[Federal Register Volume 76, Number 104 (Tuesday, May 31, 2011)]
[Rules and Regulations]
[Pages 31217-31220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-13061]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 Prices of new books are listed in the first FEDERAL REGISTER issue of each 
 week.
 
 ========================================================================
 

  Federal Register / Vol. 76, No. 104 / Tuesday, May 31, 2011 / Rules 
and Regulations  

[[Page 31217]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1980

RIN 0575-AC83


Single Family Housing Guaranteed Loan Program

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

ACTION: Final rule.

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

SUMMARY: This final rule implements two changes in the regulations for 
the Rural Housing Service (RHS) Section 502 Single Family Housing 
Guaranteed Loan Program (SFHGLP) by eliminating the lender's published 
Department of Veterans Affairs (VA) rate for first mortgage loans with 
no discount points as an option for a maximum interest rate on loans 
and by allowing the Secretary to seek indemnification from the 
originating lender if a loss is paid under certain circumstances. This 
action is taken to achieve savings for the taxpayer, simplify 
regulations, and promote efficiency in managing the SFHGLP.

DATES: Effective Date: August 1, 2011.

FOR FURTHER INFORMATION CONTACT: Joaquin Tremols, Acting Director, 
Single Family Housing Guaranteed Loan Division, USDA Rural Development, 
Room 2241, STOP 0784, 1400 Independence Ave., SW., Washington, DC 
20250, Telephone: (202) 720-1465, E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Classification

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

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. Except where specified, all State and local laws and 
regulations that are in direct conflict with this rule will be 
preempted. Federal funds carry Federal requirements. No person is 
required to apply for funding under this program, but if they do apply 
and are selected for funding, they must comply with the requirements 
applicable to the Federal program funds. This rule is not retroactive. 
It will not affect agreements entered into prior to the effective date 
of the rule. Before any judicial action may be brought regarding the 
provisions of this rule, the administrative appeal provisions of 7 CFR 
part 11 must be exhausted.

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 
effect 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, most 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.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It is the determination of the 
Agency that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment, and, in 
accordance with the National Environmental Policy Act of 1969, 42 
U.S.C. 4321 et seq., neither an Environmental Assessment nor an 
Environmental Impact Statement is required.

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 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.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.) the undersigned has determined and certified by signature of this 
document that this rule change will not have a significant impact on a 
substantial number of small entities. This rule does not impose any 
significant new requirements on Agency applicants and borrowers, and 
the regulatory changes affect only Agency determination of program 
benefits for guarantees of loans made to individuals. Changes impacting 
lenders will impact all approved lenders doing business under this 
program. There is no distinction made between small and large lenders.

Intergovernmental Consultation

    This program/activity is not subject to the provisions of Executive 
Order 12372, which require intergovernmental consultation with State 
and local officials. (See the Notice related to 7 CFR part 3015, 
subpart V, at 48 FR 29112, June 24, 1983; 49 FR 22675, May 31, 1984; 50 
FR 14088, April 10, 1985.)

Programs Affected

    This program is listed in the Catalog of Federal Domestic 
Assistance under Number 10.410, Very Low to Moderate Income Housing 
Loans (Section 502 Rural Housing Loans).

[[Page 31218]]

Paperwork Reduction Act

    The information collection and record keeping requirements 
contained in this regulation have been approved by OMB in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The 
assigned OMB control number is 0575-0078.

E-Government Act Compliance

    The Rural Housing Service is committed to complying with the E-
Government Act, to promote the use of the Internet and other 
information technologies to provide increased opportunities for citizen 
access to Government information and services, and for other purposes.

Non-Discrimination Statement

    The U.S. Department of Agriculture (USDA) prohibits discrimination 
in all its programs and activities on the basis of race, color, 
national origin, age, disability, and where applicable, sex, marital 
status, familial status, parental status, religion, sexual orientation, 
genetic information, political beliefs, reprisal, or because all or 
part of an individual's income is derived from any public assistance 
program. (Not all prohibited bases apply to all programs.) Persons with 
disabilities who require alternative means for communication of program 
information (Braille, large print, audiotape, etc.) should contact 
USDA's TARGET Center at (202) 720-2600 (voice and TDD). To file a 
complaint of discrimination, write to USDA, Director, Office of Civil 
Rights, 1400 Independence Avenue, SW., Washington, DC 20250-9410, or 
call (800) 795-3272 (voice) or (202) 720-6382 (TDD). USDA is an equal 
opportunity provider, employer, and lender.

Background

    In the spring of 2009, the Inspector General completed an audit of 
the controls over lending activities in the SFHGLP. The audit evaluated 
the systems and processes to ensure that lenders (1) submit accurate 
and legitimate borrower eligibility data and (2) set interest rates on 
loans within Agency guidelines. The audit report made a number of 
recommendations for what the SFHGLP can do to streamline operations, 
prevent fraud, and improve efficiency in its mission. As a result of 
the audit a proposed rule was published in the Federal Register on May 
19, 2010 (75 FR 27949).
    Under the existing SFHGLP regulation, lenders may set an interest 
rate for a loan that does not exceed the higher of the Lender's 
published rate for VA first mortgage loans with no discount points or 
the current Federal National Mortgage Association (Fannie Mae) rate as 
defined in 7 CFR 1980.302(a), currently defined as the current Fannie 
Mae posted yield for 90-day delivery (Actual/Actual), plus six-tenths 
of 1 percent for 30-year fixed rate conventional loans, rounded up to 
the nearest one-quarter of 1 percent. The first change made by this 
final rule eliminates the lender's published VA rate for first mortgage 
loans with no discount points as an option for a maximum interest rate 
on loans. The effect of this action is to create a more uniform, 
simpler standard for interest rates under the SFHGLP, whereby lenders 
will always use the current Fannie Mae rate as the rate ceiling. The 
Fannie Mae rate is the interest rate guidance most widely utilized by 
approved lenders. It is also the most accessible to lenders and the 
Agency when documenting loan files to ensure affordable interest rates 
are extended to SFHGLP borrowers.
    The second change made by this final rule relates to the rights of 
the Secretary when the Secretary has to pay a claim under the guarantee 
for the loan and the original lender did not originate the loan in 
accordance with the program requirements. This change allows the 
Secretary in certain circumstances to seek indemnification from the 
originating lender for the Secretary's loss. This change promises to 
save taxpayer money and incentivize due care on the part of lenders by 
allowing the Government to recoup the funds it pays out in the event of 
a claim under the guarantee where the original lender did not comply 
with SFHGLP requirements.

Discussion of Public Comments Received on the May 19, 2010 Proposed 
Rule

    The Agency received comments from three different sources in 
response to the Proposed Rule. These comments came from advocacy groups 
and a community bank.
    One commenter submitted a comment on the Single Family Housing 
Direct Loan Program and expressed general concern about the 
affordability of housing for low-income families. The Agency 
acknowledges this comment and notes that the changes being adopted will 
affect only the Guaranteed Loan Program.
    One commenter agreed with the Agency that the Fannie Mae published 
rate is used by a much broader base of investors than the VA index and 
stated that the rule change creating a uniform standard will cause only 
minimal disruptions in business while lenders implement the new policy. 
This commenter requested that the final rule provide at least a 60-day 
implementation period to allow lenders to make necessary system 
changes. The Agency notes that the effective date of the final rule is 
60 days from the date of publication in the Federal Register.
    The commenter also recommended that the Agency revise the rule to 
require that the Ginnie Mae index be used if the Fannie Mae index is 
not available. The commenter made this recommendation because the 
commenter is concerned about future changes to government sponsored 
enterprises (GSEs). The Agency is aware of the vulnerabilities 
surrounding the GSEs and the potential for future changes; however, the 
Agency believes it would be premature to name a backup index at this 
time. Additionally, Ginnie Mae does not publish a similar index. The 
Agency, therefore, has made no changes to the final rule in response to 
this comment.
    One commenter expressed concern that the proposed indemnification 
policy is too broad. The commenter agreed that indemnification is 
appropriate in cases where a lender commits fraud, but the commenter 
expressed concern about a lender being required to provide 
indemnification due to an oversight by the lender or deception by the 
borrower. The Agency has revised the rule to clarify and limit the 
circumstances under which indemnification may be required. These 
changes, which address the commenter's concerns, are described in 
greater detail below.
    Another commenter made similar comments. The commenter agreed that 
indemnification is appropriate in cases of lender fraud or lender 
negligence, but the commenter expressed concern about lenders being 
held liable due to unforeseen circumstances or circumstances beyond 
their control. This commenter recommended four specific changes to the 
rule.
    First, the commenter stated that lender indemnification for fraud 
should exclude fraud committed by a third party, such as a borrower, 
real estate agent, or seller. The Agency does not intend to seek 
indemnification when fraud was committed by a third party and the 
lender had no knowledge of such fraud. The Agency has revised the rule 
to clarify that indemnification will apply ``when there was fraud or 
misrepresentation in connection with origination of the loan of which 
the originating Lender had actual knowledge at the time it became such 
Lender or which the originating Lender participated in or condoned.''

[[Page 31219]]

    Second, the commenter stated that indemnification should not be 
automatic in cases where the Agency pays a claim within 24 months of 
closing. The commenter wrote that lenders should not be subject to 
indemnification when borrowers default on their loans due to 
circumstances beyond the lender's control. The Agency disagrees with 
the commenter that indemnification is automatic. A prerequisite to 
indemnification in the proposed rule was a determination by the Agency 
that the Lender did not originate a loan in accordance with the 
requirements in 7 CFR part 1980, subpart D. Further, the Agency has 
revised the rule to clarify what conditions must be satisfied before 
the Agency can require indemnification after paying a claim within 24 
months of loan closing.
    Third, the commenter recommended that in order for a lender to be 
liable due to misrepresentation, the misrepresentation must be proven 
by clear and convincing evidence and the misrepresentation must have 
been discoverable prior to loan closing. The Agency has revised the 
rule to provide clarification regarding the circumstances under which 
indemnification may be required. If RHS pays a loss claim within 24 
months of loan origination as a result of the originating lender's 
nonconforming action or failure to act, RHS may seek indemnification 
if: (1) The originating lender utilized unsupported data or omitted 
material information when submitting the request for a conditional 
commitment to RHS; (2) the originating lender failed to properly verify 
and analyze the applicant's income and employment history in accordance 
with Agency guidelines; (3) the originating lender failed to address 
property deficiencies identified in the appraisal or inspection report 
that affect the health and safety of the occupants or the structural 
integrity of the property; or (4) the originating lender used an 
appraiser that was not properly licensed or certified, as appropriate, 
to make residential real estate appraisals in accordance with 7 CFR 
1980.334(a). In addition, RHS may seek indemnification at any time, 
regardless of how long ago the loan closed, if RHS determines that 
there was fraud or misrepresentation in connection with the origination 
of the loan of which the originating lender had actual knowledge at the 
time it became such lender or which the originating lender participated 
in or condoned and RHS paid a loss claim as a result of the originating 
lender's nonconforming action or failure to act. In this context, 
misrepresentation includes negligent misrepresentation. With regard to 
the commenter's other suggestion, the Agency has decided not to 
incorporate the ``clear and convincing evidence'' standard into the 
rule. The Agency will seek indemnification only when an analysis of all 
available evidence establishes that indemnification is appropriate 
under the standards set forth in the rule. Lenders are protected in 
that a decision to require indemnification from the lender may be 
appealed to the USDA National Appeals Division (NAD), and the final 
determination of NAD shall be reviewable by any United States District 
Court of competent jurisdiction according to NAD regulations at 7 CFR 
part 11.
    Fourth, the commenter requested that program violations be limited 
to only material program violations that adversely affect the program. 
The Agency agrees with the commenter that indemnification is 
appropriate only where the lender's violation is material. As discussed 
above, the Agency has revised the rule to clarify and limit the 
circumstances under which indemnification may be required. The Agency 
may seek indemnification only when RHS pays a claim under the loan note 
guarantee as a result of the originating Lender's nonconforming action 
or failure to act.
    The commenter also expressed concern about whether lenders would 
have appeal rights. As noted above, indemnification will be treated as 
an adverse decision, and the lender may appeal the decision. The Agency 
has revised section 1980.399(a)(2) of the rule to make clear that the 
Lender may appeal an indemnification decision alone, without the 
participation of the borrower.
    One commenter stated that the Agency's indemnification policy 
should be like the Federal Housing Administration's policy in that it 
should apply only to the originating lender and not to the servicer. 
The Agency agrees and has clarified that indemnification may only be 
sought from originating lenders. As noted in 7 CFR 1980.309(f), lenders 
are fully responsible for their own actions and the actions of those 
acting on their behalf, including during loan origination.
    One commenter asked for clarification whether the same 
indemnification standards would apply to loans that are manually 
underwritten and loans that are submitted through the Guaranteed 
Underwriting System (GUS). The Agency will apply the same 
indemnification standards to all guaranteed loans.

List of Subjects in 7 CFR Part 1980

    Home improvement, Loan programs--Housing and community development, 
Mortgage insurance, Mortgages, Rural areas.

    For the reason stated in the preamble, Chapter XVIII, Title 7 of 
the Code of Federal Regulations is amended as follows:

PART 1980--GENERAL

0
1. The authority citation for part 1980 continues to read as follows:

    Authority: 5 U.S.C. 301 and 7 U.S.C. 1989. Subpart E also issued 
under 7 U.S.C. 1932(a).

Subpart D--Rural Housing Loans

0
2. Section 1980.308 is revised to read as follows:


Sec.  1980.308  Full faith and credit and indemnification.

    (a) Full faith and credit. The loan note guarantee constitutes an 
obligation supported by the full faith and credit of the United States 
and is incontestable except for fraud or misrepresentation of which the 
Lender has actual knowledge at the time it becomes such Lender or which 
the Lender participates in or condones. Misrepresentation includes 
negligent misrepresentation. A note which provides for the payment of 
interest on interest shall not be guaranteed. Any guarantee or 
assignment of a guarantee attached to or relating to a note which 
provides for the payment of interest on interest is void. 
Notwithstanding the prohibition of interest on interest, interest may 
be capitalized in connection with reamortization over the remaining 
term with written concurrence of RHS. The loan note guarantee will be 
unenforceable to the extent any loss is occasioned by violation of 
usury laws, negligent servicing, or failure to obtain the required 
security regardless of the time at which RHS acquires knowledge of the 
foregoing. Negligent servicing is defined as servicing that is 
inconsistent with this subpart and includes the failure to perform 
those services which a reasonably prudent lender would perform in 
servicing its own loan portfolio of loans that are not guaranteed. The 
term includes not only the concept of a failure to act, but also not 
acting in a timely manner or acting contrary to the manner in which a 
reasonably prudent lender would act up to the time of loan maturity or 
until a final loss is paid. Any losses occasioned will be unenforceable 
to the extent that loan funds are used for purposes other than those 
authorized in this subpart. When the lender conducts liquidation

[[Page 31220]]

in an expeditious manner, in accordance with the provisions of Sec.  
1980.374 of this subpart, the loan note guarantee shall cover interest 
until the claim is paid within the limit of the guarantee.
    (b) Indemnification. If RHS determines that a Lender did not 
originate a loan in accordance with the requirements in this subpart, 
and RHS pays a loss claim under the loan note guarantee as a result of 
the originating Lender's nonconforming action or failure to act, RHS 
may revoke the originating Lender's eligibility status in accordance 
with Sec.  1980.309(h) of this subpart and may also require the 
originating Lender:
    (1) To indemnify RHS for the loss, if the payment under the 
guarantee was made within 24 months of loan closing, when one or more 
of the following conditions is satisfied:
    (i) The originating Lender utilized unsupported data or omitted 
material information when submitting the request for a conditional 
commitment to RHS;
    (ii) The originating Lender failed to properly verify and analyze 
the applicant's income and employment history in accordance with Agency 
guidelines;
    (iii) The originating Lender failed to address property 
deficiencies identified in the appraisal or inspection report that 
affect the health and safety of the occupants or the structural 
integrity of the property;
    (iv) The originating Lender used an appraiser that was not properly 
licensed or certified, as appropriate, to make residential real estate 
appraisals in accordance with Sec.  1980.334(a) of this subpart; or,
    (2) To indemnify RHS for the loss, regardless of how long ago the 
loan closed, if RHS determines that there was fraud or 
misrepresentation in connection with the origination of the loan of 
which the originating Lender had actual knowledge at the time it became 
such Lender or which the originating Lender participated in or 
condoned. Misrepresentation includes negligent misrepresentation.

0
3. Section 1980.320 is revised to read as follows:


Sec.  1980.320  Interest rate.

    The interest rate must not exceed the established, applicable usury 
rate. Loans guaranteed under this subpart must bear a fixed interest 
rate over the life of the loan. The rate shall be agreed upon by the 
borrower and the Lender and must not be more than the current Fannie 
Mae rate as defined in Sec.  1980.302(a) of this subpart. The Lender 
must document the rate and the date it was determined.

0
4. Section 1980.353(c)(4) is revised to read as follows:


Sec.  1980.353  Filing and processing applications.

* * * * *
    (c) * * *
    (4) Anticipated loan rates and terms, the date and amount of the 
Fannie Mae rate used to determine the interest rate, and the Lender's 
certification that the proposed rate is in compliance with Sec.  
1980.320 of this subpart.
* * * * *

0
5. Section 1980.399(a)(2) is revised to read as follows:


Sec.  1980.399  Appeals.

* * * * *
    (a) * * *
    (2) The Lender may appeal without the borrower where RHS has:
    (i) Denied or reduced the amount of a loss payment to the Lender; 
or
    (ii) Required an originating Lender to indemnify RHS for a loss 
payment.
* * * * *

    Dated: April 15, 2011.
Dallas Tonsanger,
Under Secretary, Rural Development.
    Dated: April 21, 2011.
Michael Scuse,
Acting Under Secretary, Farm and Foreign Agricultural Services.
[FR Doc. 2011-13061 Filed 5-27-11; 8:45 am]
BILLING CODE 3410-XV-P