[Federal Register Volume 72, Number 247 (Thursday, December 27, 2007)]
[Rules and Regulations]
[Pages 73252-73256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25107]


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DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3550

RIN 0575-AC59


Single Family Housing Loans, Payment Assistance

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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SUMMARY: This Final Rule implements a change in the regulations for the 
Rural Housing Service (RHS) 502 Direct Single Family Housing Loans by 
amending the formula that calculates payment assistance for which a 
borrower qualifies. This action is being taken to improve the 
distribution of program benefits, simplify the application process and 
improve customer service. This Final Rule follows the publication of 
the Proposed Rule on February 17, 2006, and takes into consideration 
the public comments received in response to the Proposed Rule.

Effective Date: April 1, 2008.

FOR FURTHER INFORMATION CONTACT: Michael S. Feinberg, Chief, Loan 
Origination Branch, Rural Housing Service, USDA, Ag Box 0783, Room 
2214, 1400 Independence Avenue, SW., Washington, DC 20250-0783, 
Telephone: 202-720-1474.

SUPPLEMENTARY INFORMATION:

Classification

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

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
602), the undersigned has determined and certified by signature of this 
document that this rule will not have a significant economic impact on 
a substantial number of small entities. This rule does not impose any 
new requirements on Agency applicants and borrowers, and the regulatory 
changes affect only Agency determination of program benefits for 
individual loans.

Environmental Impact Statement

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

Unfunded Mandates Reform Act

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

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 States, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose substantial direct compliance costs on State and local 
governments. Therefore, consultation with the States is not required.

Programs Affected

    This program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.410, Low Income Housing Loans.

Intergovernmental Consultation

    For the reasons set forth in the final rule to 7 CFR part 3015, 
subpart V, and related notice (48 FR 29115) this program is excluded 
from the scope of Executive Order (E.O.) 12372, which requires 
intergovernmental consultation with State and local officials.

Civil Justice Reform

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

Paperwork Reduction Act

    The information collection requirements contained in these 
regulations have been approved by OMB under the provisions of 44 U.S.C. 
chapter 35 and have been assigned OMB control number 0575-0172 in 
accordance with the Paperwork Reduction Act. This rule does not revise 
or impose any new information collection requirements.

[[Page 73253]]

E-Gov Statement

    RHS is committed to compliance with the E-Government Act of 2002 
(E-Gov), which requires Government agencies, in general, to provide the 
public the option of submitting information or transacting business 
electronically to the maximum extent possible.

Economic Impact Analysis

    In 2004, USDA Rural Development engaged Bearing Point to study the 
methodology used to determine the amount of Payment Assistance provided 
on direct single family housing loans made pursuant to the Housing Act 
of 1949, as amended. Payment assistance is the subsidy on the interest 
rate charged to the borrower and reduces the amount of their principal 
and interest payment to as low as a 1 percent interest rate. The study 
was done in response to concerns expressed by the program's 
stakeholders that the use of Area Median Income (AMI) to establish 
individual borrower subsidy resulted in disparate treatment and was 
unnecessarily complicated. In addressing the concerns, the Agency 
wanted to assure that the program would continue to serve the same 
target market without additional cost to the program.
    Payment assistance is the largest component of the subsidy cost for 
this program, estimated to be 9.37 percent for FY 2008.
    Comments on the proposed rule expressed concern about the effect of 
the changes. As a result, further analysis was performed, again with 
the assistance of Bearing Point. The concerns focused on the treatment 
of leveraged loans and the potential adverse impact on the lower income 
customers within the target market.
    The Bearing Point studies are available for public inspection 
during working hours at Room 2214, 1400 Independence Avenue, SW., 
Washington, DC 20250-0783. Telephone: 202-720-1474.
    The proposed formula eliminated the consideration of AMI addressing 
the disparity between higher and lower income areas. As a result, 
borrowers with the same income will receive the same amount of payment 
assistance based on the same housing costs (Principal, Interest, Taxes, 
and Insurance) regardless of where they live. The proposed change also 
required that borrowers pay a minimum of 25% of their income towards 
repayment of the loan. The current formula bases minimum payment on a 
range from 22 to 26 percent depending on the borrower's income relative 
to AMI.
    In the final rule, the Agency reduced the minimum payment to 24% of 
income and also allowed for consideration of a leveraged loan when the 
loan is based on an affordable housing product. An eligible leveraged 
loan is a loan with payments amortized over a period of not less than 
30 years and an interest rate that does not exceed three percent.
    Implementing this revised payment assistance formula directly 
addresses the concerns expressed in the comments that the proposed new 
formula will increase the cost burden on very-low income borrowers. 
While the PITI contribution of some very-low income borrowers will 
still rise (from 22% to 24%), the impact will not be as great as it 
would have been with a rise in borrower's PITI contribution from (22% 
to 25% of AAI) as was originally suggested in the Proposed Rule. 
Implementation of this payment assistance formula will also address the 
concerns raised in the comments that the proposed new formula adversely 
affects the leveraged loan program. This adjustment provides incentives 
for borrowers who receive affordable leverage loans.
    The program will continue to assist very-low and low-income, rural 
residents to improve their living conditions and economic situation by 
building equity through homeownership. Based on the new study the 
payment assistance formula will not have an adverse economic impact on 
potential borrowers and will provide fair and equitable treatment to 
all borrowers. In addition, the study also concluded that the new 
formula will not increase the cost of the program and will continue to 
serve the same target population.
    The methodology for determining payment assistance upon 
implementation of the Final Rule will have no significant economic 
impact and will result in a small decrease in the subsidy cost of the 
program to a level of 9.31% in FY 2008.

I. Background

    The U.S. Department of Agriculture's (USDA's) Rural Development is 
revising the regulations for its Direct Single Family Housing Loans. 
This Program provides loans to low and very-low income households to 
purchase homes in rural areas. Rural Development provides rural 
homeownership credit to those who otherwise could not obtain it. These 
loans provide financing at reasonable rates and terms with no 
downpayments required. Since 1995, resultant mortgage payments and 
payment assistance amounts have been based on a percentage of the 
participating household's adjusted annual income (AAI). However, in 
recent years, Rural Development began to gather anecdotal information 
that suggested the formula implemented in 1995 may be resulting in 
disparate treatment for some borrowers, especially those located in 
more rural counties. Additionally, the Agency received complaints that 
the payment assistance calculation was too complex, relying upon 
multiple variables that change from year to year, making the formula 
difficult to explain to both borrowers and other parties involved in 
the loan origination and servicing processes. As a response, Rural 
Development contracted for a study of the payment assistance formula, 
and requested the development of alternative formulas. After extensive 
analysis, one alternative formula was chosen and proposed in the 
Federal Register on February 17, 2006. This formula differed from the 
current formula in that it removed the average median income (AMI) 
component from the payment assistance calculation, reduced the emphasis 
on the use of leveraged loan funding by applying a single payment 
assistance formula to all households (versus the current formula, which 
has different criteria for borrowers who do not use leveraged loans 
versus borrowers who do) and increased the minimum household's 
principal, interest, taxes, and insurance (PITI) contribution floor 
payment from 22% to 25%.

II. New Payment Assistance Formula Proposed in Federal Register on 
February 17, 2006

    Below is the proposed new payment assistance formula for all 
borrowers:

Payment Assistance = Note Rate PITI - Borrower's PITI Contribution

    Regardless of the use of leveraged loans, the borrower's PITI 
contribution is the higher of:
     25 percent of borrower's adjusted annual income (``AAI'').
     Principal and Interest (``P&I'') calculated at 1 percent 
plus Taxes and Insurance (``T&I'').

III. Discussion of Public Comments Received on the February 17, 2006 
Proposed Rule

    The Agency received 51 comments in response to the Proposed Rule. 
These comments came predominantly from non-profit organizations, 
advocacy groups, and community development organizations. Several 
comments supported the new formula. 14 comments supported the removal 
of AMI from the current formula, 7

[[Page 73254]]

comments supported the increased simplification, and 2 comments 
supported the consideration of taxes and income. Rural Development also 
received comments that expressed concern regarding some unintended 
consequences of the new formula. The three largest concerns included: 
The impact on the leveraged loan program (36 comments); the impact on 
very-low income borrowers (21 comments); and the impact on the target 
market (7 comments). The Agency has examined these three concerns in 
detail and amended the proposed formula to minimize the unintended 
consequences arising from the implementation of a new payment 
assistance formula.

A. Concern 1--The Impact of the Proposed New Formula on the 
Leveraged Loan Program

    Under the current program, state set-asides are established to fund 
Rural Development loans with leveraged funding based on certain 
partnership arrangements. This means that applications using leveraged 
loans do not have to compete with applications that do not use 
leveraged loans. Additionally, under the current regulations, borrowers 
who use leveraged loans are not subject to the floor rate portion of 
the payment assistance formula. Payment assistance for a borrower who 
uses a leveraged loan is determined using only the effective interest 
rate (EIR). This provision has, on average, increased the payment 
assistance for those borrowers who have leveraged loans, providing an 
incentive for borrowers to seek out leveraged funding. The payment 
assistance formula, as proposed, will no longer distinguish between the 
two types of borrowers. All borrowers, regardless of their use of 
leveraged loans, will be treated equally under the new formula. Many 
comments opposed this reduced emphasis on the use of leveraged loans.
    Agency Response: While it is true that the proposed new formula 
will reduce the incentive to use leveraged loan funding, this does not 
necessarily translate into affecting target borrowers in a materially 
detrimental way. Consider:
    1. The leveraged portion of the average borrower's principal is 
relatively insignificant. Out of 10,502 new borrowers in Fiscal Year 
2003, 4,548 (43%) were under the leveraged loan program. However, 
leveraged loan dollars accounted for only 8.2% of the total loan level.
    2. Borrowers who use leveraged loans have, on average, higher 
adjusted annual incomes than the average income of all borrowers in the 
Direct Single Family Housing Loan Program.
    3. Pursuant to their first lien position and insulation from credit 
risk, private lenders accrue much of the subsidy benefit, rather than 
borrowers.
    Adjustment made to reflect comment concerns: In light of the strong 
response against the reduced incentive for leveraged lending, the 
Agency has amended the proposed payment assistance formula to recognize 
payments made on leveraged loans that meet certain criteria as part of 
the borrower's minimum PITI contribution. In order to be recognized 
under the new formula, leveraged loans must have:
     An interest rate that is equal to or less than 3%, and
     A long-term amortization (not less than 30 years).
    This adjustment sustains an incentive for leveraged loan 
participation, but limits that incentive to housing loans at interest 
rates reflective of affordable housing products (i.e., rates of 3% or 
less).

B. Concern 2--The Impact of the Proposed New Formula on the 
Very-Low Income Households

    Another concern expressed in the comments was that the proposed new 
formula would have a potentially adverse affect on very-low income 
borrowers. Comments expressed concern that the amount of payment 
assistance received by very-low income borrowers would decrease as a 
result of the proposed new formula. Comments also expressed 
apprehension that the new formula would narrow the window of 
eligibility for very-low income borrowers by raising the borrower's 
PITI contribution against fixed underwriting standards. Currently, the 
maximum front-end ratio (a borrower's contribution toward total housing 
products as a percentage of AAI) is fixed at 29% for very-low income 
borrowers and 33% for low income borrowers, and the maximum back-end 
ratio (total debt as a percentage of AAI) for all borrowers is fixed at 
41%. As very-low income borrowers have the tightest underwriting 
criteria, they have the potential of being the most affected by the new 
formula.
    Agency Response: Rural Development acknowledges that, by 
definition, the new formula will decrease the amount of payment 
assistance some very-low income borrowers receive, as their expected 
borrower's contribution will rise from 22% of AAI to 25%. However, it 
is important to note that the new formula will alleviate inequitable 
distribution of Program benefits that has been occurring under the 
current formula, and therefore will be more beneficial as a whole to 
the market served by the Direct Single Family Housing Loan Program. 
Further, the elimination of the stair steps associated with the old 
formula will have a positive impact on the stability of the borrower's 
payments, improving their ability to stay current on their loans. The 
Agency is required by law to maintain that at least 40 percent of 
appropriated funds for the Program are used to assist families with an 
annual income of less than 50 percent of area median income to ensure 
this part of the market continues to receive maximum benefit.
    Analysis revealed that using the proposed new formula, when 
compared to the current formula, only a negligible number of borrowers 
would be excluded from qualifying for participation in the Direct 
Single Family Housing Loan Program based on current underwriting 
criteria.
    Adjustment made to reflect comment concerns: Rural Development has 
amended the proposed formula by lowering the borrower's minimum PITI 
contribution from 25% of AAI to 24% of AAI. While the PITI contribution 
of some very-low income borrowers will still rise (from 22% to 24% of 
AAI), the impact will not be as great as it would have been with a rise 
in borrower's PITI contribution from 22% to 25% of AAI, as was 
originally suggested in the Proposed Rule.

C. Concern 3--The Impact of the Proposed New Formula on the 
Target Market

    One of the original objectives in choosing a new payment assistance 
formula was that the new formula serve the same target market of 
borrowers. Some comments received in response to the Proposed Rule 
expressed concern that the proposed new formula would not meet this 
objective. To address this issue, Rural Development examined three 
areas to assess whether the proposed new formula would serve the same 
target market:
     The level of payment assistance received.
     The number of borrowers served.
     The type of borrower served.
    Agency Response: Rural Development found that the proposed new 
payment assistance formula would not significantly alter the average 
monthly payment assistance received by participating borrowers. It also 
concluded that the proposed new formula would not increase the number 
of borrowers who were excluded from participating in the Program as a 
result of underwriting criteria. However, the

[[Page 73255]]

new payment assistance formula would exclude some borrowers because 
under the new formula, the PITI contributions of these affected 
borrowers would exceed the monthly payments they would pay at the note 
rate. In other words, the new formula would increase their expected 
PITI contributions to a level where they would no longer receive 
payment assistance from the Agency. It is important to note, however, 
that these affected borrowers have, on average, relatively higher 
incomes than the overall average income of all borrowers, and are 
predominately borrowers who use leveraged loans.
    Adjustments made to reflect comment concerns: The two adjustments 
described above seek to minimize the number of borrowers impacted by 
this phenomenon--first, by lowering the borrower's PITI contribution, 
and second, by recognizing payments made toward leveraged loans in the 
determination of the level of payment assistance a borrower will 
receive.

IV. Final Payment Assistance Formula

    Below is the final payment assistance formula to be implemented in 
the Direct Single Family Housing Loan Program for all borrowers:

Payment Assistance = Note Rate PITI - Borrower's PITI Contribution

    Regardless of the use of leveraged loans, the borrower's PITI 
contribution is the higher of:
     24 percent of borrower's adjusted annual income (``AAI'') 
for the total PITI.
     Principal and Interest (``P&I'') calculated at 1 percent 
on the Rural Development loan plus Taxes and Insurance (``T&I'').
    Rural Development is allowing the recognition of payments made on 
leveraged loans that meet certain criteria to be included in the 
calculation of the borrower's minimum PITI contribution of 24% of AAI. 
These criteria include:
     An interest rate that is equal to or less than 3%; and
     A long-term amortization (not less than 30 years).
    This final payment assistance formula preserves some incentive for 
participating borrowers to retain leveraged loans and reduces the 
impact the new formula will have on very-low income households. 
Additionally, it also maintains the objectives of increasing the 
equitability of program benefits and simplifying the application 
process, while still serving the same target market.
    A borrower who is currently on payment assistance or interest 
credit will remain on the current formula as long as they continue to 
qualify. A borrower who never received payment assistance or interest 
credit or one who stopped receiving said assistance and later qualifies 
for payment subsidy will receive Payment Assistance 2.
    Due to credit reform considerations, a borrower may not voluntarily 
switch from one method to another.
    It should be noted that recapture of payment assistance is not 
changed by this rule.

List of Subjects in 7 CFR Part 3550

    Accounting, Housing, Loan programs--Housing and community 
development, low and moderate income housing, Manufactured homes, 
Reporting and recordkeeping requirements, Rural areas, Subsidies.

0
Therefore, Chapter XXXV, title 7, Code of Federal Regulations is 
amended to read as follows:

PART 3550--DIRECT SINGLE FAMILY HOUSING LOANS AND GRANTS

0
1. The authority citation for part 3550 continues to read as follows:

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

Subpart B--Section 502 Origination

0
2. Section 3550.10 is amended by revising the definitions for 
``leveraged loan'' and ``payment assistance'' to read as follows:


Sec.  3550.10  Definitions.

* * * * *
    Leveraged loan. An affordable housing product loan or grant to an 
Agency borrower property, closed simultaneously with an RHS loan. 
Affordable leveraged loans are characterized by long term (not less 
than 30 years), amortized payments with a note interest rate equal to 
or less than 3 percent .
* * * * *
    Payment assistance. A payment subsidy available to eligible section 
502 borrowers that reduces the effective interest rate of a loan (see 
Sec.  3550.68(c)). Borrowers eligible for a payment subsidy receive 
payment assistance unless they are currently eligible for and receive 
interest credit. There are two methods of payment assistance. Payment 
assistance method 1 is found at 3550.68(c)(2). Payment assistance 
method 2 is found at 3550.68(c)(1).
* * * * *

0
3. Section 3550.68 is revised to read as follows:


Sec.  3550.68  Payment subsidies.

    RHS administers three types of payment subsidies: interest credit, 
payment assistance method 1, and payment assistance method 2. Payment 
subsidies are subject to recapture when the borrower transfers title or 
ceases to occupy the property.
    (a) Eligibility for payment subsidy. (1) Applicants or borrowers 
who receive loans on program terms are eligible to receive payment 
subsidy if they personally occupy the property and have adjusted income 
at or below the applicable moderate-income limit.
    (2) Payment subsidy may be granted for initial loans or subsequent 
loans made in conjunction with an assumption only if the term of the 
loan is 25 years or more.
    (3) Payment subsidy may be granted for subsequent loans not made in 
conjunction with an assumption if the initial loan was for a term of 25 
years or more.
    (b) Determining type of payment subsidy. (1) A borrower currently 
receiving interest credit will continue to receive it for the initial 
loan and for any subsequent loan for as long as the borrower is 
eligible for and remains on interest credit.
    (2) A borrower currently receiving payment assistance using payment 
assistance method 1 will continue to receive it for the initial loan 
and for any subsequent loan for as long as the borrower is eligible for 
and remains on payment assistance method 1.
    (3) A borrower who has never received payment subsidy, or who has 
stopped receiving interest credit or payment assistance method 1, and 
at a later date again qualifies for a payment subsidy, will receive 
payment assistance method 2.
    (4) A borrower may not opt to change payment assistance methods.

    (c) Calculation of payment assistance. Regardless of the method 
used, payment assistance may not exceed the amount necessary if the 
loan were amortized at an interest rate of one percent.
    (1) Payment Assistance Method 2. The amount of payment assistance 
granted is the lesser of the difference between:
    (i) The annualized promissory note installments for the combined 
RHS loan and eligible leveraged loans plus the cost of taxes and 
insurance less twenty-four percent of the borrower's adjusted income, 
or
    (ii) The annualized promissory note installment for the RHS loan 
less amount the borrower would pay if the loan were amortized at an 
interest rate of one percent.
    (2) Payment Assistance Method 1. The amount of payment assistance 
granted is the difference between the annualized note rate installment 
as prescribed on the promissory note and the lesser of:

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    (i) The floor payment, which is defined as a minimum percentage of 
adjusted income that the borrower must pay for PITI: 22 percent for 
very low-income borrowers, 24 percent for low-income borrowers with 
adjusted income below 65 percent of area adjusted median, and 26 
percent for low-income borrowers with adjusted incomes between 65 and 
80 percent of area adjusted median; or
    (ii) The annualized note rate installment and the payment at the 
equivalent interest rate, which is determined by a comparison of the 
borrower's adjusted income to the adjusted median income for the area 
in which the security property is located. The following chart is used 
to determine the equivalent interest rate.
    When the applicant's adjusted income is:

      Percentage of Median Income and the Equivalent Interest Rate
------------------------------------------------------------------------
                                                           THEN the
     Equal to or more than:         BUT less than:        equivalent
                                                       interest rate is*
------------------------------------------------------------------------
00%.............................  50.01 of adjusted   1%
                                   median income.
50.01%..........................  55 of adjusted      2%
                                   median income.
55%.............................  60 of adjusted      3%
                                   median income.
60%.............................  65 of adjusted      4%
                                   median income.
65%.............................  70 of adjusted      5%
                                   median income.
70%.............................  75 of adjusted      6%
                                   median income.
75%.............................  80.01 of adjusted   6.5%
                                   median income.
80.01%..........................  90 of adjusted      7.5%
                                   median income.
90%.............................  100 of adjusted     8.5%
                                   median income.
100%............................  110% of adjusted    9%
                                   median income.
110%............................  Or more than        9.5%
                                   adjusted median
                                   income.
------------------------------------------------------------------------
* Or note rate, whichever is less; in no case will the equivalent
  interest rate be less than one percent.

    (d) Calculation of interest credit. The amount of interest credit 
granted is the difference between the note rate installment as 
prescribed on the promissory note and the greater of:
    (1) Twenty percent of the borrower's adjusted income less the cost 
of real estate taxes and insurance, or
    (2) The amount the borrower would pay if the loan were amortized at 
an interest rate of 1 percent.
    (e) Annual review. The borrower's income will be reviewed annually 
to determine whether the borrower is eligible for continued payment 
subsidy. The borrower must notify RHS whenever an adult member of the 
household changes or obtains employment, there is a change in household 
composition, or if income increases by at least 10 percent so that RHS 
can determine whether a review of the borrower's circumstances is 
required.

    Dated: December 13, 2007.
Thomas C. Dorr,
Under Secretary, Rural Development.
 [FR Doc. E7-25107 Filed 12-26-07; 8:45 am]
BILLING CODE 3410-XV-P