: The Agency appreciates the comment but has made no change 
to its interim final rule. Section 3560.104(c)(4) of the interim final 
rule provides guidance for borrowers to permit resident assistants. 
This is a reasonable accommodation issue and should be treated like 
other reasonable accommodation issues.
    Topic: One commenter asked why Plainview, Texas, and Altus, 
Oklahoma, are singled out for consideration in terms of 2000 U.S. 
Census data.
    Response: These communities are authorized by statutory language in 
section 520 of the Housing Act.
General Requirements
    Topic: The commenter thought that performance and payment bonds, 
cost certifications, and building permits are not considered ``general 
requirements'' by the industry and need to be left out of the 
definition.
    Response: The professional architect on the Agency's staff 
disagrees with the commenter and feels the items mentioned are part of 
``general requirements'' by the industry and no change is needed in the 
definition.
Household Furnishings
    Topic: A commenter questioned the definition of ``household 
furnishings,'' believing household furnishings should not include 
tables, chairs, dressers, and beds.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. The commenter needs to consider that these 
items are necessary for tenants of Farm Labor Housing occupied 
primarily by migrant farmworkers.
Household Member
    Topic: The commenter thought that the proposed rule and the 
handbooks should be reconciled and should clarify their definitions of 
``household member.''
    Response: The Agency appreciates the comment and will revise Agency 
guidance about program procedures to be consistent with the regulation. 
No change to the interim final rule was needed.
Identity-of-Interest
    Topic: Numerous commenters stated that the definition of 
``identity-of-interest'' is too broad.
    Response: The definition of IOI has been moved from the existing 
regulations to 3560 without change and it is consistent with the one 
used by other Government lenders.
    Topic: Some commenters stated that the trigger for an identity-of-
interest to occur of 10 percent or more interest in the supplying 
entity was a reasonable threshold. Other commenters thought that the 
threshold was either too high or too low.
    Response: The Agency appreciates these comments. However, the 
Agency has decided to retain the definition as presented in the 
proposed rule. The concept of identity-of-interest, as it relates to 
specific issues, is discussed in more detail in subpart C. Therefore, 
the Agency has determined that retaining a general description in Sec.  
3560.11 is appropriate.
Legal or Qualified Alien
    Topic: One commenter requested that the Agency use the Single-
Family Housing definition for ``legal or qualified alien,'' which the 
commenter finds clearer.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. The definition used in the proposed rule was 
the same as the definition that is used by the Single-Family Housing 
Program (see 7 CFR 3550.10) and is consistent with the Housing Act of 
1949, section 501(h). The Agency has exercised its authority under 
sections 501(h) and 510(k) of the Housing Act of 1949 [42 U.S.C. 
1471(h) and 1480 (k)] to restrict eligibility for occupancy in all 
section 515 projects to citizens and qualified aliens. In addition, 
eligibility for the migrant farm workers programs under sections 514 
and 516 is specifically restricted to such individuals by section 
514(f)(3)(A) of the Housing Act of 1949 [42 U.S.C. 1484(f)(3)(A)].
Life-Cycle Cost Analysis
    Topic: Several commenters expressed approval of the Agency's 
decision to require life-cycle cost analyses under certain 
circumstances. Others, however, expressed concern about the 
definition's lack of specificity.
    Response: The Agency appreciates these comments and has clarified 
the life cycle cost analysis inSec.  3560.11.
    Topic: One commenter addressed the wording in the definition for 
``life-cycle cost analysis.'' The commenter believed that the Agency 
should say Licensed Engineer or Architect rather than Design 
Professional.
    Response: The Agency thanks the commenter for this suggestion but 
has made no change to the interim final rule. The Agency does not want 
to limit the borrower's option regarding preparation of the analysis.
Limited Partnership
    Topic: Two commenters suggested that ``capitol'' be revised to 
``capital'' in the definition for ``limited partnership.''
    Response: The Agency thanks the commenters for the suggestion and 
has revised the interim final rule.
Management Fee
    Topic: Regarding the definition of ``management fees,'' one 
commenter asserted that the proposed rule will use occupied units as 
the basis for all fees--an approach that is not in keeping with normal 
industry practices * * * and fails to recognize that vacant units are 
typically the ones that require the greatest amount of management 
attention and effort.
    Response: The Agency acknowledges the commenters' concerns. 
However, the Agency believes the rule as written takes into account 
partial occupancy at Sec.  3560.102(i)(2). If additional staff time is 
needed to perform leasing activities to address vacancies, these costs 
are payable directly from the project. For this reason, the Agency 
believes that a fee system based on occupied units will not adversely 
affect projects experiencing vacancies or higher turnover. Further, if 
a property is located in a difficult market, the Agency can authorize 
add-on fees as a means to

[[Page 69047]]

address issues associated with individual markets in an area. The 
Agency has made no changes to the rule, but will continue to consider 
options and refinements during the interim final rule.
Maximum Debt Limit
    Topic: The commenter supported the inclusion of the reduction of 
funding available to the borrower from sources other than the Agency in 
the definition of the ``maximum debt limit.''
    Response: The Agency appreciates the commenter's support.
Migrants or Migrant Agricultural Laborers
    Topic: Several commenters stated that the definition for 
``migrants'' and ``migrant agricultural laborers'' should be clarified 
to provide a definition of ``temporary residence.'' Others stated that 
the definition should exclude the requirement that to be migrant, the 
farmworker would have to travel out of state, and that in large states 
such as California, this requirement is not practicable.
    Response: The Agency acknowledges these comments but notes that the 
definition states that farmworkers may still be considered ``migrant'' 
if they are ``day-haul agricultural workers whose travels are limited 
to work areas within one day of their residence.'' In addition, the 
term ``temporary residence'' is discussed more fully in Sec.  3560.553 
of the interim final rule.
Moderate-Income Households
    Topic: Several commenters stated that the Agency's definition of 
``moderate income'' is not used by any other affordable housing program 
and that the Agency should adopt HUD's definition.
    Response: The Agency appreciates the commenters' concerns but has 
chosen to use the definition from the Single-Family Housing program for 
consistency within Agency programs.
Mortgages
    Topic: One commenter suggested that a definition for ``deed of 
trust'' should be added. The term ``mortgage'' is defined, but because 
many of our multi-family housing loans are secured by a deed of trust 
rather than a mortgage, deed of trust should also be defined.
    Response: The Agency appreciates the comment and has clarified its 
definition of ``mortgage'' to include deed of trust in the interim 
final rule.
    Topic: One commenter recommended that the definition of 
``mortgage'' be modified by adding the phrase ``that requires judicial 
foreclosure for enforcement'' to the end of the definition.
    Response: The Agency appreciates the comment but has made no change 
to the definition because not all states require judicial foreclosure 
for enforcement.
Native American
    Topic: Several comments addressed the definition of ``Native 
American.'' The commenters believed that the reference to the Indian 
Self-Determination & Education Assistance Act as the trigger for 
eligible status is confusing and results in a burdensome search to find 
this information.
    Response: The Agency thanks the commenters for the suggestion. The 
Agency has revised the interim final rule to define the term ``Indian 
tribe'' and provides appropriate reference to the Indian Self-
Determination & Education Assistance Act. In addition the definition of 
``Native American'' is statutory under section 501(b)(6) of title V of 
the Housing Act of 1949 (42 U.S.C. 1471(b)(6)).
Net Recovery Value
    Topic: A commenter wrote in support of the definition for ``net 
recovery value.''
    Response: The Agency appreciates the commenter's concurrence.
Nonprofit Organization
    Topic: Numerous commenters expressed concern that the definition of 
``nonprofit organization'' is too prescriptive and will cause too many 
organizations to be considered ineligible for the priority purchaser 
category in preservation transfers. For instance, in large states such 
as California, nonprofit organizations that have the capacity to 
develop and operate affordable MFH properties are often not local in 
nature. Commenters were concerned that such restrictions would limit 
the participation of capable nonprofit organizations in the development 
and operation of sections 514, 515, and 516 properties.
    Response: The Agency appreciates these comments and has simplified 
the definition of nonprofit organization to be less prescriptive and to 
allow for more widespread participation by nonprofit groups, but the 
definition remains consistent with the applicable statute. Similarly, 
the interim final rule provides a separate definition for ``nonprofit 
organization for section 515 program for prepayment or purchase'' that 
is substantially simplified to allow for greater participation in these 
activities.
Note Rent
    Topic: Several commenters expressed concern that the definition of 
``note,'' for note rent, should acknowledge that it stands for the term 
``note rate rent.''
    Response: The Agency has included the definition for ``note rent'' 
in Sec.  3560.11 of the interim final rule, and the correct term for 
this rent is ``note rent.''
Permanent
    Topic: A commenter questioned why the term ``permanent'' was 
eliminated. The commenter wondered whether the intent is that tenants 
who are here with temporary legal status papers be housed.
    Response: The Agency thanks the commenter for the suggestion and 
notes that there was an error in the proposed rule. The text has been 
revised as appropriate in the interim final rule.
Plan I
    Topic: One commenter stated that the definition for ``Plan I'' can 
be more specific by saying interest credit became effective in 1968.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule because the Agency does not believe the 
additional specificity provides any more clarity to the definition.
Prepayment
    Topic: One commenter recommended providing further clarification 
for the definition for ``prepayment'' by adding ``as authorized by the 
Agency in response to an offer from the borrower.''
    Response: The Agency appreciates the comment but has not 
incorporated the suggested language in the interim final rule. The 
Agency does not believe that the suggested revision adds anything to 
the definition because full payment of the debt may occur in situations 
other than the Agency's response to an offer from the borrower.
Renovation
    Topic: One commenter stated that ``renovation'' is a new term for 
the program that is barely used in the proposed regulation, so this 
definition should be deleted.
    Response: The Agency thanks the commenter for the suggestion and 
has deleted the definition from the interim final rule.
Rent
    Topic: Several commenters were pleased that the Agency acknowledges 
that there are many different rent levels in affordable housing 
finance. One commenter asked the Agency to address the issue of multi-
tiered rents.

[[Page 69048]]

    Response: The Agency thanks these commenters for their comments on 
this issue. The Agency did not address multi-tiered rents in the 
Definitions because such rents are not permitted in the interim final 
rule.
    Topic: One commenter found the definition of ``rent'' to be 
redundant with the definition of ``basic rent.'' The commenter 
suggested that the definition of ``rent'' include vacancy and 
contingent factors, reserve transfers, and owner's return as defined 
expenses.
    Response: The Agency appreciates the comment and has clarified the 
definition of each type of rent in the interim final rule in Sec.  
3560.11 by removing the language in Sec.  3560. 202(c). The Agency did 
this because it believes the language from the Housing Project Budget 
Form provided clearer wording for a definition of this term.
Rental Assistance
    Topic: One commenter suggested that the definition for ``rental 
assistance'' be revised to read: ``The portion of approved shelter cost 
paid by the Agency to compensate a borrower for the difference between 
the approved shelter cost (basic rent) and the tenant contribution when 
such contribution is less than the basic rent.''
    Response: The Agency has accepted the comment and has revised the 
definition for ``rental assistance'' in Sec.  3560.11 of the interim 
final rule.
    Topic: One commenter suggested revisions to ``rental assistance 
units,'' specifically, expanding the definition of servicing units to 
include RA units provided to an operational project for any reason.
    Response: The Agency thanks the commenter for the suggestion and 
has revised the interim final rule at Sec.  3560.11.
    Topic: The Agency received one comment that asks for explanatory 
guidance as to what a season is. For example, in Oregon seasonal farm 
labor housing is occupied typically up to 10 months. In other states or 
regions it may be only as long as 6 or 7 months.
    Response: The Agency appreciates the comment but has decided not to 
add this term to the interim final rule. As stated by the commenter, 
seasons vary by region and therefore, the Agency is allowing the 
borrower to have the flexibility to deal with this issue. Section 
3560.568 of the interim final rule requires the borrower, in their 
management plan, to establish specific opening and closing dates for 
off-farm labor housing operating on a seasonal basis.
Resident or Site Manager
    Topic: Regarding the definition for ``resident or site manager,'' 
the commenter recommended replacing the portion of the definition that 
currently reads: ``who lives at or near the project site.'' The 
commenter believed that maintaining a local presence is a critical 
element in providing an acceptable level of customer service.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule because a site manager is a manager who works 
at the property but is not required to live at or near the property. 
The Agency does not believe there is a connection between local 
presence and good customer service.
Rural Area
    Topic: A few commenters expressed concern that basing the 
definition of ``rural area'' on decennial census population data is 
inappropriate because the data are now several years old. Another 
commenter suggested that the definition was too complicated.
    Response: The Agency appreciates these comments but has made no 
change to the definition of rural area because it is statutory, from 
section 520 of title V of the Housing Act of 1949.
    Topic: One commenter asked the Agency to add a provision that 
allows for the automatic revision of the definition of ``rural area'' 
as statutes change. This commenter was also concerned with the 
definitions of sections 515, 514, and 516 programs.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. The definition is statutory and will be 
changed when the statute is amended.
Tenant Contribution
    Topic: One commenter suggests that in the definition for ``tenant 
contribution,'' the word ``rent'' be replaced with the words ``shelter 
cost.''
    Response: The Agency thanks the commenter for the suggestion and 
has revised the interim final rule.
    Topic: The commenter believed that the definition of ``tenant 
contribution'' implies that all tenants pay something for occupancy at 
a rental unit; however, some tenants do not pay anything.
    Response: The Agency appreciates the comment and has reworded the 
definition of ``tenant contribution'' to use the same definition that 
was used previously. Under the statutory definition (42 U.S.C. 
1471(a)(5)(A)) of income, some items are excluded from the calculation 
of income; therefore, the commenter is correct that some tenants do not 
pay any rent.
Tenants' Rights
    Topic: One commenter suggested that the regulation should include 
an explicit statement that state or local laws that give tenants 
greater rights than this regulation are not preempted by the regulation 
or handbooks, as long as those laws do not interfere with the 
fundamental purposes of the RHS programs.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. Throughout subpart D of the interim final 
rule, the Agency states that borrower policies regarding occupancy and 
tenant rights must be consistent with state and local laws.
    Topic: One commenter acknowledged that no per-unit square footages 
was proscribed. The commenter stated that this will help in dealing 
with multifunding sources; however, developing modest housing should 
still be a priority with the Agency.
    Response: The Agency thanks the commenter for the support.
    Topic: Regarding design requirements, one commenter agreed with the 
change in philosophy from cost containment to economical construction.
    Response: The Agency thanks the commenter for the support.
    Topic: The Agency received a comment regarding owner responsibility 
and requirements. The commenter believed that this provision is 
confusing and may be interpreted too broadly. Implicitly this rule 
provides that parties cannot delegate responsibility, which is not 
accurate.
    Response: The Agency appreciates the comment but has made no change 
to the interim final rule. The borrower is contractually bound to meet 
the Agency's requirements by the promissory note, loan agreement/
resolution, and mortgage. The borrower is permitted to hire a 
management company to perform day-to-day oversight of the property, but 
the borrower is ultimately responsible for the property.
    Topic: One commenter addressed Sec.  3560.60(d)(2) and the 
definition of ``to the extent possible'' as it relates to accessibility 
upgrades when a single damaged unit is being extensively repaired. The 
commenter suggested that if accessibility requirements would add more 
than 5 percent to the repair costs, the accessibility requirement 
should not be required. Further, the Agency should note that borrowers 
could use reserve funds for additional accessibility requirements.
    Response: The Agency appreciates the comment but has made no change 
to the

[[Page 69049]]

interim final rule. See the reference at Sec.  3560.2(a)(2) that the 
Uniform Federal Accessibility Standards are required (49 CFR part 
1190).
Total Development Costs
    Topic: Numerous commenters were concerned that the components of 
total development costs do not include developer fees. One commenter 
suggested that household furnishings be removed from the total 
development cost.
    Response: For Agency-financed projects with LIHTC financing, the 
developer will continue to earn developer fees. Developers of projects 
without LIHTC financing will not be permitted developer fees. The 
Agency believes that the borrower's permitted return as currently 
calculated should provide sufficient remuneration on a well-managed 
property. Furnishings, as noted in the Definition, are only part of the 
total development cost for section 514 and 516 (Farm Labor) Housing.

Subpart B--Direct Loan and Grant Origination

    Topic: Numerous commenters expressed concern that the definition of 
and restrictions on nonprofit organizations are too restrictive. 
Several commenters said that the requirement for a nonprofit to have 25 
members from the community to show community support for the project is 
excessive because finding 25 people in any community to actively serve 
is difficult. Some commenters stated that the requirements were 
unclear. For instance, several commenters asked for a definition of 
public sector, when used to describe restrictions on the number of 
board members from the public sector.
    Response: As stated in the description of the comments received for 
subpart A, General Provisions and Definitions, the Agency has revised 
the definition of ``nonprofit organization'' to be simpler, less 
prescriptive, and less restrictive to maximize participation of 
nonprofit organizations in the sections 514, 515, and 516 programs.
    Topic: Similar to the comments received on the definition of 
``total development costs,'' numerous commenters stated that developer 
fees should be an allowable expenditure of loan funds. Several 
commenters noted their belief that developer fees should be capped.
    Response: Again, the Agency's position is that for Agency-financed 
projects with LIHTC financing, developers will continue to receive 
developer fees. Developers of projects without LIHTC financing will not 
be permitted developer fees. (This is described in Sec.  3560.63(d)(2) 
of the interim final rule.) The Agency believes that a borrower's 
permitted return as currently calculated should provide sufficient 
remuneration on a well-managed property.
    Topic: The Agency received multiple comments on the requirements 
for initial operating capital and the initial equity contribution 
required of borrowers, as well as the time period during which the 
initial operating capital may be repaid to the owner. One commenter 
asked the Agency to revise the proposed language in Sec.  3560.64(b) to 
state that any additional initial operating expenses paid by owners 
above this amount would be repaid, as a priority, from available cash 
flow. A second commenter asked the Agency to clarify in Sec.  
3560.64(c) why it would require the initial contribution of operating 
to be made prior to the start of construction. The commenter asked the 
Agency to revise these requirements so that the initial operating 
contribution could be provided at the end of the construction period, 
or at least after construction is 50 percent completed.
    Response: As outlined in Sec.  3560.304, the purpose of initial 
operating capital (IOC) is to provide a source of capital for start-up 
costs. IOC may only be used to pay for approved budget expenses. The 
applicant's ability to fund the IOC, if required, is part of the 
applicant eligibility requirements and therefore, cannot be contributed 
after loan approval, e.g., at the end of construction or at 50 percent 
completion. The 2 percent IOC requirement is a minimum. If excess funds 
are contributed to the IOC, they may be withdrawn by borrower in 
accordance with Sec.  3560.304(c).
    Topic: Several commenters said that the amount of the initial 
operating capital--2 percent of total development costs--is 
unrealistically high.
    Response: The Agency has determined that 2 percent of total 
development costs is reasonable in light of the amount required to 
operate an Agency-assisted property, especially during the initial 
rent-up period, during which the amount is used to help cover startup 
costs.
    Topic: Some commenters said that the 2- to 7-year time period 
during which the initial operating capital may be repaid to the owner 
is too long, while others said it was too short.
    Response: The Agency appreciates these comments but has decided 
that the 2- to 7-year repayment period is acceptable because it allows 
adequate flexibility to borrowers. Therefore, the Agency has made no 
change to the regulation.
    Topic: Regarding the requirements for general partners in a limited 
partnership with LIHTCs, 12 commenters stated that the requirement for 
general partners to have a 5 percent financial interest in a limited 
partnership, as stated in Sec.  3560.55(d)(2), is unworkable. They 
stated that in the majority of LIHTC deals, the general partners only 
have a financial interest of 1 percent or less.
    Response: The Agency believes that the commenters are confusing the 
expression ``financial interest in the residuals or refinancing 
proceeds'' with ``financial ownership interest.'' The two expressions 
are distinct, whereby having a 5 percent interest in the former does 
not preclude having a 1 percent interest in the latter. Therefore, the 
Agency has made no change to this section.
    Topic: Numerous commenters stated that the pre-application and 
initial application submission requirements were too onerous and asked 
the Agency to clarify its position since they could not clearly 
understand the proposal. For example, one commenter recommended two 
annual Notices of Funding Availability (NOFAs) rather than one to 
promote accelerated use of USDA funds and to allow for more units to be 
produced on a 6-month versus 12-month cycle. Some commenters were 
concerned that the Agency considered additional technical assistance as 
an ineligible use of funds.
    Response: In developing the NOFA process with the three application 
stages, the Agency has endeavored to streamline the process by 
minimizing the application requirements during the pre-application 
phase when project approval is unknown to reduce the applicants' 
burden. Likewise, the Agency is requiring the minimum amount of 
information to be submitted during the initial application phase to 
reduce the applicants' burden. However, the Agency has a responsibility 
to collect enough information about proposed projects at each stage to 
allow for reasonable decisionmaking and effective underwriting. 
Therefore, the Agency has made no further changes to this section.
    Topic: Some commenters said that requiring the Agency to conduct an 
environmental review during the pre-application phase, when it is still 
uncertain whether the project will receive funds, is unrealistic.
    Response: The Agency believes that the commenters misunderstood 
Sec.  3560.56. This paragraph states that environmental reviews are 
required during the initial phase of loan processing to aid in 
determining project eligibility and feasibility.

[[Page 69050]]

    Topic: Several commenters asked the Agency to define ``State 
Consolidated Plan.''
    Response: The Agency agrees with the commenters and has added this 
definition to Sec.  3560.11 of the interim final rule.
    Topic: Some commenters said that the Affirmative Fair Housing 
Marketing Plan should not be required for submission during the initial 
application stage but should be part of the final application 
submission.
    Response: The Agency believes the commenters misunderstood the 
procedures in the handbook. The form used for this plan is given to the 
applicant during the initial application stage, but the applicant does 
not need to submit the plan until the final application stage. The 
Agency has clarified this point in Sec.  3560.56(h) of the interim 
final rule.
    Topic: Several commenters stated that the Agency should allow 
flexibility in requiring applicants to be in full compliance with any 
existing loan and grant programs, particularly in the case of property 
transfers and preservation, wherein the new owner entity should not be 
punished for taking on a property with physical, financial, or 
managerial issues, or under a preexisting workout plan of less than 6 
months.
    Response: The Agency realizes that achieving and maintaining 
compliance are challenges under these circumstances. The Agency 
recognizes these challenges, and program procedures allow RHS to accept 
a revised workout plan from the new owner that it deems acceptable 
under the standards in Sec.  3560.453 of the interim final rule and in 
the Project Servicing Handbook. Also, an exception may be requested by 
the State Director and considered by the Agency on a case-by-case 
basis.
    Topic: The Agency received several comments regarding its position 
on purchasing excess land, such as when a seller owns 5 acres and will 
only sell all of the acres, regardless of how much the applicant wants 
to develop. Commenters stated that there should be flexibility in the 
Agency's policy so that excess land can be purchased if the applicant 
cannot find a smaller parcel to purchase and develop.
    Response: The Agency recognizes the need for flexibility on this 
issue and is willing to work with applicants in determining the 
suitability of sites for development. 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. The regulations at Sec.  3560.54(a)(11) allow borrowers to 
purchase land for a site in excess of what is needed, except when the 
applicant cannot acquire an alternate site or cannot acquire the needed 
land as a separate parcel. The applicant agrees to sell the excess land 
as soon as practical and to apply the proceeds to the loan. Program 
site density requirements must be met in accordance with the site 
requirements established under Sec.  3560.58.
    Topic: Several commenters expressed concern about the difficulty in 
locating appropriate sites for development and the need for flexibility 
in the Agency's criteria. One commenter asked the Agency to clarify its 
language by changing ``will'' to ``should'' in Sec.  3560.58(a)(4). 
Commenters also said that clarification is needed regarding what 
constitutes an established rural community/eligible site. Many 
acceptable sites are located outside city limits but have water, sewer 
systems, and fire protection. Several commenters said that the 
regulation requires sites to have reasonable access to water and sewage 
removal, but this statement appears to negate the use of onsite septic 
systems as outlined in the Loan Origination Handbook, which describes 
when alternatives to ``community'' systems may be used.
    Response: The Agency appreciates these comments; however, RHS has 
not made the suggested change from ``will'' to ``should'' in Sec.  
3560.58(a)(4). The Agency wants to emphasize that it will not approve 
sites that are not an integral part of a residential community and do 
not have reasonable access, either by location or terrain, to essential 
services such as water, sewage removal, schools, shopping, employment 
opportunities, and medical facilities. Environmental studies and civil 
rights assessments must be conducted before a site is approved. The 
Agency wants to emphasize that it remains flexible pending the outcome 
of such site assessments and the review of final development costs and 
plans.
    Topic: Several commenters felt that more consideration should be 
afforded for development within 100-year flood plains, provided 
adequate flood insurance is maintained, and for development near or 
adjacent to industrial sites and processing plants, provided there are 
no threats of health hazards.
    Response: The Agency appreciates these comments. However, the 
Agency will not approve sites subject to 100-year floods when non-
floodplain sites exist. Where there are no non-floodplain sites 
available, sites located within a 100-year floodplain are not eligible 
for Federal financial assistance unless flood insurance is available 
through the National Flood Insurance Program. Once all necessary 
information is collected, analyses are performed, and the appropriate 
reviews completed for these sites, the Agency will make its decision 
based on whether the proposed project furthers the program's objectives 
and the government's interests are adequately protected.
    Topic: Numerous commenters expressed concern that the Agency does 
not consider standards imposed by other financing sources, such as 
tenant income restrictions and tiered rents. Some commenters appeared 
to be confused about tax credits as a funding source.
    Response: The Agency appreciates these comments and is committed to 
working to reduce interprogram differences to the extent practicable, 
thereby making it easier to satisfy the requirements of other funding 
sources. Moreover, as noted in Sec.  3560.66(a)(3) of the interim final 
rule, the Agency will allow the strictest interpretation of the policy 
to prevail in most instances when requirements conflict.
    Topic: Several comments focused on the Agency's preference for loan 
applications with leveraging. Commenters stated that the Agency should 
not award points, or should award fewer points, to applicants with 
``token'' financing that makes up a very small percentage of total 
development costs.
    Response: The Agency understands the commenters' position and notes 
that how points are awarded is discussed in the Agency's annual NOFA. 
It is not changing how it scores and ranks applications at this time. 
Moreover, it already awards fewer points to applications wherein there 
is a lower percentage of leveraging in comparison to the total 
development costs.
    Topic: The Agency received numerous comments on equity requirements 
for subsequent loans. One commenter stated that the Agency should 
change its language in proposed Sec.  3560.55(d)(1) to read 
``borrower,'' not ``equity.'' Several other commenters stated that 
requiring a borrower to make an equity contribution for a subsequent 
loan is a disincentive for applying for the loan. Others said that the 
equity contribution should come from the property's resources.
    Response: The Agency appreciates these comments and has changed its 
language in Sec.  3560.55(d)(1) of the interim final rule to read 
``borrower,'' but it will not change its position. RHS does not 
consider it an onerous

[[Page 69051]]

requirement for applicants for subsequent loans to make an equity 
contribution of 3 or 5 percent, depending on whether the project is 
being financed with LIHTCs.
    Topic: A substantial number of commenters focused on the required 
funding level of a property's reserve account and felt that the minimum 
deposit requirement was too high. These commenters were concerned that 
this requirement would be unduly costly and result in budget-based 
rents exceeding conventional rents for comparable units.
    Response: The Agency appreciates these concerns. Since the proposed 
rule was published, RHS has undertaken a comprehensive property 
assessment of the properties in the section 515 portfolio. The 
preliminary results provided useful information for reconsidering the 
extent of capital reserves that may be necessary to meet the capital 
needs of projects and to explore policy options for addressing these 
needs to be reflected in any necessary budgetary and legislative 
changes. More time is needed to properly address these matters. 
Accordingly, RHS has decided to publish an interim final rule that does 
not include these provisions--specifically Sec.  3560.103(c)(3) and 
Sec.  3560.306(k)(1) of the proposed rule--until their impacts can be 
assessed and policy decisions can be made for a long-term strategy.
    Topic: Several commenters believed that there were loopholes in the 
proposed rule that would have enabled a borrower to commit deliberate 
actions to force the Agency to accelerate the borrower's loan to 
circumvent the preservation/prepayment requirements.
    Response: The Agency notes that similar comments were addressed in 
subpart N and recommends referring to this part of the interim final 
rule for more information. However, it does note that in the interim 
final rule, the Agency modified Sec.  3560.456(a) to read as follows: 
``Before accelerating a project loan, the Agency will consider the 
possibility that the borrower is forcing an acceleration to circumvent 
the prepayment process. If it is found that this is the borrower's 
motivation, the Agency will consider alternatives to acceleration, such 
as suing for specific performance under loan and management 
documents.''
    Topic: The Agency received numerous comments on the restrictive-use 
provisions described in this subpart. Several of these comments focused 
on how the proposed rule was unclear about whether use restrictions 
remain in effect or terminate on properties whose borrowers make their 
balloon payment and pay off their Agency debt when the 30-year term 
expires. Some commenters expressed concern that if the use restrictions 
do not remain in effect for the entire 50-year loan amortization 
period, the supply of affordable housing will decrease. Other 
commenters said that the restrictive-use provisions should expire when 
the borrower pays off the Agency debt.
    Response: As explained in the preamble to the proposed rule, use 
restrictions are tied to the 30-year term of the mortgage. This 
requirement was established in 7 CFR part 1944, subpart E and the 
proposed rule simply continued this policy. However, the Agency notes 
that its interim final rule would allow properties to remain in the 
program if the borrower sought and obtained additional financing from 
the Agency upon expiration of the term.
    Topic: Several commenters expressed dissatisfaction with the 
Agency's policy for calculating returns on investment. Some commenters 
recommend that the full 8 percent return should be allowed on all 
equity funds up to 10 percent of the amount of the initial investment 
instead of just on the 3 or 5 percent initial contribution. These 
commenters also felt that consideration should be given for older 
projects.
    Other commenters noted that the Agency should allow a return based 
on the current value of the original investment adjusted for inflation, 
if owners are expected to maintain a business commitment to MFH 
projects.
    Response: The Agency has considered the commenters' reasons for 
suggesting higher returns but has retained the policy described in the 
proposed rule, which is consistent with the Agency's existing policy in 
7 CFR part 1944, subpart E on this topic.
    Topic: Additional commenters noted that the Agency does not account 
for inflation when estimating return on investment in Sec.  3560.68. 
(One noted that the reference to Sec.  3560.67 was wrong and should be 
Sec.  3560.68.) They also felt that there needed to be provisions for 
the payment of general partner fees for MFH projects with LIHTCs 
consistent with the LIHTC industry standard.
    Response: The Agency has corrected the cross reference in the 
interim final rule. As is the case with the payment of developer's fees 
on combined MFH/LIHTC-financed projects, general partner fees, while 
not an eligible use of Agency loan funds, may be included in the total 
development costs when such fee is paid from other financing sources, 
in accordance with Sec.  3560.63(d)(2).
    Topic: Several commenters noted that the definition of security 
value of the property is critical to the calculation of return on 
investment. If security value equals ``value-in-use,'' the return on 
investment will be greater than if the security value of the property 
equals the market value.
    Response: The Agency acknowledges these comments and has made 
revisions to the language in Sec.  3560.68 to address this concern. The 
Agency also has noted that clarifications were made in Sec.  3560.752 
of the interim final rule to reduce confusion about the types of value 
determinations.
    Topic: The Agency received comments regarding its cost 
certification requirements, which state: ``Whenever the State Director 
determines it appropriate, and in all situations where there is an IOI 
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.'' Several commenters stated that these requirements were not 
strict enough and suggested requiring further cost certifications. 
Another commenter recommended that the regulation should specify an 
audit by a CPA, who is independent from the borrower. Another commenter 
asked for clarification about some of the related procedures, and who 
pays for the audit.
    Response: The Agency appreciates these comments and has included a 
clarification in Sec.  3560.72(b) of the interim final rule that cost 
certifications must be prepared in accordance with 7 CFR part 1924, 
subpart A. The Agency believes this clarification provides the 
necessary protection. Further, the Agency, rather than the borrower, 
has the authority to contract with a CPA to perform the audit. RHS 
believes that the language in the rule is clear--the expenses related 
to the cost certification and the accompanying audit are paid by the 
borrower out of loan proceeds. If the Agency contracts for the audit, 
it pays for the cost, and the loan funds for this cost are returned. 
This process is described in Agency guidance about program procedures.
    Topic: Several commenters supported the elimination of the 
designated places requirement. The commenters said that the designated 
places list frequently excludes areas where the need for affordable 
housing is the greatest. Commenters said that if a market study 
indicates a need for affordable housing in a given area, the Agency 
should consider the project for funding, even if the location is not on 
the designated places list.

[[Page 69052]]

    Response: The Agency is committed to using its funds to benefit 
households with the greatest need for housing in areas where the supply 
of affordable housing is limited. Further, it believes this commitment 
is reflected in the designated places list, where designated places is 
a requirement in accordance with Sec.  532(c) of title V of the Housing 
Act of 1949, as well as other Agency or Administration priorities.
    Topic: The Agency received several comments on the regulation's 
references to accessibility standards. Several commenters suggested 
that the reference to the ADA be removed because the ADA is not 
applicable to residential properties. Some commenters expressed 
confusion about accessibility requirements.
    Response: The Agency has noted these comments and has removed the 
references to the ADA, except where it is applicable. The interim final 
rule continues to reference 7 CFR part 1924, subpart A, which addresses 
accessibility requirements. Further, Agency staff can help provide 
clarification about accessibility requirements during the project 
planning stage.
    Topic: Other commenters said that the accessibility requirements 
for on-farm labor housing should be less stringent.
    Response: The Agency appreciates these comments. However, the 
Agency has made no change to Sec.  3560.60(d), as its policy on 
accessible units needs to comply with the applicable civil rights 
statutes and regulations.
    Topic: The Agency received several comments on Sec.  3560.56(e), 
which states that the Agency will process the next initial loan 
application, in rank order, when an application is delayed for a period 
of time that will not permit funding of the project during the current 
funding cycle. The commenters stated that it is very difficult to 
complete projects within a particular funding cycle given all the 
development challenges and the need to obtain funds from other sources.
    Response: The Agency believes that the commenters misunderstood 
this paragraph. The Agency must be able to obligate the funds for a 
particular project, not complete the construction process, during the 
current funding cycle. The Agency recognizes the challenges in 
preparing an application involving multiple funding sources but has 
retained the language as written because it must obligate the available 
program funds within the established period.
    Topic: Several commenters focused on Sec.  3560.60 (Design 
requirements), with comments ranging from the specific to the 
relatively general. For example, commenters stated that the Agency's 
requirements for (1) economical construction, operation, and 
maintenance and (2) life-cycle cost analyses are contradictory, as 
life-cycle cost analyses can lead to greater maintenance costs. By 
comparison, a commenter asked the Agency to work with other Agencies to 
ensure that current threshold requirements are improved to prevent air 
and water infiltration.
    Response: While the Agency appreciates these comments, it has made 
no change to this section because it feels that conducting life-cycle 
cost analyses will help ensure a balance between economical 
construction and a property's long-term viability.
    Topic: Several commenters also focused the on the life-cycle cost 
analysis requirement in Sec.  3560.60 (Design requirements). Some 
commenters were concerned that requiring a life-cycle cost analysis 
would not be cost-effective for properties with minor capital needs. 
Others said that the term ``life-cycle cost analysis'' should be 
clarified so that borrowers are fully aware of their responsibilities 
for obtaining and implementing the results of the analysis.
    Response: The Agency appreciates these comments, but the life-cycle 
cost analysis requirements in Sec.  3560.60(c)(3)(iii) of the interim 
final rule are used in an effort to balance upfront construction costs 
and long-term operating costs. The Agency has made no change. The 
Agency provides further information on obtaining and using a life-cycle 
cost analysis in its guidance about program procedures.
    Topic: A number of commenters stated that a property's rents should 
be based on its operating and development costs, which might be higher 
than conventional rents for comparable units. Several of these 
commenters stated that it is difficult to find comparable rents in 
certain communities. Other commenters said that it was difficult to 
comment on the implementation of conventional rents for comparable 
units without knowing what the impact will be.
    Response: The Agency appreciates these comments, but RHS views 
conventional rents for comparable units as an important underwriting 
consideration in assessing project viability. As stated previously, the 
Agency may make an exception to the requirement that rents do not 
exceed conventional rents for comparable units if doing so is in the 
Government's best interest.
    Topic: With regard to the Agency's requirement that its loans be at 
least 25 percent of a project's total development costs, some 
commenters thought that this 25 percent threshold is reasonable, but 
others said that the threshold should be increased because of the 
difficulty in servicing small loans.
    Response: The Agency has considered the commenters' suggestions but 
has decided to retain the 25 percent threshold. The Agency believes 
this threshold is reasonable and has not been a problem for the 
majority of applicants.
    Topic: Several commenters asked what security value should be used 
to determine maximum loan limits.
    Response: The Agency has clarified these terms in the interim final 
rule so that the terms ``current value'' and ``value-in-use'' were 
replaced by ``market value'' in Sec.  3560.63(e). Also, a description 
of market value is provided in Sec.  3560.752 of the interim final 
rule.
    Topic: The Agency received several comments regarding the cap of 2 
percent of total development costs for section 515 projects and 4 
percent for off-farm labor housing projects to cover development/loan 
packaging. Several commenters said that the 2 percent for section 515 
projects and 4 percent for off-farm labor housing projects are not 
adequate to cover costs, especially in those cases where the developer 
does not serve as the general contractor. Other commenters contended 
that development costs for section 515 and off-farm labor projects are 
roughly equivalent.
    Response: The Agency acknowledges the commenters' concerns but has 
determined that there is no compelling reason to increase the cap. 
Furthermore, in the Agency's experience, development of Farm Labor 
Housing projects is more difficult than development of section 515 
properties. Therefore, the Agency has made no change in the cap for 
section 515 properties.
    Topic: Regarding the eligible uses of loan and grant funds as 
described in Sec.  3560.53, several commenters supported the Agency's 
more detailed description of allowable costs. Others said that the 
percentages for allowable builder's profit, general overhead, and 
general requirements are improved over prior allowances, while others 
thought that the percentages should be increased to compensate for 
increased costs. Several commenters said that the section should be 
more inclusive, while others thought some costs should be prohibited.
    Response: The Agency appreciates these comments but has made no 
change to its position in the interim final rule. The comments were 
very general, and RHS believes the language in the proposed rule is 
reasonable.

[[Page 69053]]

Moreover, the allowable cost percentages were derived as a result of an 
Agency review of Agency, State, and industry cost information and best 
management practices. The provisions in the Agency's interim final rule 
are consistent with the results of this review.
    Topic: Regarding the language in Sec.  3560.53 on the use of funds 
to develop and install necessary systems, some commenters felt that 
certain elements of this requirement were too prescriptive and 
bureaucratic, ultimately leading to increased development costs. Other 
commenters said that the installation of necessary systems offsite 
should require permanent easements.
    Response: The Agency has considered the commenters' concerns and 
revised Sec.  3560.53(e)(1) in the interim final rule to read: ``The 
loan applicant will hold title to the facility or have a legal right to 
use the facility in the form of an easement or other instrument 
acceptable to the Agency 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.''
    Topic: Other comments regarding Sec.  3560.53 included praise for 
the clearer, improved statement of authorized purposes. Another 
commenter stated that the language in Sec.  3560.53(b)(2) was too 
restrictive and could result in properties without the amenities to 
effectively compete with other affordable properties in their market 
area.
    Response: The Agency thanks the commenters for positively 
recognizing the improved language. RHS acknowledges the concern about 
ensuring that properties are competitive. The Agency believes that 
other provisions throughout subpart B provide sufficient flexibility to 
enable applicants to develop properties with competitive features and 
amenities for the area, while at the same time ensuring affordability 
and reasonable development costs.

Subpart C--Borrower Management and Operations Responsibilities

    Topic: The Agency received numerous comments on the property 
maintenance requirements. These comments covered three broad topics, as 
discussed below.
    Topic: A number of commenters expressed approval of the Agency's 
effort to codify property standards. They indicated that the increased 
clarity will help ensure a consistently higher level of compliance with 
the standards and provide safer, healthier environments for tenants, 
especially children. However, other commenters argued that such 
specificity should not be included in the regulation, as it can create 
a lack of flexibility for property owners who must follow the rules 
over their own judgment about cost-effective maintenance. Some 
suggested putting the detailed property standards in the program 
handbooks. One person suggested referencing an industry code.
    Response: The Agency appreciates these comments and understands the 
commenters' concerns. The Agency has considered the advantages and 
tradeoffs of including specific standards in the rule and has decided 
to keep the specific standards in the rule. By establishing the 
standards in the regulation, the Agency has a stronger regulatory basis 
for enforcing property maintenance standards.
    Topic: Similarly, commenters were concerned that for many 
properties it would not be practical to achieve and maintain compliance 
with all items in the list of requirements. They indicated that any 
single deficiency should not be interpreted as an indication of a 
poorly maintained project and questioned whether a single or limited 
number of deficiencies would put them out of compliance. One commenter 
asked for a specific statement of what would constitute compliance. 
Commenters also added that ongoing compliance with a long list of 
requirements would be even more difficult given the limits on operating 
budgets and stressed the need for adequate resources to meet these 
property maintenance standards. They suggested that they be allowed to 
consider the severity of a problem to prioritize their maintenance 
needs and not be required to address all deficiencies at once.
    Response: The Agency appreciates all these comments and has 
modified Sec.  3560.103(a) to indicate that it will not penalize the 
borrower for not meeting all standards if there is clear evidence that 
the borrower is working toward meeting 100 percent of the standards. 
Further, properties in the process of addressing deficiencies will not 
be deemed out of compliance unless the number of deficiencies 
constitutes substantial noncompliance and calls into question the 
viability of the property and the effectiveness of the borrower's 
maintenance program. The Agency has added language to the interim final 
rule at Sec.  3560.103(a)(4) indicating that upon discovery of 
conditions that do not meet the standards, it expects that the borrower 
will remedy the conditions in a reasonable period of time. The Agency 
has listed in the interim final rule at Sec.  3560.103 (a)(3)(i) 
through (xvii) the standards by which compliance will be measured.
    Topic: Commenters also had a number of suggestions, proposed 
language changes, and questions on how to interpret these standards. 
They had questions on issues ranging from rain diverters and gutters to 
van parking spots to the caulking of water closet floors and accessible 
laundry facilities. They suggested edits to the language on water 
leaks, cracks, moisture and mold, and common area accessibility. They 
also raised the issue of work order systems and the difficulty of 
implementing them in small properties.
    Response: The Agency acknowledges these comments and has made 
appropriate edits for clarity in the interim final rule at Sec.  
3560.103(a)(3)(i) through (xvii). The work order system required is not 
intended to be any more elaborate than necessary for the size of the 
property.
    Topic: Regarding the new approach to management plans, management 
agreements, and management certifications, many commenters applauded 
these changes for reducing the administrative burden on both the 
borrower and the Agency, though a number of commenters were also 
concerned that the changes might hinder the effectiveness of Agency 
oversight. Other commenters suggested further streamlining these 
requirements, and a number of comments asked to see the management 
certification form. Finally, several commenters noted that subpart C of 
the proposed rule contradicts itself by stating that management plans 
are not subject to Agency approval and then stating conversely that 
Agency approval is required (see Sec.  3560.102(c)).
    Response: The Agency acknowledges these comments. The Agency has 
remedied the conflict identified at Sec.  3560.102(c) to clarify that 
Agency approval of management plans is no longer required. The Agency 
believes that the concerns about the changes hindering Agency oversight 
reflect commenters' confusion about the some of the specifics of the 
new policy. While the Agency is no longer approving either the 
management plan or the management agreement, the management 
certification is signed by both the management agent and the borrower, 
and is approved by RHS . The certification commits the management agent 
and the borrower to operate the property in compliance with program 
requirements and provides specific financial and other penalties for 
failure to comply, including termination of the management agreement. 
This certification is similar to the document

[[Page 69054]]

used successfully in HUD multi-family programs. The Agency believes 
that this document eliminates unnecessary Agency reviews, while still 
retaining clear authority for compliance oversight and enforcement.
    Topic: Commenters made a number of suggestions on how and when to 
submit management plans and certifications. They asked if current 
management plans would need to be reviewed and updated for approval, 
and also, what types of changes in approved plans would require 
reapproval of the documents; they strongly suggested that only 
significant changes require reapproval within the 3-year timeframe. One 
commenter suggested that a borrower with multiple properties should be 
able to submit a ``master file'' with a plan for all the borrower's 
properties. Another asked if the management certification could be done 
as part of the budget document. Commenters also asked about using a 
management agreement acceptable to both the Agency and the State 
finance Agency to help eliminate paperwork.
    Response: The Agency agrees with the commenters that only 
significant changes will require resubmission of documents. As noted in 
Sec.  3560.102(c) of the interim final rule, the Agency will no longer 
approve management plans. Borrowers will need to prepare and submit 
updated management plans initially after publication of this rule. 
Subsequent updates are required when project operations substantially 
change with regard to the mandatory items in the plan, or if the 
borrower needs to submit a workout plan and the management plan needs 
to be updated to be consistent with the workout plan (see subpart J).
    Topic: Numerous commenters questioned the requirement in Sec.  
3560.102(d) that the management plan be updated if the project is found 
to be out of compliance. The commenters questioned the need to update 
the management plan in cases where the problem is not due to items 
covered in the plan and noted that this poses an unnecessary burden.
    Response: The Agency agrees with the commenters' concern but notes 
that the paragraph allows borrowers to submit a statement that the 
management plan is adequate to assure compliance if changes to the plan 
are not needed to address the violation. Further, the Agency believes 
that requiring the management plan to be updated to describe how 
compliance violations are to be addressed is reasonable when such 
changes would support compliance. Therefore, the Agency has made no 
changes to the management plan requirements.
    Topic: Management fees and the policy for determining allowable 
fees to be paid out of project income received numerous comments. A 
number of commenters supported the new method. Some commenters 
suggested that a base fee using a National average, with add-ons for 
geographic factors, would help with consistency. However, others 
expressed strong opinions that the determination of reasonable fee 
standards could only be done effectively at the State level. Numerous 
commenters were disappointed that the Agency chose to institute a ``per 
unit, per month'' management fee rather than a fee based on a 
percentage of revenue or gross collections. They were also concerned 
that much of the clarity gained through the development of 
Administrative Notices on this topic did not appear in the rule. Many 
commenters were concerned that any method used to determine a range of 
base fees for a given area would be seriously flawed. Their concerns 
included the following:
     Management fees should be determined at the State level 
because only the state has specific market knowledge to set fees 
correctly.
     Management fees should be published periodically at 
specified times. Some commenters worried that the process of 
publication will delay the release of the fees. They asked that State 
lists be made available immediately.
     RHS should consider Consumer Price Index when establishing 
management fees.
     The management fee system should ensure that the 
appropriate fee ranges are allowed. Some suggested looking at 
successful State models for per-unit fees.
    Commenters also had a number of questions and clarifications 
regarding the eligibility for fees of Public Housing Authorities, the 
fees for sections 514 and 516 projects, the bundle of services, and 
add-on fees and the relationship of these fees to fees in market rate 
properties.
    Response: The Agency acknowledges the commenters' concerns and has 
revised Sec.  3560.102(i) to address clarification issues raised by the 
commenters. Management fees will be paid based on a ``per occupied 
unit'' basis. The Agency feels that this is the fairest methodology at 
this time. The base fee will be valued on a specific ``bundle of 
services'' that has been added to this section. The ``bundle of 
services'' has previously been issued in Administrative Notices. 
Periodically, the Agency through the State Offices will publish the 
base fee. The States will determine the base fee using housing industry 
data for their state. The frequency for updating the fee ranges will be 
established in Agency program procedures.
    Topic: The Agency received numerous comments with respect to 
management agents being allowed to earn a management fee for any unit 
occupied for at least one day during the month. Several commenters said 
that allowing for a management fee for a partial month is a welcomed 
improvement; however, there was disagreement about whether the Agency's 
information management capabilities would allow it to effectively track 
monthly occupancy rates, including units that are vacant on the first 
of the month but occupied later in the month. Some commenters suggested 
that management agents should only be eligible to receive a fee for a 
unit that was occupied on the first of a month; in contrast, other 
commenters argued that occupancy should not even be a factor in 
calculating management fees. They stressed this method is not the 
industry standard because vacant units often require more attention 
than occupied units. In addition, the tracking of occupied units places 
an additional burden on the management agent. One compromise approach 
offered was to allow management fees on the total units as long as the 
property stays 90 percent occupied, and per-unit fees if the property 
falls below the 90 percent threshold.
    Response: The Agency acknowledges the commenters' concerns. 
However, the Agency believes the rule as written takes into account 
partial occupancy at Sec.  3560.102(i)(2). If additional staff time is 
needed to perform leasing activities to address vacancies, these costs 
are payable directly from the project. For this reason, the Agency 
believes that a fee system based on occupied units will not adversely 
affect projects experiencing vacancies or higher turnover. Further, if 
a property is located in a difficult market, the Agency can authorize 
add-on fees as a means to address issues associated with individual 
markets in an area. The Agency has made no changes to the rule but will 
continue to consider options and refinements during the comment period 
of the interim final rule.
    Topic: The bundle of services concept established in Sec.  
3560.102(i) received many comments and questions. Several commenters 
asked for more detail on the included list of services. Some expressed 
concern that this arrangement will add new costs and complexity to the 
compensation of management

[[Page 69055]]

agents, while others strongly endorsed the concept stating that it will 
help bring clarity and consistency to the process. Commenters stressed 
that, given the diversity of business practices among agents, the 
defined bundle of services must be complete, necessary, and consistent 
among projects, counties, and states. Some commenters asked that a list 
of charges for each state (for the bundle of services) should be made 
available for comment before the interim final rule is published.
    Response: The Agency appreciates these comments and has endeavored 
to establish a clear, appropriate, and practical delineation of 
project-related costs and services to be covered out of the management 
fee, and those costs and services to be paid directly from project 
income. RHS has developed this definition of the bundle of services for 
the management fee based on extensive input from stakeholders prior to 
the rulemaking. The bundle of services can be found at Sec.  
3560.102(i)(3) of the interim final rule.
    Topic: Commenters raised several points about the benefits and 
potential costs of the prohibition on IOI relationships in the program. 
Several commenters recommended that IOI relationships between any 
parties connected to a particular Agency-financed project be 
prohibited, while other commenters stated that such a prohibition would 
increase the cost of goods and services for many projects. In addition, 
several commenters suggested that Sec.  3560.102(g)(2) be revised to 
state that failure to disclose IOI relationships will subject the 
borrower, management agent, and any other firms or employees found to 
have an IOI relationship to suspension and debarment. Still others 
asked for more guidance on what constitutes an IOI relationship and how 
to document it.
    Response: While the Agency acknowledges the commenters' concerns, 
requirements regarding the disclosure of IOI relationships and 
documentation that the use of such providers and suppliers is in the 
best interest of the project are essential program controls to ensure 
program integrity and reduce the risk of abuse. Further, the Agency's 
ability to suspend or debar borrowers who fail to disclose IOI 
relationships is important to enforcing this requirement; however, the 
Agency reserves the right to use this provision within its discretion. 
For these reasons, the Agency has made no change to Sec.  3560.102(g) 
in the interim final rule.
    Topic: The prohibition of IOI insurance carriers drew many 
comments. Commenters explained that with rising insurance premiums, 
they have fewer and fewer choices for insurance providers. They noted 
that it is especially difficult to find insurance in rural and tribal 
areas; many have found that their only cost-effective option has been 
with carriers that would be considered to have an IOI relationship with 
the borrower. Commenters emphasized that member-owned risk pools have 
been a successful strategy for holding down insurance costs, but these, 
too, are adversely affected by the prohibition on IOIs. Commenters 
urged the Agency to remove the IOI prohibition with respect to 
insurance.
    Response: The Agency has considered these comments and has deleted 
the requirement under Sec.  3560.105(e) that prohibited borrowers from 
using IOI insurance carriers. The Agency expects that this change will 
improve borrowers' ability to obtain Agency-required coverage at a 
lower cost.
    Topic: Regarding the Agency's general insurance requirements, 
several commenters stated that the Agency should not have to deem 
insurance carriers as ``reputable and financially sound.'' Other 
commenters recommended that the minimum property insurance coverage 
should be the replacement value, not the depreciated replacement value. 
They offered that the alternative of existing debt is acceptable. 
Commenters also proposed adding language to the regulation on tenant 
responsibility for ``contents'' insurance, the use of project revenue 
for nonprofit organizations' director's liability insurance, and the 
deposit of checks. Commenters also requested certain changes to 
language in the rule for clarity regarding insurance minimums and 
limited insurance. Finally, one commenter expressed satisfaction with 
the addition of the guidance on policies for several buildings.
    Response: The Agency appreciates the comments and suggestions, and 
has made several of the suggested editorial changes to the rule for 
clarity at Sec.  3560.105(b),(c), and (d). The Agency acknowledges the 
concerns raised, and while the Agency has decided not to make 
substantive modifications to its insurance requirements in the interim 
final rule, the Agency will continue to accept comments and consider 
them in subsequent policy discussions prior to publishing the final 
rule.
    Topic: Commenters also asked RHS to allow greater flexibility with 
respect to insurance requirements to allow the Agency and borrowers to 
appropriately respond to changing market conditions. Several commenters 
expressed strong concern about rising insurance premiums and identified 
possible cost-effective alternatives to current insurance policies. 
They stressed the need for exception authority and suggested that one 
approach--at the state level grant exceptions to the deductible 
requirement, while allowing borrowers to put aside funds to self-insure 
for the difference.
    Response: The Agency recognizes the cost issues associated with 
insurance and changes in the insurance industry. Since September 11, 
2001, the Agency has been processing deductible exceptions and meeting 
with industry groups in order to develop a response to higher costs. 
Therefore, the Agency has increased the maximum allowable deductible to 
$10,000 (for property insurance). The Agency has retained the 
flexibility for increased deductible amounts.
    Topic: Regarding requirements for insurance deductibles, several 
commenters stated that the required deductibles were too low and could 
result in dramatic premium increases. Other commenters said that the 
deductible limits (of 0.5 percent or $5,000) were set many years ago 
and should be adjusted to reflect current industry standards. Finally, 
several commenters asked for clarification with regard to the language 
in Sec.  3560.105(f) about how insurance deductible ``amounts must be 
accounted for in the reserve account.''
    Response: The Agency recognizes the commenters' concerns. It has 
adjusted the deductible amounts to reflect current industry practice 
and they appear at Sec.  3560.105(f)(8) in the interim final rule.
    Topic: The Agency received several comments on the requirements for 
hazard insurance coverage. These commenters asked the Agency to clarify 
its definition of hazard insurance. For instance, some commenters were 
uncertain if terrorism or earthquake coverage is required. Several 
commenters stated that earthquake insurance should not be required as 
it is prohibitively expensive.
    Response: The Agency appreciates these comments and has revised the 
interim final rule to clarify the insurance types required at Sec.  
3560.105(f)(1) and (2).
    Topic: Regarding requirements for liability and fidelity coverage, 
some commenters said that while the proposed rule provides for minimum 
liability coverage of $1,000,000 per occurrence, no deductible is 
provided in the proposed rule. Similarly, commenters expressed concern 
that the proposed rule did not provide minimum

[[Page 69056]]

coverage amounts and deductibles for fidelity coverage. Commenters also 
asked that language regarding the breadth of liability coverage be 
changed to specify the coverage of buildings; grounds; and common, 
commercial, and other public space. They suggested that language on 
options for liability coverage, such as errors and omissions and 
environmental damage, be moved to the Asset Management Handbook. For 
fidelity coverage, commenters indicated that the provision for 
reflecting the portion covering the employee in the management plan was 
not practical.
    Response: The Agency acknowledges the commenters' concerns. The 
deductible amounts for fidelity coverage have been included in the 
interim final rule at Sec.  3560.105(h)(2)(i). The Agency has retained 
the language from the proposed rule regarding coverage of areas beyond 
the buildings in the interim final rule and has replaced the language 
regarding the fidelity premium to state that the premium could be 
prorated among the housing projects covered. The Agency has not removed 
the language on suggested coverage as it reflects current industry 
standards and, as a minimum amount, is not likely to require regular 
updating.
    Topic: Several commenters objected to the Agency's requirement that 
the Agency must be named as co-payee on all loss drafts. These 
commenters felt that this is a viable requirement only when the Agency 
is in first lien position. Several commenters said that if the Agency 
is in the junior lien position, the Agency can be named as an 
additional insured.
    Response: The Agency has considered these comments and made 
appropriate revisions at Sec.  3560.105(b)(4) of the interim final 
rule.
    Topic: Regarding the affirmative marketing and accessibility 
requirements discussed in Sec.  3560.104, one commenter expressed 
appreciation for the level of specificity provided in the rule, while 
another stated that further guidance was still needed. Several 
commenters proposed edits to the language to strengthen and clarify 
requirements regarding community contacts, the frequency of advertising 
and the publication of advertisements, the costs associated with fair 
housing training for staff, and requirements regarding limited English 
proficiency. Another commenter asked for additional detail regarding 
accessibility and reasonable accommodations. Finally, several 
commenters asked for clarification regarding the requirements for 
updates to the Affirmative Fair Housing Marketing Plan, suggesting that 
updates be made only for significant changes.
    Response: The Agency appreciates the comments and has made the 
change to clarify organizations for the disabled at Sec.  
3560.104(b)(4)(ii)(B) of the interim final rule. The Agency has not 
made changes to the language on reasonable accommodations and financial 
burden because it is based on fair housing and accessibility statutes 
and their implementing regulations. Additional clarification about 
procedures and determinations regarding reasonable accommodations and 
Affirmative Fair Housing Marketing Plans are included in internal 
Agency procedures. Limited English proficiency requirements are 
addressed in subpart A.
    Topic: The Agency received a number of additional comments 
regarding the fair housing and accessibility requirements in subpart C. 
Commenters noted the importance of these requirements. Several 
commenters stated that reasonable accommodations should be made at the 
project's expense, not at the borrower's expense as stated in the 
proposed rule. Other commenters asked for clarification as to who makes 
the decision about whether a request for an accommodation causes undue 
financial or administrative burden, and one asked for a definition of 
undue burden. Multiple commenters requested a change in the language 
about persons with disabilities and companion animals to help clarify 
which tenants can request this accommodation. Other commenters said 
that the discussion of accessible laundry facilities does not allow for 
alternate arrangements, as allowed by section 504. Other commenters 
stated that in the interim final rule, any discussion of common area 
accessibility must refer to the Uniform Federal Accessibility Standards 
(UFAS). Still other commenters said that the proposed rule's language 
defining responsibility for paying for reasonable accommodations is 
unclear.
    Response: The Agency appreciates the comments and has changed the 
language at Sec.  3560.104(c)(4) of the interim final rule to place the 
financial burden on the property, instead of on the borrower, and 
further clarifies this responsibility.
    Topic: The discussion of required signage drew many comments. Some 
suggested language changes to clarify the requirements. Others 
questioned the need for such extensive guidance on these topics. Still 
others questioned about the applicability of the requirement and 
whether existing signs had to be changed to meet the requirements or 
local requirements.
    Response: The Agency acknowledges that the ten requirements listed 
under Sec.  3560.104(d) are very specific but does not consider these 
requirements to be onerous. Further, the Agency believes that this 
detail is appropriate to help ensure compliance with applicable Federal 
fair housing and accessibility requirements. Therefore, the Agency has 
retained these requirements in the interim final rule.
    Topic: Several commenters disagreed with the language in certain 
paragraphs in subpart C that referred to the ADA. The commenters 
correctly noted that these paragraphs should refer to section 504 of 
the Rehabilitation Act of 1973 because most areas in residential 
properties are not regulated under the ADA.
    Response: The Agency thanks the commenters for highlighting this 
issue and has removed the identified references to the ADA from the 
interim final rule.
    Topic: Regarding policies related to payment of property taxes, 
some commenters stated that the Agency should not require the borrower 
to certify that the property's taxes were paid because some states have 
services that notify USDA of property tax delinquencies. Several other 
commenters suggested that instead of requiring the Agency to pay 
property taxes when the borrower fails to do so, the Agency should 
determine whether it is in the best interest of the Government to pay 
the delinquent taxes.
    Response: The Agency appreciates these comments and removed the 
requirement at Sec.  3560.105(i) for borrowers to certify the payment 
of property taxes from the interim final rule. However, this 
certification will remain as a requirement for the annual financial 
statements. The Agency has considered the suggestion regarding property 
taxes but believes that it is not prudent as a general policy to relax 
the requirement for keeping the property tax payment current. More 
guidance on the annual financial statements will be provided by the MFH 
Engagement Guidelines to be issued separately.
    Topic: The Agency received a number of comments on the 
qualifications for acceptable management agents. Some commenters 
approved of the requirements, while others suggested that it may be 
difficult to find management entities with the required 2 years of 
experience in many rural areas. Other commenters questioned whether 
this requirement is unnecessary for small properties. One commenter 
suggested broadening the requirement to allow experience managing LIHTC 
properties to satisfy the experience

[[Page 69057]]

requirement. One commenter suggested requiring the prospective 
management agent to disclose all past RRH properties managed as 
evidence of past performance.
    Response: The Agency understands the commenters' concerns but has 
retained the experience requirement. RHS believes that successful 
experience with some type of federally assisted affordable housing is 
important for effective project management because the program rules 
require specialized knowledge beyond conventional property management. 
The Agency notes that experience managing LIHTC projects would be 
acceptable experience.
    Topic: There were also comments on the 45-day approval timeframe 
for management agents. Some commenters agreed with it or suggested 
lengthening it to 90 days to allow the Agency more time for review. 
Others stated that the approval timeframe, with 30-day interim 
authorizations, for new agents is too long for a project without a 
management agent and suggested that the Agency should simply accept the 
agent and provide approval after the change has taken effect.
    Response: The Agency understands the commenters' concerns about 
getting new management agents in place quickly but also needs to allow 
adequate time for Agency review of a prospective agent's experience and 
acceptability. In balancing these two considerations, the Agency has 
decided to retain the proposed timeframes in the interim final rule.
    Topic: The Agency received several comments on the requirement for 
resident participation in property management. The commenters were 
concerned that the wording implies that residents have a role in 
decisions regarding property operation beyond input and suggestions. 
They stated that while resident input is helpful, borrowers' financial 
responsibilities also give them full responsibility for operations.
    Response: The Agency emphasizes that the borrower has ultimate 
responsibility and, therefore, decisionmaking authority in the 
property. The intent of the tenant participation requirement is only to 
provide an opportunity for tenant input into the management process, 
not a role in making decisions.
    Topic: One commenter suggested adding a requirement to the rule 
requiring language in the management agreement that clearly establishes 
a management agent's responsibility and liability for any equity 
skimming it causes or allows to happen.
    Response: The Agency does not have a direct relationship with the 
borrower's management agent and cannot hold such agents directly 
responsible for these activities. The Agency relationship is with the 
borrower and, as such holds the borrower responsible for all activities 
at Agency-financed properties.

Subpart D--Multi-Family Housing Occupancy

    Topic: The Agency received a substantial number of comments on 
lease and occupancy terminations. Several commenters said that the 
regulation should acknowledge that some tenants are displaced through 
no fault of their own and describe the tenants' rights in these 
situations.
    Response: The Agency thanks the commenters for this suggestion and 
has modified the interim final rule. Specifically, the Agency has 
modified Sec.  3560.159(c) to state that tenants whose leases are 
terminated through no fault of their own are entitled to benefits under 
the Uniform Relocation Act.
    Topic: Several commenters said that once a termination notice is 
given to the tenant to vacate, the tenant's recourse should be through 
the court system. To allow a tenant to provide a corrective action plan 
will only increase the termination time of problem tenants. Other 
commenters said that the proposed regulation still excludes evictions 
from the grievance process but also eliminates the written warning 
requirement and the right to meet with the borrower to discuss the 
alleged lease violation and possibly the termination notice itself.
    Response: The Agency has modified Sec.  3560.159(a) to state that 
the borrower must give the tenant written notice of the violation and 
give the tenant the opportunity to correct the violation prior to 
terminating a lease.
    Topic: The Agency received several comments that recommend revised 
language regarding the termination of occupancy in Sec.  
3560.159(a)(1). One commenter suggests that Sec.  3560.159(a)(1)(i) be 
revised to read: ``Violations of lease provisions or occupancy rules 
which are substantial and/or repeated.'' The commenter also suggested 
revisions to Sec.  3560.159(a)(1)(ii), specifically, removing ``beyond 
the grace period.''
    Response: The Agency thanks the commenter for the suggestions and 
has changed the above referenced sentences as recommended at Sec.  
3560.159(a)(1)(i) and (ii) in the interim final rule.
    Topic: Several commenters wanted the current regulation to better 
specify residents' rights and borrowers' obligations. Specifically, the 
commenters identified the following:
     The proposed regulation eliminates the requirement that 
the borrower notify the tenant of the right to review the borrower's 
file and copy information from it.
     RHS streamlining efforts have gone too far in the eviction 
or termination section of the proposed rule. RHS should revise the 
termination section by adding back the language about tenants' rights 
and obligations from the current regulation and stating these rights in 
a precise and clear manner that residents can understand.
     RHS should make it clear to its borrowers that the 
rejection or eviction of otherwise eligible applicants or tenants may 
cause borrowers to violate the Fair Housing Act, title VI of the Civil 
Rights Act of 1964, and other civil rights laws.
    Response: The Agency acknowledges the commenters' concerns. The 
issue regarding the tenant's right to review the borrower's file is 
described in the interim final rule at Sec.  3560.160(g)(4). The Agency 
has amended 7 CFR 3560.159 to include additional tenant protections 
with respect to termination. The civil rights laws to which borrowers, 
tenants, and the Agency are bound are described in 7 CFR 3560.2.
    Topic: Multiple commenters praised the Agency for drafting the 
proposed rule to give new latitude to USDA to issue Letters of Priority 
Entitlement when required repair or rehabilitation causes displacement. 
The commenters believed that this added authority is helpful.
    Response: The Agency appreciates the commenters' support.
    Topic: One commenter advised the Agency to include ``major loss or 
destruction by fire'' as another example of conditions that could lead 
to termination, even if temporary until the housing can be restored for 
occupancy.
    Response: The Agency acknowledges the commenter's concern. The 
situation described is referenced in 7 CFR 3560.159(c), which states 
that a tenant's occupancy may be terminated in the event of a building 
rehabilitation or a natural disaster. This paragraph further explains 
the tenant's rights under these circumstances.
    Topic: Commenters stated that material lease violations should not 
be attributed to innocent members of the household, particularly in 
cases of domestic violence.
    Response: The Agency notes the commenters' concerns. However, 
termination of tenancy terminates the lease of the unit and not 
specific household members.

[[Page 69058]]

    Topic: Comments were received regarding the Agency's prohibitions 
against noncitizens. Several commenters contended that if enacted, the 
regulation would have a negative impact on many existing tenants who 
are not eligible noncitizens. This, in turn, will have a negative 
impact on the projects themselves. One commenter asked whether 
noncitizens could live in section 515 properties.
    Response: While the Agency acknowledges the commenters' concerns, 
restricting occupancy in sections 514, 515, and 516 properties to U.S. 
citizens and legal immigrants is a statutory requirement.
    Topic: The Agency received one comment recommending that RHS expand 
its proposed definition of legal or qualified alien to include three 
classes of immigrants that Congress recently determined should be 
eligible for public benefits, including ``public and assisted housing'' 
under the Personal Responsibility and Work Opportunity Reconciliation 
Act of 1996 and the Illegal Immigration Reform and Immigrant 
Responsibility Act of 1996.
    Response: While the Agency appreciates the commenter's suggestion, 
it has made no change because the definition of a legal alien is 
statutory per 42 U.S.C. 1436(a). The Agency has exercised its authority 
under sections 501(h) and 510(k) of the Housing Act of 1949 [42 U.S.C. 
1471(h) and 1480(k)] to restrict eligibility for occupancy in all 
section 515 projects to citizens and qualified aliens. In addition, 
eligibility for the migrant farm worker programs under sections 514 and 
516 is specifically restricted to such individuals by section 
514(f)(3)(A) of the Housing Act of 1949 [42 U.S.C. 1484(f)(3)(A)].
    Topic: Several comments were received regarding the proposed rule's 
citizen requirement for the head of household. First, the commenter 
indicated that RHS's proposal to require the head of household be a 
citizen or a permanent resident violates section 501(h) of the Housing 
Act of 1949. In addition, the commenter asserted that HUD has not 
conditioned eligibility to reside in its housing upon an adult member 
being a citizen or a person legally admitted for permanent residency. 
Finally, the commenter urged RHS to clarify language in Sec.  3560.152 
to indicate that only one member of a household need be a citizen or 
legal or qualified alien.
    Response: The Agency acknowledges the commenters' concerns, but it 
has made no change because the requirement for occupants of sections 
514, 515, and 516 housing to be citizens or legal immigrants is 
statutory.
    Topic: With regard to Sec.  3560.152(a)(1) and Sec.  
3560.154(a)(7), a comment was received suggesting that USDA incorporate 
appendix 2 to the HUD Handbook 4350.3. Further, the commenter urged 
USDA to coordinate with the Department of Homeland Security in much the 
same manner as HUD.
    Response: The Agency thanks the commenter for this suggestion. 
Appendix 2 to the HUD Handbook 4350.3 is incorporated into internal 
Agency procedures.
    Topic: Several comments were received regarding the acceptance of 
income-ineligible tenants into section 515 properties. Several 
commenters noted that if enacted, the Agency would require the borrower 
to publish local notices when waivers are granted to allow a project to 
rent to ineligible tenants. They thought that Sec.  3560.152(d) was an 
unnecessary, excessive, and costly requirement to impose on what are 
presumably vacancy-troubled projects.
    Response: The Agency notes the commenters' concerns and has removed 
this requirement from the interim final rule. In the proposed rule, it 
was located at Sec.  3560.152(d)(3).
    Topic: Regarding Sec.  3560.152(d)(4), commenters believed that 
borrowers should not be required to submit monthly reports to the 
Agency regarding marketing efforts to locate eligible tenants. Instead, 
records should be kept onsite for review during Agency inspections.
    Response: The Agency thanks the commenters for raising this issue 
and has modified the interim final rule so that the monthly report 
submission is not required. In the proposed rule, this was located at 
Sec.  3560.152(d)(4).
    Topic: Regarding Sec.  3560.152(e), commenters generally argued 
that the move-in date should be the effective date for tenant 
certification, which is the first of the month.
    Response: The Agency provides rental assistance, if available, to 
eligible tenants as of the first day of the tenant's first full month 
of occupancy. Therefore, the recertification date is the first day of 
the month for which the tenant is eligible to receive the subsidy. The 
Agency has made no change to the interim final rule.
    Topic: One commenter asked what ``prevailing market rent rate'' 
means as referenced in Sec.  3560.152(d)(8).
    Response: The Agency appreciates the commenter's question. The 
Agency has removed this reference from Sec.  3560.152(d) of the interim 
final rule.
    Topic: Several commenters addressed ineligible tenant waivers with 
regard to the lease term, as well as the Farm Labor Housing rent. 
First, with regard to lease terms, commenters acknowledged that the 
proposed rule calls for one-year leases to ineligible tenants followed 
by a month-to-month lease thereafter. The commenters recommended that 
the lease to ineligible tenants should simply be month-to-month. In 
terms of Farm Labor Housing rent, the commenters believed that income-
ineligible tenants should be expected to pay the greater of the one 
percent note rent or prevailing market rent, not the lease rate of one 
percent in the proposed rule. The Agency received one comment 
suggesting that over income residents should be required to move after 
the expiration of the current calendar year or 90 days, whichever is 
later.
    Response: The Agency acknowledges the commenters' concerns. The 
Agency allows a 1 year lease for ineligible tenants because not 
allowing an ineligible tenant to remain in the unit for at least 1 year 
could result in an undue financial burden to that tenant, and in many 
localities, contravenes State or local law. The Agency believes, 
however, that once the year elapses, it is fair to require the 
ineligible tenant to move within 30 days if this is stated in the lease 
and does not contravene State or local law. The Agency has removed the 
reference to prevailing market rate rent.
    Topic: Regarding Sec.  3560.152(d)(7), one commenter suggested that 
this paragraph be deleted. Other commenters indicated that requiring a 
25 percent surcharge for a Plan I projects, which operate at market 
rents, would require the borrower to charge rents higher than the 
market and consequently hurt project occupancy.
    Response: The Agency appreciates the commenters' concerns but has 
made no change to Sec.  3560.152(d)(7) because the requirement is not a 
change from existing policy, which merely requires that ineligible 
tenants pay a higher rent than eligible tenants.
    Topic: One commenter addressed Sec.  3560.152(e)(1)(iv) and asked 
for clarification regarding the ineligibility consequences faced by 
tenants who fail to comply with tenant certification.
    Response: The Agency appreciates the commenter's concern. The 
interim final rule states that tenants who fail to recertify are no 
longer eligible for occupancy and subject to termination of tenancy in 
Agency MFH programs covered by the interim final rule. The interim 
final rule (at Sec.  3560.152(d)) also explains how ineligible tenants 
may

[[Page 69059]]

continue to be housed and the regulations concerning their occupancy.
    Topic: Multiple comments were received asking that any change in 
tenant eligibility should grandfather in existing tenants.
    Response: The Agency notes the commenter's concern; however, any 
changes in tenant eligibility requirements will not grandfather in 
existing tenants. Existing tenants should not be affected by changes in 
eligibility requirements, until their upcoming recertifications. 
Further, the Agency's internal procedures provide guidance for existing 
tenants.
    Topic: One commenter said that allowing borrowers to ``temporarily 
rent apartments to all persons without regard to age or income 
restrictions'' appears to violate the exemption from the prohibitions 
against discrimination because of familial status that was granted to 
RHS.
    Response: The Agency does not agree with this commenter's 
assessment. Ineligible tenants are permitted for temporary periods to 
protect the financial interest of the Government. No change was made to 
the interim final rule.
    Topic: Several comments were received on tenant grievance 
procedures. These commenters said that the Notice of Adverse Action is 
specifically listed as a category of action a tenant or prospective 
tenant may grieve. The commenters went on to say that new language 
defines a Notice of Adverse Action as a proposed action that may have 
adverse consequence for tenants or prospective tenants, whereas in the 
prior regulation it was not clearly defined, and that notice delivery 
requirements were excluded from the proposed rule.
    Response: The Agency appreciates the commenters' recommendations 
and has included delivery requirements at Sec.  3560.160(e) of the 
interim final rule.
    Topic: Several commenters asked the Agency to include a provision 
that when the tenant and the borrower disagree as to whether something 
is grievable, the dispute should be viewed as a threshold question to 
be decided before the Hearings Officer or panel.
    Response: The Agency has made no change to the interim final rule. 
The actions that are grievable are identified at Sec.  3560.160(d) of 
the interim final rule.
    Topic: One commenter suggested that the proposed regulation 
indicate that the tenant has a right to grieve the borrower's action or 
inaction when it involves the borrower's failure to comply with lease 
terms or rules.
    Response: The Agency acknowledges the commenter's concern. Section 
3560.160(b)(2) lists the circumstances under which a borrower's action 
or inaction is not grievable. Borrower's failure to comply with lease 
provisions or rules would fall under Sec.  3560.160(b)(1) of the 
interim final rule.
    Topic: The Agency received a few comments regarding compliance with 
Sec.  3560.103 and a tenant's right to grieve. One commenter believes 
the standards contained in the proposed rule are too broad. For 
example, the commenter cited Sec.  3560.103, which indicates that 
failure to maintain the premises in such a manner that provides decent, 
safe, sanitary, and affordable housing is grounds for a grievance. The 
commenter interpreted this to mean that residents would have a right to 
a grievance hearing if they thought the landscaping was not attractive. 
Another commenter believed that these standards should be posted or 
handed out to tenants at the time a lease agreement is executed.
    Response: The Agency acknowledges the commenters' concerns. The 
Agency cannot prevent nuisance or frivolous grievance filings but has 
attempted to outline realistic standards of property maintenance that 
are expected of borrowers. Additionally, the Agency does not believe it 
is necessary to require borrowers to provide these standards to tenants 
as part of the lease. The standards are contained in Sec.  3560.103 of 
the interim final rule.
    Topic: One commenter addressed the issue of grievances based on 
discrimination against protected classes (Sec.  3560.160(a)(2)). 
According to the commenter, this paragraph includes marital status and 
sexual preference as protected classes, which is unlike any other 
Federal law. The commenter believes there is no apparent need to have 
greater fair housing provisions than in other Government programs.
    Response: The Agency thanks the commenter for raising this issue. 
The Agency has revised the language in this section to include only the 
protected classes as specified under Federal law. Marital status and 
sexual preference have been removed from Sec.  3560.160(a)(2) in the 
interim final rule.
    Topic: Several comments addressed grievances that may involve 
discrimination. One commenter suggested that language should be added 
to Sec.  3560.160(a)(2) to clarify that discrimination complaints 
should be filed with the Regional Fair Housing and Equal Opportunity 
Office of HUD. Another commenter suggested that discrimination 
grievances could be handled under Sec.  3560.160, if the grievant so 
desires.
    Response: The Agency thanks the commenters' for these suggestions 
and has modified the language in Sec.  3560.160(a)(2) to state that any 
tenants or potential tenants who feel that they are being discriminated 
against may present a complaint to the U.S. Department of Agriculture's 
Office of Civil Rights.
    Topic: One commenter suggested that the process outlined in Sec.  
3560.160 may be abused and used merely for delay. The commenter 
recommended allowing an exception where the owner determines that a 
resident poses a risk to health and safety to other residents and 
property staff.
    Response: While the Agency recognizes the commenter's concerns, the 
Agency has a responsibility to ensure that all tenants have equal 
protection under civil rights and fair housing laws. Tenants have the 
right to participate in a grievance process when they feel that they 
have been treated unfairly by a borrower or agent of the borrower in an 
Agency-assisted MFH property. Section 3560.160(b)(2) makes it clear 
that tenants who engage in unlawful behavior that threatens the health 
and safety of other tenants may not take advantage of the grievance 
process once the termination action has been initiated. The Agency has 
made no change to the interim final rule.
    Topic: One comment addressing Sec.  3560.160(h)(2)(iii) recommended 
that the right of a tenant to confront and cross-examine witnesses 
during the hearing be specifically included in Sec.  
3560.160(h)(2)(iii) because both the current and the proposed 
regulations include such a right for the borrower.
    Response: The Agency thanks the commenter for this suggestion and 
has made the change to Sec.  3560.160(h)(2)(iii).
    Topic: The Agency received a comment regarding Sec.  3560.160(g)(4) 
expressing concern that this section limits a tenant's inspection of 
the documents, records, and policies a borrower intends to use at a 
hearing to a ``reasonable time before the hearing.'' The commenter 
believed that the regulation must include a timeframe in which the 
borrower is required to disclose their evidence before the hearing so 
that the tenant has adequate time to prepare for the hearing.
    Response: The Agency acknowledges the commenter's concern, but 
believes that, ``reasonable time before the hearing'' is clear. In this 
instance, a reasonable time is that which allows the tenant adequate 
time to use the information to the benefit of his or her case against 
the borrower. The Agency has made no change to Sec.  3560.160(g)(4) of 
the interim final rule.
    Topic: Several comments were received regarding fair and impartial

[[Page 69060]]

hearing procedures. Specifically, the commenters recommended that the 
regulation:
     Require Hearing Officers to be ``impartial and 
disinterested.''
     Include the prohibition against the Agency's appointing a 
Hearing Officer who was earlier considered by either party to ensure 
the integrity of the process.
     Include the language of the current regulation, which 
prohibits a Hearing Officer from being paid, unless done so by the 
Agency.
    Response: The Agency acknowledges the commenters' concerns and has 
incorporated the suggestions into Sec.  3560.160(g)(2) of the interim 
final rule.
    Topic: The Agency received several comments urging time limits for 
certain actions. Specifically, the commenters recommended that the new 
regulation:
     Impose a time limit on a borrower to submit the summary of 
the informal meeting to the tenant. This would be similar to the 
proposed regulation, which imposes a 10-day time limit on the tenant to 
request a hearing after receipt of the summary (Sec.  3560.160(g)(1)).
     Include a specific timeframe in which the borrower is 
required to submit a summary of the meeting to both the tenant and the 
Agency.
     Impose a requirement on the borrower to prove receipt of 
the Response to a Notice of Adverse Action.
     Change the 10-day Response time for grievances regarding 
lease modifications.
    Response: The Agency acknowledges the commenters' concerns. Section 
3560.160(f) of the interim final rule has been revised to provide for a 
10-calendar day time frame for the borrower to provide a summary of the 
informal meeting. The Agency has also imposed a requirement on the 
borrower to prove receipt of the Response to a Notice of Adverse 
Action. The Agency did not change the 10-day Response time for lease 
modifications. No justification was provided by the commenter for the 
change.
    Topic: One comment addressed Sec.  3560.160(f)(3) and noted that 
language contained in the current regulation required the borrower to 
include certain information in the summary submitted to the tenant, but 
this language was left out of the proposed rule. The commenter 
recommended that this language be retained in the new regulation.
    Response: The Agency acknowledges the commenter's concerns and has 
incorporated this requirement at Sec.  3560.160(f)(3) of the interim 
final rule.
    Topic: The Agency received multiple comments on how borrower/tenant 
communications, such as Notices of Adverse Action, waiting list 
decisions, and eligibility decisions should occur. One commenter urged 
that communications be sent via certified mail. Another commenter 
suggested that communications be sent by regular mail to the last known 
address. Other commenters urged that phone contact be made.
    Response: The Agency acknowledges the commenters' concerns. Section 
3560.160 of the interim final rule provides direction for borrower/
tenant communications in those areas where tenant rights are concerned. 
The Agency would prefer that borrowers establish the most efficient 
communication system for their property.
    Topic: Several commenters urged that any notice from the resident 
to the owner or management must be in writing.
    Response: The Agency appreciates the commenters' concerns. The 
Agency has added language in Sec.  3560.160(f) of the interim final 
rule that tenants or prospective tenants must file grievances in 
writing.
    Topic: One comment recommended that the rule state that any tenant 
or prospective tenant seeking occupancy in a housing project may 
complain to the Secretary of Agriculture.
    Response: The Agency thanks the commenter for this suggestion and 
has modified the interim final rule's language in Sec.  3560.160(a) to 
state that any tenants or potential tenants may present a complaint to 
the U.S. Department of Agriculture's Office of Civil Rights, which 
Agency is the receiver of all complaints.
    Topic: One commenter suggested that Sec.  3560.160 should be 
deleted. According to the commenter, residents already have leases and 
lease rights, landlord/resident law, the legal right to form 
associations, and access to the regulatory Agency, so the additional 
processes outlined in Sec.  3560.160 are duplicative and burdensome.
    Response: While the Agency recognizes the commenter's concerns, it 
has a responsibility to ensure that all tenants have equal protection 
under civil rights and fair housing laws. Tenants have the right to 
participate in a grievance process when they feel that they have been 
treated unfairly by a borrower or agent of the borrower in an Agency-
assisted multi-family housing property.
    Topic: The Agency received a comment regarding Sec.  3560.160(f)(2) 
stating that the 5-calendar-day timeframe for the meeting requirement 
by the borrower is rather short. The commenter believed that this time 
limit should be extended to 10 days.
    Response: The Agency thanks the commenter for this suggestion and 
has incorporated it into Sec.  3560.160(f)(2) of the interim final 
rule.
    Topic: One commenter cited Sec.  3560.160(i)(2), which indicates 
that 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. The commenter recommended that this section 
clarify that the 10 days are calendar days. Second, the commenter 
believed that the reference to (i)(3) appears to be wrong and should be 
(i)(4).
    Response: The Agency thanks the commenter for this suggestion and 
has changed the interim final rule to clarify that the 10 days are 10 
calendar days. The Agency has made the other editorial changes as well.
    Topic: The Agency received a comment regarding Sec.  3560.160(g)(5) 
recommending that 15 calendar days are used, rather than 15 days. Also, 
in terms of escrow deposits, the commenter suggested a new section be 
added that requires that the grievant notify the borrower of his 
intention to escrow funds and the name of where the funds are being 
held.
    Response: The Agency acknowledges the commenters' concern and has 
added ``calendar'' to clarify the time period. The Agency believes 
Sec.  3560.160(g)(6)(iv) of the interim final rule provides the 
guidance for the tenant providing proof of escrow deposit information.
    Topic: A commenter addressed the failure of either party to appear 
at a scheduled hearing (Sec.  3560.160(h)(5)). The commenter believed 
that postponement of the hearing should not be an option when either 
party has failed to appear at a scheduled hearing.
    Response: The Agency appreciates the commenter's concern but has 
made no change to this provision so that both the borrower and the 
tenant have ample opportunity to defend their respective positions.
    Topic: The Agency received multiple comments regarding the 
importance of resolving disputes without litigation. The commenters 
believed that the regulation leaves tenants without adequate protection 
and leaves borrowers without a clear process to resolve lease 
compliance issues without litigation. One commenter suggested that 
without a dispute resolution process, borrowers and tenants will be 
forced into litigation and resident evictions will increase.

[[Page 69061]]

    Response: The Agency acknowledges the commenters' concerns. 
However, the Agency believes that adequate protections are afforded to 
the tenant in the interim final rule, including a grievance process, 
and that borrowers have appeal rights in certain situations. The Agency 
believes that its policy and accompanying procedural guidance provide 
ample protection for borrowers and tenants.
    Topic: One commenter recommended involving tenants and advocates in 
the rulemaking process.
    Response: The Agency recognizes that the position of tenants and 
advocates is very important to the proper implementation of the 
regulation. Tenants' representatives were included in stakeholder 
meetings prior to the development of the rule and their input was 
considered by the Agency as it developed the proposed rule.
    Topic: Several commenters stated that the proposed requirement that 
adverse decisions be issued in English as well as other languages when 
the area contains a concentration of non-English speakers is overly 
burdensome.
    Response: The Agency acknowledges the commenters' concerns but has 
made no change to the language in the interim final rule because 
requirements concerning limited English proficiency of applicants and 
tenants are civil rights issues and are covered under Sec.  3560.2(b).
    Topic: Several commenters stated that applicants with incomplete 
applications should not be entered on the waiting list.
    Response: The Agency appreciates these comments and has modified 
Sec.  3560.154(f)(4) of the interim final rule to state that tenant 
selection will be made from the applicants on the waiting list with 
completed applications.
    Topic: Several commenters addressed requirements about specifying 
both a time and a location when applications can be taken, as well as 
office hours in key documents. Specifically, multiple commenters 
believed that the requirement to list the office times on the 
management plan and Affirmative Fair Housing Marketing Plan should be 
removed because it is burdensome to the borrower and managing agent to 
update these documents often as office hours change. Other commenters 
expressed concern about having to maintain regular office hours in 
small projects to take applications, especially since many are 
submitted by mail; maintaining office hours in small projects can be 
costly.
    Response: The Agency acknowledges the commenters' concerns and has 
revised Sec.  3560.154(c) of the interim final rule to eliminate the 
requirement to maintain a place for accepting applications to provide 
more flexibility to smaller projects. However, borrowers still need to 
announce when and where applications will be taken (in rental 
advertisements) and document this information in the management plan 
and the Affirmative Fair Housing Marketing Plan because this 
information needs to be formally documented to establish compliance 
with key fair housing requirements. This is required in Sec.  
3560.154(c) of the interim final rule.
    Topic: One commenter addressed Sec.  3560.154(g)(2)(ii), believing 
that the definition of ``displaced'' is not clear. The commenter 
suggested creating a definition of displaced in Sec.  3560.11.
    Response: The Agency acknowledges the commenter's concern but has 
not added a definition of ``displaced'' because the definition is 
contained in the Uniform Relocation Act, which is applicable to all 
Agency MFH properties.
    Topic: The Agency received several comments regarding the 
automation of forms and waiting lists. The commenters believed that the 
continuation of this practice should be permitted. Another commenter 
advocated a waiting list cap.
    Response: The Agency appreciates the commenters' concerns and has 
undertaken substantial automation initiatives recently. The commenter 
did not provide a justification for establishing a waiting list cap, 
therefore no change was made to the regulation.
    Topic: One commenter suggested revising Sec.  3560.152(e)(1)(iii) 
to read: ``Tenants must report to borrowers all changes in their 
household status that may affect the tenant's eligibility.''
    Response: The Agency thanks the commenter for this suggestion and 
has made the suggested change to Sec.  3560.152(e)(1)(iii) of the 
interim final rule.
    Topic: One commenter recommended that in Sec.  3560.152(e)(2) the 
Agency should require borrowers to use wage-matching techniques to 
confirm tenants' income. The commenter believed that this practice 
should be done at initial certification and at each annual 
recertification.
    Response: The Agency notes the commenter's suggestion. Wage 
matching is an internal Agency procedure and not available to 
borrowers.
    Topic: One commenter addressing the 10-day standard in Sec.  
3560.152(e)(2)(iii) recommended that in certain circumstances this 
standard should be waived.
    Response: The Agency acknowledges the commenter's suggestion, but 
no change has been made because Sec.  3560.8 of the interim final rule 
describes the requirements for administrator exceptions.
    Topic: Several comments were received on the Agency's policy of 
collecting race and ethnicity data on applications for occupancy. 
Several commenters said that the proposed rule requires applicants to 
provide this information on the application form and if they elect not 
to do so, the owner is required to note applicants' race/ethnicity and 
sex on basis of visual observation or surname. In addition, several 
commenters noted that applicants' race and/or ethnicity should not 
appear on the waiting list. Further, some commenters urged that if race 
and/or ethnicity appear on the waiting list, then gender should be 
included as well. One commenter said that listing the race categories 
in alphabetical order is problematic. This text is based on 7 CFR part 
1900, subpart A, and the Federal Register Notice entitled ``Revisions 
to the Standards for the Classification of Federal Data on Race and 
Ethnicity'' published October 30, 1997.
    Response: The Agency thanks the commenters for highlighting this 
important issue and has modified Sec.  3560.154(a)(9) of the interim 
final rule to include a disclosure statement about the use of race and 
ethnicity information that must appear on all applications for housing 
under sections 514, 515, and 516. Applicants are not required to 
provide this information. The Agency requires the waiting list to 
include race and ethnicity information for statistical purposes only.
    Topic: One commenter addressed Sec.  3560.154(f) and recommended 
that computer-generated waiting lists should only be allowed if the 
program does not allow names to be deleted or inserted. The commenter 
believes that otherwise computer-generated waiting lists are open to 
manipulation and civil rights data are not accumulated.
    Response: The Agency appreciates the commenter's concern but it 
notes that in Sec.  3560.154(i) of the interim final rule and 
irrespective of the form (i.e., electronic or nonelectronic), the 
Agency requires borrowers to document their purging procedures in the 
project's management plan. To further address the commenter's concern, 
the Agency added language to this same paragraph establishing minimum 
standards regarding these procedures that will allow Agency review of 
borrower management of the waiting list to check for such concerns.
    Topic: One commenter disagreed with the requirement that applicants 
must

[[Page 69062]]

certify that the unit will be their permanent residence as stated in 
Sec.  3560.154(a)(7). The commenter argues that this rule will not work 
for migrant families and urges the Agency to revise the language.
    Response: The Agency wishes to clarify its position. Section 
3560.154(a)(7) states that the applicant must certify that the unit 
will be the household's primary residence, not its permanent residence.
    Topic: One commenter suggested a revision to Sec.  3560.154(a)(2) 
regarding ``the number of household members and their ages.'' The 
commenter suggested that this be changed to ``number of household 
members and their dates of birth.''
    Response: The Agency appreciates the commenter's suggestion and has 
incorporated this change into Sec.  3560.154(a)(2).
    Topic: One commenter addressed Sec.  3560.154(a)(10) and did not 
believe that individuals have a ``taxpayer identification number.''
    Response: The Agency appreciates the comment and has changed this 
item to refer to the individual's social security number.
    Topic: Several commenters voiced their approval of Sec.  
3560.152(a)(3), which makes a household eligible if it qualifies for 
and is receiving housing benefits through another program, such as 
section 8 or the Low-Income Housing Tax Credit (LIHTC) program.
    Response: The Agency thanks the commenters for their support of 
this provision.
    Topic: Regarding Sec.  3560.154(g), commenters expressed concern 
that there is no mention of the right of borrowers to give priority to 
LIHTC-eligible tenants if the project is operated under the LIHTC 
program, or any mention of the right to leave a unit vacant if no 
LIHTC-eligible applicant is available.
    Response: The Agency recognizes the commenters' concerns and has 
included language regarding selection of applicants in LIHTC projects 
at Sec.  3560.154(d) of the interim final rule.
    Topic: Comments were received that addressed the Agency's 
requirements to establish occupancy policies related to unit sizes. 
Numerous commenters stated that the proposed rule was not clear about 
the borrower's responsibilities toward residents who are over-or 
underhoused. Some commenters asked whether these families would be 
required to move from the project. Others suggested that basing 
eligibility on unit size could potentially be construed as a violation 
of applicable civil rights laws. Another commenter recommended that any 
decision on unit size should be given in writing and should contain 
specific references to the grievance process.
    Response: The Agency appreciates these comments and has deleted the 
requirement for borrowers to establish a minimum threshold of one 
person per bedroom for each rental unit from Sec.  3560.155 (e). 
Families who are over-or underhoused will be required to move into the 
first appropriate size unit available at the property, not to vacate 
the property altogether.
    Topic: One commenter questioned the proposed regulation regarding 
occupancy policies in Sec.  3560.155 because it deletes references to 
``fair housing concepts'' such as reasonable accommodation. The 
commenter recommended that these concepts remain in the regulation.
    Response: The Agency thanks the commenter for raising this issue 
and has added references to reasonable accommodation to Sec.  
3560.155(e)(3) of the interim final rule.
    Topic: The Agency received multiple comments on Sec.  
3560.156(c)(1)(iii) and Sec.  3560.156(c)(15)(xiii) expressing concern 
about increasing the extended tenant absences from two weeks to four 
weeks. One commenter recommended that the definition of extended tenant 
absences remain at two weeks and not be increased to four weeks.
    Response: The Agency thanks the commenters for highlighting this 
issue. The reference to the time period for extended absences has been 
deleted from the interim final rule. The Agency believes this is an 
occupancy rule that is best determined by each property. It is not a 
regulatory definition. The borrower has the right to decide what 
constitutes an extended absence as long as the definition is 
consistently applied to all tenants.
    Topic: Several comments specifically focused on Sec.  
3560.156(c)(15)(xx) of the proposed rule. One commenter suggested that 
the Agency delete examples of good cause and note that good cause 
varies based on local practices. In addition, two commenters addressed 
the lease requirements contained in Sec.  3560.156(c)(15)(xx). The 
commenters recommended that the Agency specify a distance that 
represents a good cause move to another location, such as 100 miles.
    Response: The Agency acknowledges the commenters' concerns and has 
deleted the examples of good cause from the interim final rule.
    Topic: The Agency received several comments regarding Sec.  
3560.156(c)(15)(iii) of the proposed rule, which requires the owner to 
accept a tenant's net contribution. One commenter urged greater 
flexibility in how borrowers are allowed to apply these funds to 
amounts owed by the tenant. Other commenters recommended that this 
section be revised so that the owner must first apply funds to back 
rent and any damages, then current rent. A commenter believed that this 
would limit property abuse.
    Response: The Agency acknowledges the commenters' concerns and has 
revised the interim final regulation at Sec.  3560.152(c)(8) to clarify 
that the tenant contribution should first be used for rental charges.
    Topic: One commenter addressing Sec.  3560.156(c)(15)(iii) of the 
proposed rule argued that the proposed regulation and handbook sections 
pertaining to leases and occupancy rules do not adequately cover 
security deposits. The commenter thought that the new regulation should 
place limits on security deposits, allow residents to contribute to the 
deposit over a period of time, require the owner to place the deposits 
in segregated escrow accounts, and require that leases contain 
information consistent with provisions of State law regarding the use, 
collection, and disposition of security deposits.
    Response: The Agency appreciates the commenter's concern, but this 
information is contained in Sec.  3560.204 of the interim final rule.
    Topic: Multiple comments were received regarding displaced tenants 
in cases where a unit is uninhabitable in Sec.  3560.156(c)(15)(xviii) 
of the proposed rule. One commenter urged that RHS modify the 
regulation to make clear that tenants who are displaced from units when 
they become uninhabitable have a first right to return to the unit 
after it is rehabilitated unless the owner has terminated the residency 
for good cause. The second commenter acknowledged that both the current 
and proposed regulations require that the lease contain a provision 
about disposition of a lease when a unit becomes uninhabitable. 
Further, commenters suggested that the proposed regulation clarify that 
termination of the tenancy and the subsidy are two different issues, 
and that both require written notice and a hearing.
    Response: The Agency appreciates the commenters' concerns. While 
the Agency has made no change to this section in the interim final 
rule, it has modified Sec.  3560.159(c) to state that any tenant 
displaced due to a unit being uninhabitable is eligible for benefits 
under the Uniform Relocation Act. Section 3560.159 refers to 
termination

[[Page 69063]]

of tenancy only; termination of subsidy is discussed at Sec.  
3560.259(c) of the interim final rule.
    Topic: The Agency received one comment about Sec.  
3560.156(c)(15)(ix) of the proposed rule suggesting that the Agency 
clarify the proposed rule to indicate that the tenant may not be 
evicted for failure to pay charges other than rent or utilities. 
Instead, the commenter suggested that the borrower should be limited to 
other legal action to collect those charges.
    Response: The Agency acknowledges the commenter's concern. However, 
the Agency believes it is appropriate for termination of occupancy 
based on material noncompliance with lease requirements and has 
retained this language at Sec.  3560.159(a)(1)(ii) of the interim final 
rule.
    Topic: Several comments addressing the 30-day move out requirement 
in Sec.  3560.156 (c)(1)(i) of the proposed rule recommended that this 
paragraph allow tenants to move out either within 30 days or at the end 
of the term of the lease, whichever is greater, which would agree with 
language in Sec.  3560.158(b).
    Response: The Agency acknowledges the issue raised by the 
commenters and has revised the interim final rule so that the 
requirement is consistent with the language in Sec.  3560.158(b).
    Topic: The Agency received a comment about Sec.  3560.156(c)(1)(iv) 
of the proposed rule, acknowledging the requirement that tenants make 
restitution when unauthorized assistance is received but expressing 
concern that the proposed rule does not differentiate between the 
unauthorized assistance being the fault of the tenant or the borrower.
    Response: The Agency appreciates the commenter's concern. The 
Agency has moved references to unauthorized assistance due from the 
borrower or from the tenant to subpart O of the interim final rule.
    Topic: One commenter addressing Sec.  3560.156(c)(15) of the 
proposed rule recommended that the lease include a statement that 
tenants agree that they will be held financially responsible if they 
receive any excessive Government subsidies because of their failure to 
report their accurate income, income changes, true members of the 
household and their incomes, or any other improper actions.
    Response: The Agency acknowledges the commenter's concern. The 
certification form that tenants are required to sign includes the 
penalties for fraudulent reporting of income. This issue is further 
addressed in subpart O of the interim final rule.
    Topic: One commenter suggested month-to-month leases rather than 
year-long leases.
    Response: The Agency has made no change to this provision because 
it has always required a minimum one-year initial lease term for all 
its MFH projects, as is the case with other Federal housing programs.
    Topic: Several comments addressed Agency concurrence with lease 
agreements. One commenter suggested the use of standard lease 
agreements by State to reduce the attorney certification process that 
is required under the proposed regulation. Other commenters questioned 
the process of approval of lease modifications. One commenter believed 
that the Agency's role should be expanded from just a ``concurrence'' 
role. One commenter urged that the Office of General Counsel or other 
qualified Agency staff be involved in lease reviews.
    Response: The Agency has amended Sec.  3560.156(a) of the interim 
final rule to state that the Agency must approve all leases. The 
borrower's attorney is responsible for ensuring that the lease complies 
with all applicable State and local laws. This should not be unduly 
burdensome, as most standard leases are in compliance with these laws.
    Topic: One commenter expressed opposition to the provision in the 
proposed regulation that allows borrowers with projects receiving 
section 8 project-based assistance to use the HUD model lease, because 
tenant rights and regulations are significantly different between the 
two programs.
    Response: The Agency appreciates this comment and has revised the 
language in Sec.  3560.156(e) to clarify that the HUD lease provisions 
will prevail unless they conflict with the requirements of Sec.  
3560.156. The revision also specifies that in the event of an overlap 
or conflict between the requirements, the provisions most favorable to 
the tenant will apply.
    Topic: One commenter expressed concerned about the way that the 
requirements in Sec.  3560.156(d)(5) have been revised. The commenter 
believed that the new wording could lead to borrowers having to notify 
a tenant of their intent to bring suit as opposed to notifying them 
that a suit has been filed.
    Response: The Agency thanks the commenter for raising this issue. 
The Agency has revised this section to specify lease clauses stating 
that the borrower may institute a lawsuit without providing advance 
notification to the tenant are prohibited.
    Topic: Commenters stated that the Agency's requirement to provide 
leases, Notices of Adverse Action, and other important documents in 
English as well as other languages when the area contains a 
concentration of non-English speakers is burdensome from both an 
administrative and financial standpoint.
    Response: The Agency acknowledges the commenters' concerns, but has 
made no changes to the applicable sections of subpart D. The 
requirements concerning limited English proficiency of applicants and 
tenants are civil rights issues and are covered under Sec.  3560.2(b) 
of the interim final rule.
    Topic: One commenter acknowledged that the proposed regulation 
includes language not found in the current rule that ``borrowers must 
execute their Agency approved lease with each tenant household * * *'' 
The commenter believed that borrowers should be required to offer the 
same lease to all households in a project or a locality.
    Response: The Agency acknowledges the comment. Each household is 
required in Sec.  3560.156 of the interim final rule to have an 
executed lease on file and borrowers are required to offer an Agency 
approved lease to tenants.
    Topic: Multiple comments addressed that the proposed regulation 
adds the requirement that leases contain the street address of the 
management agent to which tenants may direct complaints. Commenters 
thought that this meant a management agent with authority to address 
the complaint.
    Response: The Agency acknowledges the above comment but considers 
the sentence as written to be sufficiently clear. Therefore, the Agency 
has made no change to this language.
    Topic: One commenter did not understand Sec.  3560.156(c)(4) of the 
proposed rule. The commenter supported the new requirement 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. The 
commenter did not understand the use of the term ``other than Federal 
assistance.''
    Response: The Agency appreciates the commenter's support for the 
addition of this clause. The term ``other than Federal assistance'' has 
been deleted from 3560.156(c)(3) of the interim final rule. (The 
reference to Sec.  3560.156(c)(4) of the proposed rule was changed and 
is now Sec.  3560.156(c)(3) of the interim final rule.)
    Topic: One commenter asserted that leases must state that the 
housing project is subject to title VI of the Civil Rights Act of 1964, 
section 504 of the Rehabilitation Act of 1973, the Age Discrimination 
Act of 1975, and the ADA. While the current regulation (7

[[Page 69064]]

CFR part 1930, subpart C), in addition to identifying the Federal 
antidiscrimination laws that apply to the housing project, describes 
the appropriate complaint procedure under those laws, the commenter 
believed that the complaint information is omitted from the proposed 
regulation and should be included.
    Response: The Agency appreciates the commenter's suggestion. The 
information on applicable civil rights related laws is included in 
Sec.  3560.156(c)(6). The complaint procedure is described in Sec.  
3560.160.
    Topic: One commenter believed that both the proposed regulation and 
handbooks should explicitly prohibit lease clauses that would limit 
occupancy by persons with disabilities.
    Response: The Agency acknowledges the commenter's concern; however, 
it is against all applicable Federal civil rights laws to prohibit 
occupancy by persons with disabilities. The Agency feels that this 
information does not need to be restated in Sec.  3560.156(d).
    Topic: One commenter suggested that the Agency provide something 
similar to the Form RD 1910-11, Applicant Certification Federal 
Collection Policies for Consumer or Commercial Debts, to tenants at the 
time that they apply for assistance, because such a form describes 
actions that may occur to protect the interests of the government.
    Response: The Agency has not imposed this additional requirement, 
as the certifications on the forms that tenants complete when they 
apply for assistance provide the government with authority to collect 
unauthorized rental assistance.
    Topic: Several comments were received regarding the Agency's 
policies on calculating applicant/tenant income and assets. The 
majority of commenters on this subpart supported the Agency and stated 
that by using the HUD definitions of annual income, adjusted income, 
and net assets found in 24 CFR part 5, the Agency will reduce burden on 
owners and managers who might otherwise be required to use different 
criteria for calculating income and assets for various Federal 
programs. Other commenters asked for a comparison between the current 
practice and the proposed practice to illustrate how the change would 
affect individuals.
    Response: The Agency appreciates the commenters' support. The 
Agency will consider providing some comparison examples for internal 
Agency procedures.
    Topic: A commenter suggested that chapter 5 of the HUD Handbook 
4350.3, sections 1 and 2, provide considerable guidance on determining 
annual income, adjusted income, and net assets. The commenter thought 
that RHS should include similar provisions in its handbooks or, at the 
very least, refer borrowers and tenants to this HUD Handbook when 
questions arise concerning these matters.
    Response: The Agency appreciates the commenter's suggestion. 
Because the information from this HUD Handbook is procedural, the 
Agency will be using similar information on determining annual income, 
adjusted income, and net assets in Agency internal guidance about 
program procedures.
    Topic: Comments were also received on the Agency's policy toward 
criminal activity and drug use. Several commenters asked that Sec.  
3560.154(j) reference 24 CFR part 5.
    Response: The Agency has modified this section to include this 
reference.
    Topic: Other commenters stated that the Agency's policy to not 
allow the lessee or other adult members occupying the unit who commit a 
drug violation to enter the premises unless the individual agrees not 
to commit a drug violation in the future, participates in a counseling 
or recovery program, or has completed such a program is too lax. These 
commenters recommended that the Agency employ HUD's one-strike policy.
    Response: The Agency thanks the commenters for their 
recommendations; however, the Agency disagrees with the commenter's 
view that the above-stated policy established in Sec.  3560.156(c) of 
the interim final rule is too lax. It provides the borrower with the 
authority to take specific actions to limit the access of such persons 
and ultimately terminate tenancy if further drug-related violations are 
committed.
    Topic: One commenter suggested that Sec.  3560.159(a)(1) should 
include evidence of minor infractions such as drug paraphernalia.
    Response: The Agency appreciates the commenter's suggestion. The 
Agency believes the borrower can include this in occupancy rules or 
lease provisions without Agency direction.
    Topic: With regard to Sec.  3560.159(a)(1) and (a)(2), one 
commenter believed that the regulation should include an innocent 
tenant defense for material noncompliance cases.
    Response: The Agency appreciates the commenter's concern. However, 
the lease termination is based on the terms of the lease, and any 
member of the household who signs the lease becomes subject to the 
terms of the lease.
    Topic: Several commenters stated that the Agency's requirements for 
occupancy rules described in Sec.  3560.157 should include guidance on 
how to determine who will remain in the unit and/or receive the rental 
assistance in the event of a family breakup, particularly in the event 
of domestic abuse.
    Response: The Agency appreciates this comment. Households that add 
or lose any member are required to recertify their income in order to 
establish eligibility and/or rental assistance levels. This can be 
found in the interim final regulation at Sec.  3560.158(d).
    Topic: With regard to Sec.  3560.154(d) and (h), a commenter 
indicated that the proposed regulation requires the borrower to base 
decisions related to the approval or rejection of the application on 
selection criteria contained in the Agency-approved management plan. 
The commenter believed, however, that the regulation gives insufficient 
guidance on the development of those selection criteria. The commenter 
recommended that language be included in this section providing that 
the borrower give ``due consideration to mitigating factors'' that 
might have led to a history of poor credit, and/or employment or 
housing problems.
    Response: The Agency appreciates the commenter's concerns. The 
interim final rule at Sec.  3560.102 (b) requires that the borrower 
describe his applicant eligibility and selection criteria in the 
property's management plan, which is reviewed by the Agency.
    Topic: Several comments focused on the threshold for interim 
recertifications. These commenters stated that the proposed rule 
requires a tenant income recertification ``whenever a change in 
household status results in a net tenant contribution change that is 
greater than $25 per month.'' These commenters felt that tenants cannot 
be expected to understand how a change in their household income will 
result in a $25 change in their rent.
    Response: The Agency reviewed this threshold and has modified Sec.  
3560.152(e) to state that an interim recertification is required when a 
household's monthly income changes by $100 or more per month. In an 
effort to achieve a more realistic threshold, the Agency evaluated 
HUD's requirement for recertification and took into further 
consideration the generally lower incomes of tenants in Agency-financed 
properties. The overwhelming majority of tenants have annual incomes 
under $10,000 (or about $800 a month) and turnover at Agency-financed 
properties does not result in a substantive change in the tenant income 
profile. The Agency determined that a $100 per month change (half of 
HUD's $200

[[Page 69065]]

amount) is substantial enough to trigger a recertification but not 
common enough to create an undue burden on either the tenant or 
borrower in terms of documentation and follow-up. The Agency further 
established that a tenant may request a recertification when household 
income changes by at least $50 per month.
    Topic: One commenter recommended that recertification take place 
every 2 years rather than every year.
    Response: The Agency has made no change because the requirement to 
recertify tenant incomes annually is statutory (see 42 U.S.C. 1490a 
section 521(a)( 2)(B)).
    Topic: Several commenters addressed Sec.  3560.156(c)(1)(ii) of the 
proposed rule. One commenter recommended that the proposed rule require 
residents to obtain advance approval of any increase in household 
members. Another commenter suggests that, in general, the Agency should 
consider eliminating recertification when the only change in a 
household is the addition of a minor child (without any increase in 
income).
    Response: The Agency acknowledges the commenters' concerns but has 
made no change. The Agency does not have the authority to require 
tenants to obtain preapproval of increases in household members, only 
to require reporting of these changes. The Agency does not mandate that 
an interim recertification be completed when a minor child is added to 
the household unless the household's income will increase as a result.
    Topic: With regard to tenant certification and verification, a 
commenter cited that the proposed regulation, unlike the rule that it 
replaces, fails to set forth any timeframe or deadline for a borrower 
to process an updated or interim tenant certification.
    Response: The Agency appreciates the commenter's concern. The 
timeframe requirement can be found at Sec.  3560.152(e)(2)(iii) of the 
interim final rule.
    Topic: Several comments were received regarding policies on the 
occupancy of accessible units. Several commenters said that Sec.  
3560.158(d)(3)(ii) should be modified to say that if an applicant with 
a need for a unit with accessibility features applies for housing at a 
project and the unit is occupied by an ineligible family, the family 
should only be required to move when another suitable unit is available 
in the project. Some commenters said that the 30-day notification to 
move needs to be clarified, specifically, those moving can only be 
given the notification when another nonaccessible unit becomes 
available, since it is not the intent to displace a tenant totally. The 
commenter believed that it would be difficult to rent such units if 
tenants could be forced to move from the complex on 30 days notice at 
any time.
    Response: The Agency thanks the commenters for these 
recommendations and has modified this section to address the 
commenters' concerns. Tenants in units with accessibility features will 
not be required to vacate these units until another appropriate size 
unit without accessibility features becomes available in the project. 
The Agency does not intend to displace in-place tenants, but to move 
them to accommodate the needs of persons with disabilities.
    Topic: One commenter asked whether a tenant would be considered 
overhoused if they were disabled and needed an extra room for apparatus 
related to their disability.
    Response: A tenant who is disabled will not be considered 
overhoused if the tenant needs an additional room for an apparatus 
related to the tenant's disability or a live-in aide.
    Topic: The Agency heard from several commenters on its policies for 
allowing surviving family members to remain in units for which they are 
ineligible after the eligible household member dies. Several commenters 
recommended that Sec.  3560.158(d) allow a surviving member in this 
instance to remain in the unit, even if an eligible applicant or tenant 
is available to occupy that unit, unless another suitable unit becomes 
available in the project.
    Response: The Agency has modified Sec.  3560.158(d) of the interim 
final rule, which deals with surviving family members and establishes 
timeframes in which surviving members must move to a suitably sized 
unit when one becomes available.
    Topic: Several commenters stated that mixed housing projects should 
not be allowed because designating certain units for occupancy by 
families and others for occupancy by elderly households constitutes 
segregation and is in violation of title VIII of the Civil Rights Act 
of 1968.
    Response: The Agency thanks the commenters for their 
recommendation. The interim final rule at Sec.  3560.151 has been 
revised to clarify that mixed projects are no longer eligible for 
Agency financing under the multi-family housing program.
    Topic: The Agency received several comments regarding pets and 
service animals. The most frequent comment was that the definition of 
reasonable pet rules must be clarified. One commenter noted that the 
proposed regulation should contain a further discussion of factors to 
consider in the development of pet rules and a list of prohibited 
clauses, and that borrowers of operational projects consult with 
tenants when revising pet rules and document how that consultation 
process was conducted.
    Response: The Agency appreciates the commenters' concerns. Internal 
Agency procedures will provide further guidance on the development of 
pet rules.
    Topic: Several comments addressed the issue of guests. One 
commenter suggested that the trespass provision of Sec.  
3560.156(c)(12) of the proposed rule may violate State laws and 
Constitutional rights to association. Other commenters suggested that 
the proposed rule should specify exactly when a guest will be 
considered a member of the household so that these criteria are applied 
equally, fairly, and consistently at all RRH projects.
    Response: The Agency acknowledges the commenters' concerns, but has 
made no change because the lease requirements established in Sec.  
3560.156(c)(12) of the proposed rule are statutory. Further, Sec.  
3560.157(b)(10) establishes the borrower's responsibility to establish 
the terms under which a person staying in the unit is no longer 
considered a guest and becomes a member of the household as part of the 
property's occupancy rules. The Agency has not provided further detail 
because the appropriate definition will vary depending on local 
circumstances and in some cases local law. The Agency believes that 
this policy is most appropriately set by the borrower and then applied 
consistently within a property. The interim final rule provides 
guidance on situations in which there is a conflict between Federal and 
State or local laws. Specifically, 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.
    Topic: Multiple commenters addressed Sec.  3560.156(c)(6) and the 
requirement that leases will state that the housing will be subject to 
the ADA. However, the commenters pointed out that if there is no public 
space, this law would not be applicable.
    Response: The Agency thanks the commenters for raising this issue 
and has removed the reference to the ADA from Sec.  3560.156(c)(6) of 
the interim final rule.
    Topic: One commenter expressed concern about the requirement in 
Sec.  3560.156(c)(4) of the proposed rule that leases must specify that 
no change in the resident contribution will occur due to loan 
prepayment. The

[[Page 69066]]

commenter believed this has the effect of extending use restrictions 
for undefined periods, which is inappropriate and inconsistent where 
the Agency has determined that prepayment is acceptable or where it has 
been judged the owner's contract right.
    Response: Tenant contributions as a result of prepayment are 
covered under subpart N--Housing Preservation in the interim final 
rule. Reference to subpart N is made at Sec.  3560.154(c) of the 
interim final rule.
    Topic: Several comments were received on including office hours in 
the occupancy rules and leases. Commenters believe the office hours 
should be removed from the occupancy rules; including this in the 
occupancy rules would require unnecessary changes.
    Response: The Agency has made no change because Sec.  
3560.157(b)(7) states that the office hours must be posted at the 
property and included in the project's occupancy policies. While the 
occupancy policies are to be attached to each tenant's lease, the 
Agency believes that it is not too cumbersome to provide a blanket 
amendment to each tenant's lease in which the new office hours are 
listed.
    Topic: One commenter addressed Sec.  3560.157(c), which requires 
that 30 days notice be given to residents upon a change in the 
occupancy rules, despite the fact that the preceding paragraph requires 
the ongoing and permanent posting of the current occupancy rules. The 
commenter believed that this paragraph serves no useful purpose since 
the occupancy provisions that exist at the time of signing the lease 
are the only rules that apply to any given tenant.
    Response: The Agency wishes to clarify this matter. The occupancy 
rules are an attachment to the lease, not the lease itself. The 
borrower may not change the lease, but may change the occupancy rules, 
upon written notification to all tenants.
    Topic: One commenter noted that the current regulation provides 
examples of unreasonable restrictions on the use of community rooms by 
tenants and tenant organizations, but the proposed regulations omit 
these examples. The commenter thought that they should be included.
    Response: In Sec.  3560.157(b)(6), the interim final rule states 
that the occupancy rules must address housing services and facilities 
available to tenants and members. The Agency will incorporate this 
information into its internal Agency procedures. Some examples of 
unreasonable restrictions may include occupancy rules requiring 
management representatives to be present in order to use community 
rooms, barring tenant or cooperative organizational meetings from using 
the rooms, or requiring management representatives to be present at any 
resident organizational meeting held in community rooms.
    Topic: One commenter suggested that the Agency remove the words 
``beyond agreed to grace period'' from Sec.  3560.159(a)(1)(ii).
    Response: The Agency has made this change to Sec.  
3560.159(a)(1)(ii) of the interim final rule.

Subpart E--Rents

    Topic: The Agency received numerous comments addressed to this 
subpart about the CRCU limitation. While these comments are discussed 
here, the Agency notes that CRCU is covered in a number of subparts 
throughout the rule, including subparts A, B, G, I, and N. Some 
supported the concept, while many expressed significant reservations. 
Those that did not support the concept argued either that market forces 
already achieve the objective sought by the Agency, or that the concept 
places the properties in jeopardy by limiting the resources available 
to them. In particular, they noted the potential danger to troubled 
housing, new construction, and Farm Labor Housing. They asked that the 
concept be piloted before being used broadly. Others asked that the 
Agency specifically cite its exception authority.
    Commenters cited the critical importance of clearly defining terms 
such as ``conventional,'' ``comparable,'' and ``reasonable costs.'' 
Many commenters noted the difficulty of establishing comparable rents 
in rural areas. They noted that comparable units must be similar in 
terms of size and age, within the same market (not geographic) area. 
Several commenters stressed that the cost of developing new units may 
not be reflected in local market rate units. Commenters also noted that 
section 515 projects have operational costs that make them difficult to 
compare to conventional units such as tenant grievance procedures and 
reserve requirements. Commenters also fear that the CRCU may serve as a 
disincentive for new owners to take on troubled properties and may make 
it difficult to work with other funding sources. They asked that there 
be sufficient flexibility in the definition to facilitate transfers, 
rehabilitation, and new units and to work with other leveraging 
sources. Finally, one commenter stated that the CRCU limitation should 
not apply to public housing authorities.
    Response: The Agency recognizes and acknowledges the commenters' 
concerns. CRCU applies to loan applications, servicing actions, and 
preservation actions, not to annual budget reviews and requests for 
rent changes. As noted in the preamble to the proposed rule, the Agency 
has incorporated this policy into the multi-family regulations to 
improve the long-term viability of the multi-family properties in the 
program, limit future costs of rental assistance, and reduce the risk 
of defaults. The Agency emphasizes that the interim final rule provides 
RHS with explicit authority to grant exceptions that allow rents that 
exceed CRCU under certain circumstances, such as when allowing these 
rents would preserve a valuable affordable housing resource. This 
flexibility addresses a number of the commenters' concerns. Section 
3560.205(f)(4) was deleted in the interim final rule in order to 
address any confusion.
    Topic: Numerous comments were received on the Agency's policies on 
rent payment grace periods and late fees. Commenters stated that rent 
should be due by the fifth day of the month and that late fees should 
be increased. They stated that the grace periods and fees in the 
proposed rule are not industry standard and do not provide sufficient 
incentive to tenants to pay on time. They also noted that they are not 
consistent with HUD rules and asked for guidance about what to do in 
projects with HUD funding.
    Response: While the Agency understands that conventional properties 
have a stricter definition of late rent payments and charge higher late 
fees, it has made no change to Sec.  3560.209. Many tenants of sections 
514, 515, and 516 properties receive their income from Government 
agencies by mail. Allowing a 10-day grace period helps to ensure that 
tenants are not penalized when their checks are not received on time 
and mirrors the borrower's grace period for submitting mortgage 
payments to the Agency. Likewise, increasing late fees would be 
prohibitive to many tenants living in Agency-financed properties. For 
properties with multiple sources of financing, the strictest rules 
always apply.
    Topic: Some commenters addressed the use and refunding of security 
deposits. Several of these commenters remarked that the proposed rule 
allows for payment plans for security deposits but offers no parameters 
for these plans. Other commenters said that ``routine turnover 
expenses'' and other items that may not be covered by a tenant's 
security deposit should be more clearly

[[Page 69067]]

defined or that the Agency defer to State laws on this issue. They also 
asked for language to clarify the policy on pets versus companion 
animals.
    Response: The Agency acknowledges these concerns and notes that the 
parameters for security deposit payment plans are described in internal 
Agency procedures. The Agency has revised Sec.  3560.204(d)(1) in the 
interim final rule to substitute ``routine turnover expenses'' with 
``expenses due for addressing normal wear and tear.'' ``Normal wear and 
tear'' is a term that is commonly used and understood by the property 
management industry. The Agency has also revised the interim final rule 
to distinguish between pets and companion animals.
    Topic: Several comments were received on the budget-based rent 
approach described in the proposed regulation. Several commenters said 
that there should be standard rent increase allowances, such as 
occupancy cost adjustment factor (OCAF) or cost-of-living increases 
that are reviewed every three years but are automatic during the 
interim years. They also noted that project rents must work with rent 
standards established by other funding sources (typically the 30 
percent of Area Median Income (AMI)). Several other commenters were 
concerned that the budget-based rent approach would be undermined by 
CRCU, which would impose an arbitrary cap. Still others asked for 
clarification on the four definitions provided in Sec.  3650.202(c), 
specifically the mention of LIHTC rents. Finally, commenters asked how 
rents would be tested once established.
    Response: Regarding the budget-based rent approach, see the 
Agency's response in the description of comments received on subpart G 
(Financial Management). The Agency has clarified in the preamble to the 
interim final rule that the comparison to CRCU will not be applied 
during reviews of project budgets, only to new projects, projects 
requesting servicing actions, and preservation activities. The Agency 
has listed CRCU as a standard in the rule in the circumstances when the 
Agency will use it as a standard. The Agency wants to clarify that CRCU 
is not listed as a standard in Sec.  3650.303 of the interim final rule 
because it will not be used during Agency reviews of annual project 
budgets. With regard to the comments on the four definitions provided 
in Sec.  3650.202(c), the rents listed in Sec.  3650.202(c) are now 
defined in subpart A of the interim final rule. The Agency also deleted 
Sec.  3560.205(f)(4) in the interim final rule.
    Topic: Several commenters said that the annual review of utility 
allowances is too time-consuming and should not be required.
    Response: Because utility costs can change notably from year to 
year, the Agency, and its interim final rule, requires annual review of 
utility allowances as a necessary part of the budgeting process. Just 
like the annual tenant income recertification, this annual review helps 
to ensure that the amount that tenants pay for shelter cost is not 
greater than specified by the program, and helps ensure that rental 
assistance usage reflects the utility costs that tenants actually face.
    Topic: Several commenters requested that rather than having all 
rent changes for all projects go into effect at the beginning of the 
project's fiscal year, these should be permitted at any other time. 
They noted that by allowing new rents to take effect over several 
months, borrowers could submit rent changes and tenant certifications 
simultaneously, saving time for the Agency, the borrower, and the 
tenant.
    Response: The Agency appreciates these comments, but no change has 
been made because the rent changes are requested as part of the annual 
budget that must be submitted for the fiscal year. However, it should 
be noted that Sec.  3560.205(c) of the interim final rule states that 
the Agency will accept borrower requests for rent changes anytime 
during the year if the property is financially distressed due to 
circumstances beyond the borrower's control.
    Topic: Several commenters asked that the Agency allow projects to 
keep section 8 overage as project revenue to address necessary project 
repairs. They noted that the Agency is willing to offer interest credit 
of 1 percent rents regardless of tenant subsidy and therefore should be 
willing to consider letting the project keep the section 8 overage. 
Commenters also asked that overage paid by the tenant be kept by the 
project.
    Response: In such instances of overage, the borrower's interest 
credit will be reduced. Further, if a borrower is collecting 
significant overage from tenants, project rents should be reevaluated.
    Topic: One commenter asked that the proposed rule be revised to 
address the circumstance of a security officer occupying a unit for the 
good of the property.
    Response: The Agency's interim final rule does not address this 
issue as it is currently dealt with on a case-by-case basis.
    Topic: One commenter asked that the paragraph on funds contributed 
to reduce rents clarify that this does not mean borrower contributions 
or rehabilitation loans.
    Response: The Agency appreciates the comment and notes that the 
language in the proposed rule was not intended to mean borrower 
contributions or rehabilitation loans. The Agency added a sentence to 
Sec.  3560.202(e) of the interim final rule to clarify that funds from 
borrower contributions or rehabilitation loans will not be counted 
towards reducing rents.
    Topic: One commenter welcomed the move toward conversion to Plan 
II, as this will reduce the cost of operating section 515 projects.
    Response: The Agency appreciates the commenter for this support.
    Topic: Several commenters remarked that the Agency's approach to 
reviewing HUD section 8 subsidized budgets is only appropriate when HUD 
is providing less than 100 percent of the tenant subsidy. They 
suggested that when HUD is providing 100 percent of the tenant subsidy, 
the Agency should allow the project to charge the rents HUD is willing 
to subsidize.
    Response: The Agency acknowledges the comment but no change has 
been made to the interim final rule because the Agency seeks to ensure 
that properties in the program do not receive excessive subsidy. HUD 
has issued guidance regarding reviewing HUD section 8/515 subsidized 
budgets. The information is included in chapter 14, ``RHS section 515/
8,'' of HUD document, ``Section 8 Renewal Policy--Guidance for the 
Renewal of Project-Based Section 8 Contracts.'' This document is 
available on the HUD Web site at: http://www.hud.gov/offices/hsg/mfh/exp/guide/s8renew.pdf.
    Topic: Commenters had issues with the provisions for rent payment 
during eviction proceedings. They noted that rent cannot be accepted 
when eviction proceedings are underway. Further, they questioned why 
rental assistance and interest credits are suspended, as this can be 
detrimental to the property. One commenter added that while tenants 
under eviction proceedings are charged the note rent, they do not 
always pay it and that borrowers should only be responsible for the 
note rent if they actually receive it. Finally, one commenter stressed 
the need to protect tenants by ensuring that a failure to recertify was 
truly a willful act on the part of the tenant and that the tenant 
received adequate notice about recertification.
    Response: The Agency acknowledges these comments and has revised 
its

[[Page 69068]]

language in Sec.  3560.208(a) of the interim final rule to require 
borrowers to put any rent received during eviction proceedings into 
escrow and has removed language suspending rental assistance and 
interest credits. The Agency believes that the current language 
adequately protects tenants as it requires sufficient notice.
    Topic: Comments varied regarding the extension of time to submit 
the recertification. One commenter said the extension would be helpful 
because obtaining signatures from agricultural workers and immigrants 
on extended family trips can be difficult. Another commenter agreed 
that the additional 10 days for certifications and recertifications 
would be helpful. However, one commenter disagreed with the extension.
    Response: The Agency appreciates these comments. The majority of 
the comments agreed with the proposed rule, therefore, no changes were 
made for the interim final rule.
    Topic: One commenter suggested that utility allowances be 
calculated only once every three years, with adjustments to the rate 
only once a year.
    Response: The Agency appreciates the comment but did not make this 
change. In Sec.  3560.202(d) of the interim final rule, the Agency 
notes that borrowers must review utility allowances annually, adjust 
for accuracy, and submit any utility allowance changes to the Agency 
for approval. Even if there are no changes, the borrower must notify 
the Agency that no changes were made. This annual review is necessary 
because utility allowances are integral to a project's budget and 
budgets must be submitted annually in accordance with statute 42 U.S.C. 
1490(a)(2)(B).

Subpart F--Rental Subsidies

    Topic: Several commenters addressed the Agency's requirement to 
submit information to the Agency electronically. Some commenters 
expressed concern about submitting certification and recertification 
information, stating that this requirement is unfair to ``mom and pop'' 
ownership entities that will resist submitting the information 
electronically. Others stated that older properties in the portfolio 
should be exempt from this requirement. Conversely, several commenters 
urged that the Agency encourage or require the use of Industry 
Interface, for example, when borrowers submit their monthly requests 
for rental assistance payments, as under Sec.  3560.256, and for the 
purpose of assigning rental assistance, as under Sec.  3560.257.
    Response: The Agency is requiring electronic submission in order to 
expedite the gathering of requisite data. Section 3560.102(i) 
establishes the submission requirements for properties with eight or 
more units. The Agency has been upgrading their automation processes to 
provide better flexibility for borrowers to submit data electronically 
to the Agency. The upgraded system, Management Interactive Network 
Connection (MINC), allows for borrowers to use software purchased from 
vendors or input data directly into the MINC Web site. For more 
information, access the MINC Web site at https://usdaminc.sc.egov.usda.gov.
    Topic: One commenter asked if a tenant that receives a subsidy 
under a HUD program is prevented from giving up the subsidy to qualify 
for rental assistance under RHS.
    Response: The Agency notes that a tenant receiving a HUD subsidy is 
only required to give up the subsidy when a rental assistance unit is 
available.
    Topic: Several comments were received in which the commenter stated 
that the priorities for assigning rental assistance shown in Sec.  
3560.253(b) should be changed or removed.
    Response: The Agency acknowledges that these priorities were 
confusing and has deleted this paragraph in its interim final rule.
    Topic: Several commenters addressed eligibility issues under Sec.  
3560.254. One commenter addressed the requirements for eligible units, 
stating that the current requirements to meet Sec.  3560.103 were 
impossible to achieve and that alternative language could include 
``Borrowers may not request rental assistance for rental units that are 
not habitable.'' Another commenter suggested that the Agency add 
language to this section that would terminate rental assistance for 
borrowers found in noncompliance with Agency requirements, ``as a means 
for expediting repairs and corrective actions.''
    Response: The Agency has addressed this topic in the revisions to 
subpart C. The Agency has modified the requirements in Sec.  3560.103 
to recognize borrower progress in correcting physical deficiencies. If 
a borrower is correcting physical deficiencies within a reasonable 
period of time, the borrower will not be found out of compliance.
    Topic: One commenter wrote that ``the change to require interim 
tenant recertifications only when the change in rent would be $25 or 
more is an improvement.''
    Response: The Agency appreciates the commenter's support for the 
change and has made a change in this policy in the interim final rule 
to follow the structure used by HUD for recertifications. In the 
interim final rule, interim recertifications are required only when a 
household's monthly income increases by $100 or more per month.
    Topic: Other comments addressing Sec.  3560.254 discussed household 
eligibility. One commenter suggested that compliance with occupancy 
rules be clarified so that households that are under-or overhoused due 
to a lack of appropriately sized units do not lose their eligibility; 
they should retain their rental assistance but be required to move when 
an appropriately-sized unit becomes available. Another commenter 
suggested that the requirement for having a signed, unexpired tenant 
certification form on file be clarified so that households retain their 
eligibility if the lack of such a form is not the household's fault.
    Response: The Agency notes that subpart D clarifies that under- and 
over-housed tenants will retain their rental assistance and be required 
to move when a unit becomes available. For situations in which a tenant 
does not have a signed, unexpired certification form on file, the 
Agency has not modified this rule, but recognizes that individual 
circumstances should be considered and that no tenant should be 
unfairly penalized.
    Topic: Several commenters expressed dismay at the Agency's 
citizenship requirements. Commenters said that the Agency should not be 
in the business of immigration status. More specifically, one commenter 
questioned whether RHS had an adequate basis to consider an entire 
household to be eligible based on the citizenship or immigration status 
of its head of household, and therefore be eligible for assistance only 
if the head of household is eligible. The commenters believed that one 
solution would be to follow HUD's approach of prorating assistance to 
the household based on the eligibility of each individual. If the 
Agency retains this requirement, another commenter stated that many 
otherwise eligible farmworker families would no longer be eligible for 
occupancy in Agency-assisted housing.
    Response: The Agency acknowledges the commenters' concerns, but no 
change has been made because the requirement for occupants of sections 
514, 515, and 516 housing to be citizens or qualified aliens is 
statutory.
    Topic: Another commenter was confused by the head of household 
citizenship requirement because it implied that non-rental assistance 
units could be rented to noncitizens/illegal aliens. This person stated 
that the implication would contradict the

[[Page 69069]]

requirement ``in Sec.  3560.152 that all household [sic], regardless of 
rental assistance status, qualify under the citizen/alien definition in 
Sec.  3560.11.''
    Response: The Agency notes that the head of household citizenship 
requirement does not imply that non-rental assistance units could be 
rented to noncitizens/illegal aliens. The requirement that all 
households, regardless of rental assistance status, must qualify under 
the citizen/alien definition is statutory.
    Topic: One commenter suggested that the Agency coordinate with the 
Department of Homeland Security (DHS) as HUD has, incorporating 
appendix 2 to the HUD Handbook 4350.3, which is a copy of the User 
Manual created by U.S Citizenship and Immigration Service (USCIS) in 
2000 for the Systematic Alien Verification Entitlements (SAVE) Program. 
References to USCIS should also be replaced with references to DHS.
    Response: The Agency recognizes that the correct reference is DHS. 
However, the Agency does not feel this comment lends itself to being 
incorporated in this rule. Nevertheless, the commenter's suggestion is 
incorporated into the Agency's guidance about program procedures.
    Topic: Several commenters expressed their approval of the new 
requirement that allows borrowers to request rental assistance by 
checking a box on the budget form.
    Response: The Agency thanks the commenters for their support.
    Topic: One commenter questioned the Agency's automatic renewal of 
rental assistance agreements at the existing unit number because the 
policy does not account for changes in the number of units or the 
amount of rental assistance being received.
    Response: The Agency recognizes that changes occur. When borrowers 
need rental assistance for more units, they can apply for additional 
units. When borrowers require rental assistance for fewer units, the 
Agency will transfer the rental assistance to properties with greater 
need. Consequently, the Agency does not feel a change to this rule is 
necessary.
    Topic: Two commenters disagreed with the Agency's requirement that 
the borrower notify tenants of a subsidy loss when the Agency does not 
have funding available to renew the borrower's rental assistance 
contract.
    Response: The Agency has decided to retain the requirement that the 
borrower notify the tenant because the borrower is in a landlord-tenant 
relationship with the tenant, and the loss of rental assistance may 
affect the terms of the lease.
    Topic: Several commenters said that the borrower should have the 
option of paying utility allowances to the utility companies in 
individually metered projects. Another suggested that the Agency allow 
the issuance of a joint check made payable to the tenant and the 
utility company to prevent fraud and abuse and to allow the payment to 
be applied directly to the tenant's utility bill.
    Response: While the Agency acknowledges the commenters' concerns, 
it does not have the capacity at present to pay some utility allowances 
directly to the utility companies. Implementing this suggestion would 
cause an undue administrative burden to the Agency. Currently, 
management companies may issue a joint check payable to the tenant and 
the utility company.
    Topic: One commenter suggested that the Agency clarify Sec.  
3560.256 to prevent borrowers from holding households financially 
responsible when the Agency adjusts rental assistance payments.
    Response: The Agency notes that this issue is clarified in the 
public comments and Agency responses addressing subpart O.
    Topic: The Agency received several comments urging RHS to prorate 
rental assistance based on the tenant's move-in date.
    Response: The Agency acknowledges that for units where a tenant 
moves in during the middle of the month and the tenant is eligible for 
rental assistance, either the property or the tenant covers the 
difference. However, the Agency has made no change to the interim final 
rule because it does not currently have the information system 
capability to allow rental assistance to be prorated.
    Topic: Other commenters questioned the idea that residents must be 
in good standing to receive rental assistance. The commenters' believed 
that tenants should be able to be somewhat delinquent and able to pay 
back rent through a payment plan; if tenants could afford to pay their 
rents without hardship, they would not be eligible for rental 
assistance in the first place.
    Response: The Agency appreciates the comment; however, no changes 
have been made to this subpart. The Agency allows borrowers to 
establish policies on rent charges under Sec.  3560.157(b)(2) and 
encourages borrowers to structure these policies to permit workout or 
payment plans for tenants who encounter payment difficulties due to 
circumstances beyond their control. Tenants who are following a payment 
plan that is consistent with such a policy and acceptable to the 
borrower would be in adequate standing to receive rental assistance. 
However, the Agency wants to emphasize that such policies do not 
relieve tenants of their responsibility for timely rental payments.
    Topic: Several commenters addressed the requirements for assigning 
rental assistance in Sec.  3560.257. Commenters indicated that 
requirements generally needed to be more flexible and that, in 
particular, documenting the percentages occupied by low-income 
households was burdensome.
    Response: The Agency appreciates the commenters' desire to have 
more flexibility, but its first responsibility is to the tenants. By 
assigning priorities and targets, the Agency has tried to use its 
available rental assistance to best serve the tenants with the greatest 
need. Information about the percentage of low-income households is 
necessary to help the Agency manage its rental assistance resources 
most effectively. Consequently, neither of these suggestions are being 
adopted in this rule.
    Topic: Two commenters agreed that identifying the term of rental 
assistance agreements or having no term was problematic. One person 
nevertheless suggested that the term could be ``when the funds 
obligated for the units are expended or 5 years, whichever comes 
first.''
    Response: The Agency appreciates the comment; however, the term of 
the agreements have traditionally been established in the appropriation 
language each fiscal year, and can change. Therefore, the Agency has 
not specified the term of the agreements in the interim final rule.
    Topic: One commenter stated his support of the ``change to allow a 
lease clause stating that a tenant's rent will not increase when rental 
assistance is terminated by actions of the borrower/owner.''
    Response: The Agency thanks the commenter for supporting this 
provision; this lease clause is addressed in subpart D.
    Topic: Several commenters addressed Sec.  3560.259 on the transfer 
of rental assistance, with most concerns addressing the effect of the 
transfer on the property. For example, two commenters recommended that 
unused rental assistance remains equal to 5 percent of the total units 
to avoid financial problems that occur if the property ends up with 
less than 95 percent occupancy the following year. Other commenters 
addressed the conditions under which rental

[[Page 69070]]

assistance might be lost and thought clarification in the regulation is 
needed for conditions such as transfer of rental assistance due to unit 
damage during a disaster, the inability to get an ineligible tenant 
evicted, turnover in separate units over 4 months, or units for which 
tenant-based section 8 has been accepted and no rental assistance would 
be used.
    Response: The Agency appreciates the comments addressing the 
various conditions that could effect and be affected by the transfer of 
rental assistance. The Agency believes that most issues should be 
resolved by the 6-month timeframe that occurs before the Agency 
assesses whether to transfer rental assistance. For all situations, 
particularly those brought about by disasters or by eviction, the 
Agency has exception authority under Sec.  3560.8 of the interim final 
rule. For clarification, the timeframe for transferring rental 
assistance refers to one unit, not to multiple units several months in 
a row.
    Topic: Other comments on the transfer of rental assistance focused 
on the borrower's role in transferring rental assistance. Regarding the 
borrower, commenters urged that the regulation expressly allows 
borrowers to transfer rental assistance from one project to another or 
to accommodate the transfer of rental assistance among projects under a 
common general partner.
    Response: The Agency acknowledges the commenters' suggestion; 
however, RHS must consider the needs of the larger portfolio and tenant 
population in making decisions about the allocation or transfer of 
rental assistance. For this reason, the Agency has made no change, and 
it remains the Agency's decision regarding where to transfer rental 
assistance.
    Topic: Other comments on the transfer of rental assistance focused 
on the effect on the household. One commenter recommended that 
households in a project who did not receive rental assistance be 
notified of the transfer of the rental assistance prior to its 
approval. Another commenter pointed out that households that were over-
income are allowed to pay the ``overage,'' and suggested ``leases be 
allowed to ``non-renew'' at the annual recertification date for any 
``overage tenant'' whose continued occupancy prevents reassignment of 
rental assistance.''
    Response: The Agency notes that the regulation already protects the 
interests of non-rental assistance tenants in the property and has made 
no changes to the interim final rule. Prior to transferring rental 
assistance, the Agency conducts a review to determine if the property 
has other eligible households that qualify for rental assistance. Also, 
borrowers who lose rental assistance through transfers can apply for 
new rental assistance units when their property reflects a need. The 
Agency considered the comment regarding ``overage.'' Tenants paying 
overage are eligible to reside in Agency financed housing properties 
and should not be forced out of their units when they are still income 
eligible. The Agency's housing is available to very low-, low- and 
moderate-income tenants in rural areas.
    Topic: The Agency received numerous comments on Sec.  3560.259 
regarding the Agency's timeframe for transferring rental assistance. 
Several commenters contended that requiring the transfer of unused 
rental assistance after 4 months is not sufficient for several reasons, 
including the seasonal nature of farm work and the recreational 
industry and the time it takes to repair units after disasters. Several 
commenters stated that the Agency should continue to transfer unused 
rental assistance after 12 months. However, one commenter agreed that 
rental assistance should be transferred if it is unused for 4 months or 
more to ensure that the assistance goes to those with the greatest 
need.
    Response: The Agency appreciates these comments and acknowledges 
that four months does not give the Agency sufficient time to analyze 
assistance needs of current tenants. Therefore, the Agency has 
increased the time period to six months in the interim final rule.
    Topic: Several comments were received in connection with the 
Agency's requirement that non-RHS subsidy contracts cannot be for less 
than five years. Some commenters said that non-Agency rental assistance 
should be allowed for any period of time because ``some rental 
assistance is better than none,'' as one commenter noted. Other 
commenters said that this requirement is inconsistent with those of 
other funding sources.
    Response: The Agency acknowledges the commenters' concerns and has 
revised Sec.  3560.260(d)(2) in the interim final rule to allow for 
subsidy agreements with non-Agency sources ``similar to existing or 
current Agency rental assistance funding levels.'' This should make it 
easier for projects with Agency financing to obtain rental assistance 
from other sources.
    Topic: Two commenters provided the following comment: ``Projects 
with HUD certificates (project based) have often received a minimal or 
no mortgage rate interest credit reduction from the Agency, which often 
realizes a basic rent equal to HUD established rent. This regulation 
should allow for use of the HUD established rental rate.''
    Response: The Agency notes that Sec.  3560.207 of the interim final 
rule addresses this issue.
    Topic: Two commenters addressed the topic of minimum rents. One 
commenter expressed disappointment that the regulation did not address 
zero'income tenants and require a minimum rent level. One commenter 
wrote that zero rents should be prevented (especially in labor housing) 
and suggested that there be a minimal payment of $50 or $100, with 
exception granted by the Agency.
    Response: The Agency has considered the suggestion but has decided 
to retain the language from the proposed rule at this time until it has 
time to further evaluate this issue.
    Topic: One commenter suggested that the regulation allow rental 
assistance to go to higher rent units in LIHTC and tax-exempt bond 
projects.
    Response: The Agency has decided not to adopt the comment; because 
rental assistance is not assigned to a particular unit or rental rate, 
it is prioritized by the tenant's need. The Agency details its 
priorities in Sec.  3560.257(a) of the interim final rule.
    Topic: Two commenters suggested that the Agency allow borrowers 
flexibility in how they make use of rental assistance to maximize its 
benefits, particularly when the tenant household income rises and its 
relative use of rental assistance declines to a nominal amount. In this 
situation, one commenter stated: ``The rental assistance unit is tied 
up and cannot be reassigned to a more needy very low-income tenant/
applicant. This predicament could be alleviated by creating latitude 
for borrowers to intervene and assume responsibility of the cost of 
rental assistance to tenants or for the project to offer marketing 
incentives to near-moderate income tenant (e.g., those using rental 
assistance at a rate of <$10 per month).''
    Response: The Agency believes this comment is permitted under this 
rule. However, the Agency will need to draft implementing procedures.
    Topic: One commenter asked for clarification regarding Sec.  
3560.257 because that commenter did not understand the issue.
    Response: In Sec.  3560.257 of the interim final rule, the Agency 
gives priority to the tenants who most need rental assistance. The 
issue is further discussed in the Agency's internal guidance about 
program implementation.

[[Page 69071]]

    Topic: One commenter stated that the changes in the calculation for 
electronic submission of certifications/recertifications were unclear.
    Response: The Agency believes that the commenter misunderstood the 
changes; the timeline was changed, but the calculation was not changed. 
The timeline changes are addressed earlier in this subpart.

Subpart G--Financial Management

    Topic: Numerous comments were received on Sec.  3560.308 regarding 
the requirements for submitting annual financial statements. Several 
commenters stated that lowering the threshold for requiring a 
Government Auditing Standards (GAS) audit for projects from 25 units to 
16 units would be cost-prohibitive, particularly by raising the costs 
for projects least prepared to absorb the additional costs. Several 
commenters attempted to estimate the increase in cost, including the 
cost to tenants or to taxpayers of subsidizing this increased expense. 
Additionally, because the number of projects requiring an audit will go 
up, a commenter stated that this requirement will create an additional 
burden on Area Offices to review these audits. Other commenters 
disagreed, stating that the submission requirements for small 
properties currently do not contain sufficient information to 
adequately analyze the financial status of the project, and that the 
additional requirements in the proposed rule are appropriate. Several 
commenters suggested an agreed upon procedures report for smaller 
properties that is consistent with generally accepted accounting 
principles (GAAP) under 42 U.S.C. 1485(z)(1) be required as an 
alternative to a standard audit. Another commenter suggested using a 
``verification of review'' to achieve the same goals as the audit at 
lower costs. Another suggested requiring audits every second or third 
year or forgoing audits on projects that have a good track record of 
financial integrity as a way of reducing the burden. Another commenter 
said that audits are only as good as the accountant providing them; 
since the owner is the one providing the information and paying for the 
audit, it is doubtful that requiring audits on smaller complexes will 
bring to light additional fraudulent activities. The commenter went on 
to say that MFH specialists do not have accounting degrees and are not 
equipped to quickly recognize fraudulent activities, and that an audit 
of the project should provide all pertinent information that RHS is 
interested in that affects Agency-financed projects.
    Response: As discussed in the preamble to the proposed rule, the 
Agency implemented the change to address concerns raised by the USDA 
OIG. The Agency has modified Sec.  3560.308 of the interim final rule 
in response to the commenters' concerns, while staying consistent with 
the actions agreed upon with OIG. OIG requires that annual financial 
reports are prepared in a way that allows the Agency to get a realistic 
picture of the property's financial status and operations. By requiring 
an Agency approved engagement, the Agency should be able to address OIG 
concerns and obtain the information necessary to get an accurate 
picture of the property's health. In addition, the Agency has 
substantially modified Sec.  3560.308 in the interim final rule to 
allow properties with 16 or more units to obtain an Agency approved 
engagement report. This section also states that properties with fewer 
than 16 units may obtain a limited-scope engagement. These engagements 
may be conducted by a CPA or other accounting professional and will 
cost considerably less than GAS audits, thereby minimizing the 
financial impact on the properties. The Agency has not adopted the 
suggestion for procedures reports or verification of reviews because 
the Agency needs the information that would be provided in an 
acceptable engagement letter so that it can meet OIG needs. The 
Agency's new policy shifts away from standard GAS audits to year-end 
reports that provide a more detailed picture of each property being 
managed. To address the issue of additional burden on Area Offices, RHS 
intends to automate most of the review process, enabling Area Office 
staff to concentrate on problem cases. One of the major considerations 
of the Agency in developing this new policy was the financial impact on 
properties. The limited scope engagement required in Sec.  3560.308 
provides the Agency with adequate financial information while not 
imposing a full audit requirement on smaller properties. The Agency has 
the option to obtain full audits on randomly-selected properties every 
two or three years. The Agency notes the concerns about the accountants 
being selected by the borrowers, but feels that the current rule 
strikes the best balance between risk, cost, and reliability.
    Topic: Two commenters suggested raising the number of units 
triggering the audit threshold from 25 to 33 or 36, rather than 
lowering it to16. Another commenter suggested that the cost to projects 
that had not been subject to the auditing process would be high, 
especially to prepare the first audit, as this auditor would want to 
review data from the beginning of the project, which will increase 
operating expenses for the most difficult properties to manage. These 
properties will have to impose rent increases to accommodate the 
additional expense. Another commenter said that one reason stated for 
this new requirement is to further monitor IOI transactions, and that 
the new proposed management certification should provide the Agency 
with a certain amount of comfort that it is putting borrowers on notice 
that IOI relationships will be closely monitored. Another commenter 
said that the list of borrower accounting responsibilities should 
include a requirement to maintain documentation of the financial 
benefits where IOI work is used. The dollar amount of fraud at smaller 
properties would be less than the added expense of trying to catch it. 
Another commenter said that the proposed rule basically allows projects 
with less than 16 units to self-certify that their financial reports 
are accurate; the proposed rule is unclear in that it says the borrower 
must certify that the ``* * * housing meets the performance standards * 
* *'' The commenter went on to say that the rule should be more 
specific, saying that the borrower must certify that the financial 
statement report is accurate and that project funds have only been used 
for authorized purposes and for expenses that are actual, necessary, 
and reasonable. A commenter said that Agency personnel are currently 
awaiting the publication of an Agency guide about preparing annual 
financial statements being developed with the assistance of OIG.
    Response: The Agency acknowledges the commenters' concerns. The 
policy set forth in the proposed rule and the interim final rule--the 
16-unit threshold--responds to OIG's concern that the Agency is not 
receiving a complete and accurate picture of the financial and 
operational status of the properties in the Agency's portfolio. While 
the Agency's goal is to receive more targeted information, it 
recognizes that GAS audits performed by independent CPAs are costly, 
which is why the Agency has opted to allow annual reports that are 
tailored to Agency specifications for larger projects and limited scope 
engagements for smaller projects. The Agency has researched the costs 
of obtaining these types of financial reports, which are substantially 
lower than the cost of a GAS audit. The Agency does not think that the 
cost of such audits will pose an undue financial burden, such as

[[Page 69072]]

increased rents, on the properties in its portfolio. With respect to 
identity-of-interest relationships and their impact on the financial 
activity at properties, the new management certification will reveal 
such relationships but the new financial statement requirements 
outlined in Sec.  3560.308 will provide more financial information 
regarding these relationships. The new regulation also outlines the 
performance standards each engagement and limited engagement is 
required to cover. Agency review of this information will verify the 
owner's certification. The Agency did not adopt the suggestion 
regarding maintaining documentation because that documentation must 
already be retained for audits provided under this rule.
    Topic: Two commenters said that the Agency should not require an 
Agency engagement letter, as this would create additional burden on 
Agency staff and could cause delays in completing the audit if the 
Agency does not approve the engagement letter in a timely manner. The 
commenters went on to say that it would be beneficial for the Agency to 
provide suggested wording in accordance with AICPA. Another commenter 
said that if the Agency's intention is to distribute the exact verbiage 
entailed in an engagement letter, it may be beneficial for the Agency 
to ensure the wording is in accordance with GAS and AICPA standards. 
The commenter noted that if the prescribed letter was not written in 
accordance with the above mentioned standards, accounting firms would 
still need to issue a separate engagement letter to discuss their 
procedures to be performed in accordance with GAS and AICPA standards. 
The commenter went on to say that such firms are required to issue an 
engagement letter detailing the procedures to remain licensed in their 
profession by peer review standards.
    Response: The Agency thanks the commenters for raising this issue; 
however, the commenters seem to have misinterpreted Sec.  3560.308(b). 
The Agency does not feel that audits in accordance with GAS are 
sufficient because they would not sufficiently cover IOI compliance 
issues and do not provide a sufficient sampling for this program. This 
section states that the borrower must use an Agency approved engagement 
letter, not that the Agency must approve the engagement. The engagement 
letter must be approved by the Agency. The Agency will consult with the 
OIG which regularly consults with AICPA on engagement and audit 
compliance standards. Therefore the engagement letter should be in 
alignment with AICPA requirements.
    Topic: One commenter suggested that Sec.  3560.308(a)(1) should be 
limited to requiring that engagement letters be compliant with GAS. 
Another stated that the regulation should specifically state that the 
audit should be in accordance with GAS. Another commenter said that for 
projects with less than 16 units where a compilation is required, the 
MFH Balance Sheet should be submitted. For project with 16 or more 
units, in lieu of the MFH Balance Sheet, a balance sheet in accordance 
with GAS should be accepted. Another commenter pointed to chapter 1, 
section 1.01 of the GAO Government Auditing Standards 2003 Revision 
issued by the Comptroller General of the United States which states 
that audits and engagements compiled according to GAS are considered 
reliable. This commenter also highlighted chapter 1, section 1.02, 
regarding auditors who use GAS can support Government accountability. 
Another commenter stated that the idea of not getting audits on all 
projects creates more opportunity for problems; while this might save a 
project some money, most owners must have audits prepared for their 
partners anyway.
    Response: The Agency acknowledges the commenters' concerns. The 
Agency does not feel that audits in accordance with GAS are sufficient 
because they would not sufficiently cover IOI compliance issues and do 
not provide a sufficient sampling for this program. The Agency has 
established the engagement standards. A balance sheet is not sufficient 
to meet OIG requirements. The regulation does not prevent borrowers 
from obtaining GAS audits, but rather seeks to ensure that the Agency 
receives detailed financial information tailored to its needs to assist 
in the Agency's portfolio analysis.
    Topic: One commenter said that in the past, it has been difficult 
to reconcile an accrual-based audit to a cash-based Form RD 1930-7, 
``Multiple Family Housing Project Budget,'' and that while the proposed 
rule indicates that an engagement letter will control the annual report 
process for projects with 16 or more units, one of the proposed program 
handbooks indicates that this is still an audit. The commenter noted 
that as such, the same situation may result--the Form RD 1930-7 is 
prepared on a cash basis, while the annual reports are prepared on an 
accrual basis. The commenter recommended that the bookkeeping system 
and reporting be consistent.
    Response: The Agency thanks the commenter for introducing these 
issues and has modified Sec.  3560.302(b)(1) of the interim final rule 
to say that the borrow must conduct accounting, bookkeeping, and budget 
preparation in a manner consistent with the engagement.
    Topic: One commenter said that Sec.  3560.302 could be confusing to 
the independent accounting community because it states ``borrowers must 
maintain records in a manner suitable for an audit or an engagement.'' 
The commenter said that an engagement can be several things: An audit, 
an audit performed to agreed upon procedures, a review, or a 
compilation, all of which are typically performed by CPAs. The 
commenter continued, saying that review and compilation engagements do 
not include procedures/tests to verify the accuracy of the amounts 
disclosed in financial statements, whereas audits are designed to do 
just that.
    Response: The Agency thanks the commenter for this observation and 
has made changes to Sec.  3560.302(a) to refer to maintaining ``records 
in a manner suitable for an engagement,'' rather than to an audit or 
engagement.
    Topic: One commenter contacted the AICPA and spoke with the 
Director of Professional Standards and Services, Ian A. MacKay, on July 
11, 2003, more than halfway through the comment period on the proposed 
rule. The commenter found that the Director was not even aware of any 
changes being proposed by the Agency that would affect the accounting 
profession and auditing and urged that any planned changes to audit 
guidance must include and involve CPAs. The commenter believed that the 
Agency needs to engage and work with industry partners who are the 
experts in accounting before issuing the final rule. Another commenter 
echoed the idea that CPAs should be involved in writing the Agency 
policy and guidance on this topic.
    Response: The Agency would like to reassure the commenters that 
CPAs and the HUD were consulted during the development of these 
policies.
    Topic: Another commenter questioned whether the intent of Sec.  
3560.308(b) was for projects owned by the same owner and managed by the 
same manager to not be required to have separate audits for each 
property. The commenter stated a preference for having annual financial 
statements on all properties. One commenter suggested that in Sec.  
3560.308(b), the term ``managing'' general partner be defined as the 
partner responsible for operation under the partnership agreement. One 
commenter recommended removing Sec.  3560.308(c) because if only a 
sample of housing projects were audited in a specific time period, 
audits conducted in later years would lack the necessary data inputs.

[[Page 69073]]

    Response: The Agency appreciates the commenters' suggestions and 
has deleted in the interim final rule what was Sec.  3560.308(b) in the 
proposed rule. All properties will be required to prepare annual 
financial statements, not just a sample number of properties.
    Topic: One commenter stated that Sec.  3560.308(d)(7) was too 
subjective.
    Response: The Agency appreciates the commenter's concern. However, 
the Agency believes the standards are sufficiently objective to meet 
the needs of the Agency and borrowers.
    Topic: Several commenters questioned the 2-year limit in Sec.  
3560.308(f), indicating that (1) most audit requests for proposals are 
for more than two years, and (2) required audit costs should always be 
an authorized project expense. Another commenter requested 
clarification on the procedures required by Sec.  3560.308 after the 
initial 2-year period. Another commenter said that the proposed rule 
states that the Agency will approve a ``full audit expense'' for two 
years after the effective date of this regulation and questioned 
whether this is an attempt to get borrowers going with these audits and 
not worrying about the additional costs that they would incur doing 
these ``full audits.''
    Response: The Agency thanks the commenters for highlighting this 
issue and has deleted Sec.  3560.308(f) from the interim final rule. 
Annual financial statements are an allowable financial expense through 
the term of the property's Agency loan.
    Topic: Regarding the proposed language for Sec.  3560.305, several 
commenters stated that borrowers should be able to take their returns 
without prior authorization from the Agency. Other commenters said that 
Sec.  3560.305 appears to allow an owner be paid a return that was 
earned several years prior but still not paid, provided sufficient 
funds are available to pay it. Some commenters thought that it was 
prudent to allow the borrower to accrue unpaid returns on investments, 
while others thought that the period for capturing the return should be 
limited. One commenter said that the proposed rule should limit how 
many years the borrower can go back and be paid earned but unpaid 
return on investment, which would possibly prevent large withdrawals on 
project accounts where borrowers have not collected their return on 
investment because of negative cash flow or their own discretion. One 
commenter said that if the audit confirms sufficient cash flow, which 
would allow for a return on investment, then the return on investment 
should be taken the next year. The commenter went on to say that the 
Agency should allow for this return to not be taken ``immediately 
after,'' but rather any time during the next year.
    Response: The Agency notes these concerns and has modified Sec.  
3560.305(b) of the interim final rule to state that a borrower may only 
take a return that is accrued but unpaid for the previous year only. 
The interim final rule does not require the borrower to receive Agency 
approval before taking a return unless the project had a negative cash 
flow. The Agency believes that the period of time to recapture earned 
returns should be limited and believes this policy is in the best 
interest of the property. The borrower is permitted in Sec.  3560.305 
to take his return after the fiscal year. The Agency has removed the 
word ``immediately'' from the section discussed by the commenter.
    Topic: Other commenters said that an owner's return should be 
treated like any other property operating expense and that the Agency 
should encourage owners to stay in the program instead of discouraging 
their involvement by establishing regulations and administrative 
processes that result in denying payment of an owner's return. Another 
commenter said that the timing for payment of accrued but unpaid return 
on investment is unclear and that owners should be allowed to accrue 
such returns indefinitely or until sale or other disposition of the 
owner's interest, since returns are paid from surplus cash, and do not 
affect the underlying real estate. One commenter said that rent 
increases should be allowed for a return on investment, which is part 
of the budget, and that the Agency's denying such a request constitutes 
a clear violation of the loan agreements. The commenter felt that if 
RHS cannot guarantee a return, it at least must permit the owner to 
seek that return.
    Response: The Agency acknowledges the commenters' concerns; 
however, the return to owner is to be paid only when the project has 
surplus cash while being properly operated and maintained. If the 
property has adequate occupancy and is operating properly, then the net 
operating cash available at the end of the year would enable the 
borrower's return to be paid. The Agency does not believe the policies 
concerning returns on investment discourage participation in the 
program. However, a policy that permits unlimited accrual of such 
return could financially harm the property and the Agency's security. 
The return on investment is a budgeted line item and, combined with 
other operating costs, could be the basis for a rent increase. However, 
a rent increase based solely on guaranteeing the return on investment 
is not permitted. Therefore the Agency has not adopted these 
suggestions.
    Topic: One commenter said that consideration should be given to 
returns on investment for older projects and allow a return based on 
the current value of the original investment, which would help preserve 
existing projects because the return allowed is insignificant when 
compared to the property's current value.
    Response: The Agency acknowledges the commenter's concern but has 
not modified the regulation at this time. However, the Agency will 
consider methods to implement such a change.
    Topic: One commenter said that it appears from the language in the 
proposed rule that an owner may be paid for a return on investment that 
was earned several years prior but still not yet paid, provided 
sufficient funds are now available to pay it. The commenter asked if a 
project experiences a negative cash flow for the year and lacks 
sufficient surplus cash to pay the return, is it assumed that a return 
was not earned for that year and therefore could not be paid in 
subsequent years. If not, the commenter wanted to know if there is ever 
a situation where the return on investment is not earned.
    Response: The Agency thanks the commenter for these suggestions. 
The borrower may carry accrued, unpaid distributions on the project 
balance sheet but only will be eligible to receive a distribution from 
the prior year. This can be found at Sec.  3560.305(b) of the interim 
final rule.
    Topic: Several commenters said that if the Agency approves a 
negative cash flow budget, then the return on investment should be paid 
because it is outside the borrower's control. They thought that payment 
of return should depend on whether there are sufficient funds to 
address the project's capital or operational needs. If reserves are 
funded as required, the commenter felt that the return on investment 
should be allowed and paid.
    Response: The Agency acknowledges the commenters' concern. The 
Agency will only approve a negative cash flow budget at the beginning 
of the project's fiscal year if the property has sufficient cash on 
hand from the previous fiscal year. Under these circumstances, the 
borrower could be eligible to receive a return, but only with the 
Agency's prior approval. This can be found at Sec.  3560.305(a)(2) of 
the interim final rule. The Agency does not believe the return is 
outside of the borrower's control because the borrower controls the 
budget. Further, the Agency has not adopted the suggestion to pay a 
return

[[Page 69074]]

if there are sufficient funds to address the project's capital or 
operational needs because the Agency needs to evaluate the performance 
of the property.
    Topic: One commenter asked under what conditions, or with what 
justification, would the Agency authorize borrowers to be paid their 
return on investment, while at the same time their project is 
experiencing a negative cash flow. The commenter asked if these 
criteria are published to ensure their consistent use. Several 
commenters suggested that the borrower be prohibited from taking a 
return on investment from the project's reserve account.
    Response: The Agency wishes to clarify this issue. The Agency may 
authorize that a return be paid to an owner when the property has a 
negative cash flow under very limited circumstances, as described in 
Sec.  3560.305(a)(2) of the interim final rule--when surplus cash 
exists in the reserve account and the property has sufficient funds to 
address its capital needs. The Agency policy remains the same and the 
borrower is permitted, with Agency approval, to withdraw ROI from 
surplus cash in the reserve account. The Agency did not adopt the 
suggestion that the borrower be prohibited from taking a return on 
investment from the reserve account because taking this return has no 
adverse effect on the project.
    Topic: One commenter said that the reference in Sec.  
3560.305(a)(2)(i) to Sec.  3560.306(d)(2) should read Sec.  
3560.306(d)(1).
    Response: The Agency thanks the commenter and has revised the 
reference in the interim final rule.
    Topic: Regarding budget reviews and approvals, a substantial number 
of commenters decried the Agency's decision to have the budget 
submission date for borrowers requesting rent increases be 105 days 
before the end of the project's fiscal year. Commenters explained that 
this timeframe would require borrowers to prepare budget information so 
early in the project's fiscal year that they would have inadequate 
data--such as projected property taxes--to estimate the upcoming year's 
cost. Another commenter expressed approval of the proposed timeline. 
Another commenter said that the Agency should allow for rent increases 
on days other than the first day of the fiscal year because many 
management companies recertify all residents on a specific annual day. 
If that day is February 1, having a rent increase January 1 will 
require managing agents to implement a rent increase January 1 and then 
revise the rent on February 1, doubling the workload. In addition, the 
commenter said that this will require Agency staff to update their 
records twice, increasing their workload. The commenter believed that 
allowing rent increases on days other than the first day of the fiscal 
year will decrease workloads and allow rent increase reviews to occur 
over a period of months. However, several Agency commenters said that 
the timeframe proposed for reviewing budgets with and without rent 
increases was a welcome addition.
    Response: The Agency appreciates these comments and has revised 
Sec.  3560.303(d) of the interim final rule to reflect the previous 
deadline for budget submissions of 90 days before the end of the 
project's fiscal year for a project for which a rent increase is being 
requested and of 60 days before the end of the project's fiscal year 
for a project for which a rent increase is not being requested. The 
Agency's streamlined budget processing also makes it possible for 
budgets to be reviewed on a more timely basis. The Agency wishes to 
note that there is nothing in the regulation that prohibits a borrower 
from submitting a rent increase request that will go into effect on a 
date other than on the first of the year. Further, Sec.  3560.205 of 
the interim final rule allows requests for rent or utility allowance 
changes any time during the year if necessary to preserve the financial 
integrity of the housing complex and the circumstances are due to 
factors beyond the borrower's control.
    Topic: Another commenter said that the Agency's new expedited 
review will free up Agency resources, which are stressed when all 
budgets come in at the same time, and will eliminate owners' having to 
operate their projects without approved budgets because of long waits 
for Agency approval. However, another commenter stated that the Agency 
has too many budgets to review at one time.
    Response: The Agency thanks the commenter for this concurrence. The 
Agency is working to improve its management information systems to help 
expedite budget reviews, thereby enabling it to complete this task on 
time.
    Topic: One commenter said that the proposed rule does not specify 
any thresholds and refers to budgets with ``no rent increase.''
    Response: The Agency wishes to clarify this issue. ``No rent 
increase'' means that the borrower did not request a rent increase with 
the submitted budget package. Thresholds are addressed in Sec.  
3560.303(d) of the interim final rule, which describes budgets and rent 
increases for which Agency approval is required.
    Topic: One commenter said that the proposal to use thresholds when 
reviewing annual budgets seems good; however, there needs to be a way 
for the public to comment on the thresholds used.
    Response: The Agency appreciates the comment; however, the 
thresholds are an internal program standard used to determine the level 
of Agency review. The thresholds are not part of the criteria used to 
determine whether the budget can be approved. Because the thresholds 
are part of internal program procedures, there is no obligation to 
allow public comment. The Agency does want to note that the public can 
easily find out the thresholds being used by obtaining the relevant 
Agency guidance about program procedures, which is readily available 
via the Internet or Agency Offices. Further, the Agency wants to 
emphasize that the criteria that borrowers must meet are provided in 
Sec.  3560.303(a) of the interim final rule.
    Topic: Several commenters said that the proposed rule should 
include the information contained in the current 7 CFR part 1930, 
subpart C, exhibit C whereby a budget is considered approved if the 
Agency approval official does not act on the request within 30 days. 
The commenters believed that this should include any budget, regardless 
if a rent change is requested.
    Response: The Agency acknowledges the commenters' concern. Language 
was added to Sec.  3560.303(d)(3)(ii) of the interim final rule to 
address budgets and automatic rent change procedures.
    Topic: The Agency also received comments on the disposition of 
interest earned on the project's reserve account. Several commenters 
stated that letting the borrower retain 25 percent of the interest 
earned on reserve accounts helps offset taxes paid on phantom income. A 
few commenters felt that borrowers were not entitled to this benefit. 
Another commenter said that the criteria for Agency approval under 
Sec.  3560.306(i) should be (1) A statement from a CPA in an audit or 
compilation regarding the amount of interest on reserves, and (2) a 
request to release 25 percent of that interest amount. The commenter 
said that this should not be calculated as return to owner; instead, 
this will mostly compensate owners for the tax burden from interest 
income as a return to owner. Someone commented that borrowers or 
management companies do not put the reserve account on higher yielding 
interest rate accounts because they do not get to keep the interest; 
there is no business

[[Page 69075]]

incentive. Further, to obtain higher interest yields, this commenter 
said that long-term commitments are required, and borrowers and agents 
may be afraid to have funds locked at a time when they may need the 
money for an emergency. Another commenter said that the proposed rule 
needs to limit the withdrawal of 25 percent of interest earned on 
reserve accounts to borrowers that deposit project funds in high 
interest-bearing accounts; at best, this is a break-even deal for the 
borrower, which is not a good incentive. Another commenter said that 
the annual return should equal 35 percent of the interest earned on 
reserve accounts, because 25 percent is not sufficient to compensate 
borrowers. Still, another said that the borrower should receive 100 
percent of the interest earned on this account. One of the commenters 
concurs with the basic principle of the rule change to allow borrower's 
to keep up to 25 percent of the interest earned on reserve accounts, 
provided that the use of reserve fund interest to pay borrowers a 
return on investment (Sec.  3560.306(i)(2)(ii)) is conditioned on the 
deposits to the maintenance reserve account being on schedule. However, 
the commenter is opposed to any concession to limited profit owners 
that might result in underfunding the maintenance reserve.
    Response: The Agency appreciates the commenters' concerns. The 
Agency will not consider the 25 percent of interest income as part of 
the return to owner. The Agency believes the 25 percent figure, as 
opposed to 35 percent or 100 percent, is a reasonable amount. The 
Agency will monitor this new policy and determine if any change is 
necessary. The Agency has attempted to provide borrowers with 
investment options so they are less limited by the size of the reserve 
account that may be invested. This policy allows borrowers to receive 
an amount to offset the effect of phantom income taxes. Borrowers are 
entitled to this amount if interest is earned on the reserve account. 
It is not dependent upon compliance with the reserve account funding 
schedule. Borrowers are encouraged to maximize their interest return as 
long as they remain in alignment with this rule.
    Topic: One commenter said that Sec.  3560.306(d)(2) of the proposed 
rule states that the borrower may need to deposit surplus general 
operating account funds into the reserve account ``if the reserve 
account is not fully funded,'' but could not find a definition for 
``fully funded.'' Another commenter stated that borrowers should make 
required deposits until the reserve is fully funded.
    Response: The Agency appreciates the commenters' questions and has 
revised Sec.  3560.306(d)(2) of the interim final rule to state that 
the borrower will be required to deposit surplus general operating 
funds into the reserve account. This does not change the borrower's 
required contribution to the reserve account. This is because scheduled 
contributions are required until the account is fully funded as stated 
in the loan agreement.
    Topic: With respect to Sec.  3560.306(h)(3), one commenter said 
that the paragraph should read that borrowers may make an annual 
withdrawal from the reserve account equal to no more than 25 percent of 
the interest earned on a reserve account during the prior year, rather 
than on amounts earned. The commenter believed that this paragraph 
should state that interest income earned does not include any increased 
equity in the value of any reserve securities. Another commenter 
praised the new rule because it requires borrowers to record the price 
actually paid for securities when reserves are involved. The commenter 
said that this will help the Agency determine whether accounts have 
lost money and will also help determine that 25 percent of earnings to 
be released to the owner for taxes.
    Response: The Agency acknowledges the first commenter's concern and 
has revised Sec.  3560.306(h)(3) to read that borrowers may withdraw 25 
percent of the interest earned on a reserve account during the prior 
year. The Agency believes this clarifies its position sufficiently. The 
Agency appreciates the second commenter's support of its position.
    Topic: One commenter said that borrowers should not be able to take 
25 percent of the earned interest out of the reserve account because 
interest earned is not phantom income; the interest is income earned on 
an asset, thus increasing the asset. The commenter continued that the 
value of the asset is higher because the interest is left with the 
property, and that there is already a problem with the reserve accounts 
not being adequate to cover needed capital improvements. Another 
commenter said that 25 percent of the interest earned only be given to 
the owner if the actual annual deposit to the account exceeds this 
amount.
    Response: The Agency appreciates the commenters' position but does 
not agree that the disposition of the interest earned on the reserve 
account should be limited per the commenters' suggestions. The Agency 
understands that paying taxes on phantom income is a disincentive for 
staying in the program and that allowing borrowers to receive a portion 
of the interest income earned on the reserve accounts helps to mitigate 
this disincentive. The Agency expects that 100 percent of the interest 
earned on the account will be deposited to the account. Twenty-five 
percent of that amount is available for withdrawal. The Agency will 
monitor this new policy and determine if any change is necessary.
    Topic: Regarding allowable project expenses, several commenters 
stated that costs incurred in connection with alleged civil rights 
abuses by the borrower should be allowable project expenses if the 
borrower is not guilty. Other commenters said that the language in 
Sec.  3560.303(b)(2)(v) is overly restrictive because if a judge 
overturned a management agent's eviction action, it would be for a 
violation of some portion of landlord--tenant law. The commenter said 
that regardless of how minor or insignificant the violation is, this 
would prevent the owner from billing the legitimate legal fees to the 
project; if owners end up paying for such legal fees, they will be less 
likely to pursue such actions, which might have a detrimental effect on 
other tenants.
    Response: While the Agency takes civil rights abuses very 
seriously, it acknowledges that the borrower should not be required to 
pay for costs associated with frivolous lawsuits. Section 
3560.303(b)(2)(v) has been revised to remove the term evictions and now 
states only that borrowers must pay for fines, penalties, and legal 
fees when they are found guilty of civil rights or other violations.
    Topic: One commenter said that the proposed rule states that 
authorized purposes for project funds are described in the rule, but 
felt that Sec.  3560.303(b) is not specific enough.
    Response: The Agency acknowledges the commenter's concern. 
Allowable and unallowable project expenses are discussed in greater 
detail at Sec.  3560.303(b) of the interim final rule.
    Topic: Several comments were received on project payment for tenant 
services. One commenter said that the proposed rule should spell out 
the limits on how much project funds can be budgeted for tenant 
services. Another commenter suggested adding a section to the rule that 
allows a project controlled by a nonprofit corporation or public body 
to utilize operating revenues to pay for tenant services that enhance 
the tenant's quality of life. An additional commenter said that the 
value of tenant services in creating a healthy community is recognized 
by the MFH industry and that the Agency

[[Page 69076]]

encourages these services but does not allow them to be paid for from 
operating costs. A commenter said that HUD's project reengineering 
program allows tenant services to be paid for by project operating 
funds and that nonprofit organizations should be allowed to expense 
tenant services that enhance the tenant's quality of life (e.g., 
computer rooms, afterschool programs, etc.).
    Response: The Agency has considered the comments but has decided to 
retain the language from the proposed rule at this time until it has 
time to further evaluate this issue.
    Topic: One commenter noted that Sec.  3560.302(c)(5)(iii) should 
state that uses of funds for nonprogram purposes does constitute a non-
monetary default, not that it ``may'' constitute a non-monetary 
default.
    Response: The Agency thanks the commenter for highlighting this 
issue and has made this change in the interim final rule.
    Topic: The Agency received several comments on asset management 
fees. One commenter said that the proposed rule does not provide a 
definition for asset management fee. The commenter suggested that to 
facilitate the acquisition of Rural Development housing by nonprofit 
organizations, a reasonable and customary asset management fee be 
established; additionally, payment of asset management fees is 
inconsistent throughout the country. Another commenter asked the Agency 
to clarify that nonprofit organizations can obtain asset management 
fees consistent with current practice. However, one commenter strongly 
disagreed with allowing an asset management fee for nonprofit 
organizations. Another commenter said that the Agency should allow 
asset management fees as an allowable project expense as required by 
third-party entities, in conjunction with grants, loans, or equity.
    Response: The Agency acknowledges the commenters' concerns. The 
Agency is not adopting a definition of ``asset management fees'' nor 
setting a ``reasonable and customary management fee'' because it feels 
this concept is sufficiently delineated in the provisions of this rule. 
The Agency allows nonprofit organizations to use housing project funds 
as asset management expenses directly attributable to ownership 
responsibilities. Section 3560.303(b)(1)(ii) of the interim final rule 
delineates the purposes of the asset management fee, which are 
reasonable and customary costs incurred by nonprofit organizations. 
While the Agency acknowledges commenter's disagreement, it also 
recognizes that small nonprofit organizations often cannot afford to 
cover the time to perform property oversight functions or errors and 
omission insurance, and this oversight and coverage is important to 
ensuring the viability of the property.
    Topic: Several commenters stated that supervised bank accounts are 
too cumbersome. Some of these commenters also stated that certain banks 
would no longer accept responsibility for dual signature accounts. 
Several individuals thought that the Agency micromanages reserve 
accounts because the borrower must submit a request for withdrawal of 
reserves to the local USDA office for review and approval with 
supporting documentation for eligible replacement items or residual 
receipts. Another commenter said that HUD and other affordable housing 
funders allow borrowers to operate their reserve accounts as legitimate 
needs dictate. Another commenter recommended that borrowers should be 
given more control over management of the reserve accounts, with USDA 
reviewing and verifying the accounts on a semiannual or annual basis.
    Response: The Agency acknowledges the commenters' concerns. The 
Agency has determined that these requirements are necessary to enable 
RHS to meet its fiduciary responsibility to ensure that these funds are 
used for the purposes for which they were intended. The Agency does 
recognize, however, that technological and other changes may require 
different techniques to ensure the Agency's security. The Agency will 
review possible acceptable alternatives for the dual signature 
requirement. The Agency does not believe that (1) it micromanages 
reserve or operating accounts, (2) the requirements it imposes are 
unreasonable or cumbersome, and (3) that it can give borrowers more 
control over the management of the reserve accounts * * *
    Topic: One commenter noted that the postapproval requirement 
contained in Sec.  3560.306(h)(5) should be discretionary with the 
Agency, but ``extraordinary circumstances'' should be revised to 
accommodate emergencies where prior approval is not practical and where 
there are delays in Servicing Office approvals.
    Response: The Agency has revised the regulation at Sec.  
3560.306(g) to respond to emergency situations and will include further 
direction in internal Agency procedures. The Agency wants to emphasize 
that it has a fiduciary responsibility to ensure that these funds are 
used for the purpose for which they were intended.
    Topic: Several comments were received on pre- and postapprovals of 
project reserve funds. One commenter said that to require preapproval 
of all expenditures from reserve accounts in unnecessarily burdensome; 
current practices at both HUD and many State housing agencies allow for 
postreporting in many instances--for instance, below a certain 
threshold dollar amount. The commenter recommended that the Agency 
modify this requirement to allow for postreporting of expenditures when 
the dollar amount is budgeted or when the amount is less than $10,000. 
Conversely, another commenter said that a bad precedent will be set if 
the Agency begins to post-approve withdrawals from the reserve account 
based on the funds' being used for authorized purposes and having been 
approved by the Agency anyway, even if the proposed rule says that 
these will be approved only under ``extraordinary circumstances.''
    Response: The Agency has revised Sec.  3560.306(g) of the interim 
final rule to state that borrowers must inform the Agency of planned 
withdrawals when the project's budget is prepared. The Agency has not 
adopted a threshold requirement because the Agency feels it needs to 
evaluate program use and categorization of reserve accounts and due to 
the extensive problems the Agency has had with reserve accounts. In 
addition, the Agency has deleted from the interim final rule the 
statement in Sec.  3560.306(g)(5) that it may postapprove the use of 
reserve funds only under extraordinary circumstances.
    Topic: Numerous comments were received on Sec.  3560.306 regarding 
the required deposits to the project's reserve accounts. The comments 
were similar to those described in the comments to subpart B.
    Response: For the Agency's response, please refer to the discussion 
in the comments to subpart B.
    Topic: Several commenters said that the proposed rule states that 
the required deposit amount will be an amount needed to maintain the 
property. They said that the methods of determining the amount need to 
be described in the program handbooks, or everyone will deposit the 
current 10 percent of the loan amount. The Office of Rural and 
Farmworker Housing agrees that maintenance reserve requirements should 
be revised (Sec. Sec.  3560.65 and 3560.306). They said that history 
seems to indicate that the current one percent per year required 
contribution is insufficient; for the Agency to continue using one 
percent as a base would seem to invite the problems of the past, as 
some say this

[[Page 69077]]

amount is too high and some say it is too low. One commenter believed 
that the correct approach would be flexible and tied to the new 
requirement for including life-cycle cost analysis in the design and 
specifications of the proposed project (Sec.  3560.60(c)) and suggested 
that there should be two bases for funding the reserve accounts:
     One percent per year for 15 years for projects using 
materials with longer lives, such as brick siding and long-life heating 
equipment. During year 15, future maintenance needs would be calculated 
and the reserve conditions changed up or down as appropriate. In some 
cases, excess reserves should be returned to the owner as appropriate.
     One-and-a-half percent per year for 10 years for projects 
using average designs and specifications, with reevaluation performed 
during or after year 10.
    Response: RHS has decided to publish an interim final rule that 
does not include Sec.  3560.103(c)(3) and Sec.  3560.306(k)(1) of the 
proposed rule, until their impacts can be assessed and policy decisions 
can be made for a long-term strategy. For the interim final rule, the 
Agency incorporated the relevant language from the existing regulation 
(7 CFR part 1930, subpart C).
    Topic: Several commenters said that while increasing maintenance 
reserves will increase rents and therefore rental assistance costs in 
the short term, these increases should be balanced by smaller increases 
in the long run. They thought that the potential for deferred 
maintenance is more critical than the need for additional rental 
assistance with respect to the program's long-term success and its 
ability to serve the lowest-income rural residents.
    Response: The Agency is in the process of evaluating the capital 
needs of the properties in the portfolio. However, over half of the 
residents in Agency-financed properties receive rental assistance; more 
than 93 percent of our residents are very low income and earn less than 
$10,000 a year. Rental assistance will continue to be a very important 
component in the long-term success of the RHS MFH programs.
    Topic: One commenter said that the proposed rule reads as if future 
reserve requirements would be imposed on existing projects, which may 
require an agreed upon change to the loan agreement by the owners. 
Regardless, this commenter thought that this is only possible if the 
Agency increased rental assistance and allows liberal rent increases. 
While the commenter wanted to see well-capitalized properties, 
additional reserves simply cannot be expected without more income being 
provided to the projects.
    Response: The Agency refers the commenter to the response for the 
two preceding topics.
    Topic: One commenter asked the Agency to allow borrowers the 
flexibility to deposit funds irregularly over the course of the year, 
as long as they achieve the required annual deposit.
    Response: The Agency agrees with the commenter's suggestion and has 
revised Sec.  3560.306(c) of the interim final rule to address this 
comment and it is based on the language in the loan agreement as to the 
timing of deposits into the reserve account.
    Topic: The Agency received a number of comments on the requirements 
for disposition of surplus operating funds and excess reserve account 
funds. Several commenters stated that excess reserve funds should be 
transferred to the property's operating account. Other commenters 
contended that borrowers should be allowed maximum flexibility in using 
surplus funds for the benefit of the project and that the borrower 
should be able to use excess reserves to make repairs and capital 
improvements and cover unexpected costs or unanticipated cost 
increases--in other words, for any project purpose when needed or to 
pay the return on investment. They thought that this language makes use 
of the excess reserves more restrictive than the use of reserves. 
Several commenters said that when a determination of surplus funds is 
made, it should take into account the upcoming year's budget of the 
project. One commenter said with regard to Sec.  3560.306(d)(2) that 
rather than saying that if the housing project's general operating 
account has surplus funds at the end of the project's fiscal year, the 
Agency may require the borrower to use the funds to address the 
project's capital needs, with the word ``may'' being replaced with the 
word ``will.''
    Response: The Agency appreciates these comments and has made 
several modifications to Sec.  3560.306(d) in the interim final rule. 
These modifications should add flexibility to the requirements for 
transferring excess operating funds to the reserve account and 
determining whether the borrower is entitled to take a return on 
investment. The Agency has also revised Sec.  3560.306(d)(2) in the 
interim final rule to read that the Agency will require the use of 
surplus operating funds to address the project's capital needs. Excess 
funds should be deposited to the reserve account because so doing: (1) 
Maintains Agency control and oversight; and (2) ensures these funds are 
readily available for capital expenses and emergency needs. Use of 
surplus reserves is outlined in Sec.  3560.306(k), all for the benefit 
of the project. Internal Agency procedures require evaluation of the 
upcoming project budget with reviewing surplus reserves.
    Topic: A commenter asked if the priorities for using excess reserve 
funds shown in Sec.  3560.306(l) are in order of importance.
    Response: The Agency wishes to clarify this issue and has modified 
Sec.  3560.306(k) of the interim final rule to read: ``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, for any of the 
following.''
    Topic: Several commenters stated that under Sec.  3560.306(d)(1), 
the Agency seeks to keep excess funds to a maximum of 10 percent of the 
budget, which causes many properties to operate more thinly than is 
recommended and puts a property at financial risk to the normal 
vagaries of operations. They thought that prudent industry servicing 
should permit several months of funds to accumulate.
    Response: The Agency thanks the commenters for their suggestions 
and has revised the interim final rule to state that the general 
operating account will be considered to contain surplus funds when the 
balance at the end of the project's fiscal year exceeds 20 percent of 
the budget. This can be found at Sec.  3560.306(d)(1) of the interim 
final rule.
    Topic: With regard to the requirements of initial operating 
capital, the Agency received a substantial number of comments. Comments 
received were similar to those described in the comments to subpart B. 
Several commenters said that the rule allows the developer to take the 
initial operating capital in more than one withdrawal within the 2- to 
13-year period after a property is built, which decreases the 
developer's incentive to have a successful project as soon as possible. 
To these commenters, it appeared that there may be conflicting 
information as the summary indicates 2 to 7 years, while Sec.  
3560.304(c)(2) allows the developer 2 to 13 years to take the initial 
operating capital. Some commenters approved of this timeframe; some 
thought it was too short, and some thought it was too long.
    Response: There was an error in the proposed rule and it should 
have stated that the developer may take the initial operating capital 
in more than one withdrawal in years 2 through 7, with

[[Page 69078]]

Agency approval. This can be found at Sec.  3560.304 of the interim 
final rule.
    Topic: Some commenters expressed skepticism regarding the benefits 
of this proposed rule change. One commenter questioned if there is an 
element of the borrower's desire to max out profit. The commenter went 
on to say that in today's market, owners are receiving an eight percent 
rate of return on their investment in their property, while the best 
any bank will do is a two or three percent.
    Response: The Agency acknowledges the commenters' concerns but 
believes that the proposed rule change is more equitable to borrowers. 
Therefore, the Agency has not revised its regulatory language in the 
interim final rule.
    Topic: Several comments were received on the Agency's requirements 
for project bank accounts. Most of these comments contended that the 
regulation should be permissive enough to allow for establishing 
accounts required by other funding sources, over and above the four 
that RHS requires. Another commenter said that Sec.  3560.302(c)(5)(v) 
should be reworded to clarify whether commingling of accounts is 
acceptable between projects owned by the same borrower, or project 
owned by different borrowers but operated by the same entity. Another 
commenter said that the proposed rule states in Sec.  3560.302(d)(1) 
and (d)(2) that the borrower may combine two or more housing project 
accounts, and in (d)(3) it says that they cannot if they are managed by 
the same management company. One commenter asked whether nonprofit 
organizations could have all program funds through one account as long 
as they are tracked separately for each program; if this is the case, 
the commenter wanted to see separate operating and maintenance accounts 
for the housing program, along with separate reserve accounts for each 
project.
    Response: The Agency acknowledges the commenters' concerns. Section 
3560.302(c)(3) in the interim final rule identifies permitted accounts, 
including account required by third-party lenders. The Agency has also 
revised Sec.  3560.302(c)(5)(v) in the interim final rule to state that 
borrowers, including nonprofits, may operate one account for multiple 
projects as long the funds for each project are accounted for 
separately. Management companies may not commingle funds for multiple 
properties. This can be found at Sec.  3560.302(d)(3).
    Topic: Several commenters believed that the collateral requirements 
for project accounts are too restrictive. One commenter said that the 
Agency's proposal to use the cash in reserve accounts as security for 
the Agency's loan does not address the issue of multiple lenders on 
projects. The individual thought that this requirement should be 
amended to address the mechanism to be used when multiple lenders, 
including the Agency, require this type of security. Some additional 
commenters expressed concern that the proposed rule does not address 
circumstances when borrowers have not adequately collateralized 
accounts that exceed the Federal Deposit Insurance Corporation (FDIC) 
insurance limit of $100,000. Other commenters noted that the proposed 
rule continues and expands 7 CFR 1902.4(a)(5) to require collateral 
pledges for not just reserve accounts, but for all project accounts. 
They stated that this is a cumbersome, time-consuming, and an 
unnecessary requirement. They favored simply continuing 7 CFR 
1902.4(a)(5), which allows more flexibility because a collateral pledge 
only applies to reserve accounts, and even then a collateral pledge is 
not required if the financial institution has its accounts insured 
against theft and dishonesty. The commenter believed that the 
requirement for collateral pledges should be removed.
    Response: The Agency notes the commenters' concerns. The Agency 
feels that security issues involving multiple lenders should be handled 
on a case by case basis. Regarding the comment concerning inadequate 
collateralization, the Agency makes an independent assessment of 
collateralization. If the Agency were to determine that the accounts 
were inadequately collateralized, then it would treat this as a non-
monetary default. The Agency does not believe the collateral 
requirements are too restrictive. An alternative to collateral pledges 
are multiple accounts under $100,000. Regarding the comment that 
collateral pledges now apply to all project accounts: that has always 
been the case. No change was made in this rule and the Agency continues 
to believe it is necessary to have these accounts pledged to support 
the loan. The identified collateral requirements establish a minimum 
threshold for protecting the Government's financial interest.
    Topic: The Agency received several comments on this subpart related 
to life-cycle cost analyses. Comments received were similar to those 
described in the comments to subpart B.
    Response: For the Agency's response, please refer to this 
discussion in the comments for subpart B.
    Topic: One commenter expressed concern that little is stated in the 
proposed rule concerning vacancies when preparing project budgets. 
Another commenter said, however, that the vacancy rate should be capped 
at 10 percent for properties with 15 or fewer units. Vacancies for 
properties with more than 15 units should have a maximum vacancy rate 
of 15 percent. Another commenter said that vacancies should be 
realistic given the project's history, but history is not defined.
    Response: The Agency thanks the commenters for their observations. 
The methods for budgeting vacancy rates vary depending on each 
project's occupancy history and cannot be capped or based on number of 
units in the property. The Agency will provide additional details in 
its program procedures.
    Topic: One commenter said that, as an alternative to management 
fees, the regulation should allow an administrative fee, possibly as a 
state's option. For example, in Mississippi, the management company is 
paid an all encompassing administrative fee that is intended to cover 
salary, paperwork, postage, etc., with the exception of training and 
auditing. The commenter noted that other states also use this system, 
and in all cases the reduction in micromanagement results in a much 
smoother cooperation between management companies and Agency personnel.
    Response: The Agency thanks the commenter for this observation. The 
Agency understands the utility of having the property pay for a 
specific bundle of services for management and/or administrative 
services. The Agency describes this bundle of services in Sec.  
3560.102 (i)(3) of the interim final rule. However, the Agency cannot 
adopt this comment because it wants a nationwide, consistent fee 
structure through the management fee process rather than individual 
``state options'' of administrative fees.
    Topic: One commenter said that there must be ways for management 
companies to do a better job at being more frugal with their project 
budgets. Another commenter said that audits are reviewed on a first-
come, first-served basis; there are so many to review in a short period 
of time in addition to other work demands. The commenter felt that 
there are opportunities for management companies to improve on their 
financial management during the year to avoid issues and questions 
during auditing times, as well as for auditors to provide clearer 
explanations on sources of expenditures or findings.
    Response: The Agency thanks the commenters for sharing these 
concerns. The Agency designed the interim final

[[Page 69079]]

rule to provide guidelines to ensure that borrowers manage their 
properties as effectively and efficiently as possible.
    Topic: One commenter said that if a borrower chooses to advance 
funds to properties to meet short-term needs, then the Agency should 
accommodate repayment. The commenter believed that the limited return 
limits the ability to repay advances even if funds are later available, 
and that RHS should allow owners a priority repayment to encourage 
advances to protect operations.
    Response: The Agency appreciates the comment. The Agency has 
modified the regulation and allows repayment of such advances to 
projects to meet short-term needs, but prior Agency approval is 
required. This can be found at Sec.  3560.307 of the interim final 
rule.
    Topic: With regard to the borrower's financial management of 
Agency-financed multi-family housing, one commenter said that adequate 
documentation must be defined so it is objective, not subjective. This 
individual believed that adequate documentation should mean supporting 
documentation such as invoices, general ledger receipts, or other 
readily available information to support the books and records.
    Response: The Agency thanks the commenter for this observation. 
Section 3560.302 of the interim final rule sets forth the Agency's 
basic requirements for project accounting, bookkeeping, budgeting, and 
financial management systems. ``Adequate'' or ``supporting'' 
documentation is any documentation required to substantiate the books, 
records and accounting systems.
    Topic: One commenter noted that the requirement to notify tenants 
of rent increases should be compatible with State and local laws, and 
that there is no need for longer notification periods. Another 
commenter mirrored this concern and said that a 105-day notification 
period is too long, especially as rent increases would not be approved 
unless they were necessary and justified. The commenter believed that 
the current requirement for 60 days should be continued subject to 
State law.
    Response: The Agency appreciates the commenters' concerns. As 
stated previously, the Agency has revised the budget submission 
timeline so that the process in the interim final rule is similar to 
that of the existing budget submission/tenant notification timeline. By 
revising some target dates, the Agency gives the tenant 90-day 
notification of the impending rent increase. Generally, State laws 
require a shorter timeframe for notification to tenants, so the 90-day 
period should provide adequate notice.
    Topic: Several commenters said that, in principle, they agree with 
the Agency's requirement to tie reserve for replacement deposit amounts 
to capital needs assessments, but that this policy could be used by 
borrowers to inflate project rents.
    Response: RHS has decided to publish an interim final rule that 
does not include Sec.  3560.103(c)(3) and Sec.  3560.306(k)(1) of the 
proposed rule, until their impacts can be assessed and policy decisions 
can be made for a long-term strategy. For the interim final rule, the 
Agency incorporated the relevant language from the existing regulation 
(7 CFR part 1930, subpart C).
    Topic: Several commenters noted that the Agency is not always in 
the senior debt position and that any senior debt needs to be reflected 
as a priority over Agency debt; since the Agency is allowing 
conventional loans to be in the senior debt position, this needs to be 
reflected throughout the regulations as necessary. Another commenter 
said that this is critical if the Agency wishes to continue leveraging 
other sources of debt, which is necessary given low program funding 
levels.
    Response: The Agency appreciates the commenters' concerns and has 
revised in the interim final rule Sec.  3560.303. This paragraph states 
that the first priority of planned and actual budget expenditures is 
the senior position lienholder, if any.
    Topic: One commenter said that the proposed rule should explain the 
appeal rights available to the borrower if the borrower's proposed 
budget is rejected.
    Response: While the Agency acknowledges the commenter's concern, 
the borrower's appeal rights are covered in Sec.  3560.9 of the interim 
final rule and in greater detail in 7 CFR part 11.
    Topic: Several commenters noted that some of the regulatory 
citations were incorrect:
     In Sec.  3560.306(f), the section references should be 
Sec.  3560.65 and Sec.  3560.302(c)(5). Section 3560.305(f) should be 
changed to Sec.  3560.306(f).
     Section 3560.306(m) references Sec. Sec.  3560.102(c), 
(d), and (i). The correct references appear to refer to Sec. Sec.  
3560.102(g), (j), and (k).
     Section 3560.306(f) regarding funds invested in securities 
should refer to Sec.  3560.306(g) instead of Sec.  3560.305(f).
    Response: The Agency thanks the commenters for their suggestions 
and has made these changes to the interim final rule.
    Topic: One commenter said that Sec.  3560.306 of the proposed rule 
needed ``grammatic cleanup'' and has ``many long, run-together 
thoughts.''
    Response: The Agency acknowledges the commenter's concern and has 
substantially revised Sec.  3560.306 in the interim final rule to be 
much clearer and more concise.
    Topic: There were several comments about the Agency's proposed 
guidelines for investing reserve for replacement funds. Two commenters 
said that the proposed rule establishes very narrow guidelines for 
investing reserve funds--State- and Federal-backed securities and AAA-
rated tax-exempt bonds. They thought that this latitude should be 
expanded to include investment funds commonly used by State and local 
Governmental organizations. For instance in California, housing 
authorities and public bodies routinely place funds in the Local Agency 
Investment Fund (LAIF). The commenters felt that such prudent State-
sponsored investment funds should be allowable investments. In West 
Virginia, the monitoring and maintenance of investments necessitate 
significant staff time; significant losses have occurred in West 
Virginia when CDs have been pledged as security for nonproject loans.
    Response: The Agency appreciates the commenters' concerns and has 
revised Sec.  3560.306(f) in the interim final rule to allow for more 
flexibility in the investment of reserve funds but still requires 
reserves to be held at a Federally insured domestic institution. This 
policy ensures that the Agency maintains its fiduciary 
responsibilities.

Subpart H--Agency Monitoring

    Topic: One commenter asked that the Agency revise the regulatory 
language in Sec.  3560.352(c)(3) and in Sec.  3560.352(b)(4) to remove 
``the Fair Housing Amendments Act of 1988'' because this language is 
redundant with language earlier in the paragraph.
    Response: The Agency appreciates the comment and has revised the 
regulatory language in both Sec.  3560.352(c)(3) and Sec.  
3560.352(b)(4) to incorporate this suggestion.
    Topic: Several comments were received regarding the Agency's 
monitoring techniques and borrower responsibilities. Commenters 
suggested including information related to inspections, supervisory 
visits, triannual supervisory visits, and compliance reviews in the 
final rule. One commenter expressed concern that the proposed rule did 
not describe how often onsite monitoring reviews would be performed nor 
the specific review procedures. However, another commenter expressed 
appreciation that the Agency did specify the frequency of monitoring 
activities in the proposed

[[Page 69080]]

rule because it gives the Agency the flexibility to ``focus on the most 
important tasks and problem cases.''
    Response: The Agency purposefully did not include the specific 
procedures in the interim final rule's regulatory language, as was 
suggested by the commenters, in order to retain regulatory flexibility. 
However, the Agency describes its monitoring activities (e.g., timing 
of monitoring activities, items examined during monitoring activities) 
in its internal Agency procedures, which have been updated in 
conjunction with the issuance of the interim final rule.
    Topic: Several commenters were concerned about the policy of 
scheduling onsite monitoring reviews without giving the borrower prior 
notice and whether the Agency has the right to enter private property 
without providing notice to property owners. The commenters requested 
some assurance for borrowers that tenant-landlord law will be followed. 
One commenter noted that onsite visits without notice could subject 
owners to greater insurance liability claims, and requested that 
borrowers ``receive protection, financial and otherwise, from the 
Agency for any claims from tenants regarding a violation of their 
privacy rights based on the actions of Agency staff.'' Another 
commenter suggested that staff seeking access for an Agency review 
should have some standard of notice as any unit inspection must comply 
with local tenant-landlord law to not disrupt either property 
operations or residents' homes.
    Response: The Agency recognizes the commenters' concerns. The 
proposed rule specifies: ``Generally, the Agency will provide the 
borrower prior notice of an onsite monitoring review * * *.'' In the 
interim final rule, the Agency has retained the authority to conduct 
onsite reviews without prior notice because RHS needs the flexibility 
to conduct these reviews in cases where it is not feasible to reach the 
borrower or give the borrower prior notice. The Agency has no interest 
in causing the borrower or the tenants any discomfort about the 
inspection process. We respect the tenant's rights to privacy and the 
landlord's responsibility to manage the property without interference 
from the Agency. However, there may be isolated instances in which the 
Agency needs to inspect the property or a unit as part of an emergency 
to protect the health and safety of the resident population and 
therefore the Agency reserves this right.

Subpart I--Servicing

    Topic: One commenter indicated that the proposed rule gives almost 
no attention to the problems associated with a significantly reduced 
Agency budget. The commenter also stated that the proposed rule does 
not adequately take into account the extent of leveraging of funds that 
currently occurs in the program and that has increased substantially in 
recent years. The commenter believed that the Agency's policies tend to 
reflect the same perspective as when the Agency provided 100 percent of 
the funding. The commenter recommended that the regulation's servicing 
requirements be relaxed or waived when other funding sources are 
participating in a project.
    Response: The Agency acknowledges the commenter's concern. However, 
the Agency wants to emphasize that it has made a number of changes in 
both its requirements and procedures for flexibility when multiple 
funding sources are involved in a project. There has been language 
added to Sec.  3560.406 of the interim final rule that acknowledges the 
use of third-party loans and the ability to subordinate Agency loans. A 
change in internal Agency procedures is allowing the Agency to use 
appraisal reports and capital need assessments (CNA) from other funding 
sources provided the appraisal and ``CNA'' meet the guidelines as 
established by the Agency. The combination of these actions will reduce 
the duplication of work needed to finance these deals and expedite the 
current time frames.
    Topic: Several comments were received on Sec.  3560.405 and its 
requirement for borrowers to certify annually that there has been no 
change to the ownership entity. Commenters said that reporting 
organizational changes to the Agency would be unduly burdensome. Others 
were opposed to having proposed organizational changes approved by the 
Agency.
    Response: The Agency does not require annual reporting but does 
require annual certification by the borrower. Only changes in the 
organizational structure need to be reported. Further, Agency approval 
is only required prior to a change in the controlling interest of the 
ownership entity. This responsibility is already a requirement under 
existing regulations, and these requirements provide the Agency with 
information that is fundamental to RHS in maintaining borrower 
accountability and ensuring compliance. For this reason, the Agency has 
made no change to this requirement in the interim final rule.
    Topic: Regarding Sec.  3560.405(a)(2), the commenters requested 
clarification to the definition of ``substantial influence.'' To 
illustrate potential points of confusion, a commenter asked whether a 
limited partner with limited control rights that buys a 99 percent 
ownership interest or an instance of upper-tier syndicated ownership, 
such as the general partner of the 99 percent limited partner of the 
ownership entity, would be seen to exercise substantial influence. In 
both instances, the commenter believed that such entities may not exert 
substantial influence and asked that the Agency clarify this term. 
Another commenter asked whether the paragraph indicated that a 
management company had a controlling interest.
    Response: The Agency has removed this paragraph. The guidance of 
the phrase ``controlling interest'' in Sec.  3560.405(a) should be 
sufficient to describe a general partner in a limited partnership 
entity, rather than non-controlling limited partners or management 
agents.
    Topic: One commenter addressed the Agency's limited recourse when a 
borrower makes a change in ownership or transfer of ownership interest 
without Agency consent as outlined in Sec.  3560.406(b). The commenter 
advised that when a borrower makes a change in organizational structure 
or transfers a title without Agency consent, the Agency should have the 
power to subject the project to restrictive-use provisions; moreover, 
if the new ownership entity or transferee will not execute a 
restrictive-use agreement, then the Agency should take steps to 
judicially impose such restrictions on the project.
    Response: Failure to obtain Agency approval for a change in 
ownership or transfer of ownership interest is considered a default and 
handled in accordance with subpart J of the regulation. Subpart J of 
the regulation covers Special Servicing, Enforcement, Liquidation and 
Other Actions. A noncompliance issue of this nature could constitute 
the initiation of the liquidation process, or lesser penalties such as 
subjecting the borrower to civil money penalties provided in the new 
regulations. The imposition of a restrictive-use agreement does not 
deter someone from conducting this type of activity without prior 
approval. An action of this nature must be handled in accordance with 
the section of the interim final rule that imposes actions against 
owners who undertake actions without prior Agency approval.
    Topic: The Agency received a comment recommending a change to the 
proposed rule allowing an exception to the processing limitations 
contained in Sec.  3560.406(b)(2) for partners that were not present 
during a default or recent

[[Page 69081]]

substitution of partners approved by Rural Development.
    Response: The Agency acknowledges the commenter's concern but the 
reference citation provided refers to ``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''. The citation does not reference the presence of members 
during a default or recent substitution of partners.
    Topic: Numerous comments were received asking the Agency to 
streamline its property transfer process. These comments included 
suggestions that there should be expedited processing of those 
transfers where purchasers seek to preserve affordable housing or 
rescue troubled properties. Several commenters said that to expedite 
the transfer process, environmental reviews should not be required when 
existing security property is being transferred.
    Response: The Agency agrees with the intent behind many of the 
comments. The Agency is implementing procedural steps to streamline the 
transfer process. While the Agency acknowledges the commenters' concern 
about requiring an environmental review for all properties being sold, 
it has made no change because such a review is an established 
requirement of 7 CFR part 1940, subpart G.
    Topic: Comments received by the Agency advocate for a firm time 
limit for processing transfers. One comment suggested a minimum of 60 
days for processing. Others suggested that within 90 days of the 
submission of a transfer application, the appropriate State Office must 
process and approve or reject the application, and if the office 
rejects the application, then it must provide specific reasons and 
suggestions for approval. The commenter felt that if such action is not 
taken, then the Agency should allow applicants to pursue their 
application with the National Office.
    Response: The Agency appreciates these comments but has not 
incorporated arbitrary processing timeframes in this interim final 
rule. While the Agency is committed to processing transfers as 
expeditiously as possible, the coordination of resources and action of 
all participants in the transactions makes the imposition of deadlines 
in all cases difficult and unreasonable.
    Topic: With respect to the transfer of ``at risk'' properties, 
several commenters stated that the policy for the transfer and 
assumption of at risk MFH projects should be clearly defined in the 
proposed rule.
    Response: The Agency appreciates these comments and notes that 
Sec.  3560.406(b)(1) states: ``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.'' Currently, this is the extent to which the Agency will go 
toward establishing a definition for at risk properties.
    Topic: The Agency received comments that suggest at the closing of 
escrow accounts, the balance in each of the operating, tax and 
insurance, and reserve accounts should be released to the transferor, 
provided the transferee fully replaces the funds in each account.
    Response: The Agency notes this concern and has revised the 
regulatory language to allow for the release of the reserve to the 
transferor. The release of these funds is contingent on the new owner 
funding the reserve account in an amount sufficient to cover the 
project's immediate needs.
    Topic: Comments were received on the Agency's requirement for 
restrictive-use provisions for transferred properties. Several 
commenters said that purchasers should not be bound by these 
restrictions because doing so penalizes buyers and sellers seeking to 
stay in the program without further accommodation, by increasing the 
use restrictions. One commenter said that the Agency should track the 
format of HUD Notice 00-8 (available from HUD) for preserving section 
236 properties. Another commenter noted that the proposed rule does not 
institute any new requirements with regard to restrictive-use 
provisions. The commenter went on to state that subordination is a 
serious servicing action and should carry with it a requirement for a 
new, extended restrictive-use agreement.
    Response: While the Agency acknowledges the commenters' concerns, 
the Agency has made changes in the process throughout Sec.  3560.406 to 
allow for equity at the time of transfer based on the period of time 
the borrower is willing to agree to restrictive-use provisions. Also at 
the time of transfer, it is the Agency's goal to have a Capital Needs 
Assessment completed and all necessary work completed through 
rehabilitation. It is the aim of the Agency to extend the useful life 
of the property through rehabilitation at least through the 
restrictive-use period. The transfer process is being utilized to 
preserve the existing portfolio for years to come and provide the 
needed housing for those who otherwise could not afford it. The Agency 
has made no changes to Sec.  3560.406(g) of the interim final rule. The 
Agency will continue to monitor this requirement to assess whether it 
serves to discourage transfers, which help preserve the supply of 
affordable housing.
    Topic: Summarizing the views of several commenters, one commenter 
suggested that Sec.  3560.406 ``should provide a form use restriction 
agreement that can be amended for form for local legal and recording 
requirements.'' Commenters also suggested that when purchasers agree to 
both use such a form and extend existing use restrictions, then the 
purchaser should be able to obtain other Federal, state or local 
financing to pay for purchase and rehabilitation. They thought that RHS 
should agree to subordinate and, if requested, reamortize its existing 
section 515 loan. The commenters suggested that the Agency refer to HUD 
Notice 00-8 (available from HUD) for more information on such a 
transfer structure.
    Response: In Sec.  3560.406 of the interim final rule, the Agency 
encourages the use of third-party financers in order to preserve 
affordable housing. This includes clarifying process requirements such 
as determining capital needs and simplifying servicing actions such as 
subordination or reamortization requests. The Agency streamlined the 
transfer process utilizing a new processing checklist to be used by 
Agency personnel for transfers which should expedite these type 
transactions.
    Topic: The Agency received a comment suggesting that changes in or 
transfers of MFH ownership should only be approved by the Agency in 
cases where further availability of housing would be in the best 
interest of the resident and the Federal Government.
    Response: The Agency appreciates this comment and has outlined a 
process to determine if the transfer would be in the best interest of 
the government in Sec.  3560.406. This process takes into account 
current market conditions, need for the existing housing, existing 
condition of the property, and cost to rehabilitate the property in 
order to preserve the property for years to come. The Agency believes 
that the requirements regarding ownership transfer and sales adequately 
protect the Government's interest and the availability of affordable 
housing.
    Topic: The Agency received comments on appraisals and security

[[Page 69082]]

issues. Several commenters questioned the use of the ``as-improved 
value'' for security property to be transferred. Several comments 
recommended using ``as-is market value.'' One commenter stated: ``There 
should not be a $100,000 limit as long as the approval official 
documents that security is adequate,'' a concern echoed by several 
other commenters. One commenter urged that the word ``market'' be 
deleted from Sec.  3560.406(d)(3)(i) because it creates confusion. 
According to the commenter, the value of the housing project should be 
a ``prospective value-in-use,'' not a ``market value.'' Other comments 
concerned the rights of purchasers to obtain an appraisal.
    Response: The Agency acknowledges these concerns regarding the use 
of appraisal terminology and throughout Sec.  3560.406, it has made 
revisions as necessary and appropriate. The requirements for 
determining the value of security property have been clarified and may 
be found in subpart P of this part. To determine what is in the best 
interest of the Government, the Agency determined that the appraisal 
process is necessary when the value of the property exceeds $100,000.
    Topic: Reflecting several commenters' concerns, one commenter said: 
``The subordination of interest or a junior lien will not cause the 
debt from all sources to exceed the value of the security property; 
however, total debt should be allowed to exceed the value of the 
property on a temporary basis during rehabilitation, provided the 
transferee can demonstrate that permanent financing will not exceed the 
value of the property.''
    Response: The Agency acknowledges this concern but has made no 
change because it believes that permitting total debt to exceed the 
value of the property fails to adequately protect the government's 
interest. This issue is addressed adequately in Sec.  3560.409.
    Topic: A commenter stated that CRCU should apply to initial loans, 
as well as to transfers.
    Response: The Agency has made no change because initial loans are 
subject to CRCU as described in subpart B of this part.
    Topic: The Agency received a comment regarding the proposed rule's 
remedy against an unauthorized junior lien, for which the Agency must 
declare a default and pursue liquidation of the borrower's loan. The 
commenter expressed concern with this approach, citing the Agency's 
obligation to preserve its housing stock. The commenter asked the 
Agency to explore other options outside of the acceleration and 
foreclosure process (e.g., enforce the contract, impose fines on the 
borrower, seek a receivership, and impose continued use restrictions) 
and amend the regulation accordingly.
    Response: The Agency is not required to pursue liquidation. The 
regulation provides for a cure period and opportunities for the 
borrower to resolve the issue. The Agency does not believe the 
regulation needs further amendment.
    Topic: The Agency received comments expressing concern that the 
proposed rule does not allow project accounts to be encumbered by 
others. The commenters stated that this restriction is unrealistic and 
unnecessary, especially given the need to leverage other lenders' 
funds. According to one commenter: ``Other lenders will want to 
encumber project accounts, and this should be allowed provided the 
Government's position is not unduly impaired,'' a statement that 
reflects other commenters' concerns.
    Response: The Agency appreciates these comments but has decided to 
retain the language in the interim final rule. The Agency has decided 
not to change the rule because it already allows for liens under 
conditions that are advantageous to the project and to the Government 
and has determined that it is not appropriate to reduce its standards.
    Topic: One commenter expressed that Sec.  3560.406(e)(2) ``should 
be modified to allow a non-Agency prior lien to also be transferred to 
the transferee if previously accepted by the Agency for the 
transferor.''
    Response: The Agency disagrees with the commenter. A non-Agency 
prior lien would reduce the equity and therefore, should be paid off 
before any equity is paid to the borrower.
    Topic: One commenter indicated that Sec.  3560.409 entitled 
``Subordination or junior liens against security property--other 
liens'' appears to be unnecessary and duplicative of what is already in 
Sec.  3560.408.
    Response: The Agency appreciates this comment but disagrees that 
Sec.  3560. 409 is duplicative of Sec.  3560.408. Section 3560.408 
deals with the lease of security property and does not explain the 
procedures of Sec.  3560.409, which deals with the subordination and 
junior liens against security property. In light of this, it is 
necessary to keep both sections as stated in the interim final rule.
    Topic: Several commenters addressed the issue of final balloon 
payments that are routinely set up under section 515 loans. Under the 
current regulation, as loans approach the 30-year balloon payment, they 
may be reamortized as a servicing action, without the need to extend 
any new funds. The commenters are concerned that the proposed rule 
discontinues this practice.
    Response: The Agency wants to clarify that this practice is 
allowable and is addressed in Sec.  3560.74. No change was needed.
    Topic: One commenter requested that RHS or a third party provide 
training and assistance to existing owners and local groups to explain 
the responsibilities that come along with property ownership.
    Response: The Agency agrees with the comment but training is 
outside of the scope of the regulation. The Agency is issuing 
administrative guidance on processing transfers more effectively. A 
training request should be forwarded to the Agency. This type of 
training can be provided on all levels. If such a request is received, 
the Agency will make every effort to accommodate the needs of its 
customers. It must also be noted though that with the Agency's current 
budget constraints, it would be advisable to also seek alternative 
solutions for obtaining this type training, such as housing 
organizations, non-profit training centers, etc.
    Topic: A commenter asked whether all transfers would be for new 
rates.
    Response: The Agency believes that Sec.  3560.406(i) clearly states 
how the interest rate is determined in conjunction with an ownership 
transfer or sale. In most cases transfers will be based on new rates 
and terms in order to accommodate the preservation activity taking 
place with the transfer. In other instances loans will be transferred 
on new rates and terms if it is advantageous to the government. There 
may be some instances where transfers take place utilizing same rates 
and terms but only on rare occasion.
    Topic: One commenter addressed the language used in Sec.  3560.406. 
The commenter suggested changing all occurrences of ``the transfer 
should be in the financial interest of the government'' to ``the 
transfer should not result in a negative impact to either the 
government or the tenants.''
    Response: The Agency appreciates the intent of this comment. 
However, the Agency has made no change to the language in the interim 
final rule to ensure that a transfer affirmatively achieves the goals 
of the program. This provision is based on the statute section 515(h) 
of title V of the Housing Act of 1949.
    Topic: A commenter stated that local and State Rural Development 
offices do not have an adequate list of local nonprofit organizations. 
The commenter believed that Rural Development offices must be given 
assistance in developing

[[Page 69083]]

and maintaining up-to-date lists of active local nonprofit 
organizations and public bodies.
    Response: The Agency appreciates this comment. The Agency works 
with local and State offices to ensure that they have the necessary 
materials and information they need. The implementation of the 
Prepayment Information Exchange (PIX) as mentioned in this document's 
discussion of subpart N will greatly improve the Agency's ability to 
maintain a complete listing of non-profit organizations interested in 
Agency rental programs.
    Topic: One comment raised as an issue the practice that banks do 
not accept stocks as a form of collateral.
    Response: The Agency notes that this comment is outside the scope 
of this regulation. The Agency has no control over what financial 
institutions accept as collateral and therefore has no authority to 
change and regulate the daily procedures of these institutions.
    Topic: The Agency received a comment urging that a borrower and RHS 
give notice to residents that the borrower has applied to RHS to 
transfer the development to another entity. Further, the commenter 
believed that residents should be given an opportunity to comment on 
the transfer. The commenter thought that residents should be asked to 
report to the Agency any needed repairs and/or improvements in 
operations; if residents make legitimate suggestions, the Agency should 
include corrections of those issues as conditions for completing the 
transfer.
    Response: The Agency appreciates the comment. However, the Agency 
does not believe the tenants need to be involved in a borrower's 
business transaction (transfer) that otherwise does not affect the 
availability or affordability of the rental housing. The Agency 
believes that the regulation as written requires identification of 
repairs and improvements needed prior to transfer approval.
    Topic: One commenter identified an issue with the authority to 
transfer or sell developments under special rates, terms, and 
conditions as discussed in Sec.  3560.406(l). According to the 
commenter, the authority fails to consider the Agency's statutory 
prepayment obligations. The commenter thought that the proposed rule 
would effectively authorize a borrower to sell a development outside 
the program restrictions whenever it is considered in the Government's 
best interest, that the section must be revised to also condition the 
sale upon the prepayment restrictions set out in subpart N.
    Response: The Agency appreciates this comment but has determined 
that no change is required to the proposed regulation because Sec.  
3560.406(l) does not establish any criteria that would exempt new 
owners from being required to accept restrictions. Any project that 
would leave the program would be required to pay off the loan and leave 
the program in accordance with subpart N.
    Topic: A commenter suggested that the Agency should allow for a 
reduction of the interest rate for the note at either the transfer of 
general partners' interest or the sale. According to the comment, many 
properties have interest rates approaching 18 percent. If the note 
could be reduced to a lower rate, then note rent could be lower, which 
could increase the possibility of attracting moderate-income 
applicants.
    Response: In Sec.  3560.406(i), the interim final rule allows for 
loan restructuring during such transactions to set the interest rate at 
the current level or at closing level, whichever is lower. This should 
address the commenter's concerns.
    Topic: One commenter stated that current regulation and the 
proposed rule make it almost impossible for national nonprofit 
organizations to acquire properties. As such, the commenter thought 
that the definition of ``nonprofit organization'' in Sec.  3560.11 must 
be revised and simplified to require only that entities be not-for-
profit under section 501(c) of the Internal Revenue Code.
    Response: The Agency acknowledges the commenter's concerns and has 
revised and simplified the definition of ``nonprofit organization'' in 
Sec.  3560.11.
    Topic: One commenter urged RHS to recognize the lack of market 
value in some properties that nonetheless serve an important resident 
and market need. The commenter asserted that RHS should revise its 
regulation to allow for recasting a portion of the existing loan as a 
soft note payable from cash flow. According to the commenter, this 
would most likely be needed where a portion of the section 515 loan 
could not be supported by existing income or where a portion of the 
existing section 515 loan, through subordination or otherwise, would be 
undersecured.
    Response: The Agency acknowledges the commenter's position. The 
Agency is currently reviewing its ability to recast a portion of the 
loan as a note not requiring fixed installment payments (soft note).
    Topic: A commenter expressed confusion regarding the type of third-
party financing that is permitted given the language in Sec.  
3560.406(f). Specifically, the commenter believed that the proposed 
rule limits the borrower's financing options.
    Response: The Agency has rewritten Sec.  3560.406(f) to more 
clearly state the borrower's options. These options state that equity 
funding to the borrower may be provided in cash or through a loan 
either by the Agency or through a 3rd party lender. This will enable 
the borrower to receive their equity from a 3rd party lender in the 
event the Agency is unable to provide the funding.
    Topic: The Agency received a comment regarding the use of project 
funds for the purchase of computer equipment relating to industry 
interface and tenant certifications. The commenter believed that states 
are not modifying their security agreements to include this equipment. 
Further, the commenter indicated that costs have skyrocketed based on 
requests to use project funds for these purchases. The commenter 
believed that the proposed rule should address this issue.
    Response: The Agency appreciates this comment, which requires a 
change in the security agreement to include the equipment at the 
property site. The Agency has modified the security agreement.
    Topic: Two comments were received that encourage the Agency to 
revise the proposed rule to allow for the donation or below-market sale 
of portions of a MFH security property. They argued that the 
requirement of Sec.  3560.407(b)(3)(i) that ``the value of the security 
will not be reduced'' is not adequately permissive to allow such 
transfers.
    Response: The Agency appreciates this comment and has considered 
whether to adopt this recommendation. However, the Agency has made no 
change to the interim final rule because it has determined that while 
such a donation or below-market sale may benefit the owner, the project 
may not benefit from such action.
    Topic: Several comments addressed Sec.  3560.408(b), asking why 
borrowers are prohibited from leasing their property to public housing 
authorities and suggesting that there may be times when it is in the 
Government's interest to allow this practice.
    Response: The Agency acknowledges the comments. However, the 
commenters did not provide any examples when it would be advantageous 
and therefore the Agency has declined to make the change in the 
regulation.
    Topic: One comment was made regarding the requirement that lessees 
pay all prorated expenses associated with what is being leased. The

[[Page 69084]]

commenter believed that this may be difficult to determine and, 
instead, such lessees should only demonstrate that they are in the 
financial best interest of the project and tenants, and that the 
project itself will not be adversely affected financially.
    Response: The Agency appreciates this comment but has made no 
change to the interim final rule. The rule is written to protect any 
expenses to the project that were not previously taken care of prior to 
the lessor leasing the property to the lessee. There is no way to know 
if some unforeseen expenses will adversely affect the property or not; 
therefore, by having rules in place to cover the cost ensures the 
financial stability of the property.
    Topic: The Agency received a comment specifying that the new loans 
obtained by nonprofit purchasers seeking to acquire and preserve 
section 515 properties generally cover the following: (1) Cost of 
improvements or repairs, (2) a payment to seller, (3) purchaser's due 
diligence and transaction costs, (4) a debt service reserve for the new 
lender, and (5) lender's fee and cost of counsel. The commenter 
believed that nonprofit purchasers should not be expected to come out 
of pocket with monies to accomplish a preservation transaction.
    Response: The Agency appreciates this comment but made no changes 
to the interim final rule. It is the Agency's position that these costs 
are part of the cost of doing business that every entity must be 
responsible for addressing.
    Topic: A commenter stated that under existing regulations, phased 
properties could be consolidated as long as the entities were the same, 
regardless of when they were closed. A commenter asked whether this 
practice would still be allowed.
    Response: The Agency acknowledges the commenter's position and 
there was no change in the new regulations. Consolidations are 
permitted as long as they are feasible and in the best interest of the 
government.
    Topic: Several comments were received regarding loan 
consolidations. Commenters urged the Agency to add a paragraph to the 
regulation allowing loans for projects made to multiple borrowers to be 
consolidated when transferred to a new single borrower.
    Response: The Agency wants to clarify that the proposed rule allows 
this type of loan consolidation and Sec.  3560.410 of the interim final 
rule continues this policy. No change was needed. It should be noted 
that for a consolidation to occur the same borrower must own all 
projects that are to be consolidated. This common ownership can occur 
after a transfer as described by the commenter.

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

    Topic: The Agency received several comments expressing concern 
about a loophole related to acceleration that was not closed by the 
language in the proposed rule. Commenters noted that this loophole 
could allow borrowers to save their property during acceleration after 
the restrictive-use provisions have been removed and thereby circumvent 
the established prepayment process. Commenters stated that the loss of 
use restrictions after acceleration results in a loss of affordable 
housing, and some claimed that it is an approach used by owners to 
avoid being subjected to such provisions. Commenters requested that the 
Agency add language to the regulation allowing RHS to retain 
restrictive-use provisions on a property during and after acceleration 
and foreclosure.
    Response: The Agency acknowledges these comments and has made 
revisions to the interim final rule to address owners that force 
acceleration in an effort to evade the prepayment process. The Agency 
has added language to Sec.  3560.456 in the interim final rule that 
allows it to take alternative actions, such as suing for specific 
performance, when the Agency determines that the owner's motivation is 
to circumvent the prepayment process.
    Topic: Several commenters requested that RHS adopt additional 
remedies and actions as part of special servicing actions. The 
objective of these remedies, proposed by commenters, is designed to 
preserve the supply of affordable housing. Suggested additional actions 
included being able to impose fines, appointing a receiver, recasting a 
portion of the RHS loan as a soft note payable from cash flow, and 
adding restrictive-use provisions in conjunction with special servicing 
actions, including loan restructuring.
    Response: The Agency acknowledges the concerns raised by the 
commenters. RHS has authority to use a number of enforcement actions 
beyond those established in the current instruction. These additional 
actions have been incorporated into the interim final rule in Sec.  
3560.460 through Sec.  3560.463 and have expanded the enforcement tools 
available to the Agency. RHS has also added the authority to require 
that expiring loan or assistance agreements not be extended unless the 
owner executes an agreement to comply with additional conditions 
prescribed by the Agency, or executes a loan or assistance agreement in 
the form prescribed by the Agency. The Agency is currently reviewing 
its ability to recast a portion of the loan as a note not requiring 
fixed installment payments (soft note).
    Topic: A commenter recommended that the Agency acknowledge that 
past servicing actions may have an impact on the cash flow for a 
project, which can affect a borrower's ability to address deteriorated 
physical conditions. The concern expressed is that some projects' cash 
flow may be insufficient to quickly correct deficiencies, particularly 
physical deficiencies. The commenter asked that the Agency explicitly 
recognize in the rule that some projects may need additional time to 
correct deficiencies due to the extent of funds available to the 
project.
    Response: The Agency acknowledges that there are situations and 
circumstances that will require additional time to correct 
deficiencies. In such cases, the Agency requires the borrower to submit 
a workout agreement that identifies the time periods required to 
address these deficiencies.
    Topic: A commenter requested that the regulation cross-reference 7 
CFR part 1900, subpart D and the administrative appeals rules.
    Response: The Agency notes that a cross reference to 7 CFR part 11 
and 7 CFR part 1900, subpart D appears in Sec. Sec.  3560.9 and 3560.10 
of subpart A, and this reference continues in the interim final rule.
    Topic: A commenter suggested that workout agreements should 
supersede management plans and requested that the Agency be required to 
notify an owner before canceling a workout agreement so that the owner 
has an opportunity to respond to Agency concerns.
    Response: The Agency views the two documents--workout agreement and 
management plan--as serving distinct, but related, functions. RHS 
disagrees that the workout agreement should supersede the management 
plan. Rather, the two need to be consistent. The Agency has retained 
the language from the proposed rule in Sec.  3560.453 (e)(i) of the 
interim final rule, which establishes that updating the management plan 
to be consistent with the content of the workout agreement is a 
condition of Agency approval of the workout agreement. Further, RHS has 
added language to Sec.  3560.453(e)(2) of the interim final rule 
indicating that the Agency will provide notice to the borrower upon 
cancellation of the workout agreement for a property.
    Topic: With regard to the occupancy waiver in Sec.  3560.454(b), a 
commenter

[[Page 69085]]

raised the concern that the language as written could create an impasse 
at properties where the vacancy issue is the need for rental assistance 
and none is currently available. The commenter suggested that the 
requirement for housing applicants on the waiting list before any over-
income applicant be revised so that it better matches with the 
availability of rental assistance.
    Response: The Agency recognizes that in circumstances when RA is 
not available, higher income tenants need to be considered for 
occupancy and Sec.  3560.454(b) of the interim final rule allows for 
this type of situation.
    Topic: Multiple commenters requested that the Agency allow a 
borrower to reamortize its loan if the borrower is current with all 
payments. One commenter suggested that an appraisal should not be 
required as part of a reamortization regardless of debt, with proper 
cash flow.
    Response: The Agency wants to clarify that a reamortization is 
allowable in these circumstances as is shown in Sec.  3560.455(b)(3) of 
the interim final rule. The circumstances when appraisals are required 
are covered in Sec.  3560.455(b)(3) of the interim final rule. As long 
as there is other adequate evidence that the Agency's security interest 
is protected as required by Sec.  3560.455(b)(1)(ii), an appraisal 
would not be necessary. Finally, Sec.  3560.454(b) of the interim final 
rule does allow for reamortizations in situations other than just 
delinquency.
    Topic: A commenter requested further clarification from the Agency 
on the meaning of ``suspending'' rental assistance.
    Response: Information regarding suspension of rental assistance can 
be found at Sec.  3560.456(b)(2) of the interim final rule. The Agency 
notes that, generally, rental assistance is suspended when interest 
credit has been cancelled due to a default. The rental assistance can 
be restored once the default has been resolved.
    Topic: A few commenters addressed the write-down provisions in 
Sec.  3560.455. One commenter recommended that the Agency change the 
requirement from one write-down per property to one write-down per 
owner. Another commenter stated that the sections dealing with write-
downs and reamortizations were excellent and would help maintain viable 
projects in very rural areas.
    Response: The Agency agrees with the comment that requiring no 
previous write-down of indebtedness associated with a housing project 
as a condition to receive a write-down is too restrictive. The Agency 
has removed this condition from the interim final rule. The Agency has 
not further restricted these requirements to one write-down per owner 
because the Agency does not believe the servicing remedy is necessarily 
related to the owner but rather to the performance of the property.
    Topic: A commenter requested that the Agency allow for a write-down 
of debt without a change to the current ownership, if there are no 
issues with the ownership members.
    Response: The Agency wants to clarify that the interim final rule 
does allow loan write-downs for the current ownership as specified in 
Sec.  3560.455(c).
    Topic: A commenter requested that Sec.  3560.456 be revised to 
specifically include the ability to make a reasonable bid at a 
foreclosure sale. The commenter recommended that the regulation allow a 
discounted bid, as allowed by Single Family Housing, to include holding 
time, sale cost, and other factors.
    Response: The Agency appreciates the commenter's suggestion and has 
incorporated the language from 7 CFR 3550 (at 3560.456(c)), which gives 
the Agency additional flexibility to accept a discounted bid.
    Topic: In reference to Sec.  3560.452, a commenter requested that 
the proposed rule explicitly allow RHS to extend the time period for 
correction or resolution of a default.
    Response: The Agency notes that the proposed rule does allow for 
workout agreements to extend beyond 2 years. This provision under Sec.  
3560.453(e) allows the Agency to extend the period.
    Topic: A few commenters requested that the Agency include a 
provision under Sec.  3560.454 that would allow an applicant or 
resident who does not want to provide income and asset documentation, 
but is willing to pay market rent, be allowed to live in the property 
on an ineligible basis. Such residents would need to vacate the unit if 
needed by an eligible applicant.
    Response: The Agency understands the commenters' concern but has 
made no change to Sec.  3560.454. Under the applicable statute, RHS 
must have documentation of a tenant's eligibility for occupancy. 
Section 3560.454(b) and Sec.  3560.158(c) allow for ineligible 
applicants to reside in a property with Agency approval if the specific 
unit type has no waiting list, or if accepting an over-income tenant is 
necessary to maintain the financial viability of a property. An Agency 
waiver is required in these circumstances, and only properties that 
have received a waiver may admit tenants that do not meet or will not 
document income eligibility requirements.
    Topic: A few respondents commented on the authority of State and 
Field Offices to approve workout agreements and other special servicing 
actions. One commenter appreciated the Agency position of not requiring 
State Office approval of workout agreements longer than 2 years. Other 
commenters requested that the Agency provide the authority below the 
State Office for approval of Affirmative Fair Housing Marketing Plans, 
workout agreements, servicing market rents, and change of project 
designation.
    Response: Approval levels are internal Agency procedure and not set 
forth in Agency regulations.
    Topic: A few commenters noted that subpart J in the proposed rule 
did not include specific language on enforcement.
    Response: The Agency has added four sections to the interim final 
rule to more specifically address enforcement: Sec.  3560.460 (Double 
damages), Sec.  3560.461 (Enforcement provisions), Sec.  3560.462 
(Money laundering), and Sec.  3560.463 (Obstruction of Federal audits).
    Topic: A commenter noted the actions that an owner may take or fail 
to take that would cause the Agency to determine that the loan is at 
risk. The commenter noted that the Agency may remove the management 
agent if the Agency determines that a compliance violation or loan 
default was caused, in full or in part, by the management agent. The 
commenter stated that it agreed with the Agency's strengthened ability 
to remove a management agent that causes compliance violations or loan 
defaults.
    Response: The Agency appreciates the commenter's support.
    Topic: A commenter inquired whether equity skimming is considered a 
non-monetary default under Sec.  3560.462.
    Response: The Agency appreciates this comment and agrees that 
equity skimming is a form of non-monetary default but has made no 
changes to Sec.  3560.462. Additional procedural information on 
handling suspected cases of equity skimming are addressed in the 
Agency's internal procedures.
    Topic: A commenter requested that the Agency provide clear 
definitions for when a payment is considered past due and how the 
Agency calculates 10-, 20-, and 30-days past due.
    Response: The language in the definitions section of subpart A for 
``Default,'' and in Sec. Sec.  3560.401(c) and 3560.451(c) has been 
revised to provide that a past due obligation is one which remains 
unpaid or unperformed for more than 30 days after the due date.

[[Page 69086]]

The references to 10 and 20 days in the proposed rule were clear and 
were not changed.
    Topic: A commenter noted that Sec.  3560.452(e) included an 
incorrect cross-reference to enforcement and liquidation sections.
    Response: The Agency appreciates this comment and has corrected the 
cross-reference in the interim final rule.
    Topic: A commenter noted that the discussion in Sec.  3560.453 
concerning workout agreement budgets does not reflect the fact that the 
Agency may not be the senior debt. The commenter recommended that the 
Agency add language reflecting Agency procedures when it is in a junior 
lien position.
    Response: The Agency appreciates this comment and has added 
language to Sec.  3560.453(d) in the interim final rule recognizing the 
prior lienholder's position, if any, in the order of cash disbursements 
under a workout agreement budget.
    Topic: In reference to Sec.  3560.454(e) regarding the termination 
of the management agreement, a commenter stated that the Agency must 
give the management agent and owner due process and allow them a joint 
opportunity to contest the termination.
    Response: The Agency agrees with the commenter that the management 
agent and owner have the right to contest a termination but has made no 
changes to this section in the interim final rule because these rights 
are provided under the Agency's appeals procedures.
    Topic: A commenter noted that procedures for the Debt Collection 
Improvement Act of 1996 were developed for the Agency, but that MFH was 
excluded because its own handbook was under development. The commenter 
recommended that the rule refer to 7 CFR part 3 covering debt 
collection for the Department or include language directly in the 
regulation.
    Response: The Agency appreciates the comment and has added language 
regarding debt collection procedures to Sec.  3560.460 in the interim 
final rule.
    Topic: A few commenters noted typographical errors in Sec. Sec.  
3560.455 and 3560.456.
    Response: The Agency appreciates these comments and has corrected 
these errors in the interim final rule.
    Topic: A few commenters noted that Sec.  3560.456(a)(2) regarding 
payment subsidy conflicts with guidance provided in the draft Project 
Servicing Handbook which was made available online when the proposed 
rule was published.
    Response: The Agency appreciates this comment. The regulation is 
correct as written and changes have been made to the Agency's internal 
procedures to ensure that it reflects the regulation.
    Topic: With regard to Sec.  3560.456(a)(2), a commenter asked 
whether the Agency needs to wait until the appeals process is complete, 
rather than immediately following acceleration, to suspend interest 
credit and rental assistance.
    Response: The Agency has removed the phrase ``immediately following 
the issuance of an acceleration notice'' from the regulation to clarify 
that interest credit and rental assistance will be suspended upon 
acceleration.
    Topic: With regard to Sec.  3560.456(c), a commenter asked whether 
the Agency has the ability to foreclose on a mortgage without going 
through the U.S. Attorney's office, which can slow down the process.
    Response: The Agency appreciates this comment but has made no 
changes because representation of the Agency by the Department of 
Justice is a Federal requirement and litigation is necessary to 
initiate a judicial foreclosure action in those states requiring 
judicial foreclosure.
    Topic: A commenter stated that the Agency's procedures in dealing 
with deceased owners were unclear, in particular when there is no heir 
who wants to operate the property as affordable housing.
    Response: The Agency appreciates this comment but the property is 
still subject to the restrictions and the Agency will work with the 
heirs, as necessary, to facilitate the transfer of the property to an 
eligible borrower.

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

    Topic: A few commenters requested that preference be given to 
eligible nonprofit organizations for the disposition of REO property.
    Response: Section 3560.504(c)(1) of the interim final rule has been 
revised to explain that the Agency will publicly solicit requests for 
sealed bids and publicize auctions. The successful bidder will be the 
applicant with the highest bid. It is the Agency's policy to get the 
best price for the property and not limit the potential pool of 
applicants.
    Topic: A commenter requested that the Agency include language 
similar to the language from the current regulation in 7 CFR 
1965.223(c), which provides for the continuation of restrictive-use 
provisions on projects sold out of inventory.
    Response: The Agency appreciates this comment and believes its 
interim final rule adequately addresses this issue. When inventory 
properties are sold as ``program'', then Sec.  3560.505(d) of the 
interim final rule requires the loan closing follow the requirements of 
subpart B (see Sec.  3560.62(a)(2) of the interim final rule) for 
executing a restrictive-use contract acceptable to the Agency.
    Topic: A commenter requested that the Agency change the requirement 
for nonprofit organizations from having experience in the Agency's MFH 
programs to having experience in providing affordable housing.
    Response: The Agency appreciates this comment but has determined 
that all applicants need experience in operating MFH to be eligible to 
own and manage this type of housing. The Agency notes that Sec.  
3560.102(e) of the interim final rule adequately covers acceptable 
management agent criteria and, therefore, determined that no change to 
the regulation is needed.
    Topic: A commenter recommended that the Agency revise its policy 
stated in Sec.  3560.504(c)(1) that the Agency will make an award to 
the first offer drawn as part of a sealed bid process for REO property. 
The commenter suggested that it would be in the Agency's interest to 
open all bids and accept the highest eligible bid.
    Response: The Agency agrees with this comment and has revised Sec.  
3560.504(c)(1) of the interim final rule to clarify that RHS will 
accept the highest eligible bid or, if no acceptable bids are received, 
the Agency may negotiate a sale without further public notice.

Subpart L--Off-Farm Labor Housing

    Topic: Several comments were received on Sec.  3560.576 (formerly 
Sec.  3560.575(b)(2) of the proposed rule) and the requirement that a 
substantial portion of income for Farm Labor Housing households come 
from farm labor employment. Commenters expressed concern that the 
standard for domestic and migrant farm laborers will increase so 
greatly that it will make many existing tenants ineligible, limit new 
occupancy, hurt the people that the program was intended to serve, and 
place existing properties at risk. Other commenters expressed concern 
because they were not able to see specifically how the income standard 
would change and there was no definition. One commenter also noted that 
exhibit J of RD Instruction 1944-D (available in any Rural Development 
office) has not been published annually by the Agency.
    Response: Section 514 of the Housing Act of 1949 defines ``domestic 
farm labor,'' in part, as ``* * * any person (and the family of such 
person) who receives a substantial portion of his or

[[Page 69087]]

her income from primary production of agriculture or aquaculture 
commodities * * *.'' Previously, exhibit J of RD Instruction 1944-D 
(available in any Rural Development office) provided ``Federal Regional 
Income Limits for Hired Farmworkers.'' Domestic farm labors, other than 
migrant farmworkers, were required to earn actual dollars from farm 
labor for at least 65 percent of the annual income limits found in 
exhibit J. Migrant farmworkers were required to have at least 50 
percent of the annual income limits. Exhibit J was distributed as a 
Procedural Notice on July 2, 1986, and has not been updated since that 
time. The proposed rule indicated that the Agency would be replacing 
exhibit J and updating the limits. However, the Agency has not changed 
its basic policy here in the interim final rule.
    The Agency believes that commenters misunderstood the Agency's 
intent and the policy presented in the proposed rule. The examples 
provided suggest that the commenters interpreted the proposed rule as 
requiring the use of the income limits published by the Agency for 
eligibility in RRH as the basis for calculating 65 percent or 50 
percent of income from farm labor. The Agency is not using the RRH 
income limits as the basis for the income standard for percentage of 
income from farm labor.
    The Agency has retained the basic method used in Sec.  
3560.576(b)(2)(i)(A) of the interim final rule to determine whether a 
substantial portion of a household's income comes from farm labor 
employment. However, the Agency has raised the income limits that were 
previously published in exhibit J by 50 percent to reflect increases in 
farm worker incomes since 1986 (when the income limits were last 
published). When revising the income limits, the Agency used data from 
the Bureau of Labor Statistics. The new limits are found in internal 
Agency guidance and will be updated periodically, not annually, to 
reflect changes in the workforce. The changes will be announced in the 
Federal Register prior to the time that they take effect. The Agency 
has revised language from the proposed rule in an effort to clarify its 
policy on this topic.
    Topic: One commenter questioned the statutory basis by which the 
Agency uses income to determine eligibility and stated that the 
proposed rule should comply with the statute. Further, the commenter 
added that if ``Congress had intended to place income limits on 
tenants, it would have explicitly said so in the Act.'' Another 
commenter recommended that moderate-income farmworker families be able 
to live in section 514/516 projects with continued use of the priority 
system (preferred no change to the existing system).
    Response: The Agency has made no change to the current policy. 
Section 3560.576 of the interim final rule continues the current 
eligibility policy requirement that farmworkers must not have income 
which exceeds the moderate income limit (previously published at 7 CFR 
1944.153) but will also continue to allow farmworkers with above 
moderate incomes to occupy units if there are no eligible applicants on 
the waiting list.
    Topic: Several commenters were concerned with tenant priorities for 
off-farm labor housing. These commenters felt that the priorities were 
too confusing and cumbersome.
    Response: The Agency agreed with these comments and has simplified 
the priorities in the interim final rule at Sec.  3560.577(a).
    Topic: One commenter said that priority for occupancy in off-farm 
labor housing should be based on annual household income, rather than 
on the percentage derived from farm labor.
    Response: The Agency agrees with this comment and has eliminated 
this requirement from the interim final rule but still has to meet the 
definition of Domestic Farm Laborer which includes receiving a 
substantial portion of their income from the primary production of 
agricultural or aquacultural commodities or the handling of such 
commodities in the unprocessed stage.
    Topic: A number of commenters felt that the requirements for a 
nonprofit organization should be simplified and that too much emphasis 
was placed on local representation. One commenter asked the Agency to 
use a standard definition of a nonprofit organization--one similar and/
or used for other programs such as the LIHTC program. The commenter 
also thought it would be appropriate to include public agencies, such 
as public housing authorities and redevelopment Agencies.
    Several others requested clarification on what ``reflect the 
demographics of the community'' means as opposed to ``representation on 
the board from the area where the housing is located'' because the 
proposed language in Sec. Sec.  3560.55(a) and (b) does not speak to 
reflecting community demographics and Sec.  3560.55(c) only lists 
additional eligibility requirements for nonprofit organizations. The 
commenters thought that the three sections do not address the 
instruction in Sec.  3560.555(a)(1) that requires board representation 
from the housing area instead of a board that reflects the community's 
demographics. One commenter also stated that paragraph (9) in the 
definition of non-profit organization (Sec.  3560.11) requires 
``capacity'' as an underwriting issue and should not be in the 
definition; the Agency should clarify its intent prior to finalizing 
the proposed rule.
    Response: As stated in the description of comments for subpart A, 
the Agency agrees and has revised the definition of a nonprofit 
organization. The Agency has also added, language to Sec.  3560.555 to 
specify that to be eligible for an off-farm labor housing loan or 
grant, a nonprofit organization must be a ``broad-based'' nonprofit 
organization. RHS has added this language so that the regulation is 
consistent with sections 514 and 516 of the Housing Act of 1949. The 
Agency has brought forward a sentence from the current regulation to 
describe what is meant by a ``broad-based'' nonprofit organization.
    Topic: Several commenters questioned why limited partnerships were 
ineligible for Farm Labor Housing grants.
    Response: The Agency notes that there is no authority under section 
516 of the Housing Act of 1949 to provide grants to limited 
partnerships. For this reason, limited partnerships remain ineligible 
for Farm Labor Housing grants.
    Topic: Several comments were received concerning Sec.  3560.559, 
some of which concerned the requirement that off-farm labor housing 
incorporate exterior washing facilities (showers) as necessary to 
protect the resident and the property from excess dirt and chemical 
exposure. A few commenters thought that exterior washing facilities 
should be encouraged but not required.
    Response: The Agency agrees with these comments and has revised its 
position in the interim final rule.
    Topic: Another commenter thought that the Agency should use 
different terminology so that ``washing facilities'' is not confused 
with ``laundry facilities.''
    Response: The Agency agrees with this comment and has changed 
``exterior washing'' facilities to ``outdoor showers, boot washing 
station, and/or hose bibb'' in the interim final rule.
    Topic: A commenter contended that exterior washing facilities were 
not needed and thought that the idea sounded discriminatory.
    Response: The Agency does not agree with the commenter and believes 
that there are instances when outdoor showers can improve the quality 
of life of farmworkers by giving them the opportunity to wash off 
excess dirt and chemicals before entering their homes.
    Topic: Several comments were received concerning construction

[[Page 69088]]

financing requirements for off-farm labor housing. These commenters 
want the Agency to allow grant funds to be used before loan funds to 
reduce interest costs.
    Response: The Agency has made no change to the requirement because 
it contends that a borrower's own resources, including loans, need to 
be utilized prior to the disbursement of grant funds. The Agency notes, 
however, that this section of the regulation has been rewritten to 
state that equity contributions being made by the borrower or grantee 
must be contributed and disbursed prior to the disbursement of loan or 
grant funds.
    Topic: One commenter also asked that the Agency include fees for 
oversight in its provisions for an asset management fee for owners of 
Farm Labor Housing projects that are not self-managed in subpart L. An 
additional comment wanted the Agency to allow an operating line item 
for the provision of services because the provision of services is used 
as criteria for funding projects by both Rural Development and some 
states.
    Response: In the proposed rule, the Agency inadvertently left out 
the key language from the earlier Operating Subsidy Proposed Rule. The 
Agency has inserted the missing language into the interim final rule. 
The Agency believes that this additional language addresses the 
commenter's concerns. In accordance with Sec.  3560.303(b), 
cooperatives and nonprofit organizations may use housing project funds, 
with prior Agency approval, for asset management expenses directly 
attributable to ownership responsibilities. The Agency has decided not 
to include a separate operating line item for the provision of 
services. However, if a Farm Labor Housing complex has a Tenant 
Services Plan and incurs administrative expenses while carrying out 
that Plan, those expenses can be budgeted for on the budget's ``Other 
Administrative Expenses'' line provided the expenses are directly 
attributable to housing project operations and are necessary to carry 
out successful operations.
    Topic: A number of commenters expressed their concern with the 
distinction between off-farm and on-farm labor housing. One commenter 
noted that the Agency does not define the terms and suggested that they 
are used inconsistently.
    Response: Definitions for the terms ``On-farm labor housing'' and 
``Off-farm labor housing'' have been added to the definition section of 
the interim final rule in Sec.  3560.11.
    Topic: The Agency was asked by two commenters to provide more 
detail to Sec.  3560.556. The first commenter asked that the Agency 
specifically use ``may'' instead of ``will'' in the final regulatory 
text and consider offering over-the-counter funds from time to time 
without being tied to a formal NOFA process. The second commenter asked 
to make Sec.  3560.556 similar to Sec.  3560.56 and to provide more 
detail. The commenter suggested that the minimum acceptable level of 
detail would be that a proposal or initial application should be 
submitted in accordance with the NOFA and those with the highest 
rankings will submit a final application.
    Response: The NOFA that is annually published by the Agency 
contains much of the same detailed information that is found in Sec.  
3560.56. In this manner, the Agency will have more flexibility in 
modifying the application and processing procedures, without having to 
implement a change to the regulations. It may be necessary to have this 
flexibility to respond to changes in funding levels or shifts in 
program priorities. The Agency also retained the words ``will be 
published'' because the Agency will continue with a competitive 
application process, rather than making funds available ``over-the-
counter'' from time to time, as suggested by the commenter.
    Topic: One commenter asked the Agency to provide more flexibility 
in its occupancy limits for seasonal housing. The 6-month limit may be 
too restrictive, such as in the Northwest where seasonal work can last 
for 10 months per year. They offered that different units should be on 
a rolling seasonal schedule so that all do not close on one date, but 
perhaps on different dates throughout the off-months. The commenter 
also asked to have more flexible opening and closing dates for off-farm 
units.
    Response: The Agency believes that the commenter misunderstood 
Sec.  3560.60 as it does not establish an 8-month occupancy limit for 
seasonal housing. Section 3560.559 establishes a design requirement for 
off-farm labor housing that is housing occupied less than 8 months per 
year. The Agency has made one additional change from the proposed rule 
to allow seasonal housing to be constructed for full-year occupancy to 
provide additional flexibility with regard to this issue according to 
Sec.  3560.559(a).
    Topic: Two commenters were concerned with Sec.  3560.562 and its 
use of the terms ``security value'' and ``value-in-use,'' both of which 
one commenter asked the Agency to clarify in its final rule. 
Specifically, the commenter thought that value-in-use should actually 
refer only to the value of the subject real estate, as restricted. The 
commenter felt that the problem with basing the term security value on 
the term value-in-use is that the value-in-use of a subject property, 
as restricted including the value of the interest credit subsidy, does 
represent security value, but the value-in-use of a subject property, 
as restricted including the value of the interest credit subsidy and 
the value of the section 516 grant, does not represent security value.
    This commenter believed that there is a catch-22 for securing 
section 516 grants because their value must be added to the value-in-
use of the subject property to secure the grant but value cannot be 
added because it does not represent security value. The commenter 
suggested revising Sec. Sec.  3560.562(a) and (c) so that section 516 
grants do not have to be secured by the value-in-use of the Farm Labor 
Housing project but instead, are based strictly on total development 
cost, not on security value.
    The second commenter also had issues with the proposed regulatory 
language in that both the loan and grant must be securitized by the 
value of an appraisal or the total development cost, if it is less; 
yet, there are few comparable properties upon which to base ``comps'' 
in rural areas, so appraisals often come in below the total development 
costs. Since these rural area projects are often only feasible as a 
result of grants (RHS and others) the commenter requested that the 
Agency either not require an appraisal to cover the grant or allow 
exceptions to the appraisal requirements.
    Response: The Agency acknowledges the commenters' concern and has 
revised Sec. Sec.  3560.562(a) and (c) to clarify that the maximum 
amount of the grant is not limited by the security value of the 
property. The grant is limited to the lesser of: (1) 90 percent of the 
total development cost 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.
    Topic: Multiple commenters asked whether it is practical (as stated 
at Sec.  3560.565(b)(2) of the proposed rule) to lock the Agency into 
providing 100 percent of rental assistance if there are more 
affordable, alternate sources available.
    Response: The Agency appreciates the comment and has revised the 
language

[[Page 69089]]

in Sec.  3560.565(b) of the interim final rule to delete the 100 
percent requirement.
    Topic: A commenter wondered why the Agency allows the 50-year grant 
term to exceed the 33-year loan amortization period.
    Response: The Agency has revised Sec.  3560.566(c) of the interim 
final rule by removing the reference to a 50-year grant term. This was 
done so that the regulation is consistent with the grant agreement. The 
grant agreement requires that the housing be used for authorized 
purposes for as long as it is needed.
    Topic: Several commenters focused on Agency requirements for loan 
and grant closings. One commenter suggested that all loan applicants 
should be executing loan agreements, and all such loan and grant 
agreements, regardless of applicant, should include the provisions 
listed in Sec.  3560.571(b)(1) through (3). Three others asked the 
Agency to ensure that the documentation requirements for loan and grant 
closings are the same.
    One of these commenters asked about the restrictive-use period, 
which the proposed rule states is specified in subpart N. They were 
uncertain if this referred to Sec.  3560.662(a) with its 20-year 
restrictive-use period. They asked whether the Agency would disallow 
prepayment (commensurate with the section 515 program) and instead 
require a 33-year restrictive-use period (commensurate with the section 
514 loan term).
    Response: The Agency has deleted Sec.  3560.571(b)(1) through (3) 
and has also revised Sec.  3560.571 in the interim final rule to 
clarify the restrictive-use provisions for off-farm labor housing. 
Additional details are provided in Sec.  3560.72(a)(2) and subpart N. 
The Agency agreed with the commenters and revised this section. The 
items that were listed in Sec.  3560.571(b)(1) through (3) have been 
deleted from this section and have been placed in the Agency-approved 
loan and/or grant resolution, loan agreement, and grant agreement 
forms.
    Topic: Two commenters stated that the Agency should include 
provisions governing the alternative option to use section 521 rental 
assistance as an operating subsidy in off-farm migrant labor projects. 
They added that the option was ``enacted into law a number of years ago 
and there is no legitimate reason for omitting it here.''
    Another commenter was disappointed that provisions for an operating 
subsidy on seasonal units was not incorporated into the Agency's 
proposed rule.
    Response: The Agency has adopted the language from the earlier 
Operating Subsidy Proposed Rule for the interim final rule.
    Topic: Two commenters expressed their support for the Agency's 
effort to provide increased latitude in verifying Farm Labor Housing 
tenant income and farm employment.
    Response: The Agency appreciates the commenters' support for this 
provision.
    Topic: The Agency heard from a commenter asking that provisions for 
section 514/516 technical assistance grants be included in the final 
rule.
    Response: The Agency has adopted the commenter's suggestion in the 
interim final rule at Sec.  3560.553(b) and (c).
    Topic: A commenter stated that Sec.  3560.575(a) be modified to 
clarify that for Farm Labor Housing properties operated under the LIHTC 
program, the borrower may restrict occupancy to only those farm 
laborers who also qualify under the LIHTC program.
    Response: The Agency has made no change because the tenants, by 
definition, must comply with the LIHTC program requirements.
    Topic: Multiple commenters requested a reduced servicing 
requirement for grant-only projects, one for Sec.  3560.577 and one for 
Sec.  3560.578 (which is now Sec.  3560.578 and Sec.  3560.579 in the 
interim final rule).
    Response: The Agency will not reduce servicing requirements for 
grant-only projects because RHS believes these activities are necessary 
to ensure the continued viability and compliance of such projects.
    Topic: A commenter stated that Sec.  3560.574 should be moved to 
subpart M since it deals with on-farm labor housing only.
    Response: The Agency believes that the commenter may have 
misunderstood the intent of Sec.  3560.574 since it does not deal with 
on-farm labor housing, so it has made no change.
    Topic: One commenter saw no reason to distinguish between domestic 
and migrant farmworkers in the Agency's programs. They anticipate that 
the 50 percent requirement included for migrant farmworkers would be 
less onerous to both residents and borrowers.
    Response: The Agency has made no change because this distinction is 
necessary, since migrant farmworkers are the ones in greatest need and 
are the program's primary focus.
    Topic: Multiple commenters were interested in ensuring that 
surviving households be able to remain in housing but did not expect or 
think it reasonable for this to be a priority to gain tenancy.
    Response: The Agency appreciates the comment and has deleted the 
provision from Sec.  3560.576(d)(1), which addresses a surviving 
household of a deceased farm laborer. The rights of surviving 
households to remain in their units are already addressed in Sec.  
3560.158.
    Topic: Multiple commenters stated that developers are recognizing 
the need for senior Off-Farm Labor Housing projects and asked that the 
Agency expressly state that elderly Farm Labor Housing applications may 
be targeted for admission.
    Response: The Agency has revised Sec.  3560.576(b) and (c) to make 
retired farm laborers a priority for such housing, with ``retired farm 
laborer'' being defined in subpart A to be workers at or in excess of 
55 years old. Although the Agency does not finance Farm Labor Housing 
projects that are restricted to the elderly, Farm Labor Housing should 
be marketed to all eligible persons, including, but not limited to, 
persons who meet the definition of a retired domestic farm laborer.
    Topic: A commenter asked about the policy in Sec.  3560.575(d) in 
which the Agency allows section 514/516 properties to be rented to non-
farmworkers. The commenter notes this section does not provide a 
process for seeking approval or setting time limits and asks that a 
formal waiver process be included in the final rule.
    Multiple commenters stated that the Agency should broaden its Farm 
Labor Housing statute definition to meet Congressional intent. One 
commenter suggested that the Agency mirror that of HUD (reference 42 
U.S.C. 1436a(a)) and thereby address Congressional intent; 
specifically, the Agency should adopt the ``legal or qualified alien'' 
definition for all Farm Labor Housing, just as it has for other multi-
family housing.
    Response: The Agency appreciates the first commenter's suggestion 
and has revised Sec.  3560.575(d) in the Interim Final Rule to account 
for the suggested change. The Agency has made no change to the 
definitions because its requirements for citizenship are statutory.
    Topic: A commenter asked that Sec.  3560.575(d) be revised to 
address when areas cease to have farmworkers, which would include 
identifying the exception process to allow the development to 
permanently rent to non-farm laborers.
    Response: The Agency has revised its proposal to identify a process 
by which non-farm laborer tenants are able to occupy units. In the 
interim final rule, Sec.  3560.576(e), the Agency has reserved however, 
the authority for such units to revert to farm laborer tenants if the 
need again arises.

[[Page 69090]]

Subpart M--On-Farm Labor Housing

    Topic: Commenters stated that as long as the Agency's loan is 
adequately secured, then the Agency should not prescribe what comprises 
adequate security.
    Response: The Agency understands this point and has revised Sec.  
3560.610(b) to read: ``When feasible, the on-farm labor housing will 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 lien on the tract of land where 
the on-farm labor housing is located and the security must have 
adequate value to protect the Federal Government's interest. The Agency 
will seek a first or parity lien position on Agency-financed property 
in all instances, however, the Agency may accept a junior lien position 
if the Federal Government's interests are adequately secured.'' This 
language is both less prescriptive and less restrictive and should 
address the commenters' concerns.
    Topic: Regarding the on-farm labor housing program, several 
commenters said that rather than providing flexibility, the proposed 
regulation would add many restrictions that would disqualify 
agricultural housing providers. One commenter pointed out that the 
proposed regulation fails to recognize or provide a transition for 
owners with section 514 loans who agreed not to charge rent to their 
farmworkers.
    Response: The Agency appreciates the commenters' concerns. However, 
the proposed regulations do not add any restrictions that are not 
currently in place. With respect to a transition for farmworkers who 
agreed not to charge rent, the regulations do not require that 
farmworkers pay rent; the regulations require that if rent is charged, 
it must first be approved by the Agency.
    Topic: Several comments were received regarding the regulations on 
on-farm farm labor housing. Commenters were concerned that the 
regulation creates barriers to housing access for farmworkers and 
similarly disqualifies agricultural housing providers. One commenter 
noted that requiring proof of the tenant's eligibility prior to move in 
would make seasonal housing especially difficult to secure; in most 
cases, tenants do not usually have to certify their eligibility until 
after they move in. Another commenter noted that the proposed 
regulation would disqualify agricultural housing providers, such as a 
farmer with two or more employees, and such restrictions are unhelpful.
    Response: The Agency does not know what was meant by the term 
``agricultural housing provider.'' However, the regulation does not 
make farmers with two or more employees ineligible. Requiring proof of 
tenant eligibility prior to move in simply conforms the on-farm 
regulations with other MFH provided by the Agency.
    Topic: Commenters stated that the program should use language to 
facilitate growth of the Farm Labor Housing program and increased 
connections between affordable housing nonprofit organizations and farm 
owners. One commenter suggested that the program should be brought in 
line with other owned and operated rental properties by allowing a 
professional property manager firm to manage the property so that the 
farmers can concentrate on farming. Another commenter said that the 
proposed rule should allow limited partnerships to participate in the 
ownership of on-farm housing, similar to that done with LIHTC projects.
    Response: The Agency acknowledges the commenters' concerns. While 
nonprofit organizations are allowed to work with farmers to develop on-
farm labor housing by statute, this is not a specific objective of the 
program. While farmers are encouraged to manage their on-farm labor 
housing properties effectively, these are not conventional properties 
and should not be managed as such. However, there is nothing in the 
interim final rule to preclude professional management of on-farm labor 
housing projects. At the same time, the Agency does not anticipate the 
need for professional management except, perhaps, on rare occasions 
when there are a significant number of on-farm housing units at one 
farm. There is no statutory authority to allow on-farm labor housing 
loans to be made to limited partnerships.
    Topic: One comment noted that in addition to the program objectives 
in Sec.  3560.602, farmers should be allowed to receive grants as an 
incentive for providing affordable housing.
    Response: Under section 516 of the Housing Act of 1949, only the 
following entities are eligible for farm labor housing grants: States 
or political subdivisions thereof, Indian tribes, broad-based public or 
private nonprofit organizations incorporated within the state, and 
nonprofit organizations of farmworkers incorporated within the state.
    Topic: One commenter noted that the proposed rule should give 
leasing and renting priority to employees of the farmer but should also 
allow nonemployee agricultural workers an opportunity to rent or lease 
a unit if the units are vacant for an extended amount of time. Another 
commenter noted that farm borrowers should be allowed, on a case-by-
case basis, to provide housing for immediate relatives if the Agency 
can document that these family members are farmworkers in the best 
interest of both parties and essential for farm operation.
    Response: The Agency acknowledges the commenters' concerns. The 
interim final rule gives the Agency the authority to provide exceptions 
to on-farm labor housing borrowers to enable them to rent to 
ineligibles on a temporary basis. The borrower must, however, 
demonstrate that efforts have been made to fill the units with eligible 
applicants.
    Topic: Several comments were received concerning the limitations of 
the definitions of ``farmer'' and ``farm owner'' found in Sec.  
3560.11. Many commenters were concerned that such definitions might 
significantly restrict the pool of eligible farmer applicants. The 
commenter thought that this section should be amended to remove 
references to ``family size farm'' requirements and the reference to 7 
CFR 1941.4. The commenter believed that the regulation ``de-motivates'' 
farmers who are legitimately interested in housing their workforce but 
cannot participate because they are not included in this definition. 
One commenter noted that the program should be available to all farmers 
on an equal basis because the one being helped is the farmworker, not 
the farmer; further, the section about ineligible farmers should be 
eliminated.
    Response: The Agency acknowledges the commenters' concerns. The 
Agency has revised definitions of ``farm'' and ``farm owner'' in the 
interim final rule to be consistent with the current regulation and 
statute. In addition, a definition for ``farm'' is now included in the 
interim final rule. The revised definitions are less restrictive than 
those included in the proposed rule.
    Topic: One commenter expressed concern that the proposed rule would 
increase the amount of work farmers have to do, especially when having 
to provide information from lenders indicating that they are 
unqualified to obtain credit from a commercial source.
    Response: The Agency acknowledges the commenter's concern. The 
requirement that borrowers must provide documentation that they have 
sought credit elsewhere and have been refused is not a new one. The 
goal of the section 514 program is to provide financing to those who 
cannot obtain credit elsewhere. The ``test for credit'' requirement is 
a statutory requirement.

[[Page 69091]]

Section 3560.605(a)(3) of the interim final rule has been revised so 
that it is consistent with the statute and the prior regulation.
    Topic: Several commenters expressed concern over the strong 
language about demonstrating that the farmer could not develop the 
housing without the USDA assistance. They felt that the requirement is 
counterproductive and should be removed; tying financing to borrowers' 
financial resources misses the mission of the Farm Labor Housing 
program.
    Response: The Agency wishes to clarify the policy described by the 
commenters. Section 3560.605(a)(3) states that the applicant must be 
unable to provide the housing using the applicant's own resources. This 
is true for all the Agency's direct MFH loans. The Agency's mission is 
to provide financing for MFH in rural areas and/or for farmworkers by 
providing financing to those who cannot obtain it from another source. 
The requirement is a statutory requirement.
    Topic: Several comments were received regarding the accessibility 
of the labor housing. One commenter noted that the farmer should only 
be required to add accessibility features on a reasonable accommodation 
basis rather than a mandatory feature; mandatory accessibility design 
feature requirements increase costs and may act as a disincentive for 
farmers to provide affordable housing for workers.
    Response: The Agency acknowledges the commenters' concerns and has 
added Sec.  3560.605(d) to state: ``On-farm labor housing that consists 
of buildings with less than three units, need not meet the requirement 
that five percent of the units be constructed as fully accessible 
units, as described in Sec.  3560.60(d).''
    Topic: Several comments addressed site and construction 
requirements. One commenter said that all housing should be built to 
permanent unit requirements because of the low-construction quality and 
lack of maintenance of seasonal units. The commenter went on to suggest 
building an integrated community of permanent and seasonal worker 
units, which would be easier to maintain and manage.
    Response: The Agency acknowledges the commenters' concerns and has 
modified Sec.  3560.608(c)(2) to state: ``Seasonal housing may be 
constructed in accordance with exhibit I of 7 CFR part 1924, subpart A. 
If constructed in accordance with exhibit I, the housing must be 
suitable to allow for conversion to full-year occupancy if the need for 
migrant farmworkers in the area declines.''
    Topic: There were several comments made concerning reserve 
accounts. One comment suggested that the reserve account requirement 
apply only when on-farm housing operations include 13 or more units, 
rather than the proposed number of five or more units. Another 
commenter noted that imposing standards on only five or more units 
sounds good but is an unnecessary burden and could discourage some 
farmers from applying.
    Response: The Agency thanks the commenters for raising this issue 
and has modified Sec.  3560.614 to state that the reserve account 
requirement applies when on-farm housing operations include 12 or more 
units.
    Topic: Several comments were received regarding participation with 
other funding sources. One commenter noted that Sec.  3560.615 cross-
references Sec.  3560.66, discussing the availability of rental 
assistance, but should make clear that on-farm labor housing projects 
may not receive rental assistance. Another commenter said that 
encouraging the use of other funding sources is incongruent with the 
rest of the proposed rule--the goal is to obtain nondebt financing for 
projects, not more debt financing. The commenter said that the 
regulation is written as if USDA were providing 100 percent of the 
financing, which is not always the case; this does nothing to help USDA 
partner with funding sources, an essential element.
    Response: The Agency acknowledges the commenters' concerns. The 
reference to Sec.  3560.66 in Sec.  3560.615 refers to situations in 
which the borrower obtains other funding sources. With regard to 
additional funding sources, the Agency's intent is to encourage on-farm 
labor housing borrowers to obtain other funding sources, either debt or 
non-debt. There is no restriction against nonprofit organizations 
assisting farmers to obtain funds from other sources. Section 3560.254 
has been revised to clarify that on-farm labor housing is not eligible 
for rental assistance.
    Topic: One comment noted that the term of the loan should be 50 
years instead of 33 years to allow for lower monthly debt service 
payments and lower monthly rent payments by the tenant.
    Response: The Agency appreciates the commenter's concern but has 
made no change because the 33-year limit is statutory.
    Topic: One commenter suggested that funds for on-farm labor housing 
should only be provided as permanent financing after the development 
work is complete.
    Response: The Agency notes that on-farm labor housing borrowers are 
subject to the same financing requirements as off-farm labor housing 
and section 515 borrowers, as described in Sec.  3560.71.
    Topic: The Agency received several comments concerning housing 
management and occupancy restrictions. One commenter noted that on-farm 
labor housing borrowers generally have a single-family unit, where 
imposing a management plan requirement is burdensome for both Rural 
Development staff and the borrower.
    Response: The Agency acknowledges these concerns. The requirements 
for management plans for on-farm labor housing projects are minimal.
    Topic: Several comments were received concerning tenant 
eligibility. One commenter stated that any change in tenant eligibility 
should take previously existing tenants into consideration or 
grandfather them in. Another commenter noted that a definition of 
eligibility for Farm Labor Housing projects based on ``annual income 
limits published by the Agency'' will have very negative consequences 
for existing tenants; given that farmworkers are often some of the 
lowest paid workers, many of these tenants could be displaced if the 
proposed rule is adopted as currently written.
    Response: The Agency acknowledges the commenters' concerns. 
However, the Agency wants to clarify that it has not changed the 
eligibility requirements for tenants of on-farm labor housing, and the 
annual income limits only apply to tenants of off-farm labor housing 
projects with a nonrestrictive farm labor clause, as stated in Sec.  
3560.575(b)(2)(iv).
    Topic: One commenter noted that the proposed rule requires an 
Affirmative Fair Housing Marketing Plan even though on-farm labor 
housing is by definition restricted to employees only. The commenter 
thought that the regulatory language should explain clearly what is 
expected given these circumstances.
    Response: Borrower's with on-farm labor housing loans for less than 
5 units are not required to submit an Affirmative Fair Housing 
Marketing Plan. The Agency acknowledges that the Affirmative Fair 
Housing Marketing Plan might be an abbreviated version since the 
borrower is required to restrict occupancy to farm employees. However, 
the Agency intention is to ensure that there are no violations of fair 
housing and civil rights laws in providing on-farm labor housing.

[[Page 69092]]

    Topic: Regarding establishing and modifying rental charges, one 
commenter noted that the Agency should only require sufficient 
financial information to show that the housing operation is operating 
in a nonprofit manner for the rental rate imposed. The commenter felt 
that the owners should be allowed the flexibility to provide budget 
information for the unit that is acceptable to the State Director.
    Response: The Agency wishes to clarify the issue raised by the 
commenter. The interim final rule states that the borrower is to 
document the need for a rent increase and obtain approval from the 
Agency in accordance with subpart E. Subpart E does not specify what 
the borrower must submit to the Agency; only that ``borrowers must 
fully document that changes to rents and utility allowances are 
necessary to cover housing or utility costs.''
    Topic: One commenter thought that the regulations pertaining to the 
on-farm program should continue to ensure that existing borrowers not 
charge rent to their laborers.
    Response: The Agency appreciates the comment. The Agency's policy 
is that the on-farm borrower can choose to charge rent or not. The 
interim final rule provides the option in Sec.  3560.628 by stating 
``If it becomes necessary to establish or modify a shelter cost, the 
borrower must obtain Agency approval as specified in subpart E of this 
part.''
    Topic: One comment was received regarding security deposits. The 
commenter noted that this should only be addressed as required lease 
language and make no reference to multi-family regulations as stated as 
Sec.  3560.204.
    Response: The Agency wishes to clarify this issue. On-farm labor 
housing borrowers are not required to charge security deposits. If they 
choose to do so, however, the terms set forth in Sec.  3560.204 must be 
followed to protect both the tenant and borrower and ensure that the 
borrower is in compliance with applicable State and local laws.

Subpart N--Housing Preservation

    Topic: The Agency received numerous comments on the sale to 
nonprofit organizations or to public agencies and the priority for 
local nonprofits. Some commenters indicated that this requirement is 
too restrictive and will slow down the preservation process as it 
limits the entities that can participate. Some suggested broadening the 
definition of nonprofits to facilitate the participation of National 
and regional nonprofit organizations (which are limited by the board 
composition requirements under the current definition), as well as 
nonprofit general partners who otherwise agree to the use restrictions 
(which would allow for the use of LIHTCs and tax-exempt bonds). Others 
suggested eliminating the preference all together to allow for limited 
nonprofit and for-profit entities that agree to use restrictions. Other 
commenters, however, stated that the priority of nonprofit buyers is 
critical to the preservation of affordable housing and should be made 
more explicit in the regulation. It was also suggested that nonprofits 
be offered all available incentives to assist them in acquiring and 
preserving properties.
    Response: The Agency has not removed the sale to the nonprofit 
organization and public body process from the interim final rule 
because the requirement is statutory. However, the Agency has 
simplified the definition, as stated above under subpart A. The rule 
will retain the preference to local nonprofits, as that is required by 
statute as well. The Agency has also taken several administrative and 
procedural steps to facilitate nonprofit purchases by providing them 
better access to loans and advances.
    Topic: The Agency received numerous comments about restrictive-use 
provisions. Comments fell into four major categories:
     A lack of clarity about how the provisions are determined,
     Opposition to restrictive-use provisions,
     A call for greater use and enforcement of restrictive-use 
provisions, and
     The impact of the restrictive-use provisions on future 
transfers.
    Topic: There were general complaints about lack of clarity about 
the Agency's regulatory authority to require restrictive-use provisions 
and the process by which they are determined. Commenters raised 
questions about specific dates cited in the rule, the application of 
the requirements to limited partnerships, language on affected 
households, and the exception for properties receiving another USDA 
loan. They also argued that there are no standards laid out in the rule 
for determining the applicable-use restrictions and objected to 
language stating that the provisions will be ``as determined by the 
Agency.''
    Response: The Agency acknowledges the commenters' concern and while 
the requirements are statutory, the Agency has revised Sec.  3560.658 
and Sec.  3560.662 to clarify its requirements and provide the terms of 
the restriction. The statute (42 U.S.C. 1472(c)) specifies which loans 
are subject to restrictive-use provisions and provides the terms of the 
restriction. The Agency cannot change this. The Agency incorporated the 
specific language for restrictions into forms, guided by the detailed 
descriptions at Sec.  3560.662.
    Topic: There were also significant objections to the restrictive-
use provisions in general. Commenters indicated that these provisions 
place an undue burden on borrowers who have already fulfilled the 
obligations of their agreements. Commenters also indicated that, in 
some cases, the restrictive-use provisions are not needed (e.g., in 
areas where other housing opportunities exist or in properties where 
other loans place restrictive-use provisions on the property). They 
also questioned the 10- and 20-year extensions to use restrictions.
    Response: The Agency has not removed the requirement for 
restrictive-use provisions because it is statutory. However, the rule 
does allow alternative options for properties that are not needed in 
the program or have other restrictions in place. The Agency added the 
10-year use restriction to provide owners with additional options when 
agreeing to sell to a nonprofit organization or public body, rather 
than imposing additional requirements.
    Topic: Several commenters stressed the need for effective 
enforcement of the restrictive-use provisions. They indicated that 
tenant involvement is important to enforcement efforts but that Agency 
action will be important as well. They suggested that language about 
Agency enforcement of provisions be included in the applicable legal 
documents. Commenters also expressed concern that some properties have 
not had restrictive-use provisions applied because of their section 8 
status. They indicated that a property might lose its section 8 
assistance and no longer be subject to affordability requirements.
    Response: The Agency will use the resources it has available to 
enforce its restrictive-use provisions; however, the involvement of 
tenants and other interested parties will be critical to maximizing the 
Agency's enforcement resources. The restrictive-use provisions required 
by Sec.  3560.662 will have to be included in Agency approved legal 
documents. Current regulations require that the availability of section 
8 will not be considered when determining if restrictions are required. 
The Agency contemplates no change in that administrative process.
    Topic: Several commenters stated that the proposed rule places 
another restriction on the property if bought by a nonprofit/public 
body--not only must it be operated as affordable housing for

[[Page 69093]]

the remaining useful life of the housing, but it cannot be transferred 
to new owners without Agency concurrence. The commenters asked why the 
Agency must approve subsequent transfers if restrictive-use provisions 
bind the purchasers.
    Response: The Agency acknowledges the commenters' concerns but has 
made no change to Sec.  3560.659 as this requirement is required by 42 
U.S.C. 1472(c)(5)(E).
    Topic: The list of requirements for prepayment requests drew many 
comments and question on this list of items, the burden of complying, 
and how to comply.
    Topic: The Agency received numerous comments on the list of items 
required for a preservation application and suggested edits and 
changes. Several commenters said that requirement to provide 3 years of 
operating budgets should be eliminated because if the purchaser 
provides the Agency with a market study, the Agency should be assured 
that the market rents are sufficient to cover the property's operating 
costs. Several commenters, however, suggested that the requirement for 
a market study be eliminated because of the cost factor involved, 
unless the cost can be funded through incentives. Commenters also 
suggested that the requirement to provide a balance sheet be 
eliminated, as the Agency should already have a copy, and that the 
request for the waiting list should be eliminated because it is 
irrelevant in determining prepayment eligibility. One commenter also 
suggested that the Agency distinguish between ``complete information'' 
and ``responsive information'' as a way to pare down the materials to 
be submitted.
    Response: The Agency appreciates these comments and has 
significantly reduced the number of submissions, eliminating the 
requirements for the balance sheet, waiting list, operating budgets, 
and market study. The remaining required submissions include only 
evidence of the borrower's ability to prepay and documentation of the 
borrower's willingness to comply with applicable State and Federal laws 
on prepayment, including Fair Housing rules and tenant protection 
through the lease. With this greatly reduced reporting burden the 
Agency sees no need for a further delineation between ``complete'' and 
``responsive'' submissions.
    Topic: The requirements for prepayment requests also elicited 
numerous comments and questions about the burden associated with the 
application packet. Some stated that the amount of information required 
posed a burden on the borrowers and that the Agency should take on more 
responsibilities as outlined in the Emergency Low Income Housing 
Preservation Act (ELIPHA). One commenter indicated that compliance with 
State laws is important and agreed that the burden should be on the 
borrower to demonstrate compliance.
    Response: The Agency has made a serious effort to balance the 
burden of compliance with the Agency's responsibility to assess the 
prepayment requests. The changes discussed above reduce the borrower's 
burden considerably without jeopardizing the Agency's ability to assess 
the request.
    Topic: Finally, commenters raised a number of questions about the 
contents of prepayment requests, specifically, how to demonstrate 
ability to prepay, lease language on prepayment, and the Fair Housing 
certification.
    Response: The Interim Final Rule outlines the required submissions 
while leaving the detail on how to submit them in the handbook. The 
Agency recognizes the complexity of these issues and provides 
additional detail on how the Agency will make these review 
determinations in Agency guidance about program procedures.
    Topic: The Agency received many comments on the prepayment notice 
requirements, regarding the new frequency of the notices, the tenant/
Agency meetings, the way notice is provided, and responsibilities 
regarding new tenants.
    Topic: Commenters offered different points of view on the new 
prepayment notice and meeting requirements. Some argued that the new 
notices and the Agency meeting are overly burdensome and tend to cause 
confusion among tenants rather than provide useful information. 
However, others stressed the critical importance of informing tenants 
through the notices and meetings, and argued for further requirements 
to strengthen the notice requirements, such as requiring borrowers to 
provide tenant names and addresses as part of their prepayment 
application, allowing greater response time for tenants, and including 
the sample notices, currently found in internal Agency guidance. 
Commenters also had suggestions for the delivery of the notices related 
to the language, the use of regular versus certified mail, and the 
Agency's responsibility for delivering the notices.
    Response: The Agency appreciates all the comments. The notices as 
outlined in the proposed rule are not new and represent, in the 
Agency's estimation, the best compromise between burden for the 
borrowers and for the Agency and the tenants' need for information. For 
example, the Agency automated information system called MFIS currently 
contains information on tenant names and addresses, and their income 
status, so borrower provision of these data is redundant and was 
eliminated. The rule establishes minimum requirements for keeping 
tenants adequately informed of the prepayment process at all stages 
including response times. All notices must be approved by the Agency 
and the Agency will consider adopting a pre-approved sample notice. The 
Agency feels that a further level of detail is unnecessary in its 
regulations. The Agency will issue subsequent guidance on approved 
notice procedures including content and delivery and how the 
notification process fits into the prepayment process. The Agency's 
regulations do not require it to provide the notices.
    Topic: One commenter raised an issue regarding the notification of 
new tenants after a borrower has applied to prepay a loan. The 
commenter indicated that some borrowers might use this provision to 
warn potential tenants about the potential changes in the property to 
discourage low-income tenants from taking the units, thereby reducing 
their prepayment obligations. The commenter asserted that provisions 
should be put in the rule to limit this behavior.
    Response: The Agency acknowledges this comment. However, based on 
the Agency's experience as it has worked with borrowers during the 
prepayment process, RHS has found that this type of action is not 
common practice. Further, the significant loss of rental revenue that 
would occur if borrowers took this type of action in an effort to 
obtain possible relief from prepayment obligations to tenants is a 
strong disincentive against this practice. For this reason, the Agency 
decided to make no change to the interim final rule.
    Topic: The Agency received many comments on the timeframes 
established for receiving incentives and closing deals with nonprofit 
organizations or public agencies. On the 15-month timeframe for 
receiving incentives, several commenters stated that the new process is 
not significantly improved and urged additional streamlining to reduce 
the 15-month wait time. Others stressed the importance of securing 
adequate funding in the Agency budget to meet the 15-month deadline. 
Still others opposed the 15-month cap, stating that it violates the 
Agency's responsibilities under ELIPHA to preserve housing and

[[Page 69094]]

will allow borrowers to opt out. On the 24-month timeframe, several 
commenters welcomed the limit but requested that an exception be made 
in cases where the purchaser has not received adequate cooperation from 
the Agency or the borrower. Some argued for a 48-month timeframe to 
address the intense competition for resources, while others stated that 
24-months is commercially unreasonable. Some commented on wait list 
procedures and proposed putting borrowers on the list sooner to speed 
up the process.
    Response: The Agency acknowledges the commenters' concerns and has 
revised Sec.  3560.660(a) to incorporate the suggestion for an 
exception to the 24-month deadline. The Agency has significantly 
reduced the waiting period for incentives since the proposed rule was 
published and expects that performance to continue. Otherwise, the 
timeframes and wait list procedures remain in effect, as the most 
feasible compromises among the various interests. Additional details on 
these timeframes and procedures are covered in Agency guidance about 
program procedures. The Agency appreciates the commenter' suggestions 
about the borrower's desire to opt out but hopes to have sufficient 
resources available so that the waiting list timeframes remain 
relatively short, although overall program funding is not under the 
control of the Agency. We also note that borrow cooperation is a 
critical component to help meet timeframes. For wait list integrity, 
the borrower must accept an incentive offer before they can establish a 
position on the waiting list.
    Topic: Several comments were received regarding the third party 
financing in preservation transactions. Several commenters said that 
the proposed rule does not enumerate the authorities that permit use of 
third party financing and instead refers back to subpart I. The 
commenters further state that Sec.  3560.406(f) prohibits the use of 
project funds to pay for such financing, which effectively eliminates 
all third-party financing options.
    Response: The Agency thanks the commenters for highlighting this 
issue and has modified Sec.  3560.406(f) so that it does not eliminate 
participation of third party financing during the transfer process. 
Also, Sec.  3560.657 clarifies that third party loans are acceptable as 
part of the prepayment process. The Agency has been and intends to 
continue using third party financing as an option when prepayment is 
requested.
    Topic: Commenters also discussed third-party loans as possible 
incentives. They asked that provisions be added to the rule to 
specifically allow borrowers to obtain an outside equity loan as a 
possible incentive. Commenters also asked the Agency to revise the 
regulation to more clearly recognize the range of financing mechanisms 
it has recently implemented through Administrative Notices that allow 
third parties to bring private and public financing into the section 
515 program.
    Response: The Agency finds that the interim final rule allows third 
party financing in Sec.  3560.659(g). Third-party equity loans are 
permissible as long as they are approved by the Agency in accordance 
with subpart I.
    Topic: The Agency also heard from commenters focused on appraisal 
issues under subpart N. Several of these commenters stated that the 
requirement for two appraisals, especially for a sale to a nonprofit 
organization, is excessive. They stated that if the borrower and the 
Agency can agree to a sales price after one appraisal is conducted, 
then a second one should not be required. Similarly, commenters 
suggested that if the difference between the two appraisals is less 
than 10 percent they should split the difference, rather than seek a 
third appraisal. Commenters also suggested that to help streamline the 
process, the Agency should allow for the owner to provide an appraisal, 
subject to review and approval by the Agency. Finally, there were some 
comments indicating that the appraisal requirements are not clear.
    Response: While the Agency appreciates these suggestions, it has 
made no change because the requirement for two or three appraisals is 
statutory. In response to several commenters who stated that the 
appraisal requirements are confusing, the Agency recommends reviewing 
subpart P of this part for detailed information on appraisal 
requirements.
    Topic: The Agency received several comments on identity-of-interest 
relationships in preservation transactions. These commenters said that 
prohibiting any identity-of-interest between seller and buyers, 
particularly nonprofit buyers, punishes persons who seek to convert 
ownership from for-profit to nonprofit status. The commenters suggested 
that the Agency adopt the IRS antichurning rule standards that any 
person or entity that has an interest in the seller must have a less 
than 10 percent owner interest in the buyer.
    Response: While the Agency acknowledges the commenters' concerns, 
it believes that there are sufficient numbers of nonprofit 
organizations that do not have an identity-of-interest relationship 
with borrowers of section 515 properties. The prohibition on IOI 
relationships is statutory.
    Topic: The Agency received several comments on the determination of 
minority impact. Some commenters asked for additional information on 
how the determination is made and clearer definitions of such terms as 
``market area,'' ``adverse impact,'' and ``housing opportunities for 
minorities.'' Several commenters indicated that this determination is 
of such importance that the standards for conducting this analysis 
should be included in the interim final rule instead of in the 
handbooks. Commenters also expressed concern that these determinations 
sometimes fail to correctly identify adverse impacts. Specifically, 
they stated that the Agency sometimes made incorrect assumptions about 
the need for the housing based on availability of section 8 housing, 
the lack of minorities in the property, or the size of the units. They 
suggested additional tools for the analysis, including the local 
section 8 wait list and a stronger definition of the term ``market 
area.'' Finally, some commenters ventured that the standard creates a 
new barrier to prepayment and is virtually impossible to meet.
    Response: The requirement regarding minority impact is statutory. 
While some commenters feel review criteria were too loose and others 
express concern that they will be too tight, the Agency strives to 
review relevant criteria in an objective manner. The Agency added 
language in Sec.  3560.658(b) that describes the information that will 
be reviewed when the Agency makes this determination. The Agency agrees 
that ``market area'' needed a better definition and has added one to 
subpart A. Further the Agency agreed that ``adverse impact'' needed 
further clarification and has clarified that the adverse impact should 
be disproportionate. The Agency also felt that some clarification was 
needed for ``housing opportunities for minorities.'' Therefore the 
Agency has clarified that an evaluation must be made of housing 
opportunities for minority tenants, applicants, and the market area in 
general. As to the suggestion of using local section 8 waiting lists in 
making these determinations, the Agency feels that this level of detail 
is unnecessary in its regulations. Additional details on how the Agency 
will review relevant information is available in Agency guidance about 
program procedures.
    Topic: Several comments were received regarding the borrower's 
right to prepay. These commenters said that the Agency has no right to 
prohibit prepayment because the provisions of ELIPHA are no longer 
valid, and they

[[Page 69095]]

stressed the Agency's obligation to comply with the terms of their loan 
agreements. In addition, several commenters said that given the Agency 
chooses not to acknowledge the borrower's right to prepay, it should 
further streamline the prepayment process to assist in the preservation 
of affordable housing.
    Response: The Agency's right to establish conditions for prepayment 
is statutory. The Agency has simplified the provisions throughout 
subpart N of the interim final rule to reduce the burden of preparing a 
prepayment application and retain only the requirements necessary to 
meet the statutorily required process.
    Topic: The Agency received several comments stating that the rule 
does little to clarify or streamline the process and stressing the need 
for alternatives to the prepayment process. Commenters emphasized the 
importance of an efficient process to keep properties in the program 
and to facilitate the borrower's ability to bring new financing (such 
as tax credits) into the property. Some suggested revising specific 
timeframes for review and response. Others suggested creating separate 
tracks and alternative mechanisms for dealing with properties that meet 
certain conditions. For example, they suggested that the Agency create 
an expedited process for properties that are prepaying but remain 
subject to use restrictions because of another loan, for properties 
where the borrower preemptively rejects incentives, and for obsolete 
and high-vacancy properties. Several commenters stated there should be 
two tracks for preservation deals, one for prepayment without 
restrictions and another for prepayment with restrictions, and that the 
timelines for each should be 180 and 90 days, respectively. Others 
stated that the transfer process should be streamlined to facilitate 
transfers to nonprofit organizations and loan assumptions where the 
same rates and terms remain in place, which could alleviate some of the 
strain on the prepayment process by taking some properties out of that 
process. Finally, they suggested that the roles of the Preservation 
Office and the State Offices be clarified to avoid operational issues.
    Response: The Agency has made many changes to reduce burden and 
simplify the process, in administrative practices, and both in the 
proposed rule and in the interim final rule, as the statute allows. The 
Agency has also streamlined the procedures for transfers and now allows 
for equity loans at the time of transfer in subpart I and encourages 
borrowers to take this route in lieu of prepayment. In essence, these 
actions have now created two tracks for borrowers to follow to exit the 
program while preserving the affordable rental housing project. 
Otherwise the Agency has not adopted a separate track program nor a 
special process for nonprofits because the prepayment statute (42 
U.S.C. 1472(c)) provides for a linear single track process. One of 
those tracks is within subpart I while the other is found in subpart N. 
Actions taken administratively have already reduced processing 
timeframes for most prepayments below the 180- and 90-day timeframes 
mentioned by the commenter. For example, offering general incentives 
has been a method the Agency has administratively implemented that 
greatly reduces processing time when a borrower indicates they have no 
desire to receive a specific incentive offer. Our discussion of the 
improvements made to the transfer process are detailed in our comments 
on subpart I including bringing new financing into the property.
    Topic: Several commenters stated that the processing of prepayment 
requests takes more time than it should, and that the interim final 
rule should include an application processing timeline. They questioned 
the validity of the 180-day threshold for submitting a proposal given 
the process can take longer than that and also questioned the 180-day 
rule for restricted loans as these loans already stipulate timeframes 
in the loan documents. They also suggested adding a 30-day deadline for 
Agency review of the application.
    Response: The Agency appreciates these comments and, as described 
in the Agency response to other public comments on subpart N, RHS has 
taken many steps to reduce burden, streamline the process and minimize 
delays. The 30-day tenant and nonprofit and public body notice and the 
180-day advertisement period for sales to a nonprofit and public body 
are statutory (42 U.S.C. 1472(c)). Additional information on internal 
Agency processing timelines is included in Agency guidance about 
program procedures. The Agency has retained the 180-day period before 
an anticipated prepayment as a reasonable attempt to allow borrowers 
sufficient time to meet their plans for a payment date in light of the 
procedural steps and possible contingencies they may face. Of course 
the 180-day period is a minimum notice period and the borrower can 
provide earlier notice if they feel that it is required. The interim 
final rule significantly reduced the number of required components of a 
complete application subject to review. This fact, by itself should 
greatly reduce the amount of time required by the Agency to review a 
prepayment application. However, the Agency has not adopted the 
suggestion for a 30-day review period because it considers this to be a 
matter of internal Agency procedure.
    Topic: The Agency received numerous comments on the public notice 
requirements. While some commenters indicated that the lower burden on 
the Agency would be helpful to the overall process, others complained 
that the requirements shift the notice responsibility from the Agency 
to the borrower and that this is burdensome to the borrower. They 
stated that the notice to other Agencies should be an Agency 
responsibility. They also stated that there is no mechanism for 
maintaining the contact lists and that existing lists are incomplete, 
outdated, and include insufficient contact information. They suggested 
that the owner be permitted to select a nonprofit organization to sell 
to, without going through the notice requirements, subject to Agency 
approval of the buyer. They also suggested that public notice be made 
the Agency's responsibility instead of the borrower's.
    Response: The Agency agrees with these comments and has adopted 
them into subpart N. Specifically, the Agency has developed a Web-based 
system, called the Prepayment Information Exchange (PIX), for providing 
electronic notices required during the prepayment process. PIX will 
also include a listing or nonprofit and public bodies that wish to be 
notified of prepayment requests or sales offers. The Agency also made 
changes to subpart N of the interim final rule that will permit the 
Agency to determine that no local nonprofits are available, to allow 
faster access to regional and national nonprofits.
    Topic: The discussion of incentives generated significant numbers 
of comments. These comments fell into three major areas: (1) The 
availability of incentives, (2) the structure of incentives, and (3) 
the process for calculating incentives.
    Topic: On the availability of incentives, commenters stressed the 
importance of providing promised incentives in a timely manner if the 
incentives are to be attractive to borrowers. They emphasized the need 
for sufficient budget and adherence to the timeframes in the processing 
timeline.
    Response: The Agency recognizes the need for timely provision of 
incentives and has tried to reduce burden and streamline the process 
precisely for this

[[Page 69096]]

reason. The Agency also worked to open avenues to third party resources 
to provide funding for equity when a prepayment request has been filed. 
Agency guidance about program procedures outlines the Agency's 
procedures for adhering to established timeframes. The Agency is unable 
to control its budget.
    Topic: Commenters also had a number of questions and comments about 
how incentives are structured: first, there was approval of the 
increased clarity on what the Agency can offer as incentives; however, 
this increased clarity inevitably raises new questions. One commenter 
asked if the Agency intends to retain both the specific and the general 
incentive offers. Several commenters asked why equity loans are capped 
at 90 percent. Some commenters asked that the Agency exercise 
flexibility with regard to exception rents where this is the most 
economically feasible approach to keeping a borrower in the program. 
And commenters had questions about the 50-year amortization period for 
1 percent loans. Others proposed edits for clarity around such concepts 
as equity and investment.
    Response: The Agency has developed detailed procedures for 
developing offers, which will be described in Agency guidance about 
program procedures. The general and specific incentive offer will be 
retained. The 90 percent limitation on equity loan incentives is 
statutory. The Agency has reserved the authority to exceed market rents 
and will follow procedural guidance on establishing the most valid 
amortization period. The Agency has developed these procedures with 
careful consideration to provide a fair incentive that assures adequate 
resources to borrowers so they can operate the properties in 
conformance with applicable property standards while meeting the 
Agency's statutory responsibility to retain affordable housing units. 
The Office of Rural Housing Preservation will work to coordinate 
preservation efforts so that processes are followed consistently and 
compatible guidance is developed as new issues emerge. The Agency 
adopted all edits which it felt added clarity to its prepayment 
process.
    Topic: Commenters raised a number of questions about how the 
incentives are calculated. Some asked that if the Agency provides an 
increase in annual return on the investment, the increase should be 
included in the project's operating expense budget to ensure that the 
borrower actually receives the money. Others asked about the 
applicability of the 30-year Treasury rate and what to do in the 
absence of such a rate. Some asked how to factor deferred maintenance 
into the determination of incentives. Others had questions about the 
statement that once established, incentive offers can not be 
renegotiated, though they can be changed. Still others had questions 
about the determination for equity loans that other incentives are not 
adequate.
    Response: When the Agency develops an incentive, it commits to 
rents sufficient to fund the incentive. The 30-year Treasury rate has 
been changed to the 15-year Treasury rate. Further procedural guidance 
has been developed to clarify what the Agency interprets as deferred 
maintenance. Incentives are not renegotiated to preserve the integrity 
of the original commitment. These and other topics related to process 
rather than policy are described in Agency guidance about program 
procedures. The statute requires the Agency to determine that other 
incentives are not adequate to encourage an owner to accept additional 
restrictions prior to offering an equity loan. The Agency makes this 
determination based on its knowledge of the market and the borrowers' 
interests.
    Topic: Commenters questioned when LOPEs would be used, given the 
prohibition on prepayment in properties where there is an adverse 
impact on tenants. Commenters also stated that LOPEs are not sufficient 
to guarantee housing in tight markets. Further, they asked why there 
was a time limit placed on tenants seeking LOPEs.
    Response: The Agency expects that the LOPEs will be used in 
properties where prepayment is approved. The Agency recognizes that the 
LOPEs do not address all housing problems faced by tenants.
    Topic: A number of commenters raised questions about the 
applicability of prepayment rules. One commenter observed that this 
subpart should specify that it does not apply to borrowers who make 
their last payment in accordance with their promissory note and 
amortization schedule. Another stated that the rule should allow for 
prepayment only in cases of payment in full as the current procedure 
does. And one commenter stated that all distressed properties should be 
eligible for prepayment incentive assistance, not simply those between 
1979 and 1989.
    Response: The Agency has made no changes to the eligibility for 
prepayment, or the incentives, as the statute establishes both. The 
statute does not distinguish between distressed or fully operational 
properties. Paying off a mortgage in accordance with the last scheduled 
payment at the end of the loan's full amortization schedule does not 
constitute prepayment.
    Topic: A few commenters suggested that the Office of Rental Housing 
Preservation (ORHP) adopt a broader strategy for preserving housing 
that addresses the long-term upkeep and rehabilitation of properties 
and the need to do this for funding and for new owners to achieve these 
goals. One commenter suggested a ``recovery program'' under which the 
ORHP would review and restructure financing on aging properties, 
working with for-profit and nonprofit developers who focus on troubled 
properties. Through this recovery effort, the ORHP would expedite 
transfers, prepayments, and loan workouts and would provide a subsidy 
clearinghouse for owners willing to take on troubled properties.
    Response: The Agency appreciates these comments and is examining 
new ways to facilitate these actions including examining the issues 
surrounding the ``recovery program'' concept. Any procedural changes 
made are covered in Agency guidance about program procedures. Any 
changes in policy identified by the Agency will be addressed in 
subsequent rulemaking as needed and appropriate.
    Topic: There were several comments on appeal rights. Some 
commenters questioned whether borrowers had the right to appeal the 
prepayment decisions. Others asked the tenants' rights to an appeal and 
suggested that notices provided to tenants should advise them of this 
right.
    Response: The Agency notes that subpart A states that Agency 
decisions that may negatively affect an applicant or borrower may be 
appealed pursuant to 7 CFR part 11. Tenants have a right to file 
grievances in cases where owners do not fulfill their responsibilities 
under the program, as outlined in subpart D, however, they cannot file 
grievances in cases of displacement or other adverse actions as a 
result of loan prepayment.
    Topic: One commenter asked if in Sec.  3560.655 whether the Agency 
meant ``expired restricted loan'' or ``expired restrictive-use 
provisions.''
    Response: The Agency did not find the reference, however, at Sec.  
3560.652, the Agency explicitly refers to ``expired restrictive-use 
provisions.''
    Topic: Commenters suggested several minor editorial changes for 
clarity in the section on borrower rejection of the incentives and 
asked for more detail on the definition of the market area.
    Response: The Agency has made several editorial changes to this 
section for clarity. Market area is now defined in subpart A of the 
interim final rule.

[[Page 69097]]

    Topic: A commenter asked if the language in Sec.  3560.659(e) 
inappropriately excludes new moderate-income residents from moving into 
a property that is in the process of accepting restrictions.
    Response: Any moderate-income exclusion is prescribed by statute 
(42 U.S.C. 1472(c)(5)(B)). The moderate-income exclusion would only 
take effect if a nonprofit or public body buys the project and leaves 
the program.
    Topic: Commenters had many questions about the process for selling 
to nonprofit organizations and public agencies. These comments focused 
on the advances, the selection of buyers, the sales process, and bona 
fide offers.
    Topic: Commenters welcomed the provision for advances to nonprofit 
organizations but suggested that more money is needed to make these 
sales occur and asked for more information about how the advances will 
occur. They also suggested that in addition to the funds, technical 
assistance would be helpful to nonprofits.
    Response: The Agency appreciates these comments and is striving to 
maximize the resources available to properties. The procedural guidance 
on how advances are requested and approved is covered in Agency 
guidance about program procedures. The Agency believes this guidance 
will be adequate and no significant change is anticipated from previous 
guidance provided in previous Agency instructions.
    Topic: Several commenters had questions about the selection of the 
nonprofit buyer. Some asked for more information on how to contact 
nonprofit organizations. The language in Sec.  3650.659(d) confused 
several commenters. They asked if the Agency is limiting nonprofit 
organizations to acquire, at most, one prepaid section 515 property. 
Other commenters asked for guidance on how to select among qualified 
nonprofits and asked that the rule specify that it is permissible to 
accept the highest acceptable offer.
    Response: The Agency notes that Sec.  3650.659(d) addresses 
identity-of-interest issues and does not limit the number of properties 
a nonprofit organization can acquire. The prohibition on the IOI 
between purchasing nonprofit or public body entities and entities that 
have prepaid a loan is statutory. The rule does address the selection 
between similar offers at Sec.  3560.659(f).
    Topic: Commenters also had questions on the sales process in 
general. They suggested edits to several parts of Sec.  3560.659 for 
clarity. Commenters asked for more clarity on the information to be 
provided to potential nonprofit buyers and offered some additional 
suggestions. Two commenters also asked that the rule specify some 
limits on the disclosure of information provided by the borrower to a 
prospective buyer.
    Response: Section 3650.659 of the interim final rule describes the 
types of information to be made available so that potential purchasers 
understand the project's physical and operational status. The Agency 
guidance about program procedures provides specific examples and added 
clarity of what borrowers must release to potential nonprofit buyers to 
provide sufficient information to allow for an informed offer to 
purchase.
    Topic: Commenters asked for a more extensive definition of a ``bona 
fide'' offer, for example, clarifying how committed an offerer's 
financing must be.
    Response: No further guidance will be provided on whether an offer 
is bona fide in this rule. The Agency feels that sufficient guidance is 
already provided in the rule and also independently reviews this issue 
(for example see Sec.  3560.659(e)(3)). However the Agency does want to 
note that in order to be a bona fide offer, the offer must be 
consistent with the appraised value established in accordance with 
Sec.  3560.659(a). The Agency will subsequently provide additional 
guidance on the factors it will use to evaluate whether an offer is 
bona fide. Section 3650.659(k) of the interim final rule also 
establishes a 24-month timeframe for the completion of the transaction. 
Since this is a business transaction, the credibility of any sales 
transaction will not be established in a regulation but by the terms of 
the sales contract.
    Topic: Commenters noted that all agreements currently reference 7 
CFR part 1930, subpart C and will therefore need to be updated.
    Response: The Agency appreciates these comments and has updated the 
references in the agreements.

Subpart O--Unauthorized Assistance

    Topic: One commenter expressed concern that the focus of this 
subpart was solely on unauthorized assistance, and that the Agency also 
specifically should address cases where tenants receive ``too little 
assistance'' because they inadvertently over report their income or do 
not know the exclusions or deductions to which they are entitled.
    Response: The Agency appreciates the concern and will consider this 
suggestion as it updates its internal Agency procedures.
    Topic: Another commenter noted that the proposed rule does not 
explicitly establish the policy that repayment plans need to be 
feasible given an tenant's capacity to pay.
    Response: The Agency believes that Sec.  3560.705(c) provides 
adequate guidance regarding this issue. No set structure is given 
intentionally, so flexibility is available depending on the tenant's 
situation. It should be noted, that the Agency is committed to 
collecting unauthorized assistance that was received by either the 
borrower or tenant.
    Topic: Multiple commenters indicated that they did not see an 
explicit statement in the rule establishing that when tenants receive 
unauthorized assistance due to borrower error, the borrower may not 
seek to recover this unauthorized assistance from the tenant.
    Response: The Agency acknowledges the comment, and notes that this 
was the Agency's intent in the proposed rule. RHS has revised the 
language in Sec.  3560.708(d) to clarify this policy.
    Topic: Several commenters addressed the topic of using project 
funds to pay for unauthorized assistance. Several commenters agreed 
with the language in the proposed rule prohibiting the use of project 
funds to pay for unauthorized assistance due to borrower error. Other 
commenters strongly disagreed, noting that because the program rules 
are complex, honest and/or inadvertent mistakes can occur. These 
commenters noted that in the cases of honest mistakes, the additional 
funds go to the project or the tenant, not to the manager or borrower. 
They requested that the Agency prohibit the use of project funds to 
repay unauthorized assistance only in cases of borrower fraud.
    Response: The Agency agrees with the commenters that the 
prohibition on using project funds to repay unauthorized assistance 
should only apply to cases of borrower fraud. The Agency has made this 
change in Sec.  3560.705(g).
    Topic: Several commenters addressed the language in the proposed 
rule relieving borrowers of responsibility for seeking repayment of 
unauthorized assistance to tenants in cases when the tenant has moved 
out of the property. Numerous commenters agreed with this change, 
noting that borrowers have very little practical authority to compel 
tenants to repay such funds once they no longer live at the property. 
They also noted that the process of trying to pursue former tenants can 
often be difficult and time-consuming for staff,

[[Page 69098]]

and collection agencies may not always be a viable option. Other 
commenters strongly disagreed with the policy as presented in the 
proposed rule. They indicated that borrowers often have the best 
information about such persons and often have provided the information 
to a collection agency. These commenters expressed concern that 
relieving borrowers of this responsibility will only increase the 
burden on Rural Development staff who are not in as strong a position 
to collect these funds.
    Response: The Agency acknowledges the concerns raised by commenters 
but has decided to retain the policy as described in the proposed rule 
because this policy gives RHS greater flexibility to apply resources 
cost-effectively toward the cases that most deserve to be pursued and 
reduces the burden on borrowers and projects. No changes to the 
regulation were made in response to these comments.
    Topic: Multiple commenters expressed concern that some of the 
language in the subpart appeared to hold borrowers responsible for the 
acts of residents. The commenters agreed that borrowers have a 
responsibility to take action to identify and collect unauthorized 
assistance received by tenants but took the position that borrowers are 
not responsible for another party's fraud or misrepresentations of 
income.
    Response: Borrowers must use due diligence in verifying tenant 
income. The Agency, however, acknowledges the concerns expressed by the 
commenters and has simplified and clarified the language in Sec.  
3560.708.
    Topic: Multiple commenters expressed support for the use of offsets 
as an effective tool for collecting unauthorized assistance, and one 
commenter described how it and the Treasury's Cross-Servicing Program 
had worked well.
    Response: The Agency appreciates these comments.
    Topic: One commenter questioned the reference to 7 CFR 3550.210 
regarding the use of offsets and asked whether a more appropriate 
reference would be to 7 CFR part 3.
    Response: The Agency understands the question but has made no 
change because the reference to the Single Family Housing regulation is 
specific to housing programs.
    Topic: Multiple commenters asked questions about procedures related 
to unauthorized assistance and enforcement referrals. Another commenter 
perceived inconsistencies between the proposed rule and the program 
handbooks.
    Response: The Agency will describe how it intends to address 
unauthorized assistance and enforcement referrals when it updates its 
internal Agency procedures in conjunction with the issuance of the 
interim final rule.
    Topic: One commenter suggested asking tenants to sign a document 
similar to an Applicant Certification related to Federal Collection 
Policies for Consumer or Commercial Debt at the time that they apply 
for occupancy as a possible way to further protect the government's 
interests.
    Response: This form is not necessary to be completed by the tenant. 
The Tenant Certification form has been amended to provide adequate 
language to protect the government's interests.

Subpart P--Appraisals

    Topic: Several commenters asked the Agency to clarify the 
circumstances when the different types of appraisals identified in the 
regulation should be performed. In particular, multiple commenters 
asked that the regulation indicate that a ``value-in-use'' appraisal is 
needed when a project is receiving another type of housing assistance. 
Another commenter wanted clarification that an ``as-improved'' 
appraisal is needed when a project is being rehabilitated. Further, 
some commenters asked for clarification about the methods to be used in 
conducting the appraisals.
    Response: The Agency has clarified the language in this subpart. In 
making the revisions, the Agency has used terminology that reflects 
current use within the appraisal industry in an effort to reduce the 
potential for confusion when a borrower or Rural Development requests 
an appraisal. Information about methods to be used when conducting 
appraisals will be provided in the program handbooks.
    Topic: Multiple commenters expressed concern about the language in 
the proposed rule restricting the release of appraisals to borrowers.
    Response: The Agency acknowledges the concern raised by the 
commenters and has revised Sec.  3560.752(c) of the proposed rule (now 
Sec.  3560.752(d) of the interim final rule) to allow the release of 
appraisals to borrowers or applicants upon their request.
    Topic: One commenter expressed concern that the terms ``security 
value'' and ``value-in-use'' were not adequately defined.
    Response: The Agency provides further clarification of the 
definition of ``security value'' in the handbooks. RHS has deleted the 
term ``value-in-use'' from the regulation and has included the term 
``market value, subject to restricted rents'', along with a definition, 
in this subpart. The latter term will be more readily understood by 
appraisers and users of appraisals.
    Topic: One commenter expressed concern that the language in this 
subpart contradicts the definition of current appraisal in subpart A.
    Response: The Agency has made the language consistent with the 
subpart A definition.
    Topic: One commenter expressed concern about using appraisals that 
are more than 12 months old if there is mutual agreement between the 
Agency and the borrower or applicant because this allowance could be 
abused.
    Response: An exception to the use of a current appraisal if the 
Agency and the applicant or borrower mutually agree to the use of an 
appraisal that is not current is considered by the Agency a prudent 
policy that allows for flexibility in individual cases that warrant it. 
It is unlikely that this policy could be abused if the Agency and the 
applicant, or borrower, both agree to it. Therefore, no change has been 
made based on this comment.
    Topic: One commenter stated that Sec.  3560.753 implied that 
appraisers had to be members of a professional organization to do 
appraisals, which conflicts with State licensing laws.
    Response: The Agency did not intend that membership in a 
professional organization is a qualification requirement for appraisers 
to write appraisals for the Agency. The Agency revised paragraph (b) of 
this section to clarify that MFH appraisals prepared for the Agency 
will be written by Agency appraisers or independent fee appraisers who 
are State-certified general appraisers, certified or licensed in the 
state where the property is located.
    Topic: One commenter requested that the proposed rule include a 
statement on due diligence and that due diligence be conducted in 
accordance with American Society for Testing and Materials standards.
    Response: Agency appraisal procedures concerning environmental 
issues that might impact value simply clarify established regulatory 
requirements and are being provided in the updated internal Agency 
procedures being prepared in conjunction with the issuance of the 
interim final rule.
    Topic: One commenter questioned whether the phrase ``consummation 
of a sale as of a specified date'' in Sec.  3560.752 is inconsistent 
with the sale to a nonprofit organization under subpart N.
    Response: The Agency has made no change based on this comment 
because the phrase ``consummation of a sale as

[[Page 69099]]

of a specified date'' is part of the most commonly used definition of 
``market value'' used in the appraisal industry. The phrase is an 
essential part of the definition and is not inconsistent with sale 
procedures under subpart N.
    Topic: One commenter expressed concern that subpart P uses terms 
and language that are inconsistent with the Uniform Standards of 
Professional Appraisal Practice (USPAP) and appraisal literature in 
general.
    Response: The Agency has made minor wording changes throughout the 
subpart as suggested to be consistent with USPAP.
    Topic: One commenter suggested that the Agency's handbook language 
regarding appraisals could be a guide for the regulation.
    Response: The Agency agrees with the commenter. Updated Agency 
internal procedures being issued in conjunction with the interim final 
rule will clarify procedures for satisfying the requirements 
established by this subpart.

Discussion of Comments--Proposed Rule Regarding Operating Assistance 
for Off-Farm Migrant Farmworker Projects

    The proposed rule was published in the Federal Register on November 
2, 2000 (65 FR 65790), with a 60-day comment period that ended January 
2, 2001. Four comments were received about the language in the proposed 
rule.
    The public comments about the proposed rule are discussed below. 
The regulatory provisions of operating assistance for Off-Farm Labor 
Housing projects are now addressed in 7 CFR part 3560, subpart L. RHS 
sincerely appreciates the time and effort of all commenters.
    Topic: Several commenters noted that Pub. L. 106-569 had been 
enacted since the publication of the proposed rule, and suggested that 
the rule be revised to include the provisions from this statute 
allowing the use of section 521 funds as an operating subsidy in Off-
Farm Labor Housing projects that house both migrant and year-round 
farmworkers.
    Response: The Agency agreed with the commenters and incorporated 
the provisions of Pub. L. 106-569 allowing the use of section 521 as an 
operating subsidy in Off-Farm Labor Housing projects that house both 
migrant and year-round farmworkers in Sec.  3560.575(a) of the interim 
final rule.
    Topic: Multiple commenters expressed concern that in some cases 
MTFS data will not exist and suggested that the regulations allow 
alternative methods for establishing prevailing migrant farmworker 
incomes and the amount of income from farmwork.
    Response: The Agency agreed with the commenters. Neither the 
proposed rule nor the final rule mandated the use of MTFS data. Owners 
may utilize other reliable data to establish the average adjusted 
monthly household income of migrant farmworker households in the area.
    Topic: One commenter stated that 30 percent of a migrant worker's 
income is more than a worker can afford for rent because most migrant 
workers also have to bear the cost of housing at their home base as 
well. This commenter suggested that 20 percent is a more reasonable 
portion of a migrant farmworker's income to be used for housing.
    Response: The Agency acknowledges the commenter's concern and 
considered the suggestion. However, the Agency retained 30 percent as 
the standard for the amount of income occupants of such housing are 
able to pay toward shelter costs in Sec.  3560.574 (c)(1) of the 
interim final rule. The Agency retained this standard because it 
enables the program to serve more farmworkers with the available funds, 
while keeping the amount that tenants must pay for shelter reasonable 
by the standard used in many other affordable housing programs, such as 
the section 515 program. Further, the Agency retained this standard to 
keep it consistent with the standard used in the Agency's section 515 
rental housing program.
    Topic: One commenter suggested that operating assistance be paid in 
a single annual payment, instead of the proposed equal monthly 
payments. The commenter observed that during the peak operating season 
cash demands are higher and that monthly payments could cause cash flow 
problems for properties during the peak season.
    Response: The Agency acknowledges the commenter's concern and 
considered the suggestion. However, the Agency retained the monthly 
payment provision in Sec.  3560.574(c)(3) of the interim final rule. 
The Agency acknowledges that cash flow may vary during the year, 
however, it believes that these fluctuations should not be a problem 
for borrowers operating such projects. Existing projects should be 
fiscally sound and have adequate operating reserves to cover any short-
term operating deficiencies. Further, new projects are required to have 
a two percent operating reserve to offset any short-term cash 
deficiencies.
    Topic: One commenter noted that since operating assistance payments 
are estimated, there should be a mechanism for adjusting the actual 
assistance payments if estimates are incorrect.
    Response: The Agency agrees with the commenter's remark. The Agency 
notes that the provision for annual adjustments was contained in the 
proposed rule at Sec.  1944.182(b)(3) and is included in the interim 
final rule. In Sec.  3560.574(a) of the interim final rule, the Agency 
established that the amount of operating assistance payments is 
determined each year based on the project's budget, and may not exceed 
90 percent of the annual operating costs attributable to the migrant 
units. The Agency notes that if the payments for the previous year 
resulted in a shortfall or a surplus, these circumstances can be 
addressed in the budget for the coming year, and consequently in the 
operating assistance payment amounts for the coming year.

Regulatory Crosswalk

    The following is a crosswalk that shows where the content of the 14 
regulations that have been consolidated can be found in 7 CFR part 
3560.

----------------------------------------------------------------------------------------------------------------
                                                                                  Location in:
                Topic                     Previous location    -------------------------------------------------
                                                                    7 CFR part 3560             Handbooks
----------------------------------------------------------------------------------------------------------------
General Provisions and Definitions:    Numerous Instructions:   Subpart A:               All Three Handbooks:
  Civil rights.......................  7 CFR part 1901,         Sec.   3560.2..........  Loan Origination
                                        subpart E.                                        Chapters 1 & 3, Asset
                                                                                          Management Chapter 1,
                                                                                          Project Servicing
                                                                                          Chapter 1.
  State, local, or tribal laws.......  7 CFR 1930.105(b)(6); 7  Sec.   3560.5..........  Loan Origination
                                        CFR 1944.53(c)(1); 7                              Chapter 1, Asset
                                        CFR                                               Management Chapter 1,
                                        1944.164(e)(2)(ii); 7                             Project Servicing
                                        CFR 1944.169(c)(3); 7                             Chapter 1.
                                        CFR 1944.224(d).

[[Page 69100]]

 
  Borrower responsibility and          7 CFR 1944.211(b); 7     Sec.   3560.6..........  Loan Origination
   requirements.                        CFR 1930.101; 7 CFR                               Chapters 3-13, Asset
                                        part 1930, subpart C,                             Management Chapters 3-
                                        Exhibit B, Para. III.                             9, Project Servicing
                                                                                          Chapters 4-15.
  Administrator's exception authority  7 CFR 1930.144.........  Sec.   3560.8..........  Loan Origination
                                                                                          Chapter 1, Asset
                                                                                          Management Chapter 1,
                                                                                          Project Servicing
                                                                                          Chapter 1.
  Definitions........................  All regulations listed   Sec.   3560.11.........  Loan Origination, Asset
                                        under ``Implementation                            Management, Project
                                        Proposal''.                                       Servicing, Throughout
                                                                                          all three.
Direct Loan and Grant Origination:     7 CFR Part 1944,         Subpart B:               Loan Origination:
                                        Subpart E:
  Eligible use of funds..............  7 CFR 1944.212.........  Sec.   3560.53.........  Loan Origination,
                                                                                          Chapter 4.
  Processing Section 515 housing       7 CFR 1944.231.........  Sec.   3560.56.........  Loan Origination,
   proposals.                                                                             Chapter 4.
  Initial operating capital            7 CFR 1944.211(a)(6)...  Sec.   3560.64.........  Loan Origination,
   contribution.                                                                          Chapter 4.
  Reserve account....................  7 CFR part 1944,         Sec.   3560.65.........  Loan Origination,
                                        subpart E, Exhibit A-                             Chapter 4.
                                        9, Para. 10.b.
  Participation with other funding or  7 CFR 1944.233.........  Sec.   3560.66.........  Loan Origination,
   financing sources.                                                                     Chapter 4.
  Rates and terms for section 515      7 CFR 1944.214.........  Sec.   3560.67.........  Loan Origination,
   loans.                                                                                 Chapter 5.
  Permitted return on investment       7 CFR 1944.215(n)......  Sec.   3560.68.........  Loan Origination,
   (ROI).                                                                                 Chapter 5.
  Supplemental requirements for        7 CFR 1944.224.........  Sec.   3560.69.........  Loan Origination,
   congregate housing and group homes.                                                    Chapter 11.
  Subsequent loans...................  7 CFR 1944.237.........  Sec.   3560.73.........  Loan Origination,
                                                                                          Chapter 10.
Borrower Management and Operations     7 CFR Part 1930,         Subpart C:               Asset Management:
 Responsibilities:                      Subpart C, Exhibit B:
  Housing project management.........  7 CFR part 1930,         Sec.   3560.102........  Asset Management,
                                        subpart C, Exhibit B,                             Chapter 3.
                                        Para. V.
  Maintaining housing projects.......  7 CFR part 1930,         Sec.   3560.103........  Asset Management,
                                        subpart C, Exhibit B,                             Chapter 5.
                                        Para. X.
  Fair housing.......................  7 CFR 1930.103 and 104,  Sec.   3560.104........  Chapter 1 in all 3
                                        7 CFR Part 1930,                                  Handbooks Asset
                                        Subpart C, Exhibit B,                             Management Chapter 6.
                                        Para. VI.
  Insurance and taxes................  7 CFR part 1930 subpart  Sec.   3560.105........  Asset Management
                                        C, Exhibit B, Para. XV.                           Chapter 3.
Multi-Family Housing Occupancy:        7 CFR Part 1930,         Subpart D:               Asset Management:
                                        Subpart C, Exhibit B:
  Tenant eligibility.................  7 CFR part 1930,         Sec.   3560.152........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 6.
                                        Para. VI.
  Calculation of household income and  7 CFR part 1930,         Sec.   3560.153........  Asset Management
   assets.                              subpart C, Exhibit B,                             Chapter 6.
                                        Para. VII.
  Tenant selection...................  7 CFR part 1930,         Sec.   3560.154........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 6.
                                        Para. VI.
  Assignment of rental units and       7 CFR part 1930,         Sec.   3560.155........  Asset Management
   occupancy policies.                  subpart C, Exhibit B,                             Chapter 6.
                                        Para. VI.
  Lease requirements.................  7 CFR part 1930,         Sec.   3560.156........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 6
                                        Para. VIII.
  Occupancy rules....................  7 CFR part 1930,         Sec.   3560.157........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 6.
                                        Para. VIII.
  Changes in tenant eligibility......  7 CFR part 1930,         Sec.   3560.158........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 6.
                                        Para. VI.
  Termination of occupancy...........  7 CFR part 1930,         Sec.   3560.159........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 6.
                                        Para. XIV.
  Tenant grievances..................  7 CFR part 1944,         Sec.   3560.160........  Asset Management
                                        subpart L.                                        Chapter 6.
Rents:                                 7 CFR Part 1930,         Subpart E:               Asset Management:
                                        Subparts B and C:
  Establishing rents and utility       7 CFR part 1930,         Sec.   3560.202........  Asset Management
   allowances.                          subpart C, Exhibit C.                             Chapter 7.
Tenant contributions.................  7 CFR part 1930,         Sec.   3560.203........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 7.
                                        Para. II.
  Security deposits and membership     7 CFR part 1930,         Sec.   3560.204........  Asset Management
   fees.                                subpart C, Exhibit B,                             Chapter 7.
                                        Para. VIII H.
Rent and utility allowance changes...  7 CFR part 1930,         Sec.   3560.205........  Asset Management
                                        subpart C, Exhibit C.                             Chapter 7.
Rents during eviction or failure to    7 CFR part 1930,         Sec.   3560.208........  Asset Management
 recertify.                             subpart C, Exhibit B,                             Chapter 7.
                                        Para. XIV.A.

[[Page 69101]]

 
  Special note rents (SNRs)..........  7 CFR part 1930,         Sec.   3560.210........  Asset Management
                                        subpart C, Exhibit C,                             Chapter 7.
                                        Para. IX.
Rental Subsidies:                      7 CFR Part 1930,         Subpart F:               Asset Management:
                                        Subpart C, Exhibit E :
  Authorized rental subsidies........  7 CFR part 1930,         Sec.   3560.252........  Asset Management
                                        subpart C, Exhibit E,                             Chapter 8.
                                        Para. II.
  Eligibility for rental assistance..  7 CFR part 1930,         Sec.   3560.254........  Asset Management
                                        subpart C, Exhibit E,                             Chapter 8.
                                        Para. II. A.
  Rental assistance payments.........  7 CFR part 1930,         Sec.   3560.256........  Asset Management
                                        subpart C, Exhibit E,                             Chapter 8.
                                        Para. X.
  Assigning rental assistance........  7 CFR part 1930,         Sec.   3560.257........  Asset Management
                                        subpart C, Exhibit E,                             Chapter 8.
                                        Para. XI.
  Rental subsidies from non-Agency     7 CFR part 1930,         Sec.   3560.260........  Asset Management
   sources.                             subpart C, Exhibit B,                             Chapter 8
                                        Paras. IV. C, D, and E.
Financial Management:                  7 CFR Part 1930,         Subpart G:               Asset Management:
                                        Subpart C, Exhibit B:
  Accounting, bookkeeping, budgeting,  7 CFR 1930.122, 7 CFR    Sec.   3560.302........  Asset Management
   and financial management systems.    part 1930, subpart C,                             Chapter 4.
                                        Exhibit B, Para. XIII.
  Housing project budgets............  7 CFR part 1930,         Sec.   3560.303........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 4.
                                        Para. XII.A.
  Initial operating capital..........  7 CFR part 1930,         Sec.   3560.304........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 4.
                                        Para. XIII.B.2.a.(1).
  Return on investment...............  7 CFR part 1930,         Sec.   3560.305........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 4.
                                        Para. XII.A.8.
  Reserve account....................  7 CFR part 1930,         Sec.   3560.306........  Asset Management
                                        subpart C, Exhibit B,                             Chapter 4.
                                        Para. XIII.B.2.c.
  Annual financial reports...........  7 CFR 1930.122(b)(4); 7  Sec.   3560.308........  Asset Management
                                        CFR part 1930, subpart                            Chapter 4.
                                        C, Exhibit A-1.
Agency Monitoring:                     7 CFR Part 1930,         Subpart H:               Asset Management:
                                        Subpart C:
  Agency monitoring scope, purpose,    7 CFR 1930.109, 110,     Sec.   3560.352........  Asset Management
   and borrower responsibilities.       113, 117.                                         Chapter 9.
  Scheduling of on-site monitoring     7 CFR 1930.119(d)......  Sec.   3560.353........  Asset Management
   reviews.                                                                               Chapter 9
  Borrower response to monitoring      7 CFR 1930.119(f)......  Sec.   3560.354........  Asset Management
   review notifications.                                                                  Chapter 9.
Servicing:                             7 CFR Part 1951,         Subpart I:               Project Servicing:
                                        Subpart A and 7 CFR
                                        Part 1965, Subpart B:
  Account servicing..................  7 CFR part 1951,         Sec.   3560.403........  Project Servicing
                                        subpart A.                                        Chapter 4.
  Final loan payments................  7 CFR part 1951,         Sec.   3560.404........  Project Servicing
                                        subpart D.                                        Chapter 4.
  Borrower organizational structure    7 CFR 1965.63..........  Sec.   3560.405........  Project Servicing
   or ownership interest changes.                                                         Chapter 5.
  Multi-family housing ownership       7 CFR 1965.65..........  Sec.   3560.406........  Project Servicing
   transfers or sales.                                                                    Chapter 7
  Subordinations or junior liens       7 CFR 1965.83..........  Sec.   3560.409........  Project Servicing
   against security property.                                                             Chapter 8.
  Consolidations.....................  7 CFR 1965.68..........  Sec.   3560.410........  Project Servicing
                                                                                          Chapter 11.
Special Servicing, Enforcement,        Numerous Instructions:   Subpart J:               Project Servicing:
 Liquidation, and Other Actions:
  Monetary and non-monetary defaults.  7 CFR 1955.15(d)(2)....  Sec.   3560.452........  Project Servicing
                                                                                          Chapter 10
  Workout agreements.................  7 CFR part 1965,         Sec.   3560.453........  Project Servicing
                                        subpart B, Exhibit B.                             Chapter 10.
  Special servicing actions related    7 CFR part 1930,         Sec.   3560.454........  Project Servicing
   to housing operations.               subpart C, Exhibit C,                             Chapter 10
                                        Para. IX.
  Special servicing actions related    7 CFR 1965.85..........  Sec.   3560.455........  Project Servicing
   to loan accounts.                                                                      Chapter 10.
  Liquidation........................  7 CFR part 1955,         Sec.   3560.456........  Project Servicing
                                        subpart A.                                        Chapter 12
  Negotiated debt settlement.........  7 CFR 1956.57(c).......  Sec.   3560.457........  Project Servicing
                                                                                          Chapter 12.
Management and Disposition of Real     7 CFR Part 1955,         Subpart K:               Project Servicing:
 Estate Owned (REO) Properties:         Subparts B and C:
  Conversion of single family type     7 CFR 1955.114(c)......  Sec.   3560.506........  Project Servicing
   REO property to multi-family                                                           Chapter 14.
   housing use.

[[Page 69102]]

 
Off-Farm Labor Housing:                7 CFR Part 1944,         Subpart L:               Loan Origination:
                                        Subpart D:
  Eligibility requirements for off-    7 CFR 1944.157.........  Sec.   3560.555........  Loan Origination
   farm labor housing loans and                                                           Chapter 13.
   grants.
  Design and construction              7 CFR part 1944,         Sec.   3560.559........  Loan Origination
   requirements.                        subpart D, Exhibit A-3.                           Chapters 3 & 13.
  Loan and grant limits..............  7 CFR 1944.164.........  Sec.   3560.562........  Loan Origination
                                                                                          Chapters 5 & 13.
  Participation with other funding or  7 CFR 1944.163.........  Sec.   3560.565........  Loan Origination
   financing sources.                                                                     Chapters 6 & 12.
  Loan and grant rates and terms.....  7 CFR 1944.159.........  Sec.   3560.566........  Loan Origination
                                                                                          Chapters 5 & 13.
  Supplemental requirements for        7 CFR 1944.163(e)......  Sec.   3560.568........  Loan Origination
   seasonal off-farm labor housing.                                                       Chapter 13.
  Rental assistance..................  7 CFR 1944.182.........  Sec.   3560.573........  Loan Origination
                                                                                          Chapters 4 & 13, Asset
                                                                                          Management Chapter 8.
  Occupancy restrictions.............  7 CFR 1944.154.........  Sec.   3560.576........  Loan Origination
                                                                                          Chapter 13, Asset
                                                                                          Management Chapter 6.
  Tenant priorities for labor housing  7 CFR 1944.154.........  Sec.   3560.577........  Loan Origination
                                                                                          Chapter 13, Asset
                                                                                          Management Chapter 6.
On-Farm Labor Housing:                 7 CFR Part 1944,         Subpart M:               Loan Servicing:
                                        Subpart D:
  Eligibility requirements...........  7 CFR 1944.157.........  Sec.   3560.605........  Loan Origination
                                                                                          Chapter 13.
  Site and construction requirements.  7 CFR part 1944,         Sec.   3560.608........  Loan Origination
                                        subpart D, Exhibit A-3.                           Chapters 3 & 13.
  Loan limits........................  7 CFR 1944.164.........  Sec.   3560.612........  Loan Origination
                                                                                          Chapters 5 & 13.
  Reserve accounts...................  7 CFR part 1944,         Sec.   3560.614........  Loan Origination
                                        subpart E, Exhibit A-                             Chapters 4 & 13.
                                        9, Para. 10.b.
  Participation with other funding     7 CFR 1944.163.........  Sec.   3560.615........  Loan Origination
   sources.                                                                               Chapters 6 & 13.
  Rates and terms....................  7 CFR 1944.159.........  Sec.   3560.616........  Loan Origination
                                                                                          Chapters 5 & 13.
  Supplemental requirements for on-    7 CFR 1944.163(e)......  Sec.   3560.618........  Loan Origination
   farm labor housing.                                                                    Chapter 13.
  Housing management and operations..  7 CFR part 1944,         Sec.   3560.623........  Loan Origination
                                        subpart D, Exhibit B.                             Chapters 13, Asset
                                                                                          Management Chapter 3.
  Occupancy restrictions.............  7 CFR 1944.154.........  Sec.   3560.624........  Loan Origination
                                                                                          Chapters 13, Asset
                                                                                          Management Chapter 6.
Housing Preservation:                  7 CFR Part 1965,         Subpart N:               Project Servicing:
                                        Subpart E:
  Prepayment and restrictive-use       7 CFR 1965.208 and 209.  Sec.   3560.652........  Project Servicing
   categories.                                                                            Chapter 15.
  Prepayment requests................  7 CFR 1965.205.........  Sec.   3560.653........  Project Servicing
                                                                                          Chapter 15.
  Tenant notification requirements...  7 CFR 1965.206(b)(5)     Sec.   3560.654........  Project Servicing
                                        and (b)(6); 7 CFR                                 Chapter 15.
                                        1965.215(e)(3) and
                                        (f)(2).
  Agency requested extension.........  7 CFR 1965.215(f)(2)...  Sec.   3560.655........  Project Servicing
                                                                                          Chapter 15.
  Incentive offers...................  7 CFR 1965.213.........  Sec.   3560.656........  Project Servicing
                                                                                          Chapter 15.
  Processing and closing incentive     7 CFR 1965.214.........  Sec.   3560.657........  Project Servicing
   offers.                                                                                Chapter 15.
  Borrower rejection of incentive      7 CFR 1965.214(b)......  Sec.   3560.658........  Project Servicing
   offer.                                                                                 Chapter 15.
  Sale or transfer to nonprofit        7 CFR 1965.217.........  Sec.   3560.659........  Project Servicing
   organizations and public bodies.                                                       Chapter 15.
  Acceptance of prepayments..........  7 CFR 1965.215.........  Sec.   3560.660........  Project Servicing
                                                                                          Chapter 15.
Unauthorized Assistance:               7 CFR Part 1951,         Subpart O:               Project Servicing:
                                        Subpart N:
  Identification of unauthorized       7 CFR 1951.656.........  Sec.   3560.703........  Project Servicing
   assistance.                                                                            Chapter 9.
  Unauthorized assistance              7 CFR 1951.657.........  Sec.   3560.704........  Project Servicing
   determination notice.                                                                  Chapter 9.
  Recapture of unauthorized            7 CFR 1951.658.........  Sec.   3560.705........  Project Servicing
   assistance.                                                                            Chapter 9.
  Program participation and            7 CFR 1951.658(b)......  Sec.   3560.707........  Project Servicing
   corrective actions.                                                                    Chapter 9.
  Unauthorized assistance received by  7 CFR 1951.661(a)(3)...  Sec.   3560.708........  Project Servicing
   tenants.                                                                               Chapter 9.
  Demand letter......................  7 CFR 1951.658(c)......  Sec.   3560.709........  Project Servicing
                                                                                          Chapter 9.
Appraisals:                            7 CFR Part 1922,         Subpart P:               Project Servicing:
                                        Subpart B:
  Appraisal use, request, review, and  7 CFR 1922.52..........  Sec.   3560.752........  Loan Origination
   release.                                                                               Chapter 7, Project
                                                                                          Servicing Chapter 8.
  Agency appraisal standards and       7 CFR part 1922,         Sec.   3560.753........  Loan Origination
   requirements.                        subpart B, Exhibit A.                             Chapter 7, Project
                                                                                          Servicing Chapter 7.
----------------------------------------------------------------------------------------------------------------


[[Page 69103]]

List of Subjects

7 CFR Part 1806

    Buildings, Community development, Disaster assistance, Flood 
plains, Housing, Insurance, Loan programs--Agriculture, Loan programs--
Housing and community development, Real property insurance, Rural 
areas.

7 CFR Part 1822

    Loan programs--Housing and community development, Low and moderate 
income housing, Mortgages, Nonprofit organizations, Rural housing.

7 CFR Part 1902

    Accounting, Banking, Grant programs--Housing and community 
development, Loan programs--Agriculture, Loan programs--Housing and 
community development.

7 CFR Part 1925

    Real property taxes, Taxes.

7 CFR Part 1930

    Accounting, Administrative practice and procedure, Grant programs-- 
Housing and community development, Loan programs--Housing and community 
development, Low and moderate income housing, Reporting and 
recordkeeping requirements.

7 CFR Part 1940

    Administrative practice and procedure, Agriculture, Allocations, 
Grant programs--Housing and community development, Loan programs--
Agriculture, Rural areas

7 CFR Part 1942

    Community development, Community facilities, Loan programs--
Housingand community development, Loan security, Rural areas, Waste 
treatment and disposal--Domestic, Water supply--Domestic.

7 CFR Part 1944

    Administrative practice and procedure, Aged, Farm labor housing, 
Grant programs--Housing and community development, Handicapped, Home 
improvement, Loan programs--Housing and community development, Low and 
moderate income housing--Rental, Migrant labor, Mobile homes, 
Mortgages, Nonprofit organizations, Public housing, Rent subsidies, 
Reporting requirements, Rural housing, Subsidies.

7 CFR Part 1951

    Accounting, Accounting servicing, Credit, Debt restructuring, Grant 
programs--Housing and community development, Loan programs--
Agriculture, Loan programs--Housing and community development, Low and 
moderate income housing loans--Servicing, Mortgages, Rent subsidies, 
Reporting requirements, Rural areas.

7 CFR Part 1955

    Foreclosure, Government acquired property, Government property 
management.

7 CFR Part 1956

    Accounting, Loan programs--Agriculture, Rural areas.

7 CFR Part 1965

    Administrative practice and procedure.

7 CFR Part 3560

    Accounting, Administrative practice and procedure, Aged, Conflict 
of interests, Government property management, Grant programs--Housing 
and community development, Insurance, Loan programs--Agriculture, Loan 
programs--Housing and community development, Low and moderate income 
housing, Migrant labor, Mortgages, Nonprofit organizations, Public 
housing, Rent subsidies, Reporting and recordkeeping requirements, 
Rural areas.

7 CFR Part 3565

    Banks, Civil rights, Credit, Guaranteed loans, Low and moderate 
income housing, Mortgages.

0
Therefore, Chapters XVIII and XXXV, title 7, Code of Federal 
Regulations are amended as follows:

Chapter XVIII--[Amended]

PART 1806--INSURANCE

0
1. The authority citation for part 1806 continues to read as follows:

    Authority: 75 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart A--Real Property Insurance


Sec.  1806.4  [Amended]

0
2. Section 1806.4 is amended in the introductory text of paragraph 
(a)(2) by removing the sentence after the paragraph heading.

Subpart B--National Flood Insurance

0
3. Section 1806.21 is amended in paragraph (a) by adding a sentence at 
the end of the paragraph to read as follows:


Sec.  1806.21  General.

    (a) * * * This subpart does not apply to the Rural Rental Housing, 
Rural Cooperative Housing, or Farm Labor Housing programs of the Rural 
Housing Service.
* * * * *

PART 1822--RURAL HOUSING LOANS AND GRANTS

0
4. The authority citation for part 1822 is revised to read as follows:

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

Subpart G--Rural Housing Site Loan Policies, Procedures, and 
Authorizations


Sec.  1822.271  [Amended]

0
5. Section 1822.271 is amended:
0
a. In the table in paragraph (e) by removing the entire entry for 
``Form FmHA or its successor agency under Public Law 103-354 1944-50'' 
and by revising the form number ``1944-51'' to read ``3560-51'' in the 
last entry of the table.
0
b. In paragraph (g), in the second sentence of the introductory text, 
by removing the words ``and submit to the FmHA or its successor agency 
under Public Law 103-354 Finance Office through field office terminals 
that information contained in Form FmHA or its successor agency under 
Public Law 103-354 1944-50, `Multiple Family Housing Borrower/Project 
Characteristics.' ''
0
c. By revising paragraph (d)(1) to read as follows:


Sec.  1822.271  Processing applications.

* * * * *
    (d) * * *
    (1) Request for obligation of funds and fund analysis. Form RD 
3560-51, ``Multiple Family Housing Obligation Fund Analysis'' will be 
completed in accordance with the Forms Manual Insert (FMI).
* * * * *

0
6. Section 1822.272 is revised to read as follows:


Sec.  1822.272  Approval or disapproval of a loan.

    The provisions of 7 CFR part 3560, subpart B will be followed.

0
7. Section 1822.273 is revised to read as follows:


Sec.  1822.273  Actions subsequent to loan approval.

    After the loan is approved, actions to be taken will be in 
accordance with 7 CFR part 3560, subpart B.


Sec.  1822.274  [Amended]

0
8. Section 1822.274 is amended by revising the words ``Form FmHA or its 
successor agency under Public Law 103-354 1944-52'' to read ``Form RD 
3560-52'' in both the introductory text of paragraph (c) and in 
paragraph (c)(2), and by revising the words ``Form FmHA or its 
successor agency under Public Law

[[Page 69104]]

103-354 1944-51'' to read ``Form RD 3560-51'' in paragraph (c)(1).


Sec.  1822.277  [Amended]

0
9. Section 1822.277 is amended by revising the words ``Sec.  1944.239 
of part 1944, subpart E of this chapter'' to read ``7 CFR 3560.2.''


Sec.  1822.278  [Amended]

0
10. Section 1822.278 is amended in paragraph (f) by revising the words 
``Form FmHA or its successor agency under Public Law 103-354 1944-52'' 
to read ``Form RD 3560-52.''

0
11. Section 1822.279 is revised to read as follows:


Sec.  1822.279  Loan supervision and servicing.

    Loan supervision and loan servicing will be provided according to 7 
CFR part 3560.

PART 1902--SUPERVISED BANK ACCOUNTS

0
12. The authority citation for part 1902 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 7 U.S.C. 6991, et seq.; 
42 U.S.C. 1480; Reorganization Plan No. 2 of 1953 (5 U.S.C. App.).

Subpart A--Disbursement of Loan, Grant, and Other Funds


Sec.  1902.1  [Amended]

0
13. Section 1902.1 is amended in paragraph (a) by revising the words 
``Form FmHA or its successor agency under Public Law 103-354 1944-51'' 
to read ``Form RD 3560-51'' in both places.


Sec.  1902.2  [Amended]

0
14. Section 1902.2 is amended in paragraph (d) by revising the words 
``Form FmHA or its successor agency under Public Law 103-354 1944-51'' 
to read ``Form RD 3560-51'' and in paragraph (e) by revising the words 
``Form FmHA or its successor agency under Public Law 103-354 1944-53'' 
to read ``Form RD 3560-53.''


Sec.  1902.4  [Amended]

0
15. Section 1902.4 is amended:
0
a. In paragraph (a)(4) by revising the words ``subpart C of part 1930 
of this chapter'' to read ``7 CFR part 3560, subpart G.''
0
b. In paragraph (a)(5) by revising the words ``subpart C of part 1930 
of this chapter'' to read ``7 CFR part 3560, subpart G.''
0
c. In paragraph (a)(6) by revising the words ``subpart C of part 1930 
of this chapter'' to read ``7 CFR part 3560, subpart G.''

PART 1925--TAXES

0
16. The authority citation for part 1925 is revised to read as follows:

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

Subpart A--Real Estate Tax Servicing

0
17. Section 1925.3 is amended by revising the last sentence in 
paragraph (c) to read as follows:


Sec.  1925.3  Servicing taxes.

* * * * *
    (c) * * * The Multi-Family Housing Information System (MFIS) will 
be used in posting servicing actions on delinquent taxes.

PART 1930--GENERAL

0
18. The authority citation for part 1930 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.

Subpart C--Management and Supervision of Multiple Family Housing 
Borrowers and Grant Recipients

0
19. Subpart C (Sec. Sec.  1930.1930.101 through 1930.150 and all 
exhibits) is removed and reserved.

PART 1940--GENERAL

0
20. The authority citation for part 1940 continues to read as follows:

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

Subpart L--Methodology and Formulas for Allocation of Loan and 
Grant Program Funds

0
21. Exhibit B to subpart L of part 1940 is amended by revising 
paragraphs IV., VII.A., and VII.F. to read as follows:

Exhibit B to Subpart L of Part 1940--Section 515 Nonprofit Set Aside 
(NPSA)

* * * * *
    IV. Nondiscrimination. Rural Development reemphasizes the 
nondiscrimination in use and occupancy and location requirements of 
7 CFR 3560.104.
* * * * *
    VII. * * *
    A. Preapplications/applications for assistance from eligible 
nonprofit entities under this subpart must continue to meet all loan 
making requirements of 7 CFR part 3560, subpart B.
* * * * *
    F. Provisions for providing preference to loan requests from 
nonprofit organizations is contained in 7 CFR 3560.56. Limited 
partnerships, with a nonprofit general partner, do not qualify for 
nonprofit preference.
* * * * *

PART 1942--ASSOCIATIONS

0
22. The authority citation for part 1942 continues to read as follows:

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

Subpart A--Community Facility Loans


Sec.  1942.17  [Amended]

0
23. Section 1942.17 is amended by removing paragraph (q)(1)(iii) and 
redesignating paragraph (q)(1)(iv) as (q)(1)(iii).

PART 1944--HOUSING

0
24. The authority citation for part 1944 continues to read as follows:

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

Subpart B--Housing Application Packaging Grants

0
25. Exhibit B to subpart B of part 1944 is amended by revising 
paragraph II.(B)(4) to read as follows:

Exhibit B to Subpart B of Part 1944--Housing Application Packaging 
Grant (HAPG) Fee Processing

* * * * *
    II. * * *
    (B) * * *
    (4) The 55 percent balance paid when the loan is approved. Funds 
for this 55 percent will be drawn from loan funds in accordance with 
7 CFR 3560.53 (o).
* * * * *

0
26. Exhibit C to subpart B of part 1944 is revised to read as follows:

Exhibit C to Subpart B of Part 1944--Requirements for Housing 
Application Packages

    A package will consist of the following requirements for the 
respective program.
    A. Section 502--Complete application packages will be submitted 
in accordance with the requirements of 7 CFR part 3550. The package 
must also include the following:

Form RD 410-9--``Statement Required by the Privacy Act''
Form RD 1910-11--``Applicant Certification Federal Collection 
Policies for Consumer or Commercial Debts''
Form RD 1944-3--``Budget and/or Financial Statement''

    B. Section 504--Complete application packages will be submitted 
in accordance with 7 CFR part 3550. The package must include the 
forms listed in paragraph A. of this exhibit and the following:
    The appropriate Agency application form for Rural Housing 
assistance (non-farm tract) (available in any Rural Development 
office).
    The appropriate Agency form to request verification of 
employment (available in any Rural Development office).

[[Page 69105]]

    The appropriate Agency Rural Housing Loan application package 
(available in any Rural Development office).
    Evidence of ownership in accordance with 7 CFR part 3550.
    Cost estimates or bid prices for removal of health or safety 
hazards in accordance with 7 CFR part 3550.
    C. Section 514/516--Complete application packages will be 
submitted in accordance with the Notice of Funding Availability that 
will be published in the Federal Register each Fiscal Year.
    D. Section 515--Complete application packages will be submitted 
in accordance with the Notice of Funding Availability that will be 
published in the Federal Register each Fiscal Year.
    E. Section 524--Complete application packages will be submitted 
in accordance with Sec.  1822.271(a) of subpart G of part 1822 of 
this chapter (paragraph XI.A. of RD Instruction 444.8). After Rural 
Development's review and as instructed, the application should be 
completed in accordance with Sec.  1822.271(c) of subpart G of part 
1822 of this chapter (paragraph XI.C. of RD Instruction 444.8).
    F. Section 533--Complete application packages will be submitted 
in accordance with the requirements of subpart N of part 1944 of 
this chapter.

Subpart D--Farm Labor Housing Loan and Grant Policies, Procedures, 
and Authorizations

0
27. Subpart D (Sec. Sec.  1944.151 through 1944.200 and all exhibits) 
is removed and reserved.

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

0
28. Subpart E (Sec. Sec.  1944.201 through 1944.250 and all exhibits) 
is removed and reserved.

Subpart I--Self-Help Technical Assistance Grants

Exhibit F to Subpart I of Part 1944 [Amended]

0
29. Exhibit F to subpart I of part 1944 is amended in paragraph VII by 
revising the words ``Form FmHA or its successor agency under Public Law 
103-354 1944-51'' to read ``Form RD 3560-51.''

Subpart L--Farmers Home Administration or Its Successor Agency 
Under Public Law 103-354 Tenant Grievance and Appeals Procedure

    30. Subpart L (Sec. Sec.  1944.551 through 1944.600 and all 
exhibits) is removed and reserved.

Subpart N--Housing Preservation Grants

0
31. Section 1944.656 is amended by revising the definition of 
``Overcrowding'' to read as follows:


Sec.  1944.656  Definitions.

* * * * *
    Overcrowding. Guidance is provided at 7 CFR 3560.155(e). These 
guidelines should result in an ideal range of persons per housing unit.
* * * * *

PART 1951--SERVICING AND COLLECTIONS

0
32. The authority citation for part 1951 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1932 Note; 7 U.S.C. 1989; 31 
U.S.C. 3716; 42 U.S.C. 1480.

Subpart A--Account Servicing Policies


Sec.  1951.1  [Amended]

0
33. Section 1951.1 is amended by revising the words ``subpart K of part 
1951 of this chapter'' to read ``7 CFR part 3560, subpart I.''

Subpart D--Final Payment on Loans

0
34. Section 1951.151 is amended by revising the last sentence to read 
as follows:


Sec.  1951.151  Purpose.

    * * * This subpart does not apply to direct single family housing 
customers or to the Rural Rental Housing, Rural Cooperative Housing, or 
Farm Labor Housing programs of the RHS.

Subpart E--Servicing the Community and Direct Business Programs 
Loans and Grants


Sec.  1951.220  [Amended]

0
35. Section 1951.220 is amended:
0
a. In the last sentence of paragraph (f) by revising the words ``noted 
on Form FmHA or its successor agency under Public Law 103-354 1905-10 
`Management System Card--Association' '' to read ``tracked in the 
Multi-Family Housing Information System (MFIS).''
0
b. In the last sentence of paragraph (g) by revising the words ``on 
Form FmHA or its successor agency under Public Law 103-354 1905-10'' to 
read ``in MFIS.''


Sec.  1951.223  [Amended]

0
36. Section 1951.223 is amended in paragraph (b)(4) by revising the 
words ``Form FmHA or its successor agency under Public Law 103-354 
1951-33'' to read ``Form RD 3560-15'' and in paragraph (c)(3) by 
revising the words ``Form FmHA or its successor agency under Public Law 
103-354 1951-33'' to read ``Form RD 3560-15.''

Subpart F--Analyzing Credit Needs and Graduation of Borrowers

0
37. Section 1951.266 is revised to read as follows:


Sec.  1951.266  Special requirements for MFH borrowers.

    All requirements of 7 CFR part 3560, subpart K must be met prior to 
graduation and acceptance of the full payment from an MFH borrower.

Subpart K--Predetermined Amortization Schedule System (PASS) 
Account Servicing

0
38. Subpart K (Sec. Sec.  1951.501 through 1951.550) is removed and 
reserved.

Subpart N--Servicing Cases Where Unauthorized Loan or Other 
Financial Assistance Was Received--Multiple Family Housing

0
39. Subpart N (Sec. Sec.  1951.651 through 1951.700) is removed and 
reserved.

PART 1955--PROPERTY MANAGEMENT

0
40. The authority citation for part 1955 continues to read as follows:

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

Subpart A--Liquidation of Loans Secured by Real Estate and 
Acquisition of Real and Chattel Property

0
41. Section 1955.1 is amended by adding a sentence at the end to read 
as follows:


Sec.  1955.1  Purpose.

    * * * This subpart does not apply to the Rural Rental Housing, 
Rural Cooperative Housing, or Farm Labor Housing programs of RHS.

0
42. Section 1955.10 is amended by revising paragraph (d)(9) and in 
paragraph (h)(6) by removing the fifth sentence and by revising the 
last two sentences to read as follows:


Sec.  1955.10  Voluntary conveyance of real property by the borrower to 
the Government.

* * * * *
    (d) * * *
    (9) For MFH loans, assignment of Housing Assistance Payments (HAP) 
Contracts will be obtained. Rental Assistance will be retained until 
the State Director is advised by OGC that

[[Page 69106]]

the Agency has title to the property. After a voluntary conveyance, the 
Agency may transfer Rental Assistance in accordance with 7 CFR part 
3560, subpart F.
* * * * *
    (h) * * *
    (6) * * * If the project is to be removed from the Rural 
Development program, a minimum of 180 days' notice to the tenants is 
required. Letters of Priority Entitlement must be made available to any 
tenants that will be displaced.
* * * * *

0
43. Section 1955.15 is amended in paragraph (d)(2)(v) by removing the 
fifth sentence and by revising the first and last sentences to read as 
follows:


Sec.  1955.15  Foreclosure by the Government of loans secured by real 
estate.

* * * * *
    (d) * * *
    (2) * * *
    (v) For MFH loans, the acceleration notice will advise the borrower 
of all applicable prepayment requirements, in accordance with 7 CFR 
part 3560, subpart N. * * * Letters of Priority Entitlement must be 
made available.
* * * * *

Subpart B--Management of Property

0
44. Section 1955.51 is amended in the introductory text by adding a 
sentence after the third sentence to read as follows:


Sec.  1955.51  Purpose.

    * * * This subpart does not apply to the Rural Rental Housing, 
Rural Cooperative Housing, or Farm Labor Housing programs of RHS. * * *
* * * * *

0
45. Section 1955.55 is amended in paragraph (b)(2)(i) by revising the 
words ``Subpart C of Part 1930 of this chapter'' to read ``7 CFR part 
3560'' and in paragraph (a) by revising the first sentence to read as 
follows:


Sec.  1955.55  Taking abandoned real or chattel property into custody 
and related actions.

    (a) * * * (Multi-family housing type loans will be handled in 
accordance with 7 CFR part 3560, subpart J.) * * *
* * * * *


Sec.  1955.61  [Amended]

0
46. Section 1955.61 is amended by revising the words ``Subpart L of 
Part 1944 of this chapter'' to read ``7 CFR part 3560, subpart D.''

0
47. Section 1955.65 is amended in paragraph (c)(1) by removing the 
fourth sentence and by revising the sixth sentence to read as follows:


Sec.  1955.65  Management of inventory and/or custodial real property.

* * * * *
    (c) * * *
    (1) * * * For MFH projects, tenant occupancy and selection will be 
in accordance with the occupancy standards set forth in 7 CFR part 
3560, subpart D. * * *
* * * * *


Sec.  1955.66  [Amended]

0
48. Section 1955.66 is amended in paragraph (a)(2)(ii) by revising the 
words ``subpart C of part 1930 of this chapter'' to read ``7 CFR part 
3560.''

Subpart C--Disposal of Inventory Property


Sec.  1955.101  [Amended]

0
49. Section 1955.101 is amended by adding the words ``or to the Rural 
Rental Housing, Rural Cooperative Housing, and Farm Labor Housing 
programs'' to the end of the last sentence.


Sec.  1955.114  [Amended]

0
50. Section 1955.114 is amended:
0
a. In paragraph (b) by revising the words ``subpart E of part 1965 of 
this chapter'' to read ``7 CFR part 3560, subpart N.''
0
b. In paragraph (c)(3) by revising the words ``the information outlined 
in Exhibit A-7 of subpart E of part 1944 of this chapter'' to read 
``documentation as required by the Agency.''
0
c. In paragraph (c)(4) by revising the words ``subpart E of part 1944 
of this chapter'' to read ``7 CFR part 3560.''
0
d. In paragraph (c)(5) by revising the words ``the definition of 
`project' set forth in subpart E of part 1944 of this chapter'' to read 
``the requirements of 7 CFR part 3560, subpart K.''


Sec.  1955.115  [Amended]

0
51. Section 1955.115 is amended in paragraph (b) by revising the words 
``subpart E of part 1965 of this chapter'' to read ``7 CFR part 3560, 
subpart N.''


Sec.  1955.117  [Amended]

0
52. Section 1955.117 is amended in paragraph (c) by revising the words 
``FmHA or its successor agency under Public Law 103-354 1944-51'' to 
read ``RD 3560-51.''


Sec.  1955.118  [Amended]

0
53. Section 1955.118 is amended in paragraph (b)(3) by revising the 
words ``Form FmHA or its successor agency under Public Law 103-354 
1944-51'' to read ``Form RD 3560-51.''


Sec.  1955.141  [Amended]

0
54. Section 1955.141 is amended:
0
a. In paragraph (d) by revising the words ``Exhibit C of Subpart C of 
Part 1930 of this chapter'' to read ``7 CFR part 3560, subpart E.''
0
b. In paragraph (e) by revising the words ``Exhibit E of subpart C of 
part 1930 of this chapter'' to read ``7 CFR part 3560, subpart F.''

PART 1956--DEBT SETTLEMENT

0
55. The authority citation for part 1956 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 31 U.S.C. 3711; 42 
U.S.C. 1480.

Subpart B--Debt Settlement--Farm Loan Programs and Multi-Family 
Housing

0
56. Section 1956.51 is amended by revising the last sentence to read as 
follows:


Sec.  1956.51  Purpose.

    * * * This subpart does not apply to RHS direct Single Family 
Housing (SFH) loans, RHS NP loans secured by SFH property, or to the 
Rural Rental Housing, Rural Cooperative Housing, and Farm Labor Housing 
programs.


Sec.  1956.85  [Amended]

0
57. Section 1956.85 is amended in paragraph (b)(1) by removing the 
words ``on Form FmHA or its successor agency under Public Law 103-354 
1944-9, ``Multiple Family Housing Payment Transmittal,''.''

Subpart C--Debt Settlement--Community and Business Programs


Sec.  1956.143  [Amended]

0
58. Section 1956.143 is amended in paragraph (c)(3)(iv)(G)(1) by 
revising the words ``Form FmHA or its successor agency under Public Law 
103-354 1951-33'' to read ``Form RD 3560-15.''

PART 1965--REAL PROPERTY

Subpart B--Security Servicing for Multiple Housing Loans

0
59. Subpart B (Sec. Sec.  1965.51 through 1965.100) is removed and 
reserved.

Subpart E--Prepayment and Displacement Prevention of Multi-Family 
Housing Loans

0
60. Subpart E (Sec. Sec.  1965.201 through 1965.250 and all exhibits) 
is removed and reserved.

Chapter XXXV--[Amended]

0
61. Part 3560, consisting of subparts A through P, is added to read as 
follows:

[[Page 69107]]

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 note 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 [Reserved]
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.
3560.307 Reports.
3650.308 Annual financial reports.
3560.309 Advancement (loan) of funds to a RRH project by the owner, 
member of the organization, or agent of the owner.
3560.310-3560.349 [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 MFH 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 Double damages.
3560.461 Enforcement provisions.
3560.462 Money laundering.
3560.463 Obstruction of Federal audits.
3560.464-3560.499 [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 MFH use.
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.

[[Page 69108]]

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 Operating assistance.
3560.575 Rental structure and changes.
3560.576 Occupancy restrictions.
3560.577 Tenant priorities for labor housing.
3560.578 Financial management of labor housing.
3560.579 Servicing off-farm labor housing.
3560.580-3560.599 [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 Agency requested extension.
3560.656 Incentives 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-payment responsibilities for loans subject to 
continued restrictive-use provisions.
3560.664-3560.699 [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, review, and release.
3560.753 Agency appraisal standards and requirements.
3560.754-3560.799 [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 (MFH) 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.
    (c) Internal Agency procedures containing details for Agency 
processing under these regulations can be found in the program 
handbooks, available in any Rural Development office, or from the Rural 
Development Web site.


Sec.  3560.2  Civil rights.

    (a) As per the Fair Housing Act, as amended and section 504 of the 
Rehabilitation Act of 1973, all actions taken by recipients of loans 
and grants will be conducted without regard to race, color, religion, 
sex, familial 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 Rural Housing Service (RHS) 
assistance. It is unlawful for a borrower or grantee or an agent of a 
borrower or grantee:
    (1) To refuse to make reasonable 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) Borrowers and grantees must take reasonable steps to ensure 
that Limited English Proficiency (LEP) persons receive the language 
assistance necessary to afford them meaningful access to USDA programs 
and activities, free of charge. Failure to ensure that LEP persons can 
effectively participate in or benefit from federally-assisted programs 
and activities may violate the prohibition under Title VI of the Civil 
Rights Act of 1964, 42 U.S.C. 2000d and Title VI regulations against 
national origin discrimination. USDA has issued guidance to clarify the 
responsibilities of recipients and subrecipients who receive financial 
assistance from USDA and to assist them in fulfilling their 
responsibilities to LEP persons under Title VI of the Civil Rights Act, 
as amended, and implementing regulations.
    (c) Any tenant/member or prospective tenant seeking occupancy in or 
use of facilities financed by the Agency who

[[Page 69109]]

believes he or she is being discriminated against because of race, 
color, religion, sex, familial status, national origin, or disability 
may file a complaint in person with, or by mail to the U. S. Department 
of Agriculture's Office of Civil Rights, Room 326-W, Whitten Building, 
14th and Independence Avenue, Washington, DC 20410. Complaints received 
by Agency employees must be directed to the National Office Civil 
Rights staff through the State Civil Rights Manager/Coordinator.
    (d) Borrowers or grantees that fail to comply with the requirements 
of federal civil rights requirements are subject to sanctions 
authorized by law. The following are the major civil rights laws 
affecting multifamily housing loan and grant programs:
    (1) Equal Credit Opportunity Act (ECOA).
    (2) Title VI of the Civil Rights Act of 1964.
    (3) Title VIII of the Civil Rights Act of 1968.
    (4) Section 504 of the Rehabilitation Act of 1973.
    (5) Age Discrimination Act of 1975.
    (6) Title IX of the Education Amendments of 1972.


Sec.  3560.3  Environmental requirements.

    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 or any successor regulation.


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, or any successor regulation.
    (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 or any successor regulation.
    (e) Lead-based paint requirements. The applicable provisions of 24 
CFR part 35, subparts A through D, J, and R, as published by the U.S. 
Department of Housing and Urban Development.


Sec.  3560.5  State, local or tribal laws.

    Borrowers 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 RHS Administrator may delegate, on an individual or other 
basis, any decision-making responsibility for Agency 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 is 
consistent with the applicable statute, does not adversely affect the 
interest of the Federal Government, and does not adversely affect the 
accomplishment of the purposes of the MFH programs or application of 
the requirement would result in undue hardship on the tenants. 
Exception requests presented to the RHS Administrator must have the 
concurrence of a Rural Development State Director or a Deputy 
Administrator for MFH.


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 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.
    Applicant. An individual, partnership or limited partnership, 
consumer cooperative, trust, state or local public agency, corporation, 
limited liability company, nonprofit organization, Indian tribe, 
association, or other entity that will be the owner of the project for 
which an application for funding from the Agency is submitted.
    Appraisal. As used by the Agency, a written report developed by a 
qualified appraiser as established in subpart P that concludes an 
opinion of value(s) for a specific real property.
    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.
    Borrower. An individual, partnership or limited partnership, 
consumer cooperative, trust, state or local public agency, corporation, 
limited liability company, nonprofit organization, Indian tribe, 
association, or other entity that has received a loan from the Agency.
    Capital Needs Assessment. A Capital Needs Assessment is designed to 
capture and report on the immediate

[[Page 69110]]

and the long-range capital needs of an individual property. It includes 
attention to site features, mechanical and electrical systems, building 
exterior and common area systems, and dwelling unit interiors.
    Caretaker. An individual employed by a borrower or a management 
agent to handle routine interior and exterior maintenance and upkeep of 
a MFHMFH 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. Such housing does not include any licensed healthcare 
facility.
    Consumer cooperative. A corporation organized under the cooperative 
laws of a state or Federally recognized Indian tribe that 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 conventional housing located in the same 
geographic area as a particular Section 514, 515, or 516 project.
    Current appraisal. An appraisal with a report date that 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 significant monetary or non-
monetary obligations or terms of a loan, grant, or other agreement with 
the Agency which remain unpaid or unperformed for more than 30 days 
after the date such obligation is due or required to be paid or 
performed, or within time periods specified in notices of compliance 
violations.
    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;
    (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.
    Disabled domestic farm laborer. An individual with a disability as 
separately defined in this paragraph and who was a domestic farm 
laborer at the time of becoming disabled.
    Domestic farm laborer. A person who, consistent with the 
requirements in Sec.  3560.576(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 permanent 
residence. This definition may include the immediate family members 
residing with such a person.
    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 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.
    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.
    Engagement. An Agency defined financial review of a housing 
project's financial status that a borrower will contract with a 
certified public accountant or other qualified individual to perform. 
An engagement will result in annual financial reports for use by the 
Agency as described in Sec.  3560.308.
    Familial status. One or more individuals (who have not attained the 
age of 18 years) being domiciled with a parent or another person having 
legal custody of such individual or individuals; or the designee of 
such parent or other person having such custody, with the written 
permission of such parent or other person. The protections afforded 
against discrimination on the basis of familial status shall apply to 
any person who is

[[Page 69111]]

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. A tract or tracts of land, improvements, and other 
appurtenances that are used or will be used in the production of crops, 
livestock, or aquaculture products for sale in sufficient quantities so 
that the property is recognized as a farm rather than a rural 
residence. The term ``farm'' also includes the term ``ranch.'' It may 
also include land and improvements and facilities used in a non-
eligible enterprise or the residence that, although physically separate 
from the farm acreage, is ordinarily treated as part of the farm in the 
local community.
    Farmer. A person who is actually involved in day to day on-site 
operations of a farm and who devotes a substantial amount of time to 
personal participation in the conduct of the operation of a ``farm.''
    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, without respect to the 
source of employment (but not self-employed), 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.
    Farm owner. A natural person, persons, or legal entity who are the 
owners of a ``farm'' as this term is further defined in this section.
    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. Includes 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 such as 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.
    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, which is considered an 
eligible recipient under the Indian Self-Determination and Education 
Assistance Act (Public Law 93-638) or under the State and Local Fiscal 
Assistance Act of 1972 (Public Law 92-512).
    Interest credit. A form of assistance available to eligible 
borrowers that reduces the effective interest rate of the loan.
    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

[[Page 69112]]

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.
    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. 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: (1) To conduct a cost efficiency 
comparison between products, (2) for developing component replacement 
time tables, and (3) for estimating future component replacement costs. 
Life cycle cost analysis can be accomplished through various methods, 
such as; insurance actuary tables or Agency documentation of a 
component's life expectancy. 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: (1) drives and 
parking, (2) roofing system and roofing material, (3) exterior 
finishes, and (4) energy source items.
    Limited Liability Company (LLC). 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, 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 capital 
contributions.
    Loan agreement. A written agreement between the Agency and the 
borrower that 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 MFH project.
    Manufactured housing. Housing, constructed of one or more factory-
built sections, which includes the plumbing, heating, and electrical 
systems contained therein, which is built to comply with the Federal 
Manufactured Home Construction and Safety Standards (FMHCSS), and which 
is designed to be used with a permanent foundation.
    Market area. The geographic or locational delineation of the market 
for a specific project, including outlaying areas that will be impacted 
by the project, i.e., the area in which alternative, similar properties 
effectively compete with the subject property.
    Market rent. The most probable rent that a property should bring in 
a competitive and open market reflecting all conditions and 
restrictions of the specified lease agreement, including term, rental 
adjustment and revaluation, permitted uses, use restrictions, and 
expense obligations; the lessee and lessor each acting prudently and 
knowledgeably, and assuming consummation of a lease contract as a 
specified date and the passing of the leasehold from lessor to lessee.
    Maximum debt limit. The maximum amount that the Agency will lend or 
grant for a MFHMFH 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 laborer. A person (and the family 
of such person) who receives a substantial portion of his or her income 
from farm labor employment and who establishes a residence in a 
location on a seasonal or temporary basis, in an attempt to receive 
farm labor employment 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 or Deed of Trust. A form or security instrument or 
consensual lien on real property.
    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 MFHMFH project being constructed to be occupied 
for the first time.
    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 approved by the Secretary of Agriculture and considered to 
be financially responsible.
    Nonprofit organization for section 515 program (Prepayment or 
Purchase). To be eligible to purchase properties under the conditions 
of subpart N of this part, nonprofit organizations may not have among 
their 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

[[Page 69113]]

515 that have been prepaid or have requested prepayment.
    Nonprofit organization of farm workers. A nonprofit organization, 
as defined in this section, whose membership is composed of at least 51 
percent farm workers.
    Notice of Funding Availability (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.
    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 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.
    Off-farm labor housing. Housing for farm laborers in any location 
approved by the Agency but not on the farm where the laborer works.
    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 the Inspector General (OIG). The USDA Office of the 
Inspector General.
    On-farm labor housing. Housing for farm laborers located on the 
farm where they work that is away from service buildings or in the 
nearby community.
    Overage. That portion of a tenant's net tenant contribution that 
exceeds basic rent up to note rent. Full overage is an amount equal to 
the difference between the note rent for a unit and the basic rent.
    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 originally scheduled maturity date.
    Program requirements. All provisions related to MFHMFH 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 
action.
    Rehabilitation. Rehabilitation 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.
    Related facilities. Facilities in a MFHMFH 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).
    Rent. The amount established as a charge for occupancy in a rental 
unit of Agency-financed MFH. Rents must be established at the same rate 
for all similar units in the housing project. The following terms are 
used to describe rents for various program purposes.
    (1) Note 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 when such 
contribution is less than the basic rent.
    Rental assistance units. Dwelling units in a MFH 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 
MFHMFH 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 MFHMFH 
project as a part of the Agency's general loan servicing or 
preservation activities.
    Repair and replacement. Repair and replacement is the restoration 
of minor building materials, elements, components, equipment and 
fixtures. Examples include: 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. 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.
    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. 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 (1) has a population not in 
excess of 2,500 inhabitants, or (2) has a population in excess of 2,500 
but not in excess of 10,000 if it is rural in character, or (3) 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,

[[Page 69114]]

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. For purposes of this title, any area 
classified as ``rural'' or a ``rural area'' prior to October 1, 1990, 
and determined not to be ``rural'' or a ``rural area'' as a result of 
data received from or after the 1990 or 2000 decennial census shall 
continue to be so classified until the receipt of data from the 
decennial census in the year 2010, 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 section, the city 
of Plainview, Texas, shall be considered a rural area for purposes of 
this title, and the city of Altus, Oklahoma, shall be considered a 
rural area for purposes of this title 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 MFHMFH 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 
MFH 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 MFH 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 MFH project.
    Shelter costs. Basic or note 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 MFH project to ensure that the Agency is not providing excess 
assistance.
    Special 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.
    State consolidated plan. A planning document for an individual 
state that includes a housing and homeless needs assessment; a housing 
market analysis; a strategic plan for addressing the state's housing 
challenges; an Action Plan that is an annual description of the state's 
Federal and other resources that are expected to be available to 
address its priority housing needs and how the Federal funds will 
leverage other resources; certifications relating to fair housing, its 
antidisplacement and relocation plan, a drug-free workplace, and other 
statutory and program requirements; and a monitoring plan to ensure 
that the state is using its Federal funds appropriately and 
effectively.
    Tenant or co-tenant. An individual who signs a lease and occupies 
or will occupy a rental unit in a MFH 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 portion of the approved shelter cost paid 
by the tenant household. The proportion of tenant income and adjusted 
income paid will vary according to the type of subsidy provided to the 
tenant household.
    Total development cost (TDC). The cost of constructing, purchasing, 
improving, altering, or repairing MFH 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, 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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

Subpart B--Direct Loan and Grant Origination


Sec.  3560.51  General.

    This subpart contains the Agency's loan origination requirements 
for multi-family housing (MFH) 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 of this part for Off-Farm Labor Housing and subpart M of this 
part 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 
MFH and

[[Page 69115]]

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 MFH.
    (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 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 MFH 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 in the form of an easement or other 
instrument acceptable to the Agency 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 MFH 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 MFH 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 MFH 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 MFH 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 low-income housing tax credits (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 MFH project, including appraisals, environmental 
documentation, and construction plans and specifications.
    (n) Permit and application fees. Funds may be used for required MFH 
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 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, for 
costs that are reasonable and typical for the area, including:
    (1) Development and packaging of a loan application and a MFH 
proposal; and
    (2) Legal, technical, and professional fees incurred in the 
formation of the loan application and MFH 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 MFH 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 Agency 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 MFH 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

[[Page 69116]]

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 MFH 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 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 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 or the managing general partner of a borrower, as well as any 
affiliated entity having a 10 percent or more ownership interest, 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 Title VI of the 
Civil Rights Act of 1964, section 504 of the Rehabilitation Act of 
1973, and all other 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 have in its charter the provision of 
affordable housing.
    (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) In the case of off-farm labor housing loans and grants, 
nonprofit organizations must be ``broad-based'' nonprofit organizations 
(refer to Sec.  3560.555(a)(1)).

[[Page 69117]]

    (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 borrower 
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.
    (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 of this part for Off-Farm and subpart M of this part 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 MFH proposals, including 
expansion of existing MFH in designated places selected in accordance 
with Sec.  3560.57.
    (2) To be eligible for funding consideration, MFH 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) MFH 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 that 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 that 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 MFH.
    (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 MFH 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,
    (6) A review of Civil Rights Impact Analysis in accordance with 7 
CFR part 2006, subpart P, and
    (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,

[[Page 69118]]

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 application, with any additional information requested by the 
Agency, to confirm and document a housing proposal's eligibility and 
feasibility, including an affirmative fair housing marketing plan. 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 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, and
    (3) Demonstrated need for MFH 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 MFH, 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 a 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 MFH proposal in the designated 
place for processing.
    (ii) A previously funded Agency, the U.S. Department of Housing and 
Urban Development (HUD), low-income housing tax credit or other similar 
assisted MFH in the designated place has not been completed or has not 
reached projected occupancy levels.
    (iii) Existing assisted MFH in the designated place is experiencing 
high vacancy levels.
    (iv) A special note 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 MFH is insufficient or unavailable for their 
needs; or
    (ii) There is a compelling need for additional MFH, 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 MFH 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 MFH 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, may not be 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 determined by the 
Agency to be unacceptable if any of the adverse conditions described in 
this paragraph 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.

[[Page 69119]]

    (d) Densities. Allowable site densities will be determined based on 
the following criteria:
    (1) Compatibility and consistency with the community in which the 
MFH 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 Federal Emergency Management Agency (FEMA) Form 81-93, 
Standard Flood Hazard Determination, to document the site's location in 
relation to the 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 MFH 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 MFH and single family housing 
originally financed through section 502 of the Housing Act of 1949 may 
be converted to MFH. Maintenance requirements are listed in Sec.  
3560.103(a)(3).
    (b) Residential design. All MFH 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 except that when determined 
necessary by the Agency to allow for decent, safe and sanitary housing 
to be provided in market areas where conventional rents are not 
sufficient to cover necessary operating, maintenance, and reserve 
costs. Basic rents may be allowed to exceed comparable rents for 
conventional units, but in no case may the rent exceed 150% of the 
comparable rent for conventional unit rent level.
    (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 analyses 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 MFH, 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) will be followed. Individual copies of these standards 
are available from the Architectural and Transportation Barriers 
Compliance Board, 1331 F Street, NW, Suite 1000, Washington, DC 20004-
1111, Telephone: (202) 272-0080, TTY: (202) 272-0082, e-mail address: 
board.gov">info@access-board.gov. 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 quantities of fully accessible units 
will be comparable to the variety of bedroom quantities 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 quantity. In addition, accessible units should be 
distributed throughout the complex so not to concentrate the units in 
one location.
    (4) All MFH 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.
    (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

[[Page 69120]]

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 MFH 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. 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 security 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 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 security value as determined by an 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 appraisal, which will determine the market value, subject 
to restricted rents, will 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 MFH 
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

[[Page 69121]]

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 market value of the property when 
appraised as conventional unsubsidized MFH and all current unpaid 
balances. For information on appraisal issues, refer to subpart P of 
this part.
    (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 the limits 
specified in Sec.  3560.53(l) or the maximum debt limit to be exceeded 
and the cost increases were caused by:
    (i) Unforeseen factors that are determined by the Agency to be 
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 that meets requirements of Sec.  
3560.306. At a minimum, the borrower must agree to make monthly 
contributions to the reserve account at the rate of 1 percent annually 
of the amount of the total development cost until the reserve account 
equals 10 percent of the 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 MFH, 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 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 MFH 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 MFH 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 1924, subparts A and 
C. If housing includes non-Agency financed common facilities, 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 
of this part for Off-Farm and subpart M of this part 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.

[[Page 69122]]

    (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).
    (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 MFH 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 MFH 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 market value. A return may not be 
allowed on the amount above the equity contribution required by Sec.  
3560.63(c) if the market value as determined by the Agency, when added 
to the loan and grant amounts from all sources, exceeds the security 
value of the MFH 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.
    (d) Compensation to nonprofit organizations. Although nonprofit 
organizations are not eligible to take a return on investment, with 
prior Agency approval, cooperatives and nonprofit organizations may use 
housing project funds to pay asset management expenses directly 
attributable to ownership responsibilities, as described in Sec.  
3560.303(b)(1)(ii).


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 manufacturer 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

[[Page 69123]]

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 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 securing 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.
    (3) The loan check will be handled in accordance with 7 CFR part 
1902, subpart A.


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;
    (i) For all section 514 loans, except as provided in Sec.  
3560.621, made pursuant to a contract entered into on or after the 
effective date of this regulation, the following language will be 
included in the mortgage and deed of trust: ``The borrower and any 
successors in interest agree to use the housing for the purpose of 
housing people eligible for occupancy as provided in sections 514 and 
516 of title V of the Housing Act of 1949, and Rural Housing Service 
regulations then in effect. The restrictions are applicable for a term 
of 20 years from the date on which the last loan was closed. No 
eligible person occupying the housing will be required to vacate nor 
any eligible person denied occupancy for housing prior to the close of 
such period because of a prohibited change in the use of the housing. A 
tenant or person wishing to occupy the housing may seek enforcement of 
this provision as well as the Government.''
    (ii) All other loans are subject to restrictive-use provisions as 
outlined in subpart N of this part.
    (3) Provide evidence that construction financing arrangements are 
adequate when interim financing is going to be used;
    (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 
in accordance with 7 CFR part 1924, subpart A. The construction costs 
must also be audited in accordance with Governmental Auditing 
Standards, by a Certified Public Accountant (CPA). In some cases, the 
Agency will contract directly with a CPA for the cost certification. 
Funds that 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 of 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

[[Page 69124]]

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 MFH 
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,
    (2) When required by state law, and
    (3) When the Agency determines that the work being proposed 
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 MFH than to build another property in 
the same location; or
    (2) The MFH 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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

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 (MFH) 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. Project 
operations shall be conducted to meet the actual needs and necessary 
expenses of the property or for any other purpose authorized under 
Agency regulations. Any party not meeting these responsibilities may be 
subject to penalties. It is expected that only typical and reasonable 
expenses be incurred for the services rendered. Consequently, methods 
to inflate, duplicate, obscure, or failure to disclose the true nature 
and cost of work performed for the services rendered will cause the 
Agency to deny budget requests for the services or issue a demand for 
recovery and reimbursement for unauthorized actions.
    (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. The Borrower will include specific duties

[[Page 69125]]

and responsibilities of each property manager, site manager and 
caretaker;
    (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;
    (xi) Procedures for applicant and tenant appeals; and
    (xii) Describe how management will make known to tenants and 
applicants that management will provide reasonable accommodations under 
the Fair Housing Act, section 504 of the Rehabilitation Act of 1973, 
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.
    (c) Management plan effective period. A management plan 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.
    (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;
    (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; or
    (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 MFH.
    (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 MFH 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 will require 
the borrower to immediately terminate the contract with the management 
agent.
    (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) of this 
section.
    (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.

[[Page 69126]]

    (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, Office of the 
Inspector General (OIG), General Accountability Office (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. Costs and services to be paid as part of the 
bundle of services include:
    (i) Supervision by the management agent and its staff (time, 
knowledge, and expertise) of overall operations and capital 
improvements of the site.
    (ii) Hiring, supervision, and termination of on-site staff.
    (iii) General maintenance of project books and records (general 
ledger, accounts payable and receivable, payroll, etc.). Preparation 
and distribution of payroll for all on-site employees, including the 
costs of preparing and submitting all appropriate tax reports and 
deposits, unemployment and workers' compensation reports, and other 
IRS- or state-required reports.
    (iv) Training provided to on-site staff at the project site.
    (v) Preparation and submission of proposed annual budgets and 
negotiation of approval with the Agency, other governmental agencies 
and the borrowers.
    (vi) Preparation and distribution of the Agency or other 
governmental agency forms and routine financial reports to borrowers.
    (vii) Preparation and distribution of required year-end reports to 
the Agency or other governmental agency and borrowers.
    (viii) Preparation of requests for reserve withdrawals, rent 
increases, or other required adjustments.
    (ix) Arranging for preparation by outside contractors of energy 
audits and utility allowance analysis. Implement appropriate changes.
    (x) Preparation and implementation of Affirmative Fair Housing 
Marketing Plans as well as general marketing plans and efforts.
    (xi) Review of tenant certifications and submission of monthly 
rental assistance requests, and overage. Submission of payments where 
required.
    (xii) Preparation, approval, and distribution of operating 
disbursements; oversight of project receipts; and reconciliation of 
deposits.
    (xiii) Overhead of management agent, including:
    (A) Establish, maintain, and control an accounting system 
sufficient to carry out accounting supervision responsibilities.
    (B) Maintain agent office arrangements, staff, equipment, 
furniture, and services necessary to communicate effectively with the 
properties, the Agency or other governmental agency and with the 
borrowers.
    (C) Postage expenses related to the normal responsibility for 
mailings to the properties, the Agency or other governmental agency, 
the tenants, the vendors, and the owners.
    (D) Expense of telephone and facsimile communication to the 
properties, tenants, the Agency or other governmental agency, and the 
borrowers.
    (E) Direct costs of insurance (fidelity bonds covering central 
office staff, computer and data coverage, general liability, etc.) 
directly related to protection of the funds and records of the 
borrower.
    (F) Central office staff training and ongoing certifications.
    (G) Maintenance of all required profession and business licenses 
and permits. (This does not include project site office permits or 
licenses.)
    (H) Insurance coverage for agent's office and operations (Property, 
Auto, Liability, E&O, Casualty, Workers Compensation, etc.)
    (I) Travel of agent staff to the properties for on-site inspection, 
training, or supervision activities.
    (J) Agent bookkeeping for their own business.
    (xiv) Attendance at meetings (including travel) with tenants, 
owners, and the Agency or other governmental agency.
    (xv) Development, preparation, and revision of management plans or 
agreements.
    (xvi) Coordination of U.S. Department of Housing and Urban 
Development (HUD) certifications or vouchers with tenants, including 
all reporting to all pertinent agencies and borrowers.
    (xvii) Directing the investment of project funds into required 
accounts.
    (xviii) Maintenance of bank accounts and monthly reconciliations.
    (xix) Preparation, request for, and disbursement of borrower's 
initial operating capital (for new projects) as well as administration 
of annual owner's return on investment.
    (xx) Account maintenance, settlement, and disbursement of security 
deposits.
    (xxi) Working with third party auditors for initial set-up of 
audits and annually thereafter for audit preparation and review. 
Assistance with supplemental letters and preparation of Agency 
financial reports or other governmental agency reports.
    (xxii) Storage of records and adherence to records retention 
requirements.
    (xxiii) Assist on-site staff with tenant relations and problems. 
Provide assistance to on-site staff in severe actions (eviction, death, 
insurance loss, etc.).
    (xxiv) Oversight of general and preventive maintenance procedures 
and policies.
    (xxv) Development and oversight of asset replacement plans.
    (xxvi) Oversight of preparation of section 504 reviews, development 
of plans, and implementation of improvements necessary to comply with 
plans and section 504 requirements.

[[Page 69127]]

    (xxvii) Reporting to general and limited partners and State 
agencies for Low Income Housing Tax Credit (LIHTC)-compliance purposes.
    (2) Management fees may consist of a base per occupied unit fee and 
add-on fees for specific housing project characteristics. 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 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 the amount and 
qualifications to receive add-on fees. The final set of qualifications 
will be made available to all borrowers.
    (3) Allowable Administrative Expenses. (i) Identifying the Type of 
Administrative Expense. Management Plans and Agreements must describe 
if administrative expenses are to be paid from the management fee or 
paid for as a project cost.
    (A) A management plan is required for all projects. The management 
plan should describe administrative expenses paid from management agent 
fees or project operations. The management plan should provide job 
descriptions for the site manager, the management agent and other 
personnel. It is important that these documents accurately reflect the 
duties being performed by the various personnel. The management plan 
must meet the standards set out in this rule.
    (B) A task list should be used to identify which services are 
included in the management fee, which services are included in project 
operations, and which are pro-rated along with the methodology used to 
pro-rating of expenses between management agent fees and project 
operations. Some property responsibilities are completed at the 
property and some offsite. Agent responsibilities may be performed at 
the property, the management office, or at some other location.
    (C) Disputes may arise as to who performs certain services. The 
management plan and job descriptions should normally provide sufficient 
clarity to avoid or resolve any such disputes; however, sometimes 
clarifications and supporting materials may be required to resolve 
disputes. The decision must be made based on the most complete 
evaluation of the facts presented.
    (ii) Allowable Administrative Expenses. Payroll related 
administrative expenses are allowable expenses. Postage expense to mail 
out rental applications, third-party (asset income and adjustments to 
income) verifications, application processing correspondence 
(acceptance or denial letters), mailing project invoice payments, 
required correspondence, and report submittals to various regulatory 
authorities for the managed property are allowable project expenses no 
matter what location or point of origin the mail is generated. 
Photocopying or printing expense related to actual production of 
project brochures, marketing pieces, forms, reports, notices, and 
newsletters are allowable project expenses no matter what location or 
point of origin the work is performed including outsourcing the work to 
a professional printer. Correspondence or reports required for record 
retention or project compliance are allowable project expenses. The 
cost or expense of equipment and any related equipment service contract 
is a management agent direct expense, unless the machine becomes the 
property of the project after purchase.
    (iii) Determining if Expenses are Reasonable. Generally, expenses 
charged to project operations, whether for management agent services or 
other expenses, must be reasonable, typical, necessary and show a clear 
benefit to the residents of the property. Services and expenses charged 
to the property must show value added and be for authorized purposes. 
If such value is not apparent, the service or expense should be 
examined.
    (A) Administrative expenses for project operations exceeding 23 
percent, or those typical for the area, of gross potential basic rents 
and revenues (i.e., referred to as gross potential rents in industry 
publications) highlight a need for closer review for unnecessary 
expenditures. Budget approval is required and project resources may not 
always permit an otherwise allowable expense to be incurred if it is 
not fiscally prudent in the market.
    (B) Excessive administrative expenses can result in inadequate 
funds to meet other essential project needs, including expenditures for 
repair and maintenance needed to keep the project in sound physical 
condition. Actions that are improper or not fiscally prudent may 
warrant budget disapproval and/or a demand for recovery action.
    (4) Unallowable Administrative Expenses.
    (i) Certain expenses are not allowable such as legal fees, 
association dues, bonuses or monetary performance awards, parties, 
computer hardware and some software, and telephone purchases.
    (ii) It is inappropriate to charge for legal services to represent 
any interest other than the borrower's interest (i.e., representing a 
general partner or limited partner to defend their individual owner 
interest is not allowable). Where there is no finding of a borrower's 
fault, commercially reasonable legal expenses and costs for defending 
or settling lawsuits (without admission of liability) are allowable.
    (iii) Charging for payment of penalties, including opposition legal 
fees resulting from an award finding improper actions on the part of 
the owner or management agent is generally an inappropriate project 
expense. The party responsible generally pays such expenses for 
violating the standards or by their insurance carriers.
    (iv) Association dues to be paid by the project should only be 
related to training for site managers or management agents. To the 
extent that association dues can document training for site managers or 
management agents related to project activities by actual cost or pro-
ration, a reasonable expense may be billed to the project.
    (v) It is inappropriate for the project to pay for bonuses or 
monetary performance awards to site managers or management agents that 
are not clearly provided for by the site manager salary contract.
    (vi) Billing the project for parties that are large or 
unreasonable, such as renting expensive party halls or hotel rooms and 
payment for alcoholic beverages or gifts to management agent staff are 
also inappropriate.
    (vii) It is inappropriate to bill the project for computer 
hardware, some software, and internal connections that are beyond the 
scope and size reasonably needed for the services supplied (i.e., 
purchasing equipment or software for use by a site manager that is 
clearly beyond that needed to support project operations). Note that 
computer learning center activities benefiting tenants are not covered 
in this prohibition.
    (viii) It is inappropriate to bill the project for practices that 
are inefficient such as routine use of collect calls from a site 
manager to a management agent office.
    (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

[[Page 69128]]

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 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 IOI 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.
    (l) Electronic Submission of Data to Agency. For properties with 
eight or more housing units, the Agency may specify that borrowers 
submit information required by this part electronically.


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. The Agency acknowledges that property maintenance is an 
ongoing process and will not penalize borrowers for less than 100 
percent compliance as long as it is evident that the borrower is 
striving to achieve the standards listed in this paragraph. In 
addition, the Agency understands that although its multifamily housing 
portfolio is relatively homogeneous, no one standard is appropriate for 
all properties.
    (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, and 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, where appropriate for climatic conditions, 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

[[Page 69129]]

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 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 a 
conspicuous place in a common area: ``Justice for All'' poster, HUD 
equal housing opportunity poster including the Spanish version if there 
are Hispanic Limited English Proficiency tenants or applicants, 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.
    (xxiv) 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.
    (xxv) 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.
    (xxvi) 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.
    (xxvii) 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) The Agency expects that upon discovery of a condition not in 
compliance with the standards listed in this section that the borrower 
will remedy the situation in a timeframe required by the Agency. The 
Borrower must provide documentation and justification for any failure 
to meet such timeframe. Properties with deficiencies in the process of 
being addressed will not be deemed to be out of compliance unless there 
are so many deficiencies that it would result in a declaration of 
substantial noncompliance and call into questions the viability of the 
property and the effectiveness of the borrower's maintenance program. 
Failure to make such corrections or repairs constitutes a non-monetary 
default under Sec.  3560.452(e).
    (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.

[[Page 69130]]

    (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) If the borrower requests an increase in the project's reserve 
for replacement account, the borrower must have a capital needs 
assessment prepared and submitted to the Agency to reflect anticipated 
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 assessment is reasonable in cost and meets Agency 
requirements.
    (3) [Reserved].
    (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 for the project 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 must 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, and 
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 project's expense unless doing so would result in undue 
financial or administrative burden on the project. 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

[[Page 69131]]

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 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 and 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. 
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.
    (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 Agency must be named as loss co-payee on all property 
insurance policies where it holds first lien position. The Agency must 
be named as an additional insured if its lien position is other than 
first.
    (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 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; and
    (2) Be deemed reputable and financially sound as determined by the 
Agency.
    (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, hail, explosion, riot, civil 
commotion, aircraft, and vehicles. These policies may also be known as 
``Fire and Extended Coverage,''

[[Page 69132]]

``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).
    (iii) Builder's risk insurance. A policy that insures dwellings 
under construction or rehabilitation.
    (iv) Elevators, boiler, and machinery coverage. This coverage is 
required for properties that operate elevators, steam boilers, 
turbines, engines, or other pressure vessels.
    (2) Other types of insurance that the Agency may require:
    (i) Windstorm Coverage.
    (ii) Earthquake Coverage.
    (iii) Sinkhole Insurance or Mine Subsidence Insurance.
    (3) 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.''
    (4) 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.
    (5) 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.
    (6) 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.
    (7) 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.
    (8) 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.
    (9) Allowable deductible amounts are as follows:
    (i) Hazard/Property Insurance. (A) $1,000 on any housing project 
with an insurable value under $200,000; or
    (B) One-half of one percent (0.0050) of the insurable value, up to 
$10,000 on housing projects with insurance values over $200,000.
    (ii) Flood Insurance. The Agency allows a maximum deductible of 
$5,000 per building.
    (iii) Windstorm Coverage. When windstorm coverage is excluded from 
the ``All Risk'' policy, the deductible must not exceed five percent of 
the total insured value.
    (iv) Earthquake Coverage. In the event that the borrower obtains 
earthquake coverage, the Agency is to be named as a loss payee. The 
deductible should be no more than 10 percent of the coverage amount.
    (v) Sinkhole Insurance or Mine Subsidence Insurance. The deductible 
for sinkhole insurance or mine subsidence insurance should be similar 
to what would be required for earthquake insurance.
    (10) Deductible amounts (excluding flood, windstorm, earthquake and 
sinkhole insurance or mine subsidence insurance) must be accounted for 
in the replacement reserve account. Borrowers who wish to increase the 
deductible amount must deposit an additional amount to the reserve 
account equal to the difference between the Agency's maximum deductible 
and the requested new deductible. The Borrower will be required to 
maintain this additional amount so long as the higher deductible is in 
force.
    (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.
    (i) The fidelity insurance policy, at a minimum, must include an 
insuring agreement that covers employee dishonesty.
    (ii) Fidelity coverage amounts and deductible:

------------------------------------------------------------------------
                                                              Deductible
                     Fidelity coverage                          level
------------------------------------------------------------------------
Under $50,000..............................................       $1,000
In the area of $100,000....................................        2,500
In the area of $250,000....................................        5,000
In the area of $500,000....................................       10,000
In the area of $1,000,000..................................       15,000
------------------------------------------------------------------------


[[Page 69133]]

    (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 MFH 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 premium 
may be prorated among the housing projects covered..
    (8) Borrowers must review fidelity coverage annually and adjust it 
as 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.
    (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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

Subpart D--Multi-Family Housing Occupancy


Sec.  3560.151  General.

    (a) Applicability. This subpart contains borrower and tenant 
requirements and Agency responsibilities related to occupancy of 
Agency-financed multi-family housing (MFH) projects. Occupancy 
eligibility requirements apply to the following:
    (1) Family housing projects, including farm labor housing;
    (2) Elderly housing projects; and
    (3) Congregate housing or group homes for persons with special 
needs.
    (b) Civil rights requirements. All occupancy policies must meet 
applicable civil rights requirements, as stated in Sec.  3560.2.


Sec.  3560.152  Tenant eligibility.

    (a) General requirements. Except as specified in paragraph (b) of 
this section, a tenant eligible for occupancy in Agency-financed 
housing must either:
    (1) Be a United States citizen or qualified alien, and
    (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 
U.S. Department of Housing and Urban Development (HUD) Section 8 
assistance or Low Income Housing Tax Credit (LIHTC), when a tenant 
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 be able to demonstrate a need for the special 
services provided by the group home.
    (iii) Tenants cannot be required to participate in 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 one year.

[[Page 69134]]

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, including places where persons seeking rental housing 
would likely make contacts, holding open houses, making appropriate 
contacts with public housing agencies and organizations, Chambers of 
Commerce, and real estate agencies.
    (3) The borrower agrees to continue with aggressive efforts to 
locate eligible tenants and retain documentation of all marketing.
    (4) The borrower is temporarily unable to achieve or maintain a 
level of occupancy sufficient to prevent financial default and 
foreclosure. The Agency's approval of the waiver would then be for a 
limited duration.
    (5) 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.
    (6) Tenants residing in Rural Rental Housing (RRH) units who are 
ineligible because their adjusted annual income exceeds the maximum for 
the RRH project will be charged the Rural Housing Service (RHS) 
approved note rent for the size of unit occupied in a Plan II RRH 
project. In projects operated under Plan I, ineligible tenants will be 
charged a rental surcharge of 25 percent of the approved note rent.
    (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 income of $100 
or more per month occurs. Borrowers must recertify for changes of $50 
per month, 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 
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 
5.609.
    (b) Adjusted income will be calculated in accordance with 24 CFR 
5.611.


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, section 504 of the Rehabilitation 
Act of 1973, 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 birthdates;
    (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 qualified alien as defined in Sec.  3560.11;
    (8) Signature of the applicant and date;
    (9) Race, ethnicity, and sex designation. The following disclosure 
notice shall be used:

    ``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,'' and

    (10) Social security 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). 
The list of information will be restricted to the same items for all 
Agency-assisted properties of a particular type, such as a family or 
elderly complex.

[[Page 69135]]

    (c) Application submission. Borrowers must establish when 
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. (1) Applicants may be 
determined ineligible for occupancy based on selection criteria other 
than Agency requirements only if such criteria are contained in the 
borrower's 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.
    (2) Borrowers with projects receiving low-income housing tax 
credits (LIHTCs), may leave a housing unit vacant if they are required 
to rent the available unit to an LIHTC-eligible applicant, and none of 
the applicants on the waiting list meet the applicable LIHTC 
eligibility requirements.
    (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) 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.
    (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) Within 10 days of receipt of a complete application, the 
Borrower must notify the applicant in writing that he has been selected 
for immediate occupancy, placed on a waiting list, or rejected.
    (5) Selections from the completed applications on 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(c).
    (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 U.S. Department of Housing and 
Urban Development (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. At a minimum, 
borrowers must document removal of any names from the waiting list with 
the time and date of the removal. If an electronic waiting list is 
used, borrowers must periodically print out electronic waiting lists or 
preserve backup copies showing how the waiting list appeared before and 
after the removal of each name.
    (j) Criminal activity. Borrowers may deny admission for criminal 
activity or alcohol abuse by household members in accordance with the 
provisions of 24 CFR 5.854, 5.855, 5.856, and 5.857.


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 the 
accessible unit has been marketed as an accessible unit, outreach has 
been made to organizations representing the disabled, and 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.

[[Page 69136]]

    (e) Occupancy policies. Borrowers must establish occupancy policies 
for each housing project. 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;
    (2) The order in which eligible applicants and existing tenants 
will be housed or re-housed; and
    (3) How fair housing requirements will be met, including how 
reasonable accommodations will be made for applicants and tenants with 
disabilities.
    (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 approval. 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 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 for tenants who hold 
a Letter of Priority Entitlement (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.
    (2) 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.
    (3) Leases must specify that no change in the tenant contribution 
will occur due to monetary or non-monetary default or when rental 
assistance or interest credit, is suspended, canceled, or terminated 
due to the borrower's fault. For information on tenant contributions 
when a borrower prepays the Agency loan, refer to subpart N of this 
part.
    (4) Leases must contain a requirement that tenants make restitution 
when unauthorized assistance is received due to applicant or tenant 
fraud or misrepresentation and a statement advising tenants that 
submission of false information could result in legal action.
    (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; and
    (iv) The Age Discrimination Act of 1975.
    (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 must include a requirement that tenants who are no 
longer eligible for occupancy under the housing project's occupancy 
rules or do not meet the criteria set forth in Sec.  3560.155(c) and 
(e) 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, or whichever is greater, unless the 
conditions cited in Sec.  3560.158(c) exist;
    (11) 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.
    (12) Leases must include a requirement that tenants notify 
borrowers when changes occur in their income or assets, their 
qualifications for adjustments to income, their citizenship status, or 
the number of persons living in the unit.
    (13) A requirement that tenants agree to fulfill the tenant income 
verification and certification requirements established under Sec.  
3560.152.
    (14) Leases for tenants living in Plan II interest credit rental 
units must include provisions establishing the net monthly tenant 
contribution.
    (15) 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

[[Page 69137]]

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.''

    (16) 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.
    (17) 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.
    (18) All leases must contain the following information and 
provisions:
    (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 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 
contribution toward rent charges 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;
    (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; 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 institute 
suit without any notice to the tenant that the suit has been filed;
    (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 attorneys 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. The provisions of the HUD model 
lease will prevail, unless they conflict with Agency lease requirements 
in accordance with this section. If there is conflict between HUD 
requirements and Agency requirements, the provision that will be 
enforced will be the one that is most favorable to the tenant.
    (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.

[[Page 69138]]

    (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;
    (10) When a guest becomes a member of the tenant household; and
    (11) The procedures tenants must follow to request reasonable 
accommodations.
    (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 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/Assistance Animals. 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 
assistance 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 do not 
meet the criteria set forth in Sec.  3560.155(c) and (e) 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. The household in the unit with accessibility 
features will be required to move within 30 days of the housing 
project's receipt of a tenant application requiring accessibility 
features if another suitably sized unit without accessibility features 
is available in the project. 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. Prior to 
terminating a lease, the borrower must give the tenant written

[[Page 69139]]

notice of the violation and give the tenant an opportunity to correct 
the violation. Subsequently, termination 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 that are 
substantial and/or repeated;
    (ii) Non-payment or repeated late payment of rent or other 
financial obligations due under the lease or occupancy rules; 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, a 
guest of the tenant, 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;
    (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; or
    (iii) Actions prohibited by state and local laws.
    (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; and
    (3) 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 are entitled to benefits under the Uniform Relocation Act 
and 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 5.858, 5.859, 5.860, and 5.861.


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 and to ensure fair 
treatment of tenants 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/member or prospective tenant/member seeking 
occupancy in or use of Agency facilities who believes he or she is 
being discriminated against because of age, race, color, religion, sex, 
familial status, disability, or national origin may file a complaint in 
person with, or by mail to the U.S. Department of Agriculture's Office 
of Civil Rights, Room 326-W, Whitten Building, 14th and Independence 
Avenue, SW., Washington DC 20250-9410 or to the Office of Fair Housing 
and Equal Opportunity, U.S. Department of Housing and Urban Development 
(HUD), Washington, DC 20410. Complaints received by Agency employees 
must be directed to the National Office Civil Rights Staff through the 
State Civil Rights Manager/Coordinator.
    (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. The notice must include the 
telephone number and address of USDA's Office of Civil Rights and the 
appropriate Regional Fair Housing and Enforcement Agency.
    (d) Reasons for grievance. Tenants or prospective tenants may file 
a grievance in writing 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;

[[Page 69140]]

    (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. In the case of a Borrower's proposed adverse action including 
denial of admission to occupancy, the Borrower shall notify the 
applicant/tenant in writing. The notice must be delivered by certified 
mail return receipt requested, or a hand-delivered letter with a signed 
and dated acknowledgement of receipt from the applicant/tenant, 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.'' The notice must 
contain the information specified in paragraph (a)(2) of this section. 
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 in writing 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 10 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 within 10 calendar days The 
summary should include: The borrower's position; the applicant/tenant's 
position; and the result of the meeting. 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 person to serve as the sole 
hearing officer. The Agency may not appoint a hearing officer who was 
earlier considered by either the borrower or the tenant, in the 
interest of ensuring the integrity of the process.
    (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 calendar 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 cross-examine and 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

[[Page 69141]]

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 in writing 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 calendar days to allow time for an Agency review as 
specified in paragraphs (i)(3) and (i)(4) of this section.
    (3) The hearing officer or hearing panel must send a copy of the 
decision to the tenant, or 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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

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 (MFH) 
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, management and maintenance 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;
    (2) Basic rent;
    (3) U.S. Department of Housing and Urban Development (HUD) contract 
rents; and
    (4) Low-income housing tax credit (LIHTC) rents.
    (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. 
Funds from borrower contributions or rehabilitation loans will not be 
counted towards reducing rents.
    (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.
    (g) LIHTC. 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 the 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.


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) Tenant contributions. Borrowers must set 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

[[Page 69142]]

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) 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 tenant contribution. Borrowers must adjust the 
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 tenant contribution amount.
    (c) Overage. If a tenant's 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)(18)(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 assistance animals is allowed where an 
assistance animal is necessary for the normal functioning of a 
household member with a disability.
    (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 expenses due for addressing normal wear 
and tear as normal operating expenses 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.
    (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 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.
    (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 the borrower did not provide 
sufficient information to justify operating 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.
    (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.

[[Page 69143]]

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. If a tenant is appealing an 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, unless State or local laws specify otherwise.
    (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) Termination proceedings are being initiated, in accordance with 
Sec.  3560.159; and
    (2) The tenant will be charged note rent until the tenant's 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.
    (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 note rents (SNRs).

    When a Plan II housing project is experiencing severe vacancies due 
to market conditions, the Agency may allow the borrower to charge an 
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 
special 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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

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 
(MFH) 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. Rental subsidies may be in the form 
of:
    (1) Agency rental assistance;
    (2) HUD section 8 assistance, including project-based and vouchers;
    (3) Private rental subsidies; or
    (4) State or local government rental subsidies.
    (c) Multiple rent subsidies. (1) Multiple types of rent subsidies 
may be used in the same MFH 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.
    (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.

[[Page 69144]]

    (d) Agency rental assistance (RA). Agency RA is obligated to MFH 
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 
MFH projects.
    (3) Servicing units. Additional RA may be provided to operational 
MFH projects as a part of the Agency's general loan servicing or 
preservation activities.


Sec.  3560.253  [Reserved]


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. On-farm labor housing is not eligible for rental 
assistance.
    (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 the Agency determines 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 MFH;
    (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 U.S. 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 MFH 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.
    (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 certain 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 eligible 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.

[[Page 69145]]

    (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.


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) To the extent permitted by law, when any rental assistance 
units have not been used for a 6-month period; or
    (5) When the loan cannot be closed.
    (b) Agency review before transferring rental assistance. The Agency 
must perform a review to determine if all eligible tenants in the 
project are receiving rental assistance before the Agency transfers it 
to another project.
    (c) Transferring rental assistance for displaced tenants. The 
Agency may transfer rental assistance from one housing project to 
another eligible housing project for a tenant who is moving due to 
displacement as a result of prepayment, liquidation, or a natural 
disaster. 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. 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 less. 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 similar to existing or current Agency rental 
assistance funding levels 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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

Subpart G--Financial Management


Sec.  3560.301  General.

    This subpart contains requirements for the financial management of 
Agency-financed multi-family housing (MFH) 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 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 as long as the method is consistent with the 
statements required by the engagement in accordance with the standards 
identified in Sec.  3560.308.

[[Page 69146]]

    (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. Additional accounts may be required 
by third-party lenders. Accounts are to be funded in the following 
priority order, except that paragraphs (c)(3)(iv), (v), and (vi) 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. Use of funds for non-program purposes constitutes 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. A borrower may operate one 
account for multiple projects as long as the funds for each project 
themselves are accounted for separately.
    (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 deposit accounts or 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 (CPA) 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 at least three 
years after the issuance of the engagement and financial reports. Upon 
request, these materials will immediately be made available to the 
Agency, its representatives, the USDA Office of the Inspector General 
(OIG), or the General Accountability 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

[[Page 69147]]

objectives of the loan and in accordance with the applicable Agency 
requirements.
    (4) Borrower must submit supporting documentation 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. Expenses charged to 
project operations, whether for management agent services or other 
expenses, must be reasonable, typical, necessary and show a clear 
benefit to the residents of the property. Services and expenses charged 
to the property must show value added and be for authorized purposes.
    (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 as defined in Sec.  3560.102(i).
    (ii) Actual costs for direct personnel costs of permanent and part-
time staff assigned directly to the project site. This includes 
managers, maintenance staff, and temporary help including their:
    (A) Gross salary;
    (B) Employer FICA contribution;
    (C) Federal unemployment tax;
    (D) State unemployment tax;
    (E) Workers compensation insurance;
    (F) Health insurance premiums;
    (G) Cost of fidelity or comparable insurance;
    (H) Leasing, performance incentive or annual bonuses;
    (I) Direct costs of travel to off-site locations by on-site staff 
for property business or training; and/or
    (J) Retirement benefits.
    (iii) Legal fees directly related to the operation and management 
of the property including tenant lease enforcement actions, property 
tax appeals and suits, and the preparation of all legal documents.
    (iv) All outside account and auditing fees, if required by the 
Agency, directly related to the preparation of the annual audit, 
partnership tax returns and 401-K's, as well as other outside reports 
and year-end reports to the Agency, or other governmental agency.
    (v) All repair and maintenance costs for the project including:
    (A) Maintenance staffing costs and related expenses.
    (B) Maintenance supplies.
    (C) Contract repairs to the projects (e.g., heating and air 
conditioning, painting, roofing).
    (D) Make ready expenses including painting and repairs, flooring 
replacement and appliance replacement as well as drapery or mini-blind 
replacement. (Turnover maintenance).
    (E) Preventive maintenance expenses including occupied unit repairs 
and maintenance as well as common area systems repairs and maintenance.
    (F) Snow removal.
    (G) Elevator repairs and maintenance contracts.
    (H) Section 504 and other Fair Housing compliance modifications and 
maintenance.
    (I) Landscaping maintenance, replacements, and seasonal plantings.
    (J) Pest control services.
    (K) Other related maintenance expenses.
    (vi) All operational costs related to the project including:
    (A) The costs of obtaining and receiving credit reports, police 
reports, and other checks related to tenant selection criteria for 
prospective residents.
    (B) The cost of duplicating forms for those properties not owning a 
copier. This will include the costs of producing or purchasing forms 
and mailing or delivering those forms to the project site.
    (C) All bank charges related to the property including purchases of 
supplies (e.g., checks, deposit slips, returned check fees, service 
fees).
    (D) Costs of site-based telephone including initial installation, 
basic services, directory listings, and long-distances charges.
    (E) All advertising costs related specifically to the operations of 
that project. This can include advertising for applicants or employees 
in newspapers, newsletters, radio, cable TV, and telephone books.
    (F) Postage and delivery costs from the site including expenses to 
the Agency or other governmental agencies, tenants, verifying third 
parties, central management offices, etc.
    (G) Partnership or corporate business expenses including state 
taxes and other mandated state or local fees as well as other relevant 
expenses required for operation of the property by a third-party 
governmental unit. Costs of continuation financing statements and site 
license and permit costs.
    (H) Expenses related to site utilities including actual costs and 
surcharges as well as deposits and expense of utility bonds in lieu of 
bonds.
    (I) Site office furniture and equipment including site based 
computer and copiers. Service agreements and warranties for copiers, 
telephone systems and computers are also included (if approved by the 
Agency).
    (J) Real estate taxes (personal tangible property and real property 
taxes) and expenses related to controlling or reducing taxes.
    (K) All costs of insurance including property liability and 
casualty as well as fidelity or crime and dishonesty coverage for on-
site employees and the owners.
    (L) Costs of collecting rents on-site including bookkeeping 
supplies and recordkeeping items.
    (M) Costs of preparing and maintaining tenant files and processing 
tenant certifications including all office supplies, copies and other 
associated expenses.
    (N) Public relations expense relative to maintaining positive 
relationships between the local community and the tenants with the 
management staff and the borrowers. Chamber of Commerce dues, 
contributions to local charity events, and sponsorship of tenant 
activities, are examples.
    (O) Tax Credit Compliance Monitoring Fees imposed by HFAs.
    (P) All insurance deductibles as well as adjuster expenses.
    (Q) Professional service contracts (audits and compilations, tax 
returns, energy audits, utility allowances, architectural, 
construction, rehabilitation and inspection contracts, etc.)
    (R) On-site training pre-approved by the Agency provided by outside 
training vendors.
    (S) Site manager salary for additional hours associated with 
congregate housing.
    (vii) With prior Agency approval, cooperatives and nonprofit 
organizations may use housing project funds to pay 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 Agency's 
annual operating budgets, including proposed repair and replacement 
outlays and accruals.
    (C) Board of Director review and approval of capital expenditures, 
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 in 42 U.S.C. 543 (a).
    (ii) Purposes unrelated to the housing project.
    (iii) Reimbursement of inaccurate or false claims.

[[Page 69148]]

    (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, and building codes.
    (vi) Association dues to be paid by the project should be related 
to training for site managers or management agents. To the extent that 
association dues can document training for site managers or management 
agents related to project activities by actual cost or pro-ration, a 
reasonable expense may be billed to the project.
    (vii) Pay for bonuses or monetary performance awards to site 
managers or management agents that are not clearly provided for by the 
site manager salary contract.
    (viii) Billing for parties that are large or unreasonable, such as 
renting expensive party halls or hotel rooms and payment for alcoholic 
beverages or gifts to management agent staff.
    (ix) Billing for practices that are inefficient such as routine use 
of collect calls from a site manager to a management agent office.
    (c) Priorities. The priority order of planned and actual budget 
expenditures will be:
    (1) Senior position lienholder, if any;
    (2) Operating and maintenance expenses, including taxes and 
insurance;
    (3) Agency debt payments;
    (4) Reserve account requirements;
    (5) Other authorized expenditures; and
    (6) 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 change is requested, borrowers must submit budget 
documents for Agency approval 60 calendar days prior to the start of 
the housing project's fiscal year. The Agency will notify borrowers if 
the budget submission does not meet the requirements of paragraphs (a), 
(b), and (c) of this section. The borrower will have 10 days to submit 
the additional material.
    (3) If a rent change is requested, the borrower must submit budget 
documents to the Agency and notify tenants of the requested rent change 
at least 90 calendar days prior to the start of the housing project's 
fiscal year.
    (i) The Agency will notify borrowers if the budget submission does 
not meet the requirements of paragraphs (a), (b), and (c) of this 
section, or if the rent and utility allowance request has been denied 
in accordance with Sec.  3560.205(f). The borrower will have 10 days to 
submit the additional material to address any issues raised by the 
Agency.
    (ii) The rent change is not approved until the Agency issues a 
written approval. If there is no response from the Agency within the 
30-day period, the rent change is considered automatic. The following 
budgets are not eligible for automatic approval:
    (A) Budgets with rent increases above $25 per unit; and
    (B) Budgets that are submitted late or that miss other deadlines 
set by the Agency.
    (4) If the Agency denies the budget approval, the Agency will 
notify the borrower in writing.
    (5) 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, and paying 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 7th 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 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)(1) 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 the 
previous year only 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 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.
    (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 20 percent of the operating and maintenance expenses. 
If the borrower is escrowing taxes and insurance premiums, include the 
amount that

[[Page 69149]]

should be escrowed by year end and subtract such tax and insurance 
premiums from operating and maintenance expenses used to calculate 20 
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 will 
require the borrower to use the surplus funds to address capital needs, 
make a deposit in the housing project's reserve account, reduce the 
debt service on the borrower's loan, or reduce rents in the following 
year. At the end of the borrower's fiscal year, if the borrower is 
required to transfer surplus funds from the general operating account 
to the reserve account, the transfer does not change the future 
required contributions to the reserve account.
    (e) Account requirements. Borrowers must establish and maintain the 
reserve account according to Sec.  3560.65, Sec.  3560.302(c)(5), and 
the following requirements:
    (1) Reserve accounts must be deposited in interest-bearing accounts 
or securities; and
    (2) Reserve accounts must be supervised accounts that require 
Agency countersignatures on all withdrawals.
    (f) Funds invested in securities. In addition to the requirements 
specified in paragraph (e) of this section, the following requirements 
apply when reserve funds are invested in securities:
    (1) The reserve account must be held either at a Federally insured 
domestic institution such as a bank, savings and loan association, 
credit union, or at a domestic institution authorized to sell 
securities.
    (2) The borrower must record the price actually paid for the 
securities. When designated as a reserve deposit, the price paid must 
equal the required contribution to reserves.
    (3) Borrowers must be knowledgeable about industry practices and 
consider the impact of typical fees and charges for purchases and 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.
    (g) Use of the reserve account. (1) Borrowers must request Agency 
approval of reserve account withdrawals prior to the withdrawal. 
Borrowers must inform the Agency of planned uses of reserve accounts in 
their annual capital budget if known at budget planning time. Any item 
on the approved capital budget does not require additional pre-approval 
by the Agency.
    (2) The Agency will indicate any conditions governing withdrawals 
from a reserve account at the time it approves the withdrawal.
    (3) In emergency situations, the Agency may specify special 
procedures to provide an expedited approval process for the use of the 
reserve account.
    (4) 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.
    (h) 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 (g)(4) 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 if such payment comes from surplus operating funds in the 
reserve account.
    (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 interest 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.
    (i) Records. Borrowers must maintain records documenting all 
expenses that were paid by withdrawals from the reserve account.
    (j) Changes to reserve requirements. (1) As projects age, the 
required reserve account level may be adjusted to meet anticipated 
``life-cycle'' needs, including equipment and facility replacement 
costs, by amending the loan agreement/resolution.
    (2) 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.
    (k) 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, for any of the following:
    (1) Pay for expenses specified in a long-term capital plan;
    (2) Make payments and reamortize 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.
    (l) Procurement. The requirements of Sec.  3560.102(g), (j), and 
(k), 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 (b) 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 a limited scope engagement based 
on Agency approved procedures and certify that the housing meets the 
performance standards established in paragraph (c) of this section. 
Borrowers may use a CPA to prepare this report. For properties

[[Page 69150]]

that prepare a limited scope engagement, the Agency may undertake 
random audits, once every two or three years.
    (3) If a third party requires it, the borrower may have a CPA 
prepare an audit in accordance with generally accepted government 
auditing standards (GAGAS). Costs incurred to obtain this audit are an 
allowable project expense.
    (b) 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 use an Agency approved engagement letter. 
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 (c) 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 CPA in accordance with 
American Institute of Certified Public Accountant (AICPA) Standards and 
Agency requirements.
    (4) All engagement reports must be prepared for use by the Agency.
    (c) 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) Amount of 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.
    (d) Other financial reports. (1) Nonprofit and public borrower 
entities must submit audits in accordance with 7 CFR part 3052 that 
must also include the requirements set forth in the limited scope 
engagement.
    (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.


Sec.  3560.309  Advancement (loan) of funds to a RRH project by the 
owner, member of the organization, or agent of the owner.

    (a) Prior written approval by the Servicing Office is required. 
Such advances may be authorized when justified by unusual short-term 
conditions. When conditions are not short-term in nature, a servicing 
plan may be developed and advances may be approved in accordance with 
the provisions set out in Sec.  3560.453 of this part. Justification 
will be based on the following:
    (1) A review of the documented circumstances and the project 
operating budget before any funds are advanced (loaned). The financial 
position of the project must not be jeopardized.
    (2) Funds are not immediately available from any of the following 
sources:
    (i) Reserve funds;
    (ii) Initial operating capital; and
    (iii) An imminent rent increase.
    (b) The funds will be applied to ordinary project operating and 
maintenance expenses.
    (c) Interest may be charged or paid on the loan from project 
income; however, interest must be reasonable. The proposal may be 
denied if Rural Development financing can be provided to resolve the 
problem in a more cost-effective manner.
    (d) No lien in connection with the loan will be filed against the 
property securing the Rural Development loan or against project income. 
The advance may show as an unsecured project liability on financial 
statements prepared for year-end reports until such time as it is 
authorized to be repaid.
    (e) The payback of the advance (loan) may be permitted by the 
Servicing Official provided the terms and conditions were mutually 
agreed to by the borrower and Rural Development at the time of the 
advance and the financial position of the project will not be 
jeopardized. Payback should only be permitted on the advance when the 
Rural Development debt is current and the reserve requirements are 
being maintained at the authorized levels.


Sec. Sec.  3560.310-3560.349  [Reserved]


Sec.  3560.350  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

Subpart H--Agency Monitoring


Sec.  3560.351  General.

    This subpart contains policies for Agency monitoring of operations 
and management at multi-family housing (MFH) 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 MFH 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;
    (4) Verify compliance with Affirmative Fair Housing Marketing 
requirements, Title VI of the Civil Rights Act of 1964, Title VIII of 
the Civil Rights Act of 1968, as amended, section 504 of the 
Rehabilitation Act of 1973, the Age Discrimination Act of 1975, 
Americans

[[Page 69151]]

with Disabilities Act of 1990, 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, 
Title VIII of the Civil Rights Act of 1968, as amended; section 504 of 
the Rehabilitation Act of 1973, the Age Discrimination Act of 1975, 
Americans with Disabilities Act of 1990; 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 
violations. 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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

Subpart I--Servicing


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 
(MFH) 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, 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 remain 
unpaid for more than 30 days after the due date, past due, after 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 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 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

[[Page 69152]]

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.  3560.74.
    (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.


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. 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.
    (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.  3560.308 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

[[Page 69153]]

organizational requirements of the borrower entity.


Sec.  3560.406   MFH 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 no 
exceed conventional rents for comparable units in the area, except that 
when determined necessary by the Agency to allow for decent, safe and 
sanitary housing to be provided in market areas where conventional 
rents are not sufficient to cover necessary operating, maintenance, and 
reserve costs. Basic rents may be allowed to exceed comparable rents 
for conventional units, but in no case by more than 150% of the 
comparable rent for conventional unit rent level; and
    (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 a level that fully protects the Agency's interest. Loans 
from third-party sources that are not dependent on project revenue for 
payment will not be included in this determination.
    (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 security value of 
the housing project 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 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 security value of the 
housing project must be determined through an 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) All immediate and long-term repair and rehabilitation needs 
must be identified by a capital needs assessment. The reserve 
requirements for the housing project will be reviewed by the Agency and 
adjusted, if necessary, to adequately cover the cost of addressing the 
property's capital needs. The Agency may approve the release of the 
current reserve amount to the transferor provided the transferee agrees 
to deposit the amount to cover the project's immediate needs into the 
reserve account at closing.
    (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

[[Page 69154]]

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) During or immediately after the transfer, a review of the 
property must be conducted to ensure that it complies with or will 
comply with section 504(c) of the Americans with Disabilities Act 
(ADA), which covers accessibility requirements, and the Title VI of the 
Fair Housing Act of 1968.
    (10) 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.
    (11) A transferee must comply with insurance and bonding 
requirements established in subpart C of this part at the time of the 
transfer.
    (12) A transferee must agree to submit financial reports to the 
Agency according to subpart G of this part.
    (13) 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.
    (14) A limited profit Rural Rental Housing transferee's initial 
investment and return on investment will remain the same as that 
originally provided to the transferor unless:
    (i) The property is transferred to a non-profit entity and the 
return on investment is eliminated; or
    (ii) The transferee contributes additional funds for repair or 
rehabilitation and the Agency agrees to recognize a higher initial 
investment.
    (e) Equity payments. The Agency will withhold any equity payment 
due to the borrower, as part of an 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. Equity may be provided in cash 
or through a loan. 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 or third-party equity loan approved by 
the Agency to the borrower, the transferee must certify that equity 
payments due to the borrower will be paid from sources other than 
housing project's 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. 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 or 
permit a loan from a third-party source in conjunction with an 
ownership transfer or sale of a housing project. The subsequent loan 
may be in the form of a junior or parity lien.
    (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;
    (ii) The Agency note rate on the day the transfer is approved;
    (iii) The Agency note rate on the day the transfer is closed; or
    (iv) If the rents are increased due to a transfer, the transfer 
will be done under new rates and terms when the Agency determines that 
it is in the best interest of the government. Subsequent loan may be in 
the form of a senior, junior or parity lien or soft second.
    (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 
security 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.

[[Page 69155]]

    (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) 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 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. Mineral leases will be handled according to 7 
CFR 3550.159 except that all references to County Supervisor will be 
construed to mean District Director when applied to the MFH Programs.

[[Page 69156]]

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. 
Borrowers must use an Agency approved subordination agreement.
    (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 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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

[[Page 69157]]

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


Sec.  3560.451  General.

    This subpart contains special servicing, enforcement, liquidation, 
and other actions that 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 or a third party (such as real estate taxes and 
insurance) under a promissory note, loan or grant agreement, workout 
agreement, or other agreement remains due more than 30 days after the 
due date.
    (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.  3560.461 or liquidation as 
described in Sec.  3560.456. 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 
made 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.
    (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

[[Page 69158]]

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) Prior lienholder, if any;
    (2) Critical operating and maintenance expenses, including taxes 
and insurance;
    (3) Agency debt payments;
    (4) Reserve account requirements; and
    (5) Other authorized expenditures.
    (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. The Agency 
will provide notice to the borrower upon cancellation of the workout 
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 a compliance 
violation or curing a default.
    (d) Special note 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 rent to attract and keep tenants 
whose incomes, according to the formula in Sec.  3560.203, would 
require them to pay the note rent. The reduced rent is called a Special 
Note Rent (SNR) and, as noted in Sec.  3560.210, approval of an SNR may 
affect approvals of loan proposals submitted to the Agency for the 
market area where the SNR is in effect.
    (1) An 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 an 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 an 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. Procedures for debt collection are 
discussed in Sec.  3560.460. 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.
    (b) Loan reamortizations. A loan reamortization is a restructuring 
of loan terms and conditions over a period of time that does not exceed 
the remaining useful life of the housing project.
    (1) Loan reamortizations will only be approved when they are in the 
best 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) If the Agency approves a reamortization of a loan under this 
section, it will be at the existing note rate, or the current interest 
rate at the time of reamortization closing or approval, whichever is 
less.
    (3) 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

[[Page 69159]]

accordance with Sec.  3560.656 to prevent prepayment of the loan;
    (iv) Restructure an existing loan in conjunction with a subsequent 
loan for rehabilitation; or
    (v) 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 sound 
management practices are proposed for correction in accordance with an 
Agency approved workout agreement; and
    (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.
    (2) Prior to Agency approval for a loan writedown, the borrower 
must obtain an appraisal of the housing project that concludes the `` 
`as-is' market value,'' subject to restricted rents, 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) Any writedown will be conditioned on a finding that the 
borrower does not have the ability to pay a higher loan payment, even 
if the loan is reamortized.
    (4) 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) Before acceleration. Before accelerating a project loan, the 
Agency will consider the possibility that the borrower is forcing an 
acceleration to circumvent the prepayment process. If it is found that 
this is the borrower's motivation, the Agency will consider 
alternatives to acceleration, such as suing for specific performance 
under loan and management documents.
    (b) 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 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.
    (3) The Agency will not accept partial payment of an accelerated 
loan unless required by state law.
    (c) Voluntary liquidation. After acceleration, borrowers may 
voluntarily liquidate through either of the following mechanisms:
    (1) Deed in lieu of foreclosure. RHS may accept a deed in lieu of 
foreclosure to convey title to the security property only after the 
debt has been accelerated and when it is in the Government's best 
interest.
    (2) Offer by third party. If a junior lienholder or cosigner makes 
an offer in the amount of at least the net recovery value, RHS may 
assign the note and mortgage after all appeal rights have expired.
    (d) 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.
    (e) 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 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 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 recovery 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) 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.
    (f) 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 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.
    (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:

[[Page 69160]]

    (1) The account is in default; or
    (2) The property has not been properly managed or maintained.
    (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. The Agency will bring a legal action to establish the legal 
capacity of the borrower to administer the project if found necessary 
to protect the government's interests. 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) On the part of the heirs or executor of the borrower's estate, 
evidence of legal action due to a will or court actions that establish 
who is to become the owner;
    (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 (MFH) 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.  3560.460  Double damages.

    (a) Action to recover assets or income. (1) The Agency may request 
to the Attorney General to bring an action in a United States district 
court to recover any assets or income used by any person in violation 
of the provisions of a loan made by the Agency under this section or in 
violation of any applicable statute or regulation.
    (2) For the purposes of this section, a use of assets or income in 
violation of the applicable loan, statute, or regulation includes any 
use for which the documentation in the books and accounts does not 
establish that the use was made for a reasonable operating expense or 
necessary repair of the project or for which the documentation has not 
been maintained in accordance with the requirements of the Agency and 
in reasonable condition for proper audit.
    (3) For the purposes of this section, the term ``person'' means:
    (i) Any individual or entity that borrows funds in accordance with 
programs authorized by this section;
    (ii) Any individual or entity holding 25 percent or more interest 
in any entity that the Agency funds in accordance with programs 
authorized by this section; and
    (iii) Any officer, director, or partner of an entity that borrows 
funds in accordance with programs authorized by this section.
    (b) Amount recoverable. (1) In any judgment favorable to the United 
States entered under this section, the Attorney General may recover 
double the value of the assets and income of the project that the court 
determines to have been used in violation of the provisions of a loan 
made by the Agency under this section or any applicable statute or 
regulation, plus all costs related to the actions, including reasonable 
attorney and auditing fees.
    (2) Notwithstanding any other provisions of law, the Agency may use 
amounts recovered under this section for activities authorized under 
this section and such funds must remain available for such use until 
expended.
    (c) Time limitation. Notwithstanding any other provisions of law, 
an action under this section may be commenced at any time during the 
six-year period beginning on the date that the Agency discovered or 
should have discovered the violation of the provisions of this section 
or any related statutes or regulations.
    (d) Continued availability of other remedies. The remedy provided 
in this section is in addition to and not in substitution of any other 
remedies available to the Agency or the United States.


Sec.  3560.461  Enforcement provisions.

    (a) Equity skimming. (1) Criminal penalty. Whoever, as an owner, 
agent, employee, or manager, or is otherwise in custody, control, or 
possession of property that is security for a loan made under this 
title, willfully uses, or authorizes the use, of any part of the rents, 
assets, proceeds, income, or other funds derived from such property, 
for any purpose other than to meet actual, reasonable, and necessary 
expenses of the property, or for any other purpose not authorized by 
this title or the regulations adopted pursuant to this title, must be 
fined under title 18, United States Code, or imprisoned not more than 
five years, or both.
    (2) Civil sanctions. An entity or individual who as an owner, 
operator, employee, or manager, or who acts as an agency for a property 
that is security for a loan made under this title where any part of the 
rents, assets, proceeds, income, or other funds derived from such 
property are used for any purpose other than to meet actual, 
reasonable, and necessary expenses of the property, or for any other 
purpose not authorized by this title of the regulations adopted 
pursuant to this title, must be subject to a fine of not more than 
$25,000 per violation. The sanctions provided in this paragraph may be 
imposed in addition to any other civil sanctions or civil monetary 
penalties authorized by law.
    (b) Civil monetary penalties. (1) When civil monetary penalties may 
be imposed. The Agency may, after notice and opportunity for a hearing, 
impose a civil monetary penalty in accordance with this section against 
any individual or entity, including its owners, officers, general 
partners, limited partners, or employees, who knowingly and materially 
violate, or participate in the violation of, the provisions of this 
title, the regulation issued by the Agency pursuant to this title, or 
agreements made in accordance to this title by:
    (i) Submitting information to the Agency that is false.
    (ii) Providing the Agency with false certifications.
    (iii) Failing to submit information requested by the Agency in a 
timely manner.
    (iv) Failing to maintain the property subject to loans made under 
this title in good repair and condition, as determined by the Agency.

[[Page 69161]]

    (v) Failing to provide management for a project that received a 
loan made under this title that is acceptable to the Agency.
    (vi) Failing to comply with the provisions of applicable civil 
rights statutes and regulations.
    (2) Amount. (i) The amount of a civil penalty imposed under this 
section must not exceed the greater of twice the damages the Agency or 
the project that is secured for a loan under this section suffered or 
would have suffered as a result of the violation, or $50,000 per 
violation.
    (ii) Determination. In determining the amount of a civil monetary 
penalty under this section, the Agency must take into consideration:
    (A) The gravity of the offense;
    (B) Any history of prior offenses by the violator (including 
offenses occurring prior to the enactment of this section);
    (C) Any injury to tenants;
    (D) Any injury to the public;
    (E) Any benefits received by the violator as a result of the 
violation;
    (F) Deterrence of future violations; and
    (G) Such other factors as the Agency may establish by regulation.
    (3) Payment of penalties. No payment of a penalty assessed under 
this section may be made from funds provided under this title or from 
funds of a project which serve as security for a loan made under this 
title.
    (4) Remedies for noncompliance. (i) Judicial intervention. If a 
person or entity fails to comply with a final determination by the 
Agency imposing a civil monetary penalty, the Agency may request the 
Attorney General of the United States to bring an action in an 
appropriate district court to obtain a monetary judgment against such 
an individual or entity and such other relief as may be available. The 
monetary judgment may, in the court's discretion, include attorney's 
fees and other expenses incurred by the United States in connection 
with the action.
    (ii) Reviewability of determination. In an action under this 
paragraph, the validity and appropriateness of a determination by the 
Agency imposing the penalty must not be subject to review.
    (c) Conditions for renewal extension. The Agency may require that 
expiring loan or assistance agreements entered into under this title 
must not be renewed or extended unless the owner executes an agreement 
to comply with additional conditions prescribed by the Agency, or 
executes a new loan or assistance agreement in the form prescribed by 
the Agency.


Sec.  3560.462  Money laundering.

    The Agency will act in accordance with U.S. Code Title 18, part I, 
chapter 95, section 1956(c)(7)(D).


Sec.  3560.463  Obstruction of Federal audits.

    The Agency will act in accordance with U.S. Code Title 18, part I, 
chapter 73, section 1516(a).


Sec. Sec.  3560.464-3560.499  [Reserved]


Sec.  3560.500  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

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 (MFH) 
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, voluntary 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 Letter Of Priority Entitlement (LOPE) as 
specified in Sec.  3560.159(c).


Sec.  3560.503  Disposition of REO property.

    (a) Preference will be given to offers from bidders who are 
determined eligible by the Agency to purchase REO property designated 
to be sold as program property. It is the Agency's priority that 
property previously operated as program property prior to becoming REO 
inventory property be sold as program property. 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.
    (b) When the Agency determines that the REO property to be sold is 
not decent, safe, and sanitary and/or does not meet cost effective 
energy conservation standards, it will disclose the basis for this 
determination to prospective purchasers. The deed by which such an REO 
property is conveyed will contain a covenant restricting it from 
residential use until it is decent, safe, and sanitary, and meets the 
Agency's cost effective conservation standards. The Agency will also 
notify any potential purchaser of any known lead based paint hazards.


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.
    (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) The Agency may authorize the sale of an REO property by sealed 
bid or public auction when it is in the best interest of the 
Government. The Agency will publicly solicit requests for sealed

[[Page 69162]]

bids and publicize auctions. If the highest bid is lower than the 
minimum acceptable bid established by the Agency, or if no acceptable 
bids are received, the Agency may negotiate a sale without further 
public notice.
    (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 properties.

    (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 MFH 
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 are 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 MFH 
use.

    Single family type REO property may be sold for conversion to MFH 
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 MFH program use. When the Agency finances the sale of 
single family-type REO property for conversion to rural rental housing 
program use (i.e., MFH 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 MFH 
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.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

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, N, O, and P of this part will apply in 
addition to the requirements in this subpart.


Sec.  3560.552  Program objectives.

    (a) In addition to the objectives stated in Sec.  3560.52, off-farm 
labor housing loan and grant funds will be used to increase:
    (1) The supply of affordable housing for farm labor; and
    (2) The ability of communities to attract farm labor by providing 
housing which is affordable, decent, safe and sanitary.
    (b) Under section 516(i) of the Housing Act of 1949 (42 U.S.C. 
1486(i)), the Agency may award technical assistance grants to encourage 
the development of farm labor housing.


Sec.  3560.553  Loan and grant purposes.

    (a) 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 residential use with appropriate furnishings 
and equipment. A temporary residence is a dwelling which is used for 
occupancy, usually for a short period of time, but is not the legal 
domicile for the occupant.
    (b) The Agency may award technical assistance grants to eligible 
private and public nonprofit agencies. These grant recipients will, in 
turn, assist other organizations to obtain loans and grants for the 
construction of farm labor housing.
    (c) Technical assistance services may not be used to reimburse a 
nonprofit or public body applicant for technical services provided by a 
nonprofit organization, with housing and/or community development 
experience, to assist the nonprofit applicant entity in

[[Page 69163]]

the development and packaging of its loan/grant docket and project. In 
addition, technical assistance will not be funded by the Agency when an 
identity of interest exists between the technical assistance provider 
and the loan or grant applicant.


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:
    (1) A broad-based nonprofit organization, a nonprofit organization 
of farmworkers, a federally recognized Indian tribe, a community 
organization, or an agency or political subdivision of State or local 
government, and must meet the requirements of Sec.  3560.55, excluding 
Sec.  3560.55(a)(6). A broad-based nonprofit organization is a 
nonprofit organization that has a membership that reflects a variety of 
interests in the area where the housing will be located; 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.  3560.555(a)(1); and
    (2) 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.
    (c) Limitation. 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, may 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, it is encouraged that the design of off-
farm labor housing incorporate outdoor shower, boot washing station, 
and/or hose bibb facilities as necessary to protect the resident and 
the asset from excess dirt and chemical exposure.
    (c) Davis-Bacon wage requirements. Construction financed with the 
assistance of a Section 516 grant will be subject to the provisions of 
the Davis-Bacon Act (40 U.S.C. 276(a)-276(a)(7)), and the implementing 
regulations published by the Department of Labor at 29 CFR parts 1, 3, 
and 5.


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 off-farm labor housing loans.
    (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
    (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.

    The requirements established in Sec.  3560.66 apply to all 
applications for off-farm labor housing loans and grants, except that 
the 25 percent requirements stated in paragraph Sec.  3560.66(b)(1) may 
consist of loan and/or grant funds.


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 so long as there is a need for farm labor housing..


Sec.  3560.567  Establishing the profit base on initial investment.

    The requirements established under Sec.  3560.68 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.

[[Page 69164]]

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) Equity contributions being made by a borrower or grantee must 
be contributed and disbursed prior to any disbursement of interim loan 
funds and any loan or grant funds from the Agency.
    (b) 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 by the Agency.
    (c) 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, 2, and 5).


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) A nonprofit organization will have its Board of Directors adopt 
an Agency-approved loan and/or grant resolution, which is required as 
part of the loan docket before loan and/or grant 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.
    (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) Off-farm labor housing loans used to build or acquire new units 
made pursuant to a contract entered into on or after the effective date 
of this regulation, will be subject to the restrictive-use provision 
stated in Sec.  3560.72(a)(2)(ii). All other off-farm labor housing 
loans are subject to the restrictive-use provisions contained in their 
loan documents and as outlined in subpart N of this regulation. Such 
restrictions must be included in the mortgage and deed of trust.


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  Operating assistance.

    Operating assistance may be used in lieu of tenant-specific rental 
assistance in off-farm labor housing projects financed under section 
514 or section 516(i) of the Housing Act of 1949 (U.S.C. 1486(i)) that 
serve migrant farmworkers. Owners of eligible projects may choose 
tenant-specific rental assistance as described in Sec.  3560.573 or 
operating assistance, or a combination of both, however, any tenant or 
unit assisted under this section may not receive rental assistance 
under Sec.  3560.572. The objective of this program is to provide 
assistance toward the cost of operating the project so that rents may 
be set at rates that are affordable to very low and low-income migrant 
farmworkers.
    (a) Project eligibility requirements. To be eligible for the 
operating assistance program, projects must be:
    (1) Off-farm labor housing projects financed under section 514 or 
section 516 with units that are for migrant farmworkers. Housing units 
for year-round farmworker households are ineligible; and
    (2) Eligible for the Agency's rental assistance program as defined 
in Sec.  3560.573.
    (b) Operating assistance limits. The amount of operating assistance 
requested by the owner must be based on the project's actual income and 
expenses and must be approved by the Agency. In the case of a mixed 
project, the amount of operating assistance must be based on the 
portion of actual income and expenses that are attributable to the 
units that are for migrant farmworkers. In no instance may the annual 
amount of operating assistance exceed 90 percent of the annual 
operating costs that are attributable to the migrant units.
    (c) Owner responsibilities. (1) Requesting for operating assistance 
program. Owners of off-farm labor housing projects with units for 
migrant farmworkers may request operating assistance by submitting a 
request to the Agency, which must include a budget. The budget must 
include:
    (i) Estimated operating costs for the migrant units, including 
authorized expenditures such as reserve deposits;
    (ii) Proposed rental rates for the migrant units to generate 
sufficient funds for operating costs of those units, taking into 
consideration all other sources of project income; and
    (iii) Estimated rental income from tenants, based on a tenant 
contribution of 30 percent of the average adjusted monthly income of 
migrant farmworker households in the area.
    (2) Requesting operating assistance payments. Each month, the owner 
will submit a request for operating assistance to the Agency.
    (3) Verifying tenant income eligibility. Owners are responsible for 
verifying tenant income eligibility. Only very low or low-income 
households are eligible for the operating assistance rents. Households 
with incomes above the low-income limits must pay the full rent.
    (4) Reporting requirements. (i) Owners will complete and submit to 
the Agency tenant certifications to document tenant income and 
eligibility.
    (ii) Owners will complete and submit monthly to the Agency a 
project worksheet for operating assistance.
    (iii) Owners must submit an annual planning budget to the Agency 
prior to the project's fiscal year.


Sec.  3560.575  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.  3560.576  Occupancy restrictions.

    (a) Restrictions on conditions of occupancy. (1) No borrower or 
grantee 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.  3560.577.
    (3) No borrower or grantee 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, disability, familial status, or national origin.
    (b) Eligible households. To be eligible for occupancy in off-farm 
labor housing, households must meet the following requirements.

[[Page 69165]]

    (1) Occupational. An eligible household must include a domestic 
tenant or co-tenant farm laborer, a retired domestic farm laborer, or a 
disabled 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, 
public or private nonprofit organizations, and limited partnerships 
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 indicated for the Standard Federal regions as 
published by the Agency for their particular region of the country. 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 annual income limits indicated for the Standard Federal 
regions, as published by the Agency.
    (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 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) Tenant eligibility requirements for operating assistance rents. 
To be eligible for operating assistance rents, tenants must meet the 
rental assistance eligibility requirements described in Sec.  3560.573 
and in Sec.  3560.252.
    (d) 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.
    (e) Non-farm laborer tenants. When there is a diminished need for 
housing for persons or families in the above categories, 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. As the basis for Agency approval or disapproval of 
the borrower's determination of diminished need, the borrower must 
submit a current analysis of need and demand to the Agency, identical 
to the market analysis that is required of loan applicants in the loan 
origination process. The borrower's determination and the State 
Director's recommendation should be forwarded to the National Office 
for concurrence. 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.  3560.577  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 with first priority going to very low-income households, 
next priority to low-income households, and last to moderate-income 
households.
    (b) Second priority is given to retired domestic farm laborer 
households and disabled domestic farm laborer households who were 
active in the local farm labor market area at the time of retiring or 
becoming disabled. Occupancy priority will be given in accordance with 
paragraph (a) of this section.
    (c) Third priority is to be given to retired domestic farm laborer 
households and disabled domestic farm laborer households who were not 
active in the local farm labor market at the time of retiring or 
becoming disabled. Occupancy priority will be given in accordance with 
paragraph (a) of this section.


Sec.  3560.578  Financial management of labor housing.

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


Sec.  3560.579  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.  3560.580-3560.599  [Reserved]


Sec.  3560.600  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

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, O, and P 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

[[Page 69166]]

    (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.  3560.54 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)(1), (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 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 necessary housing from the applicant's own resources and be 
unable to obtain credit from any other source upon terms and conditions 
which the applicant could reasonably be expected to fulfill. If the 
applicant is an association of farmers or family farm corporation or 
partnership, the individual members, individually and jointly, must be 
unable to provide the necessary housing by utilizing their own 
resources and be unable, by pledging their personal liability, to 
obtain other credit that would enable them to provide housing for farm 
workers at rental rates they can afford to pay. The individual 
resources of family farm corporation or partnership members with less 
than a 10 percent corporate or partnership interest should not be 
considered when determining if the applicant can obtain credit 
elsewhere.
    (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.
    (d) On-farm labor housing that consists of buildings with less than 
three units is not subject to the requirement that five percent of the 
units be constructed as fully accessible units, as described in Sec.  
3560.60(d).


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 
and housing shall be planned and constructed in accordance with 7 CFR 
part 1924, subparts A and C.
    (2) Sites must be accessible from a public road, 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) Seasonal housing may be constructed in accordance with exhibit 
I of 7 CFR part 1924, subpart A. If constructed in accordance with 
exhibit I, the housing must be suitable to allow for conversion to 
full-year occupancy if the need for migrant farmworkers in the area 
declines.
    (d) Accessibility. On-farm labor housing that consists of buildings 
with less than three units, need not meet the requirement that five 
percent of the units be constructed as fully accessible units, as 
described in Sec.  3560.60(d). This does not, however, eliminate any 
other accessibility requirements.


Sec.  3560.609  [Reserved]


Sec.  3560.610  Security.

    (a) Security instruments must meet the requirements established 
under Sec.  3560.560.
    (b) When feasible, the on-farm labor housing will 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 lien on the tract of land where the on-farm labor 
housing is located and the security must have adequate value to protect 
the Federal government's interest. The Agency will seek a first or 
parity lien position on Agency-financed property in all instances, 
however, the Agency may accept a junior lien position if the Federal 
government's interests are adequately secured.

[[Page 69167]]

    (c) The Agency will determine the value of the security for the 
loan in accordance with 7 CFR part 1922, subpart B if the 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 12 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 
comply with Sec.  3560.70. Manufactured housing located on-farm may 
consist of individual units.


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 loans must execute an Agency-
approved loan agreement. In addition, if determined appropriate by the 
Agency, on-farm labor housing loans made on or after the effective date 
of this regulation may be subject to the restrictive-use provisions as 
stated in Sec.  3560.72(a)(2)(ii). All other on-farm labor housing 
loans are subject to the restrictive-use provisions contained in their 
loan documents and as outlined in subpart N of this regulation.


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) Occupants must meet the definition of a domestic farm laborer, 
as defined in Sec.  3560.11.
    (a) Occupancy of on-farm labor housing is restricted to employees 
of the borrower unless otherwise approved by the Agency.
    (d) With prior written permission of the Agency, on-farm labor 
housing may be occupied by ineligible tenants on a short-term basis. 
The permission of the Agency must also be for a limited duration.


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 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;
    (g) Compliance with Agency requirements for affordable, decent, 
safe, and sanitary housing; and
    (h) Compliance with civil rights requirements.

[[Page 69168]]

Sec. Sec.  3560.632-3560.649  [Reserved]


Sec.  3560.650  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

Subpart N--Housing Preservation


Sec.  3560.651  General.

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


Sec.  3560.652  Prepayment and restrictive-use categories.

    (a) Loans with prepayment prohibitions include:
    (1) Initial section 515 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;
    (2) Subsequent loans made on or after December 15, 1989, for 
purposes other than additional rental units; or
    (3) Loans subsequently restricted by servicing actions including 
transfers.
    (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 eligible to receive incentives subject to the provisions of this 
subpart.
    (d) Loans may be prepaid if another loan or grant from the Agency 
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 an Agency loan must submit a 
written prepayment request to the Agency at least 180 days in advance 
of the anticipated prepayment date and must obtain Agency approval 
before the Agency 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 which may relate to the prepayment 
request and a statement of actions needed to assure such compliance.
    (4) 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 Agency and explaining the potential affect of 
the request on the lease.
    (5) Borrowers are required to submit a signed release of 
information form along with the prepayment request. The Agency will 
notify nonprofit organizations and public bodies involved in providing 
affordable housing or financial assistance to tenants of the receipt of 
a borrower's request to prepay their MFH (MFH) loan(s). Additionally, 
the Agency is to notify nonprofit organizations and public bodies 
whenever a borrower, who has requested prepayment, is required or 
elects to offer their property for sale to a nonprofit or public body.
    (6) A certification that the borrower has notified all governmental 
entities involved in providing affordable housing or 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 statement affirming that units in the property applying for 
prepayment will continue to be available for rent by eligible residents 
during the prepayment process.
    (c) The Agency will review complete requests to determine if:
    (1) The loan is eligible for prepayment under Sec.  3560.652(b);
    (2) The borrower has the ability to prepay; and
    (3) The borrower has complied or has the ability to comply with 
applicable Federal, state, and local laws related to the prepayment 
request.
    (d) If a prepayment request lacks full and complete information on 
any item, the Agency will return the prepayment request to the borrower 
with a letter citing the deficiencies in the prepayment request. The 
Agency will offer borrowers an opportunity, within 30 days following 
the date of the return, to address the reasons given by the Agency for 
the return of the prepayment request and will allow the borrower to 
submit a revised prepayment request.
    (e) If the Agency determines that the prepayment request 
appropriately satisfies all the conditions listed in paragraph (d) of 
this section, the Agency 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 or Sec.  3560.655. If 
the Agency determines that a loan is ineligible for prepayment or the 
borrower does not have the ability to prepay, the Agency will return 
the prepayment request to the borrower with a written explanation of 
the Agency's determinations.


Sec.  3560.654  Tenant notification requirements.

    (a) Within 30 calendar days of receiving a complete prepayment 
request, the Agency will send a prepayment request notice to each 
tenant in the housing project. Borrowers must post the Agency'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 Agency 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 Agency 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 Agency 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

[[Page 69169]]

with the borrower to discuss the prepayment request. The Agency 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 Agency agrees to accept prepayment on a loan, the Agency 
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 Agency'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 borrower withdraws the prepayment request, the Agency 
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 Agency will notify each tenant, in writing, of the 
agreement and provide 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 
Agency 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 any adverse impact. Borrowers 
must post copies of the Agency'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 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 Agency or the borrower prior to the tenant's occupancy in the 
housing project.
    (h) 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 Agency 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 Agency's notice in public areas throughout the housing 
project for a period of 60 days following the date of the notice.


Sec.  3560.655  Agency requested extension.

    Before accepting an offer to prepay from a borrower with a 
restricted loan, the Agency must first make a reasonable effort to 
enter into a new restrictive-use agreement with the borrower. Under 
this agreement, the borrower would make a binding commitment to extend 
the low-income use of the housing and related facilities for 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 provisions and restrictive-use agreement, the Agency 
should proceed to take the actions described in Sec.  3560.658.


Sec.  3560.656  Incentives offers.

    (a) The Agency 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 market value of the housing project is determined by the 
Agency, based on an appraisal conducted in accordance with subpart P of 
this part.
    (2) There are no restrictive-use agreements or prepayment 
prohibitions in affect.
    (b) Specific incentives offered will be based on the Agency's 
assessment of:
    (1) The value of the housing project as determined by the Agency 
based on an ``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; 
except that when determined necessary by the Agency to allow for 
decent, safe and sanitary housing to be provided in market areas where 
conventional rents are not sufficient to cover necessary operating, 
maintenance, and reserve costs. Basic rents may be allowed to exceed 
comparable rents for conventional units, but in no case by more than 
150% of the comparable rent for conventional unit rent level; and
    (4) An incentive amount that will be the least costly alternative 
for the Federal Government while being consistent with the Agency's 
commitment to the preservation of housing for very-low, low, and 
moderate income households in rural areas.
    (c) The Agency may offer the following incentives:
    (1) The Agency may increase the borrower's annual return on equity 
by one of the following two methods. The actual withdrawal of the 
return remains subject to the procedures and conditions for withdrawal 
specified in subpart G of this part.
    (i) The Agency may recognize the borrower's current equity in the 
housing project. The equity will be determined using an Agency accepted 
appraisal based on the housing project's value as unsubsidized 
conventional housing.
    (ii) When a current appraisal indicates an equity loan can not be 
made, the Agency may recognize the borrower's current equity in the 
housing project at the higher of the original rate of return or the 
current 15-year Treasury bond rate plus 2 percent rounded to the 
nearest one-quarter percent. The equity will be determined using the 
most recent Agency accepted appraisal of the housing project prior to 
receiving the prepayment request.
    (2) The Agency 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 Agency may offer additional rental assistance, or an 
increase in assistance provided under existing contracts under 
Sec. Sec.  521(a)(2), 521(a)(5) of the Housing Act of 1949 (42 U.S.C. 
1490a(a)(2)) or section 8 of the United States Housing Act of 1937 (42 
U.S.C. Sec.  1437f).
    (4) The Agency may make an equity loan to the borrower. The equity 
loan must not adversely affect the borrower's ability to repay other 
Agency 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

[[Page 69170]]

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 Agency 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 Agency 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 Agency may permit the borrower to receive rents in excess of the 
amounts determined necessary by the Agency to defray the cost of long-
term repair or maintenance of such a project.
    (d) The Agency must 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 Agency 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). Deferred maintenance may include 
specific items identified in previous Agency inspections where the 
borrower has had the opportunity and resources available to take 
corrective actions and did not.
    (1) Deferred maintenance does not include routine repair and 
replacement that results from normal wear and tear of the physical 
asset. 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.
    (2) Deferred maintenance including any deficiencies identified in 
project compliance with section 504 of the Rehabilitation Act of 1973 
must be addressed as part of the development of the incentive and must 
be completed as part of an acceptance agreement of any incentive.
    (f) Existing loans must be consolidated, provided consolidation 
retains the Agency's lien position, and reamortized in accordance with 
subparts I and J of this part, provided it maintains feasibility of the 
housing for the tenants or reduces 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 
Agency may consider the incentive offer to be rejected.
    (1) If the borrower accepts the incentive offer, procedures 
outlined in Sec.  3560.657 must be followed.
    (2) 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 Agency's 
offer of incentives, the borrower must complete the following actions:
    (1) Subject to the Agency's approval, the borrower must legally 
restrict the use of the project in accordance with and for the number 
of years stated in Sec.  3560.662.
    (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) Waiting lists. If funds for components of incentive offers are 
limited, the Agency will establish a waiting list of accepted incentive 
offers for funding in the date order that the complete prepayment 
request was received.
    (c) Unfunded incentive offers. If the borrower accepts the 
incentive offer but the Agency 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 Agency 
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 either continue 
operating the housing project for program purposes and in accordance 
with Agency requirements or continue processing their prepayment 
process in accordance with Sec.  3560.658. If the borrower chooses to 
withdraw their request, the borrower may resubmit an updated prepayment 
request, at any time, and repeat the prepayment process in accordance 
with this subpart.
    (4) The borrower may elect to obtain a third-party equity loan 
provided rents will not exceed comparable rents in the market area.


Sec.  3560.658  Borrower rejection of the incentive offer.

    (a) If a borrower rejects the incentive package offered by the 
Agency or an Agency request to extended restrictive-use provisions, 
made in accordance with Sec.  3560.662, the loan will only be prepaid 
if the borrower elects to agree 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 
Agency, 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.
    (b) If the borrower does not elect or agree to enter an agreement 
in accordance with paragraph (a) of this section, then the Agency 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. The Agency will review relevant information 
to determine the availability of comparable affordable housing for 
existing tenants in the market area and if minorities in the project, 
on the waiting list or in the market area will be disproportionately 
adversely affected by the loss of the affordable rental housing units.
    (1) If the Agency determines that prepayment will have an adverse 
impact on minorities, then the borrower must offer to sell to a 
qualified nonprofit

[[Page 69171]]

organization or public body in accordance with the provisions of 
paragraph (a) of this section.
    (2) If the Agency 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 Agency, to protect 
tenants at the time of prepayment.
    (3) If the Agency determines that there is no adverse impact on 
minorities and there is an adequate supply of decent, safe, and 
sanitary rental housing affordable to program eligible tenant 
households in the market area the prepayment will be accepted with no 
further restriction.
    (c) If the borrower agrees to the restrictive-use provisions, as 
determined by the Agency, the applicable language must be included in 
the release documents and the borrower must execute a restrictive-use 
agreement acceptable to the Agency and a deed restriction.
    (d) If the borrower will not agree to applicable restrictive-use 
provisions, as determined by the Agency, the borrower must offer to 
sell to a nonprofit or public body in accordance with Sec.  3560.659 or 
withdraw their prepayment request.


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 or elects to sell a housing project to a 
nonprofit organization or public body, two independent appraisals will 
be ordered, one by the Agency and one by the borrower. Both appraisals 
will conclude market value and be in accordance with subpart P of this 
part. If the borrower's assessment of the Agency's appraised market 
value indicates that no further appraisal is needed, the borrower may 
agree to accept the Agency's appraisal.
    (1) 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.
    (2) If the two appraisers fail to agree on the market value, the 
Agency and the borrower will jointly select an appraiser whose 
appraisal will be binding on the Agency and the borrower. The Agency 
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 Agency will assist the borrower in initially notifying 
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 Agency may 
determine that no local nonprofit organizations or public bodies are 
available to purchase the housing project. After this determination, 
the 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. 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 Agency 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 Agency that no identity-of-
interest relationships 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 an 
Agency MFH loan.
    (5) The purchaser must complete an Agency-approved application and 
obtain Agency 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 Agency or other sources to nonprofit 
organizations and public bodies. Agency loans to nonprofit 
organizations or public bodies may be made for the purposes described 
in this paragraph. Agency loans will be processed in accordance with 
subpart B of this part. Loans from other sources

[[Page 69172]]

will be approved by the Agency in accordance with subpart I of this 
part.
    (1) Agency 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, an Agency 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. An Agency 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 
Agency may make advances, in accordance with section 502(c)(5)(c)(i), 
not in excess of limits established by Congress 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.
    (i) Waiting list. If funds for sales to nonprofit organizations and 
public bodies are limited, the Agency will add the funding requests to 
the waiting list for incentives and follow the process established in 
Sec.  3560.657(b) and (c).
    (j) Withdrawal from sales process. A borrower may withdraw the 
prepayment request at any time prior to the sale of the property. The 
borrower will be responsible for any damages associated with breaking a 
sales contract established with a nonprofit organization or public 
body.
    (k) When no offer to purchase is received. Prepayment with no 
further restriction may be accepted by the Agency when the borrower 
agrees to offer the housing project for sale to a nonprofit 
organization or public body in accordance with Sec.  3560.659 and no 
good faith offer is received within 180 days from the date that the 
housing project was advertised for sale to a nonprofit organization or 
public body, or a good faith 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, provided the owner 
cooperated with the potential purchaser.


Sec.  3560.660  Acceptance of prepayments.

    (a) When the Agency agrees to accept prepayment, the Agency will 
notify borrowers, in writing, of the conditions under which the Agency 
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 Agency'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 Agency has not agreed to an 
alternative date based on a written request from the borrower, the 
Agency may cancel the prepayment acceptance agreement.
    (b) Tenants will be notified of the prepayment acceptance agreement 
in accordance with Sec.  3560.654(c). 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 
accordance with Sec.  3560.159(c). Tenants must request a LOPE within 
one year of the prepayment acceptance notice date.
    (c) Owners will provide certification stating that they will meet 
state and local laws prior to prepayment acceptance.


Sec.  3560.661  Sale or transfers.

    (a) If a sale or transfer is to take place in conjunction with the 
Agency incentive offer, the sale or transfer must comply with the 
processing 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 Agency may make an offer of incentives contingent on 
the successful transfer of the housing to an acceptable purchaser. The 
Agency 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.

    All restrictions require Agency approval and must be in accordance 
with the following restrictions:
    (a) The undersigned, and any successors in interest, agree to use 
the property (described herein) in compliance with 42 U.S.C. 1484 or 
1485, whichever is applicable, and applicable regulations and the 
subsequent amendments, for the purpose of housing:
    (1) Very low-, or low-income households when required by Sec.  
3560.658(a)(3), or
    (2) Very low-, low-, or moderate-income households.
    (b) The period of the restriction will be inserted in accordance 
with the following:
    (1) 10 years if required by Sec.  3560.658(a)(1);
    (2) The last existing tenant (that occupied the property on the 
date of prepayment) voluntarily vacates if required by Sec.  
3560.658(b)(2);
    (3) 30 years if required by Sec.  3560.406(g);
    (4) Remaining period of existing restrictive-use provisions and any 
agreed extension if required by Sec.  3560.655 or Sec.  3560.658 
(a)(2);
    (5) The remaining useful life of the housing and related facilities 
if required by Sec.  3560.658(a)(3); and
    (6) 20 years in all other cases.
    (c) When required by Sec.  3560.658(a)(1) or (a)(2), the 
undersigned agrees that at the end of the expiration of the period 
described in paragraph (b) of this section, the property will be 
offered for sale to a qualified nonprofit organization or public body, 
in accordance with previously cited statutes and regulations.
    (d) The Agency and eligible tenants or applicants may enforce these 
restrictions.
    (e) The undersigned also agrees to:
    (1) To set rents, other charges, and conditions of occupancy in a 
manner to meet these restrictions;
    (2) To post an Agency approved notice of this restriction for the 
tenants of the property;
    (3) To adhere to applicable local, state, and Federal laws; and
    (4) To obtain Agency concurrence for any rental procedures that 
deviate from those approved at the time of prepayment, prior to 
implementation.
    (f) The undersigned will be released from these obligations before 
the termination period in paragraph (b) of this section only when the 
Agency determines that there is no longer a need for the housing or 
that financial assistance provided the residents of the housing will no 
longer be provided due to no fault, action or lack of action on the 
part of the borrower.


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

[[Page 69173]]

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. The Agency may enforce restrictive-use 
provisions through administrative and legal actions. Tenants may 
enforce the restrictive-use provisions by contacting the Agency or 
through legal action. The Agency will release the restrictive-use 
provisions when the Agency conditions have been met.


Sec. Sec.  3560.664-3560.699  [Reserved]


Sec.  3560.700  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

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.


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 through any legal remedies available.
    (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 
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 of copy of the written 
notice to the tenant.
    (b) 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 within a specified 
period of time which might alter the determination that the assistance 
received was unauthorized.
    (c) 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 may include offsets, the use of private or public collection 
agents, and any other remedies available. 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) Repayment may be made either with a lump sum payment or through 
payments made over a period of time. If a borrower or tenant agrees to 
repay unauthorized assistance, the borrower or tenant proposed 
repayment schedule must be approved by Agency prior to implementation. 
Agency approval of a repayment schedule will take into consideration 
the best interest of the

[[Page 69174]]

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 as determined by the Agency, 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 collection of the unauthorized 
assistance from the tenant.
    (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, in accordance with Sec.  3560.461. If a tenant refuses to 
enter into an unauthorized assistance repayment schedule, the Agency 
will initiate recovery actions against the tenant.
    (g) Borrowers may not use housing project funds to pay amounts due 
to the Agency as a result of unauthorized assistance due to borrower 
fraud.


Sec.  3560.706  Offsets.

    Offsets and any other available remedies may 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 project if 
they have the legal and financial capabilities to do so. Approval 
considerations for such forbearance and repayment 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 at the incorrect interest rate 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 agrees to a separate repayment 
process.


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 is 
not allowable under the provisions of subparts D, E, or F of this part, 
as applicable; 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 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, for 
any reason, 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 or borrower sending the letter.


Sec. Sec.  3560.710-3560.749  [Reserved]


Sec.  3560.750  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

[[Page 69175]]

Subpart P--Appraisals


Sec.  3560.751  General.

    This subpart sets forth appraisal policies for Agency-financed 
multi-family housing (MFH) projects consisting of five or more rental 
units. Agency-financed housing projects 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, review, and release.

    (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 determine appropriate servicing or preservation 
decisions. Appraisals used for Agency decision-making must be current, 
unless the Agency and the applicant, or borrower, mutually agree to the 
use of an appraisal that is not current. A current appraisal is an 
appraisal with a report date that is not more than one year old.
    (b) Appraisal requests. Appraisal requests must be in writing and 
must specify the client and other intended users, the intended use, the 
purpose, and the scope of work of the appraisal, including the type and 
definition of the value(s) to be developed.
    (1) Type of Value. The appraisal request must indicate whether the 
``market value'', the ``market value, subject to restricted rents'', or 
any other type of value of the housing project and related facilities 
is to be concluded.
    (i) A request for ``market value, subject to restricted rents'' 
means the appraisal will take into consideration any rent limits, rent 
subsidies, expense abatements, or restrictive-use conditions that will 
affect the property as a result of an agreement with the Agency or any 
other financing source. Each type of financing involved, including, but 
not limited to, interest credit subsidy, low-interest loans from other 
sources, tax-exempt bond financing, tax credits, and grants, must be 
valued separately in the appraisal.
    (ii) A request for ``market value'' means the appraisal will take 
into consideration the most probable price which a property should 
bring in a competitive and open market under all conditions requisite 
to a fair sale, the buyer and seller each acting prudently and 
knowledgeably, and assuming the price is not affected by undue 
stimulus. 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) Buyer and seller are typically motivated;
    (B) Both parties are well informed or well advised and acting in 
what they consider their best interests;
    (C) A reasonable time is allowed for exposure in the open market;
    (D) Payment is made in terms of cash in United States dollars or in 
terms of financial arrangements comparable thereto; and
    (E) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (2) `` `As-is' Value'' or ``Prospective Value''. The appraisal 
request must indicate whether the ``'as-is' value'' or ``prospective 
value'' of the housing is to be concluded.
    (i) `` `As-is' value'' means the value of the housing and related 
facilities as of the effective date of the appraisal. It relates to 
what physically exists and is legally permissible at the time of the 
appraisal and excludes all hypothetical conditions.
    (ii) ``Prospective value'' means the forecasted value of the 
housing and related facilities as of a specified future date. For 
Agency appraisals, this date will typically be the projected completion 
date of proposed new construction or rehabilitation.
    (3) Section 8 project-based assistance. Depending on the intended 
use of the appraisal, the Agency will specify whether or not section 8 
project-based assistance will be considered in the valuation of the 
housing. 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 intended use of the appraisal, the Agency 
will specify whether or not tax credits and other financing sources 
involved in the housing will be considered in the valuation of the 
housing.
    (c) Appraisal review. All MFH appraisals that were not written by 
an Agency appraiser will be reviewed by an Agency appraiser, who will 
write and file a technical review report that complies with the Uniform 
Standards of Professional Appraisal Practice (USPAP) and Agency 
requirements.
    (d) Release of appraisals. MFH appraisals procured by the Agency 
will be released to owners/applicants, from their own files, upon their 
request.


Sec.  3560.753  Agency appraisal standards and requirements.

    (a) General. The Agency recognizes USPAP as the basic standards for 
appraisals. Appraisals used by the Agency must comply with USPAP and 
this subpart.
    (b) Appraisers. MFH appraisals prepared for the Agency will be 
written by Agency appraisers or independent fee appraisers who are 
state certified general appraisers, certified in the state where the 
property is located. Technical review reports will be written by Agency 
state certified general appraisers.
    (c) Appraisal report. The appraisal report format may be a form 
appraisal or a narrative appraisal. The Agency will specify the 
appraisal format that is most appropriate for the scope of work 
involved when the appraisal is requested.
    (1) Form appraisal reports. The Agency will accept appraisal report 
forms that meet generally accepted industry standards, comply with 
USPAP, 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 analysis;
    (vii) A statement regarding any environmental issues, such as 
potential contamination of the property from hazardous substances, 
hazardous wastes, or petroleum products;
    (viii) A cost approach analysis (if applicable);
    (ix) A sales comparison approach analysis (if applicable);
    (x) An income approach analysis (if applicable);
    (xi) A reconciliation of the value indications derived from the 
included approaches to value; and
    (xii) A signed and dated certification of value.
    (3) At the time an appraisal is requested, the Agency will specify 
either a complete or a limited appraisal and one of the following types 
of appraisal reports, based upon the complexity of the appraisal 
assignment.
    (i) A self-contained report that comprehensively describes all 
information significant to the solution of the appraisal problem;
    (ii) A summary report that summarizes all information significant

[[Page 69176]]

to the solution of the appraisal problem; or
    (iii) A restricted use report, intended for Agency use only, that 
briefly states all information significant to the solution of the 
appraisal problem.
    (d) Highest and best use statement and analysis. The highest and 
best use is to be concluded for the subject site as though it was 
vacant, and for the subject property as improved, if improvements have 
been made. If the highest and best use of a subject property is for 
something other than MFH, the appraisal report must provide this 
information to the Agency for consideration in the loan process. In 
addition to being reasonably probable and appropriately supported, the 
highest and best use of both the land as though vacant and the property 
as improved must meet four implicit criteria. The highest and best use 
must be:
    (1) Physically possible;
    (2) Legally permissible;
    (3) Financially feasible; and
    (4) Maximally productive.
    (e) Valuation methods and variances. The final opinion of value 
presented in an appraisal report must have considered a cost approach, 
a sales comparison approach, and an income approach. If one of these 
standard approaches is not used, the reconciliation narrative will 
provide a full and complete explanation of the reasons the approach was 
excluded. The reconciliation will fully discuss and reconcile variances 
in the value indications concluded by each approach.
    (f) Real estate history. Appraisals must contain a 5-year ownership 
and sales history for the housing project being appraised.
    (g) Reserve accounts. Funds in the housing project's reserve 
account will not be considered in the valuation of the housing project.
    (h) Escrow accounts. Short-term prepaid escrow accounts for general 
operating expenses, such as taxes and insurance, shall not be 
considered in the valuation of the housing project.
    (i) Rental rates comparison. The appraisal report must document 
whether the housing project's basic rents are less than, equal to, or 
greater than market rents for comparable conventional, or non-
subsidized, units in the area where the housing is located.
    (j) Description of housing and property rights. The appraisal 
report must identify and describe both the real estate, which is the 
land and improvements, and the real property, or property rights, being 
appraised.
    (k) Exclusion of rental units from valuation. The Agency will 
provide appraisers with instructions and supporting information on any 
rental units that do not produce rental income at the time of the 
appraisal.
    (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.


Sec. Sec.  3560.754-3560.799  [Reserved]


Sec.  3560.800  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0189. Public 
reporting burden for this collection of information is estimated to 
vary from 15 minutes to 18 hours per response, including time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. A person is not required to respond to a 
collection of information unless it displays a currently valid OMB 
control number.

PART 3565--GUARANTEED RURAL RENTAL HOUSING PROGRAM

0
62. 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 E--Loan Requirements


Sec.  3565.204  [Amended]

0
63. Section 3565.204 is amended in paragraph (c)(2) by removing the 
words ``part 1944, subpart E'' and by adding in its place the word 
``3560.63 (d).''

Subpart H--Project Management


Sec.  3565.351  [Amended]

0
64. Section 3565.351 is amended in paragraph (c) by removing the words 
``part 1944, subpart L'' and by adding in their place the words ``part 
3560, subpart D.''

    Dated: November 12, 2004.
Gilbert Gonzalez,
Acting Under Secretary, Rural Development.

    Dated: November 12, 2004.
J.B. Penn,
Under Secretary, Farm and Foreign Agricultural Services.
[FR Doc. 04-25599 Filed 11-24-04; 8:45 am]
BILLING CODE 3410-XV-P