[Federal Register Volume 78, Number 236 (Monday, December 9, 2013)]
[Rules and Regulations]
[Pages 73928-73963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29084]



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Vol. 78

Monday,

No. 236

December 9, 2013

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 1980 and 3555





 Single Family Housing Guaranteed Loan Program; Interim Final Rule

  Federal Register / Vol. 78 , No. 236 / Monday, December 9, 2013 / 
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 Part 1980

Rural Housing Service

7 CFR Part 3555

RIN 0575-AC18


Single Family Housing Guaranteed Loan Program

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

ACTION: Interim final rule.

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SUMMARY: The Rural Housing Service (RHS) is streamlining and 
reengineering its Single Family Housing Guaranteed Loan Program 
(SFHGLP) regulation. This action is taken to reduce regulations, 
improve customer service, achieve greater efficiency, flexibility, and 
effectiveness in managing the program. The effect of this action is to 
provide better service to participating lenders and investors by 
removing Rural Development internal administrative procedures and make 
the necessary adjustments to reduce SFHGLP risk of loss.

DATES: Effective date: September 1, 2014.
    Comment date: Written comments on the interim final rule must be 
received on or before January 8, 2014.

ADDRESSES: You may submit comments on this interim final rule by any 
one of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments electronically.
     Mail: Submit written comments via the U.S. Postal Service 
to the Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, STOP 0742, 1400 Independence Ave. SW., 
Washington, DC 20250-0742.
     Hand Delivery/Courier: Submit written comments via Federal 
Express mail, or other 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, Washington, 
DC 20024.
    All written comments will be available for public inspection during 
regular work hours at the 300 7th Street SW., 7th Floor address listed 
above.

FOR FURTHER INFORMATION CONTACT: Debra Terrell, Senior Loan Specialist, 
Single Family Housing Guaranteed Loan Division, Stop 0784, Room 2250, 
USDA Rural Development, South Agriculture Building, 1400 Independence 
Avenue SW., Washington, DC 20250-0784, telephone (202) 720-1452 or 
(918) 331-9404, email is [email protected].

SUPPLEMENTARY INFORMATION: 

Executive Order 12866--Classification

    This final rule has been reviewed under Executive Order (EO) 12866 
and has been determined to be significant by the Office of Management 
and Budget. The EO defines a ``significant regulatory action'' as one 
that is likely to result in a rule that may: (1) Have an annual effect 
on the economy of $100 million or more or adversely affect, in a 
material way, the economy, a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local, or tribal governments or communities; (2) Create a serious 
inconsistency or otherwise interfere with an action taken or planned by 
another agency; (3) Materially alter the budgetary impact of 
entitlements, grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) Raise novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in this EO.
    The Agency conducted a regulatory impact analysis to fulfill the 
requirements of EO 12866. In this analysis, the Agency identifies 
potential benefits and costs of continued homeownership assistance in 
rural areas. Revising the regulation and creating handbook materials to 
further detail procedures should lead to improved performance, both by 
lenders and Agency staff. Ambiguities in program requirements will be 
eliminated and written guidance in one collective publication will be 
provided to help lenders and Agency representatives make sound 
programmatic decisions. Time savings for the Agency should result in a 
more efficient streamlined delivery of lender guarantee requests and 
reduced administrative costs to the Agency. Cost savings will be 
continuous each year and can be measured in terms of Agency staff time, 
equipment and associated costs. Workload efficiency is also expected to 
increase by delegating servicer authority to qualified lenders. The 
regulatory impact analysis estimates the Agency can save over $14,000 
in each dedicated staff time by streamlining the procedures and 
$393,000 in staff time for each servicing lender that is delegated 
authority to approve loss mitigation and property disposition plans. In 
addition, by revising the requirements for interest on Real Estate 
Owned properties to allow for property disposition within 90 days of 
acquisition will save the federal government an estimated $9.6 million 
annually.
    The analysis also discusses the benefits of changes like the new 
single close loan feature. The new process will eliminate the need for 
an interim loan, which will promote new construction in rural areas. 
Adjustments to qualifications for eligible lenders should also allow 
more program participation in underserved rural areas.
    Other federal assistance is concentrated in urban areas. The 
disparity between metropolitan homeowners who have financed with 
federal programs compared to non-metropolitan rural homeowners 
indicates the guaranteed program has a positive impact in increasing 
the level of federal assistance available to low- and moderate-income 
rural households interested in pursuing homeownership. The impacts of 
changes to the rule are positive to the federal budget, local economic 
impact and housing market. Changes are intended to streamline the 
program, reduce regulations, improve customer service and strengthen 
the Agency's ability to achieve greater efficiency, flexibility and 
effectiveness in managing the program. None of the proposed changes is 
expected to have a significant economic impact on lenders, borrowers, 
or the U.S. Treasury. The monetary impact of this rule is based on the 
overall program costs. The estimated overall program costs burden is 
$2,200 for applicants/borrowers, and $125,000 for lender entities. The 
administrative cost to the Agency for implementation of the rule is 
approximately $250,000.

Executive Order 12788--Civil Justice Reform

    This final rule has been reviewed under Executive Order 12788, 
Civil Justice Reform. In accordance with this rule: (1) All state and 
local laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) administrative proceedings in accordance with the regulations of 
the Department of Agriculture National Appeals Division (7 CFR part 11) 
must be exhausted before bringing suit in court challenging action 
taken under

[[Page 73929]]

this rule unless those regulations specifically allow bringing suit at 
an earlier date.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1996 (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 
RHS generally must prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures to State, local, or tribal 
governments, in the aggregate, or to the private sector, of $100 
million or more in any one year. When such a statement is needed for a 
rule, section 205 of the UMRA generally requires RHS to identify and 
consider a reasonable number of regulatory alternatives and adopt the 
least costly, most cost-effective, or least burdensome alternative that 
achieves the objectives of this 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.

National Environmental Policy Act

    We have analyzed this rule in accordance with the criteria of the 
National Environmental Policy Act (NEPA) (42 U.S.C. 4332(c)), the 
Council on Environmental Quality's Regulations for Implementing the 
Procedural Provisions of NEPA (40 CFR parts 1500-1508), and7 CFR part 
1940, subpart G, ``Environmental Program.'' It is the determination of 
Rural Development that this action is categorically excluded from NEPA 
documentation requirements consistent with 7 CFR 1940.310 for financial 
assistance for the purchase of an existing dwelling. An existing 
property purchase does not impose a significant effect on human 
environment. Therefore neither an Environmental Assessment nor an 
Environmental Impact Statement is required for this rule.

Executive Order 13132--Federalism

    The policies contained in this rule do not have any substantial 
direct effect on States, on the relationship between the national 
government and 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 States 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-
612) the undersigned has determined that this rule will not have a 
significant economic impact on a substantial number of small entities. 
This rule does not impose any significant new requirements on Agency 
applicants, borrowers or lenders and the regulatory changes affect only 
Agency determination of program benefits for guarantees on loans made 
to individuals.

Executive Order 12372--Intergovernmental Consultation

    This program/activity is excluded from the provisions of Executive 
Order 12372, which require intergovernmental consultation with State 
and local officials.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order imposes requirements on Rural Development in 
the development of regulatory policies that have tribal implications or 
preempt tribal laws. Rural Development has determined that the rule 
does not have a substantial direct effect on one or more Indian 
tribe(s) or on either the relationship or the distribution of powers 
and responsibilities between the Federal Government and the Indian 
tribes. Thus, the rule is not subject to the requirements of Executive 
Order 13175. Tribal Consultation inquiries and comments should be 
directed to Rural Development's Native American Coordinator at 
[email protected] or (720) 544-2911.

Programs Affected

    This program is listed in the Catalog of Federal Domestic 
Assistance under 10.410, Very low- to Moderate-Income Housing Loans.

Paperwork Reduction Act

    The information collection requirements contained in this interim 
rule have been submitted to the Office of Management and Budget (OMB) 
for review and approval.

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.

Background

    On December 15, 1999, RHS published a proposed rule with request 
for comments for the Single Family Housing Guaranteed Loan Program 
(SFHGLP) (64 FR 70123-70144). Rural Development received comments from 
sixty-three respondents. Comments were from Agency employees or 
employee groups, lenders, secondary market sources, builders, and 
various other interest groups.
    The 180 day effective date of this rule will allow Rural 
Development the opportunity to provide training to participating 
lenders and allow time for computer system changes. Rural Development 
recognizes the general need to make the program more ``user-friendly'' 
and more compatible with existing mortgage lending practices. Many of 
the comments received addressed these issues.
    With this rule, Rural Development is attempting to meld the better 
features of conventional loan programs and other Government loan 
programs to make the SFHGLP as easy for lenders to use as possible. 
Rural Development believes that loan product which is easier for 
lenders to use will help in increasing the number of rural families 
served by the program. This approach is supported by Section 706(d) of 
the Cranston-Gonzales National Affordable Housing Act (Pub. L. 101-
625), which provided in developing the guaranteed loan regulations. 
Rural Development must ensure that guaranteed loans:
     Are made in a manner that is cost-effective; and
     Reduce, to the extent practicable, the burden of 
administration and paperwork for borrowers and lenders.
    In the past, SFHGLP regulations and instructions have been the 
same. Lenders participating in the program have criticized this 
approach as not meeting their needs. This regulation omits the detailed 
internal agency administrative instructions used to administer the 
program. Several commenters welcomed the change in the regulatory 
process.
    The Agency will continue to publish all substantive policy that 
provides a benefit, imposes an obligation on the public, establishes 
eligibility criteria, or information necessary for members of the 
public to understand their responsibilities. Rural Development will 
continue to improve the clarity of the regulations and attempt to meet 
the needs of the program participants and general public. Any 
substantive changes in the regulation will continue to be

[[Page 73930]]

published in the Federal Register and each Agency field office will 
have a copy of the administrative instruction (a handbook).
    The handbook will be available on the Internet at  http://www.rurdev.usda.gov/Handbooks.html and a copy can be obtained by 
sending a written request to: Rural Development, Stop 0784, Room 2250, 
South Agriculture Building, USDA, 1400 Independence Avenue SW., 
Washington, DC 20250-0784.
    One respondent suggested the public have an opportunity to comment 
on the handbook. The Proposed Rule provided that the handbook will be 
available for public comment with regard only to its information 
collection requirements. The handbook is internal guidance and, 
therefore, not subject to comment.
    Other respondents focused on the lack of detailed administrative 
instructions. Detailed administrative guidance has been removed from 
the regulation and is provided in the program handbook.
    Several respondents noted that requiring compliance with Year 2000 
(Y2K) requirements is dated and suggested removal from the regulations. 
Rural Development concurs and has removed this requirement.
    Specific public comments and substantive changes from the proposed 
rule are addressed below in general order of appearance in the 
regulation, not based on order of importance.

Purpose (Sec.  3555.2)

    One respondent suggested removal of the reference to ``persons who 
do not own adequate housing'' since the rule also provides that current 
homeowners may obtain loans through the Single Family Housing 
Guaranteed Loan Program (SFHGLP). The Agency agrees that current 
homeowners may obtain a SFHGLP loan in certain situations, for example, 
to make needed repairs to the dwelling. This suggestion is adopted and 
the reference is removed.
    A provision has been added to specifically permit limited 
demonstration programs as allowed by law. The objective of these 
demonstration programs will be to test new approaches to financing 
housing under the statutory authority granted to the Secretary of 
Agriculture (hereafter referred as the Secretary). This provision is 
similar to other Rural Development programs, such as the Section 502 
Direct Program, found at Sec.  3550.7.

Mediation and Appeals (Sec.  3555.4)

    One respondent suggested eliminating mediation and Alternative 
Dispute Resolution (ADR) stating that neither process works well with 
the SFHGLP. Rural Development must comply with statutory requirements 
in 7 U.S.C. 6995 and the National Appeals Division regulation, 7 CFR 
11.5, granting participants the right to use available ADR or mediation 
programs to resolve adverse decisions by the Agency. No change is made 
in this provision.

 Environmental Requirements (Sec.  3555.5)

    Lenders must comply with all State and local laws and regulations 
under 7 CFR 3555.6. The proposed rule stated that Rural Development 
will take into account potential environmental impacts of proposed 
projects by working with applicants, other Federal agencies, American 
Indian tribes, State and local governments, and interested citizens and 
organizations in order to formulate actions that advance the program's 
goals in a manner that will protect environmental quality. The SFHGLP 
does not have any provision for working on proposed housing projects. 
The program guarantees loans made by private lenders to purchase, 
build, or repair a home. The private lender may be involved in proposed 
housing projects, however, and would be responsible for compliance with 
all applicable environmental quality requirements.
    Several respondents expressed concern regarding environmental 
requirements relative to flood insurance. Two respondents were in favor 
of providing financing in Special Flood Hazard Areas (SFHAs); one 
stated that there is no risk to Rural Development or lender when proper 
flood insurance is obtained and one stated that flood insurance should 
not be required if the site is located in a SFHA but not the dwelling. 
Four respondents recommended that loans be prohibited if the subject 
site is located in a SFHA. The National Flood Insurance Act of 1968, 
specifically, 42 U.S.C. 4012, prohibits Agency-assisted financing of 
dwellings on a site identified as located in a SFHA when flood 
insurance is available but has not been obtained on the building and/or 
personal property associated with the assistance. Rural Development 
will guarantee loans for existing homes in an SFHA provided the 
borrower obtains flood insurance at, or prior to, loan closing and 
maintains flood insurance for the life of the loan. The lender must be 
listed as a loss payee. Rural Development may guarantee loans for new 
or proposed homes in an SFHA, even with flood insurance, except under 
limited circumstances, such as when Federal Emergency Management Agency 
(FEMA) has issued a Letter of Map Amendment (LOMA) or Letter of Map 
Revision (LOMR) or if the lender obtains a FEMA National Flood 
Insurance Elevation Certification indicating the lowest habitable floor 
(including the basement) of the residential building and all related 
improvements/equipment are built at or above the 100-year flood 
elevation. The proposed rule did not contain any provisions for such 
situations. This change is made to achieve consistency with other 
Federally insured or guaranteed single-family mortgage programs like 
those offered by the Department of Housing and Urban Development (HUD) 
and Veterans Affairs (VA).

Enforcement (Sec.  3555.9)

    Language has been added concerning the possible assessment of civil 
monetary penalties. This penalty is authorized by section 543 of the 
Housing Act of 1949 (42 U.S.C. 1490s) and 7 CFR 3.91. The Agency does 
not have a notice and hearing process, as required by the authorizing 
statute, for the imposition of civil monetary penalties, but the 
authority has been noted in the rule for future use.

Definitions (Sec.  3555.10)

    One respondent stated the term ``acceleration'' is not a 
conventional lending term. The term is used in the mortgage lending 
business, and no change is made in the definition or term.
    The term ``amortization'' was added to describe the gradual 
reduction of the mortgage debt over the term of the loan.
    The term ``Area Median Income'' was added for clarity to describe 
the median income in a specific location, as determined by the HUD in 
order to determine borrow eligibility. This term is used in section 
502(h)(3) of the Housing Act of 1949 (42 U.S.C. 1472(h)(3)).
    The term ``condominium project'' was added for clarity to describe 
a particular form of construction development.
    The term ``combination construction and permanent loan'' was added 
based on a respondent's comments on 7 CFR 3555.101. More fully 
explained in (Sec.  3555.101) of the preamble, a ``combination 
construction and permanent loan'' is a guaranteed loan on which the 
Rural Development guarantee becomes effective at the time construction 
of an eligible single family housing project begins.
    The term ``dealer-contractor'' was removed since Rural Development 
will no longer review and approve or disapprove manufactured housing 
dealer-contractors under the SFHGLP.
    The term ``escrow account'' was revised to clarify a common 
mortgage

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industry term for the trust account typically established by lenders to 
hold funds collected from a borrower in order to pay real estate taxes, 
insurance premiums, and other similar expenses as they come due.
    There were several comments on the definitions for ``existing 
dwelling'' and ``new dwelling.'' These definitions are used in 
determining property eligibility, inspection, and home warranty 
requirements. One respondent suggested adding wording that if the 
dwelling is less than one year old and has been occupied, then it is an 
existing dwelling. One respondent suggested the wording might be 
incorrect as it relates to the requirement for the new home warranty. 
Some respondents suggested alternative wording to the definition of 
``new dwelling.'' One respondent suggested adding ``less than one-year 
old and never occupied.'' One respondent suggested permitting financing 
of spec-built dwellings without interim construction inspections and 
without a 10 year, new home warranty if the construction standards 
exceed the national building code. When the dwelling is less than one 
year old and has never been occupied, then it is a new dwelling and a 
new home warranty must be in place. Rural Development agrees that if 
the dwelling has been occupied, regardless of its age, then it is an 
existing dwelling, and a new home warranty is not required. The 
regulation and handbook have been clarified accordingly in response to 
the comments.
    One respondent suggested that the definition for a ``first-time 
homebuyer'' should be broadened to include a divorced individual who 
does not have children, arguing that in most divorces, the wife gets 
the home if she desires, and can thus argue for custody of the children 
because the husband does not own a home. The Housing Act of 1949, as 
amended, provides a definition for a first-time homebuyer. As written 
in this rule, the definition of first-time homebuyer closely follows 
the definition in the statute; therefore, no change is made. The Agency 
notes that the situation provided may fall within this definition 
depending on other factors, such as if the divorced individual was a 
homemaker.
    The term ``Fannie Mae'' was added, which is synonymous with the 
Federal National Mortgage Association.
    The term ``FHLB'' was added as the acronym for the Federal Home 
Loan Bank.
    The term ``Freddie Mac'' was added, which is synonymous with the 
Federal Home Loan Mortgage Corporation.
    The term ``Ginnie Mae'' was added, which is synonymous with the 
Government National Mortgage Association.
    The term ``loan modification'' was added to describe changes to 
promissory note characteristics such as the interest rate, loan term, 
and monthly payments.
    The term ``manufactured home'' was changed to more succinctly 
describe structures built on a permanent chassis according to Federally 
Manufactured Home Construction and Safety Standards established by HUD 
and found at 24 CFR part 3280.
    The term ``moderate income'' was amended to include a 2000 
statutory change (Pub. L. 106-387, section 751) providing that anyone 
who does not meet the greater of 115 percent of the U.S. median family 
income, the average of the state-wide and state non-metro median family 
income, or 115/80ths of the area low-income adjusted for household size 
for the county or MSA where the property is, or will be located meets 
the income eligibility criterion of 42 U.S.C. 1472(h)(2). The 
definition is consistent with the Agency's current income policy.
    One respondent suggested that the reference to Rural Development's 
thermal performance standards be deleted from the definition for 
manufactured home. Rural Development agrees that a change to this 
requirement is needed to be consistent with manufactured housing 
industry standards and is in the best interest of the program. A 
change, therefore, is made to this definition to adopt the thermal 
standard (and other home construction and safety standards) for 
manufactured housing established by the HUD. These HUD standards can be 
found at 24 CFR part 3280 or on the Internet at http://www.hud.gov/library/index.cfm.
    Several respondents commented on the definition of ``modest 
housing.'' Some suggested removing the reference to section 203(b) of 
the National Housing Act. Several suggested removal of the reference to 
in-ground swimming pools as it is not listed as a restriction in 7 CFR 
3555.102. Rural Development concurs that, because a SFHGLP loan 
applicant's household adjusted income must not exceed the moderate-
income limit for the area, the applicant's repayment ability is the 
determining factor in ensuring that the modest housing requirements in 
section 517 of the Housing Act of 1949 are met. This guaranteed loan 
standard for ``modest housing'' is different from the Section 502 
Direct Loan program which generally defines modest housing as having a 
market value which does not exceed the applicable area loan and must 
not have prohibited features. (See 7 CFR 3550.10). For Section 502 
Direct loans, the applicable area loan limits are established by each 
Rural Development State Office, but will not exceed the local HUD 
203(b) limit in effect. This difference between the SFHGLP and the 
Section 502 Direct Loan program is acceptable because of the difference 
between the programs' income limits. Applicants for the Section 502 
Direct Loan program must have very low or low incomes; a SFHGLP loan 
applicant's household adjusted income must not exceed the applicable 
moderate-income limit as defined at 7 CFR 3555.10 of this rule. For 
SFHGLP purposes, the definition of ``modest housing'' will be the 
housing that a low- or moderate-income borrower can afford based on 
their repayment ability.
    The low- or moderate-income applicant's repayment ability will be 
the determining factor in ensuring that the modest housing requirements 
in section 517 of the Housing Act of 1949 are met. The reference to 
section 203(b) of the National Housing Act is removed from the 
regulation. This is permissible since eligible housing for the SFHGLP 
need not be eligible under that statute according to section 
502(h)(4)(B) of the Housing Act of 1949.
    The term ``mortgage credit certificate'' was amended to fully 
describe a Federal tax credit which reduces a borrower's Federal income 
tax liability and improves his or her repayment ability.
    The term ``MSA (Metropolitan Statistical Area)'' was added as it is 
a term the Office of Management and Budget has prescribed for use by 
Federal agencies to collect, tabulate, and publish Federal statistics.
    The term ``new dwelling'' was amended to achieve consistency with 
other Agency program regulations and to better conform to widely 
accepted mortgage industry standards. A dwelling that has been 
completed for more than one year and that has never been occupied is 
considered an existing home.
    The term ``pre-foreclosure sale'' was added to describe a loss 
mitigation technique which reduces the cost of liquidating a property 
the lender is considering for a foreclosure.
    The term ``primary residence'' was added, which is synonymous with 
the term ``principal residence.''
    The term ``principal residence'' was added as it is the language 
included in the Housing Act of 1949, as amended, to describe eligible 
housing. For the property to be eligible, it must be a single family 
dwelling, must be modest, located in a rural area, and be used by

[[Page 73932]]

the borrower as their principal residence.
    The term ``qualified alien'' was amended to achieve a more complete 
description consistent with Section 401 of the Personal Responsibility 
and Work Opportunity Reconciliation Act of 1996 (PRWORA) at 8 U.S.C. 
1641, which describes the class of non-U.S. citizens who are eligible 
for Federal assistance in the form of a loan, grant, or guarantee.
    Two comments were received on the definition for ``rural area.'' 
Both respondents suggested expanding the population base arguing that 
doing so would make the program more competitive and reduce lender 
confusion. These comments are beyond the scope of this regulation as 
section 520 of the Housing Act of 1949 defines the term. The Agency has 
no authority for expanding the population base for Single Family 
Housing programs as suggested. The definition in this rule has been 
updated to refer to section 520 of the Housing Act, as amended.
    The term ``settlement date'' was added to clarify when additional 
interest on an unsatisfied principal balance begins to accrue for loss 
claim payment purposes under 7 CFR 3555.352. The definition takes into 
account certain state-required redemption or confirmation periods, as 
well as general industry standards and loss mitigation techniques. 
Therefore, the settlement date, for the purpose of calculating a loss 
payment, is the later of the actual foreclosure date, the closing date 
if the property sold to a third party at the foreclosure sale, the date 
the borrower with lender concurrence sold the property to a third party 
in order to avoid or cure a default situation, and when title is 
acquired to the security following the expiration of any state-required 
redemption or confirmation period.
    The term ``short sale'' was added to describe a loss mitigation 
technique which reduces the cost of liquidating a property the lender 
is considering for a foreclosure.
    The term ``SFHGLP'' was added as the acronym for the Single Family 
Housing Guaranteed Loan Program of USDA, Rural Development that is 
authorized under section 502 of the Housing Act of 1949, as amended.
    The term ``U.S. non-citizen national'' was added to be consistent 
with Section 341(b)(2) of the Immigration and Nationality Act, 8 U.S.C. 
1452(b)(2) to describe a class of applicants who may be considered 
eligible for Federal assistance in the form of a loan, grant, or 
guarantee.
    The following terms are introduced in Sec.  3555.10 as a result of 
the addition of a new section Sec.  3555.304 regarding special 
servicing options ``Extended-term loan modification,'' ``Maximum 
allowable interest rate,'' ``Mortgage payment to income ratio,'' 
``Mortgage recovery advance,'' and ``Total debt to income ratio.''

Lender Eligibility (Sec.  3555.51)

    Several respondents expressed interest in this section. Some 
expressed concern regarding the lender eligibility requirement to 
underwrite and service single family housing loans and questioned 
whether lenders presently approved and not meeting these conditions 
will be permitted to continue as approved lenders. Lenders who no 
longer meet the requirements, however, will cease to be eligible to 
participate, as has been the case in the past under 7 CFR 1980.309(h). 
Since categories of eligible lenders are being expanded, however, 
eligible lenders should increase not decrease. The same respondents 
indicated the requirements of meeting HUD's direct endorsement 
authority as a supervised or non-supervised mortgagee are too strict, 
citing that some rural lenders would not meet the net worth 
requirements. The conditions outlined for lender approval are the same 
as currently in place, but with some modification to expand eligibility 
while maintaining the integrity of the program. The requirements have 
been expanded to include as eligible those lenders supervised by 
Federal regulatory entities, or which are Government sponsored 
enterprises. Acceptable Federal supervisory entities which have been 
added for eligibility purposes include the Federal Deposit Insurance 
Corporation, the Federal Reserve System, the National Credit Union 
Administration, the Office of Thrift Supervision, the Office of the 
Comptroller of the Currency, and the Federal Housing Finance Board. The 
latter regulates banks within the Federal Home Loan Bank (FHLB) System. 
These Federal entities supervise their lenders, impose capital and net 
worth requirements, and periodically conduct audits and examinations of 
the lenders for the purposes of safety, soundness, and compliance with 
their Federal requirements. Rural Development believes these 
requirements will protect the integrity of the program and promote loan 
quality. The final rule is amended accordingly.
    One respondent noted the proposed rule omitted default and status 
reporting from the regulations. 7 CFR 3555.51 (b) (8) requires the 
lender to cooperate with Agency reporting requirements. This reference 
includes both monthly default and quarterly status reporting, etc. as 
specified in the Agency handbook. The handbook guidance uses the 
industry standard for investor and guarantor reporting requirements. 
Specifically, investor and guarantor reporting are now done through an 
Electronic Data Interchange (EDI) or other electronic methods. The 
lender's agreement also provides for reporting requirements as needed 
to monitor lender performance. As a related issue, the Agency has 
noticed that not all sales, transfers, or change of servicers are 
reported to the Agency in a timely manner. The Agency is not able to 
track the performance and status of the Guaranteed portfolio unless 
lenders report all sales, transfers or changes in servicers; hence, the 
language in 7 CFR 3555.51(b)(10) has been changed to specifically list 
these existing requirements.
    Other respondents were concerned about Rural Development requiring 
a fidelity and omissions policy listing Rural Development as loss 
payee. Rural Development has reviewed this proposal and determined that 
it is not consistent with the mortgage industry and agrees to remove. 
To be eligible, the lender must have a demonstrated ability to 
underwrite and service single-family loans and must meet standards 
established by a Government Sponsored Enterprise (GSE) or a similar 
organization or Federal entity. The fidelity and omissions policy 
requiring Rural Development to be listed as a loss payee, therefore, is 
not needed to protect the Government.
    One respondent recommended establishing a delinquency goal to 
improve and monitor a lender's servicing performance. While Rural 
Development agrees that the performance of the serviced portfolio is 
important, we believe that a delinquency goal in itself is not adequate 
to assess lender performance. Further guidance regarding acceptable 
overall lender performance and Agency monitoring procedures are 
addressed in the handbook. Lender participation requirements are 
covered in subpart B of this part. No change has been made in response 
to this comment.
    One respondent inquired as to why Ginnie Mae was not included as an 
eligible entity to purchase guaranteed loans. Ginnie Mae is not a 
holder of loans, but acts on behalf of a holder by guaranteeing 
``pools'' of securitized loans in case of default. Ginnie Mae does not 
purchase individual loans. Therefore, no change has been made in 
response to this comment.

[[Page 73933]]

    One respondent expressed a concern regarding the amount of 
paperwork and materials to be submitted by the lender to Rural 
Development and the extent to which Rural Development reviews or 
underwrites the loan. Lenders currently have sole responsibility for 
underwriting the loan and will continue to assume this responsibility 
with implementation of the final rule. Rural Development, however, 
reviews the loan for program compliance prior to issuing a Conditional 
Commitment. The loan submission and review process is covered in 7 CFR 
3555.107 and is detailed more extensively in the handbook.

Lender Approval (Sec.  3555.52)

    For several years, Rural Development has required that lenders 
undergo an online training that is available on demand in order to 
become an approved lender. This requirement has been stated in the 
rule.
    Provisions proposed describing possible suspension and debarment 
proceedings after termination or withdrawal of lender approval have 
been removed from the final rule, as unnecessary since it is covered by 
separate regulations, 2 CFR parts 180 and 418. This section has been 
clarified to state that any termination of approval will be conducted 
in accordance with the terms of the lender's agreement. The Agency may 
take any corrective action or seek any remedy authorized by law.

Loan Purposes (Sec.  3555.101)

    Several respondents requested clarification on reasonable and 
customary expenses related to obtaining the loan, recommending that the 
regulations be more specific on allowable fees and charges. One 
respondent stated that they support Rural Development's objective to 
eliminate blatant excesses and abuse by lenders in this area, but that 
the dynamics of the free market economy would be the best check against 
excessive lender fees and charges. Rural Development supports the 
benefits provided to SFHGLP loan applicants due to market competition, 
but recognizes that the SFHGLP is different than most other programs in 
that the program permits long-term financing of most, if not all, 
closing costs charged by the lender. Not only is the SFHGLP borrower 
negatively affected by excessive fees and charges, Rural Development 
pays higher claims on defaulted loans than necessary when excessive 
fees and charges are financed in the mortgage loan. Rural Development, 
therefore, has clarified this section to state that reasonable and 
customary closing costs include lender fees and charges that do not 
exceed those charged other applicants by the lender for similar types 
of transactions. For many lenders, the most similar type of transaction 
is another housing loan with Federal insurance or guarantee. Lenders 
that do not participate in other government insurance or guarantee 
programs may use for comparison a loan program that has conventional 
insurance or guarantee. Lenders will ensure that their fees and charges 
meet these requirements and will make their records available upon 
request.
    Other respondents suggested a change to allow discount points as a 
permissible loan purpose for moderate-income applicants. Discount 
points are paid to obtain a lower interest rate. Rural Development 
disagrees that moderate-income applicants should be allowed to finance 
the cost to ``buy down'' the interest rate. The need to obtain a lower 
interest rate by paying additional points is less acute for moderate-
income applicants than for low-income applicants, and not paying 
discount points keeps financed closing costs at a lower level. The 
treatment of discount points remains the same as under the prior 
regulation. The proposed provision that allows only low-income 
applicants to include reasonable discount points in their loan amount 
therefore, remains unchanged.
    Based on comments received and Rural Development's belief that 
homeownership education is a worthwhile expense for all homebuyers, 
Rural Development has elected to continue to allow the payment of 
homeownership education fees from loan funds. The restriction of this 
coverage to first-time homebuyers has been removed.
    One respondent suggested adding ovens, wall-to-wall carpeting, 
flooring, heating and cooling equipment to 7 CFR 3555.101(b)(5) to be 
consistent with those purposes stated for manufactured housing. In 7 
CFR 3555.101, paragraph (b) had been revised and paragraph (c) has been 
redesignated. The suggested items have been included in the newly 
revised paragraph (b)(1).
    One respondent suggested a ``one-time close'' provision for 
combined construction to permanent loans. Rural Development has been 
testing such a program, agrees with the respondent, and includes a 
provision for combination construction and permanent financing as an 
acceptable loan purpose in the final rule. Conditions for such loans 
are listed in newly revised 7 CFR 3555.105. The criteria for a ``one-
time close'' provision reflect those that have been successfully tested 
by Rural Development and are substantially similar to comparable ``one-
time close'' programs already prevalent in the mortgage industry today. 
The following limitations reduce the risk to the Government on these 
projects. Lenders must have at least two years of experience making and 
administering construction loans and will be responsible for reviewing 
and approving construction contractors or builders, including due 
diligence such as conducting background checks, ensuring the builder 
has two or more years of experience in constructing single family 
dwellings, and that the builder possesses the appropriate licenses, 
insurances, etc. As is the case with similar combined construction to 
permanent loan programs in the mortgage industry today, lenders will 
finance the price of the lot as well as reasonable and customary 
closing costs, and loan proceeds will be escrowed and funds paid out in 
draws during construction. Draws clarify for the builder and borrower 
when and how payment will be made during the construction period. Once 
construction is complete, the loan will be modified and re-amortized to 
achieve full repayment within the loan's remaining term, not to exceed 
30 years. Rural Development reserves the right to limit the number of 
loans guaranteed under this section based on market conditions and/or 
loan performance.
    Some respondents suggested that the regulations should be revised 
to permit refinancing of existing Section 502 guaranteed and direct 
loans with Section 502 guaranteed loans. At the time the proposed rule 
was published, Rural Development did not have the statutory authority 
to refinance existing Section 502 direct and guaranteed loans. However, 
Rural Development now has the statutory authority to do so under 42 
U.S.C. 1472(h)(14). The regulation is revised accordingly in Sec.  
3555.101(d) to incorporate the Agency policy on refinancing existing 
Section 502 direct and guaranteed loans. For these types of 
refinancing, the interest rate must be fixed and least 100 basis points 
below the original loan rate; the security must be the same property as 
for the original loan which still serves as the principal residence for 
the borrower; the borrower must have kept the account current for at 
least 180 days prior to application for refinance; borrowers may be 
deleted and qualified borrowers may be added; and the new loan amount 
cannot exceed the balance of the existing loan, interest, guarantee fee 
and reasonable closing costs. Borrowers with existing guaranteed loans 
may use a streamlined

[[Page 73934]]

option for refinancing, which does not require a new appraisal. 
Borrowers with existing direct loans must use the non-streamlined 
option and obtain a new appraisal, because direct loans are subject to 
recapture and the recapture calculation requires a current appraisal 
value. Documentation, costs and underwriting requirements of subparts 
D, E, and F of this part apply to refinances, unless otherwise provided 
by the Agency. Given housing market fluctuations, the Agency needs to 
be capable of reacting quickly to changing housing needs. The Agency 
may limit the number of guaranteed loans made for refinancing purposes 
based on market conditions and other appropriate factors in accordance 
with section 502(h)(17)(f) of the Housing Act.
    One respondent recommended correcting 7 CFR 3555.101(c) (2) (iii) 
to read that refinancing is permitted in the case of a loan for a site 
without a dwelling if a dwelling ``will be'' constructed on the site. 
Rural Development concurs and the regulation is so clarified.

Loan Restrictions (Sec.  3555.102)

    One respondent questioned whether the intent of 7 CFR 3555.102(b) 
was to require a determination whether the applicant intends to use the 
land or buildings for a business. The intent of the regulation is to 
prohibit guaranteeing loans to purchase land or buildings typically 
used primarily for income-producing purposes and the section has been 
revised for clarification.
    One respondent encouraged Rural Development to establish a maximum 
amount for property seller financing concessions to prevent over-
inflated property values. This change is adopted, and the regulations 
have been revised to state that the property seller, or other 
interested party, may contribute up to 6 percent of the property's sale 
price toward the purchaser's financing costs. The 6 percent provision 
is consistent with present HUD guidelines. This amount may change 
periodically based upon the performance of the portfolio, changing 
mortgage industry standards, and the level of exposure the Agency is 
willing to assume to excess risk by creating incentives which may 
increase the appraised value of a property.

Maximum Loan Amount (Sec.  3555.103)

    No comments were received on this section; however, the section has 
been re-written to clarify that the maximum loan amount cannot exceed 
the lesser of the market value of the property as determined by an 
appraisal that meets Agency requirements plus the amount of the loan 
guarantee fee required by newly redesignated 7 CFR 3555.107(f), or the 
total of the purchase price and all eligible acquisition costs as 
permitted by 7 CFR 3555.101. The change was made to account for 
statutory authorities granted after the proposed rule was published. 42 
U.S.C. 1472(h)(7)(C) includes the ability to exceed a 100 percent loan-
to-value to the extent that the guarantee fee is included in the loan 
amount, and no longer references HUD loan limit restrictions under 
section 203(b) of the National Housing Act.
    The proposed rule inadvertently omitted language limiting the 
maximum loan amount to 90 percent of the present market value for new 
construction when the requirements of Sec.  3555.202(a) regarding plan 
certifications, inspections and warranties cannot be met. The final 
rule corrects this omission and contains language substantially similar 
to that in current regulations, 7 CFR 1980, part D.

Loan Terms (Sec.  3555.104)

    Several comments were received on the proposal to establish a 
maximum interest rate allowable for the SFHGLP and the method of 
notification to participating lenders. Some respondents suggested 
letting the market set the rate while others commented that a maximum 
rate should be established due to limited competition in rural areas. 
Others were concerned that establishing the rate cap at 125 basis 
points over the Fannie Mae 90-day rate would be detrimental to the 
applicants and ultimately to Rural Development in higher default and 
loss rates. Most of the respondents agreed there must be flexibility in 
the rate and, that changes to the rate not disrupt the lender community 
or secondary market. After full consideration of the comments and the 
issues and risks involved, Rural Development agrees that the rate can 
be based on market competition, but that there should be a maximum 
interest rate to protect borrowers who may not be very experienced with 
mortgage financing. Permitting the lender to establish the interest 
rate by means of publishing a VA rate is objective, not subjective, so 
the proposed provision to establish the Rural Development rate was 
removed from the final rule. Substantially consistent with the proposed 
rule, the interest rate may be established based on market competition, 
provided the rate does not exceed the greater of:
     The current Fannie Mae posted yield for 90-day delivery 
(actual/actual) for 30-year fixed rate conventional loans plus 1 
percent, rounded up to the nearest one-quarter of 1 percent.
     The current Freddie Mac required net yield for 90-day 
delivery for 30-year fixed rate conventional loans plus 1 percent, 
rounded up to the nearest one-quarter of 1 percent.
    Previously, only mortgages with 30-year terms were permitted. 
Lesser loan terms may be used as Rural Development completes changes to 
its systems and subsidy rate models in order to accommodate loan terms 
of less than 30 years. Under the Housing Act of 1949, as amended, loan 
terms may be up to 30 years, but not greater. Updates to the interest 
rate limits are available in any Rural Development State Office or 
online at http://www.rurdev.usda.gov/regs/regs/pdf/04401.pdf.

Interest Assistance (Sec.  3555.105) and Recapture (Sec.  3555.106)

    A suggestion was made to remove requirements from the regulation 
since the interest assistance program is not funded nor is funding 
proposed. Since there are fewer than 50 outstanding loans receiving 
this assistance, the suggestion was adopted and a decision was made to 
include these policies in the handbook to continue administering 
existing interest assistance obligations. 7 CFR 3555.105 has been 
revised and 7 CFR 3555.106 has been reserved.

Application for and Issuance of the Loan Guarantee (Sec.  3555.107)

    Three respondents addressed concerns regarding issuance of the 
conditional commitment. All three recommended that in order for 
borrower costs to be reduced and the loan process to be efficient and 
streamlined, property inspections, such as a well test or construction 
phase inspections must be treated as conditions to loan closing. Rural 
Development does not intend that a borrower incur unnecessary costs 
prior to issuance of the conditional commitment, and has clarified the 
regulations to state that the lender may obtain evidence of required 
property inspections not needed for environmental compliance and any 
necessary repairs after issuance of the conditional commitment, but 
prior to submitting the request for the loan guarantee.
    Some respondents requested clarification on the amount of the 
guarantee fee. By statute, the up-front guarantee fee must be based on 
the principal loan amount obligated. (See 502(h)(8) of the Housing Act 
of 1949.) If the up-front guarantee fee is included in the loan amount, 
the loan amount increases along with a corresponding increase to the 
fee. Assuming for illustration purposes that the guarantee

[[Page 73935]]

fee is 2 percent, the following formula applies:

loan amount / 0.98 = loan amount, including guarantee fee
e.g. $100,000 / 0.98 = $102,2040.82 (includes the guarantee fee)

    Rural Development will provide additional comprehensive examples of 
how to calculate the guarantee fee in the handbook.
    In addition, Rural Development added in this section that, when a 
shortage of funds is projected or anticipated during the fiscal year, 
funding will be restricted to first-time homebuyers or veterans. This 
is consistent with sections 502(h)(5) and 507 of the Housing Act of 
1949, as amended, which gives priority to first-time homebuyers and 
veterans. A determination that a shortage of funds will be made if, 
based on current obligation rates, funds will be projected to run out 
before the end of the fiscal year.
    Note that an annual fee is now authorized by Section 201 of Public 
Law 111-212, 42 U.S.C. 1472(h)(8). Under that statute, the Secretary is 
authorized to collect from the lender an annual fee not to exceed 0.5 
percent of the outstanding principal balance of the loan for the life 
of the loan. The Agency published a final rule regarding the annual fee 
on July 11, 2012 in the Federal Register (77 FR 40785). The intent of 
the annual fee is to make the SFHGLP subsidy neutral, thus eliminating 
the need for taxpayer support of the program. The annual fee will be 
applicable to purchase and refinance loan transactions.
    The paragraph on proper closing (Sec.  3555.107(i)) has been 
revised to clarify the Agency's policy in allowing ``self-certified'' 
lenders to submit minimal documentation to evidence a properly closed 
loan. To obtain ``self-certification'' authorization from the Agency, 
the lender must actively originate SFHGLP loans and have demonstrated 
consistent successful loan closings with full documents. Self-certified 
lenders must still submit the promissory note and settlement statement 
to the Agency.

Full Faith and Credit (Sec.  3555.108)

    The proposed regulations inadvertently omitted a section explaining 
the ``Full faith and credit'' provisions of the Loan Note Guarantee. 
The final rule corrects this omission and contains language 
substantially similar to that in the current regulation. New language 
in this section introduces indemnification when a lender fails to 
originate a loan in accordance with the requirements in this subpart 
and possible action the Agency may take as a result of that 
determination. The proposed rule did not contain language regarding 
indemnification. This language is added as a result of a final rule 
published May 31, 2011 (76 FR 31217-31220).

Eligibility Requirements (Sec.  3555.151)

    Three respondents suggested bringing underwriting standards 
regarding credit reports, credit scores, and repayment ability in line 
with the private industry. Certain organizations such as VA, Fannie 
Mae, Freddie Mac, and others in the mortgage industry have instituted a 
single debt-to-income ratio requirement of 41 percent for low-or-no-
down payment affordable housing loans. The Agency is concerned that if 
a single ratio of 41% were adopted, the potential is that a borrower 
with limited income may be permitted to have mortgage payments of up to 
41 percent of their income if they happened to apply during a debt free 
timeframe. The concern is that the borrower would be fully encumbered 
by their mortgage payment and would become over extended if faced with 
the need for a new car loan, for example. However, the Agency will 
maintain its current policy of using a dual ratio approach--a monthly 
housing expense ratio of 29 percent or less and a total debt-to-income 
ratio of 41 percent--until sufficient data analysis permits the 
adoption of the single ratio approach and the Agency determines that a 
single debt ratio approach is prudent given current market conditions. 
The Agency reserves the right to adopt the single ratio approach once 
data analysis supports that a single debt ratio approach does not incur 
more risk.
    Other respondents recommended that the maximum debt to income ratio 
for repayment ability be raised for loans to purchase energy-efficient 
homes, such as loans to purchase homes built to energy-efficient 
standards. The respondents indicated it is industry standard to allow 
for increased debt ratios on energy-efficient home loans. HUD, VA, 
Fannie Mae, and Freddie Mac all allow for increased debt ratios for 
energy-efficient home loans. The rationale is that energy-efficient 
homes cost less to heat and cool, and the reduced costs make a higher 
mortgage payment may be more affordable to the borrower. Rural 
Development agrees some flexibility may be warranted when purchases 
involve homes built to energy-efficient standards. Further guidance 
surrounding flexibilities for increased debt ratios for energy-
efficient home loans will be addressed in the handbook. Energy 
efficient homes are properties which are built or retro-fitted to the 
standards of the most recent International Energy Conservation Code 
(IECC) are widely regarded in the mortgage industry as energy-
efficient. Rural Energy Plus provisions are further described in newly 
designated 7 CFR 3555.209. Lenders will certify that the most recent 
IECC standards have been met.
    Aside from energy-efficient housing, one respondent suggested it be 
left up to the lender to decide when to make debt ratio exceptions 
above the established threshold. The respondent indicated that 
throughout the mortgage industry the decision to make debt ratio 
exceptions are up to the lenders who document compensating or 
mitigating factors. The Agency agrees with the respondent that debt 
ratio exceptions are acceptable when supported by acceptable 
compensating factors. Further guidance on acceptable compensating 
factors and flexibility of a lender to make a decision regarding an 
increased debt ratio will be addressed in the handbook.
    Several comments were received in support of Rural Development's 
current acceptance of alternative documentation for income 
verification, specifically, the use of online resources to document 
employment history and income. This method of verification is now 
generally accepted in the mortgage industry, including Rural 
Development. The proposed rule did not specify methods to verify income 
and employment, and neither is it necessary in the final rule. Since 
reputable online resources can change from time to time, however, 
guidance pertaining to electronic verification of income and employment 
is provided in the handbook.
    One respondent suggested that the program's income limits are too 
low to assist many first-time homebuyers who have been unable to 
acquire sufficient savings for the down payment required by other 
mortgage programs, and that the limits need to be increased to keep 
pace with the cost of living. Section 502(h)(3) of the Housing Act of 
1949 governs SFHGLP income limits, and Rural Development lacks the 
authority to increase income limits specifically to meet the needs of 
more first-time homebuyers. Thus, the Agency has made no changes.
    Several comments were received on the eligibility of current 
homeowners to obtain guaranteed loans. Some respondents argued that if 
the applicant currently owns housing, then approval of a SFHGLP loan 
should not be considered. Others suggested that the current home should 
be sold prior to issuance of the Loan Note Guarantee.

[[Page 73936]]

Still, others viewed the proposed change to allow current 
homeownership, as long as the homeowners do not own nor are financially 
responsible for another home at the time the loan closes, to be 
positive and stated the change would allow more homes on the market for 
lower income families and remove the confusion regarding a deficient 
housing determination. Rural Development agrees that the proposed 
provision might prevent some applicants from obtaining homes that meet 
the needs of the household. The Agency, therefore, will allow current 
homeowners to use the program, provided: (1) They do not have another 
SFHGLP or Section 502 Direct Loan by the time of closing; (2) they are 
financially qualified to own more than one house; (3) retaining 
ownership of a home is limited to one single dwelling unit per 
household other than the one associated with the current loan request; 
(4) they will occupy the home financed with the SFHGLP loan as their 
primary residence; (5) the current home no longer adequately meets the 
family's needs, and (6) they are without sufficient resources or credit 
to obtain the dwelling on their own without the guarantee. This change 
is being made to enable an eligible qualified homeowner to use the 
SFHGLP loan program to obtain a new primary residence that the 
applicant believes will meet the household's needs, while ensuring that 
limited program funds are used within statutory authorities to assist 
as many qualified individuals as possible.
    Four respondents commented on funded buydown accounts. One stated 
that the proposed rule provided a much needed definition for buydowns. 
Two suggested eliminating funded buydowns from the regulations stating 
they are not beneficial to the applicant and may encourage inflated 
appraisals to cover the property seller's cost of the buydown. One 
respondent suggested training be required. Rural Development believes 
that funded buydowns can be used to assist qualified applicants to 
qualify for home loans and temporary interest rate buydowns are a 
financing tool designed to reduce the borrower's monthly mortgage 
payment during the early years of repayment. The Agency feels the 
proposed SFHGLP limitations provide adequate protection against 
inflated appraisals. In response to these comments, the final rule has 
been changed to require that a lender qualify the applicant at the note 
rate, rather than qualify the applicant at the temporary reduced rate, 
to ensure the eventual increase in mortgage payments will not affect 
the borrower adversely and lead to default. The mortgage industry 
generally accepts this approach. All remaining provisions of the 
preliminary rule remain unchanged. Rural Development will provide 
training to Agency staff and lenders upon implementation of these 
regulation changes.
    Several comments were received on credit qualifications. Some 
respondents expressed a concern that increasing late payments from 1 to 
3 or more late payments within the last 12 months would have a 
potential negative impact on delinquency rates even though the change 
could possibly qualify an increased number of applicants. Rural 
Development carefully considered the comments, and in recognition of 
the mortgage industry's utilization of credit scores that consider the 
number of late payments, has changed the regulation to incorporate the 
use of credit scores instead of all of the separate indicators of 
unacceptable credit as proposed. Rural Development SFHGLP performance 
and mortgage industry statistics show that credit scores are a powerful 
indicator of the likelihood for borrowers to be successful homeowners. 
Credit scores take into account all the separate indicators of credit 
in a credit report and encapsulate them into one score. Credit scores 
are widely used throughout the mortgage industry and very few loan 
programs, if any; do not make use of them. 7 CFR 3555.151 requires a 
credit score or other credit qualifications satisfactory to Rural 
Development to show the applicants' reasonable ability and willingness 
to meet their debt obligations. Further information on credit scores 
can be found in the handbook consistent with current Agency practice.
    Several comments were received on proposed Sec.  
3555.151(h)(1)(viii) relative to payment of collection accounts within 
6 months of filing an application. The respondents viewed this change 
as negative as it requires the applicant to wait 6 months after paying 
a collection in full before making application for a loan. One 
respondent noted that credit issues should be guidelines and provide 
the lender some flexibility to look at compensating factors. Rural 
Development decided to remove this requirement from the regulation and 
rely on the use of credit scores and other credit qualifications to 
determine credit-worthiness, within statutory requirements. Rural 
Development has provided examples of evaluating credit in the handbook.
    Rural Development proposed to make homeownership education 
mandatory for all first-time homebuyers. Several respondents posed 
questions and concerns regarding this proposal. Some respondents 
believe homeownership education has little or no bearing on the success 
of the loan, but does increase the cost of homeownership. These 
respondents believe that past credit history is more important in 
assessing future success. Still others indicated that if Rural 
Development requires mandatory education, that Rural Development 
provides a specific curriculum and evaluation criteria or consider 
providing the education which would alleviate the current subjective 
process used by lenders. Some respondents indicated there is a lack of 
providers in rural areas that could result in additional program 
barriers by delaying closings and imposing excessive travel to obtain 
such services. In view of the comments received, language surrounding 
homeownership education will remain consistent with conditions outlined 
for homeownership counseling currently in place.
    Section 3555.151(j) states that eligible applicants be unable to 
secure conventional credit elsewhere without a guarantee. This policy 
was adopted in the early 1990's and since that time a number of loan 
vehicles have emerged that are marketed as ``conventional,'' but have 
incorporated features that add to the potential risk of loss to 
applicants, such as allowing unreasonably low down payments and higher 
debt ratios. Some of these loans are called interest-only payment 
loans, graduated payment loans, negative amortization loans, and 
balloon payment loans. They may require private mortgage insurance. To 
clarify the meaning of ``conventional credit'' for purposes of the 
SFHGLP and distinguish it from the new, non-traditional mortgage 
products that claim to be ``conventional,'' the final rule uses the 
term ``traditional conventional credit.'' The Agency currently 
interprets ``traditional conventional credit'' as a loan that has a 30-
year fixed term, does not require private mortgage insurance, and where 
the applicant: (1) Is able to make a 20 percent down payment from 
personal funds; (2) able to pay all closing from personal funds; (3) 
has a total debt ratio of 36 percent or less; (4) has a debt ratio for 
principal, interest, taxes and insurance of 28 percent or less; and (5) 
has a good credit history consisting of at least two credit bureau 
trade lines open and paid as agreed for at least a 24-month period.

Calculation of Income and Assets (Sec.  3555.152)

    Rural Development has provided clarity in Sec.  3555.152(a)(1) and 
(a)(2) for income calculation. For determining

[[Page 73937]]

repayment income, the lender must examine the previous 2-year history 
of the applicant's income, as well as make a determination as to 
whether the income is likely to continue for at least the next 3 years. 
These requirements do not mean that an applicant had to maintain the 
same employment and earn the same amount of income for the past 2 
years. The requirement merely provides a reasonable period of time over 
which the lender must examine the applicant's past income in 
determining repayment ability for the future and aligns the analysis of 
repayment income with other Agency programs and industry practice. For 
annual income the lender must examine the 2-year income history for 
each household member. Lenders must also estimate the expected income 
for the next 12 months for each household member.
    Lenders may also consider the training and education of applicants 
in determining the continuity of income, as noted in Sec.  
3555.152(a)(1). The consideration of training and education would be 
most applicable to newly graduated students, or students who have 
completed and obtained technical degrees in various fields and are 
entering the workforce. While these students may not have a history of 
employment in their respective fields, their training and education, 
combined with a contract for hire, may be used to determine the 
stability of continuity of their income.
    One respondent suggested that proposed Sec.  3555.152(c) regarding 
adjusted income be revised to show an increase to the $480 deduction 
for each family member under 18 years of age or 18 years of age or 
older with a disability, or a full-time student to reflect inflationary 
increases of the last 10 years and to be consistent with the Internal 
Revenue Service allowance for dependents. Rural Development's 
authorizing legislation does not permit a change in this amount. This 
deduction for dependents is required by HUD regulation 24 CFR 5.611. No 
change is made to this provision.
    Language was added to the final rule specifically exempting income 
received by live-in aides from the annual income calculation. A live-in 
aid is a hired employee, not a household member, whose income is not 
typically applied to household expenses. Accordingly, income received 
by a live-in aid will not be included in the annual income calculation. 
This is consistent with 24 CFR 5.609.
    Three comments were received on proposed Sec.  3555.152(d) 
concerning the calculation of income from net family assets for 
eligibility purposes. Two respondents indicated the requirements should 
be eliminated as it imposes a penalty on those applicants who manage 
their resources and then have it count as income. One respondent 
recommended implementation as proposed. Rural Development's authorizing 
legislation, Title V of the Housing Act of 1949, as amended, requires 
the calculation of income according to HUD authorities. See the 
definition of ``income'' in 42 U.S.C. 1471(b)(5). HUD authorities 
require consideration of family assets in income. See 42 U.S.C. 
1437a(b)(4) and 24 CFR 5.609. This section, therefore, will be adopted 
as proposed.

Site Requirements (Sec.  3555.201)

    One respondent indicated that prohibiting the presence of small 
barns on properties would eliminate from consideration many homes which 
would otherwise qualify, and that small barns are commonplace on many 
residential properties in rural areas. The regulation has been revised 
to clarify that vacant land or property used primarily for agriculture, 
farming or commercial enterprise is ineligible. This language will 
allow small outbuildings which are not designed to accommodate a 
business or income-producing enterprise may be included in the site. 
Only income-producing land or buildings intended to be used principally 
for income-producing purposes are not permitted. Further guidance will 
be outlined in the handbook.
    The requirement that the site value not exceed 30 percent of the 
value of the property was removed from the final rule because it is no 
longer a mortgage industry standard. This matter is typically better 
addressed under State or local government zoning ordinances which must 
be met.

Dwelling Requirements (Sec.  3555.202)

    Two respondents discussed concerns about the proposed requirement 
that 150 percent of development funds be placed in escrow for 
incomplete exterior development. Both respondents argued that Rural 
Development should require only 100 percent of the funds for 
development is placed in escrow stating that the change would permit 
the lender to pay out the property seller and still protect the 
applicant. Rural Development agrees that this adequately protects the 
Government and will permit the lender to place only 100 percent of the 
funds for final development in escrow.
    The final rule similarly covers instances when there is incomplete 
interior development that cannot be completed until after the borrower 
takes title to the property. The time to complete all unfinished 
development was expanded from 120 to 180 days in order to accommodate 
delays due to inclement weather which in parts of the country can 
interfere with construction for extended periods of time.
    The final rule has been revised in regard to minimum thermal 
efficiency requirements for homes financed with guaranteed loans. New 
homes are typically built in accordance with local housing codes that 
address thermal efficiency standards. The thermal efficiency of 
existing homes is typically considered in the valuation process but 
cannot always be determined accurately. The cost to alter an existing 
home to meet Agency thermal standards is not always cost-effective. The 
final rule eliminates minimum thermal efficiency requirements for 
existing homes financed with guaranteed loans. Note that, properties 
which are built or retro-fitted to the standards of the most current 
IECC are widely regarded in the mortgage industry as energy-efficient 
and permit applicants to qualify at a higher debt ratio of 43 percent.
    Manufactured homes must conform to the Federal Manufactured Home 
Construction and Safety Standards (FMHCSS) and be constructed in 
compliance with the HUD's heating and cooling requirements for the 
State in which the unit will be located. The final rule is consistent 
with other federally insured or guaranteed single-family mortgage 
programs.
    The requirement that the property be free of termites and other 
wood damaging pests and organisms was removed from the final rule 
because these issues today are addressed by State and local 
governments.

Ownership Requirements (Sec.  3555.203)

    A change was made to the final rule concerning secured leasehold 
interests, to accommodate leases on American Indian restricted land 
which are for periods of 25 years and which are renewable for a second 
25-year period. Such leases are permissible.

Special Requirements for Condominiums (Sec.  3555.205)

    Several respondents questioned the requirements for condominiums. 
The proposed rule states that loans may be guaranteed for condominium 
units in condominium projects that meet the project acceptance criteria 
established by HUD, VA, Fannie Mae, or Freddie Mac. Rural Development 
has elected to not restate the project acceptance criteria of HUD, VA, 
Fannie Mae, or Freddie Mac in program regulations, but

[[Page 73938]]

has included administrative guidance for this issue in the handbook. 
This represents no change from Agency current practice. For further 
background information, the following Web sites may prove useful:http://www.freddiemac.com/sell/factsheets/condo_projects.html; https://www.efanniemae.com/sf/index.jsp; and http://www.hudclips.org/cgi/.

Special Requirements for Community Land Trusts (Sec.  3555.206)

    Some respondents argued that Rural Development should prevent 
terminating the land trust restrictions when the property is 
foreclosed. The respondents recommended the section be amended to allow 
a mortgage on the dwelling only and, thereby, keeping the restrictions 
in place upon forced sale of the dwelling. Removing or amending the 
requirement of terminating land trust restriction upon foreclosure 
would adversely affect the market ability of the property, thereby 
increasing the loss to the Government. Therefore, no change is made to 
the final rule.

Special Requirements for Manufactured Homes (Sec.  3555.208)

    Several respondents suggested Rural Development thermal standards 
not be required for manufactured housing. Based on these comments, the 
requirement related to thermal standards is revised to adopt the 
standards established by HUD, as discussed above.
    Construction must conform to the FMHCSS and HUD heating and cooling 
requirements for the State.
    Others suggested accepting the manufacturer's warranty and not 
requiring any additional dealer warranty. After considering this 
comment, Rural Development decided to remove the requirement for 
Agency-approved dealer-contractors because no other Government 
insurance or guarantee program has a similar requirement, and because 
Rural Development's interest will be adequately protected under the 
warranty provisions of the final rule. This change also reduces the 
administrative burden and cost for lenders and borrowers while still 
protecting the Agency's interests. Agency warranty requirements will 
remain in place in order to ensure that the borrower's new manufactured 
home is warranted against manufacturing defects, damage incurred during 
transport from the dealer to the site, and defects related to faulty 
installation on the permanent foundation.

Required Servicing Actions (Sec.  3555.252)

    Several comments were received on the proposal to permit the 
participation of some lenders that do not utilize tax and insurance 
escrow accounts. Six respondents disagreed with the proposal, stating 
that lenders that lack the means to escrow should not participate in 
the SFHGLP as approved lenders and that the escrowing process assists 
customers and ensures a greater homeownership success rate. Rural 
Development agrees that escrows can promote homeownership success, but 
the same result can be achieved without escrows if other safeguards are 
in place. For example, a lender can still monitor tax assessments and 
payments absent an escrow account and, in cases of non-payment, take 
appropriate actions like contacting the borrower.
    Others supported the proposal as providing greater opportunity for 
small rural lenders to participate in the SFHGLP.
    Two respondents stated that lenders who lack capacity to escrow 
should be accountable for any deficiency in the servicing of these 
accounts.
    Rural Development wishes to promote the interest of the SFHGLP to 
eligible rural lending institutions with the capability to underwrite 
and service loans, but without the capacity to escrow. Therefore, the 
final rule requires the lender to establish and maintain insured escrow 
accounts to pay real estate taxes and assessments and required hazard 
and flood insurance premiums when due, or, if the lender does not have 
the capacity to escrow, then the lender must implement internal 
monitoring processes to ensure that the borrower pays real estate taxes 
and assessments and required hazard and flood insurance premiums when 
due. In all cases, the lender is accountable for any deficiency in the 
servicing of these accounts. This rule will provide flexibility to 
small rural lenders while protecting the interests of the borrower and 
Rural Development. No significant change has been made to the language 
proposed.
    Two respondents took exception to proposed Sec.  3555.252 requiring 
the lenders to ensure all repairs or replacements using insurance loss 
claims be planned, performed, and inspected in accordance with Agency 
construction requirements. Both respondents suggested Rural Development 
adopt a dollar amount threshold (below) which the lender would not have 
to manage the repairs; rather, the insurance funds could be paid 
directly to the homeowner according to industry standards. The 
respondents suggested $10,000 as the general industry standard. The 
Agency will adopt a ``de minimis'' threshold in Sec.  3555.252 so that 
a specific amount may be defined in the handbook and adjusted according 
to changes in the industry standard. The current industry standard of 
$10,000 will be adopted in the handbook, subject to change based on the 
industry standard. If the insurance claim is beneath the de minimis 
threshold and other requirements are met (i.e. the account is current 
and there is a history of timely payments; the borrower occupies the 
property; and the borrower executes an affidavit agreeing to apply the 
funds for repairs or reconstruction of the dwelling), the funds may be 
released directly to the borrower.''
    One respondent asked Rural Development to include guidance 
regarding the requirements on reporting and delinquency notification. 
Rural Development concurs and has provided guidance consistent with 
mortgage industry standards. Lenders must notify a credit repository of 
each new guaranteed loan, identify the loan as guaranteed by the 
Agency, and must report to that repository whenever any account becomes 
more than 30 calendar days past due. No change is needed in the 
proposed language. Details on lender reports to the Agency are provided 
in the handbook.

Borrower Actions Requiring Lender Approval (Sec.  3555.255)

    Rural Development's final rule on partial release of security 
property requires, in part, that the borrower receive adequate 
compensation and either make a reduction to the principal balance, or 
make improvements to the security property, in order to maintain the 
current loan-to-value ratio for the guaranteed loan. If the borrower 
receives adequate compensation for a partial release and makes a 
commensurate reduction to the principal balance or makes improvements 
to the security property, the pre-release loan-to-value for the 
guaranteed loan should be preserved or improved. This clarification has 
been added to the final rule which otherwise remains unchanged from the 
proposed.

Transfer and Assumptions (Sec.  3555.256)

    Some respondents suggested adding a section discussing the release 
of a co-obligor in cases of divorce. Rural Development's authorizing 
legislation. Sec.  502(h)(10) of the Housing Act of 1949, as amended, 
prohibits this action, so this comment is not adopted.
    One respondent expressed concern about transfers without triggering 
the

[[Page 73939]]

due-on-sale clause arguing that fixed rate conventional documents do 
not allow assumability under original mortgage terms and that the Truth 
in Lending documents disclose that the loan is non-assumable. This 
section of the rule already discusses permissible transfers subject to 
Section 341 of the Garn St Germain Depository Institutions Act of 1982 
(Pub. L. 97-320) and no change is made on this issue.

Subpart G (Sec. Sec.  3555.301 Through 3555.308)

    The Agency has reorganized and renumbered subpart G in order to 
better organize the information and present servicing options in the 
order in which lenders will generally consider them.

General Servicing Techniques (Sec.  3555.301)

    The final rule requires lenders to evaluate loss mitigation options 
in subpart G of the rule in an effort to resolve any repayment problems 
and provide borrowers with the maximum opportunity to become successful 
homeowners. The lender retains the discretion to choose which, if any, 
such options will best resolve the borrower's repayment problems while 
acting as a prudent lender and in the financial interests of the 
Government.
    This section clarifies certain steps that are part of the industry 
standard practices the lender must take to contact a borrower who is in 
default, such as an initial contact to ascertain the circumstances of 
the default and possible resolution, and a certified letter requesting 
an interview with the borrower when the account becomes more than 60 
days overdue. The Agency also clarifies that unless otherwise provided, 
Agency concurrence or a waiver is necessary for servicing plans that 
extend more than 90 days (Sec.  3555.301(h)). A waiver to the 
concurrence requirement may be issued if a lender demonstrates that it 
no longer needs oversight, which may be demonstrated by the lender's 
portfolio performance, such as lower than average delinquency rates, 
foreclosure rates, or loss claim rates. Rural Development may revoke 
such waiver at any time, upon notice and without appeal rights.
    In order to protect the interests of the Government, the Agency 
will require lenders to evaluate delinquent loans to determine whether 
any loss mitigation plan would be appropriate. However, the initial 
decision whether to offer a servicing plan to the borrower continues to 
be within the discretion of the lender, since the lender must determine 
whether the borrower is eligible for a servicing plan that can feasibly 
cure the delinquency before submitting any servicing plan for approval 
in accordance with Sec.  3555.301(h).

Protective Advances (Sec.  3555.302)

    Two comments were received regarding protective advances. One 
respondent asked how the borrower would repay the advance. It is 
commonplace for security instruments and promissory notes to provide 
for protective advances to become part of the borrower's debt; hence, 
no change is made in response to this comment. One respondent 
recommended adoption of the section as proposed. Rural Development 
agrees with this respondent and believes the requirements related to 
protective advances are clear and no change is made to the regulation.
    The rule further clarifies that protective advances for taxes and 
insurance do not require prior Agency concurrence. However, protective 
advances for costs other than taxes or insurance, such as emergency 
repairs, require Agency concurrence if the amount of the advance is 
significant as determined by the Agency. The handbook currently sets 
the threshold for significant advances to be those exceeding $2,000 and 
is based upon historical experience in responding to lenders who are 
caretaking abandoned properties in liquidation or are acquired in the 
lender's inventory.

Traditional Servicing Options (Sec.  3555.303)

    The traditional servicing options--repayment agreement, special 
forbearance, reamortization and loan modification--previously covered 
in proposed Sec. Sec.  3555.301, 3555.304 and 7 CFR 1980.373, have been 
consolidated into one section and renumbered as Sec.  3555.303. The 
eligibility requirements for all traditional servicing is addressed in 
Sec.  3555.303(a). Reamortization has been removed as a separate option 
since it is covered by loan modification.
    One respondent requested clarification on extending the term of the 
loan. Under section 502(h)(7) of the Housing Act of 1949, as amended, 
the maximum loan term for SFHGLP loans is 30 years. However, section 
502(h)(14(H) permits loan modification when the borrower is in default 
or facing imminent default, and the term of the loan may be extended up 
to 40 years from the date of modification. Therefore, Sec.  
3555.303(b)(3) provides that traditional servicing loan modifications 
may include extending the term of the loan up to 30 years from the date 
of modification. The guarantee is effective 30 years from the 
origination date, and if the loan term is extended beyond the original 
30 years (i.e. for another 30-year term), the guarantee will no longer 
apply beyond the original 30-year loan term. A clarification has been 
made to the rule. Extended-term loan modifications, however, are 
available under Sec.  3555.304 special servicing as discussed below in 
more detail.
    One respondent requested clarification on allowable items for 
capitalization. The respondent suggested that foreclosure fees and 
costs, tax and insurance advances, and accrued interest be capitalized. 
The respondent further suggested that if the capitalization of these 
items results in a new loan amount that is higher than the principal 
loan amount originally guaranteed, the guarantee should then be based 
on the new and higher loan amount. Rural Development agrees that 
foreclosure fees and costs, tax and insurance advances, and past due 
principal and interest payments may be capitalized in a re-amortization 
designed as a loss mitigation technique. Such capitalization is 
consistent with mortgage industry practices and standards. Late charges 
or fees may not be capitalized. The amount of the guarantee, however, 
may not exceed the principal loan amount originally guaranteed, because 
the Loan Note Guarantee was issued at origination for a certain face 
value which cannot be amended by the lender. The regulation has been 
changed accordingly, and additional administrative guidance is provided 
in the handbook.
    One respondent suggested these actions should require Agency 
concurrence prior to modification; failure to obtain Agency concurrence 
could increase loss claim exposure for Rural Development. Rural 
Development agrees, and the regulation has been changed accordingly in 
Sec.  3555.301. Lenders will continue requesting concurrence from Rural 
Development to undertake modification and any other traditional 
servicing plans that extend more than 90 days, unless a waiver is 
issued pursuant to Sec.  3555.301(h) described above.

Special Servicing Options (Sec.  3555.304)

    A new section has been added to provide Agency policy regarding 
special servicing options that lenders may utilize as authorized and 
implemented under the final rule published on August 26, 2010 (75 FR 
52429-52435). Language regarding special servicing options was not 
published in the proposed streamlining rule. The Agency will allow 
lenders to extend loans for a term of up to 40 years from the date of 
modification under the special servicing

[[Page 73940]]

options. The Agency will also allow lenders to advance funds on behalf 
of borrowers in amounts necessary to bring defaulted loans current, up 
to 30 percent of the unpaid principal balance of the loan. Upon 
request, the Agency will reimburse the lender for eligible advances. 
The intended effect of these special servicing options was to reduce 
mortgage foreclosures among SFHGLP borrowers and assist in stabilizing 
the national housing market. Before considering special servicing 
options, lenders must exhaust traditional servicing options or have 
determined that traditional servicing plans would not resolve the 
delinquency. The concurrence and waiver provisions of Sec.  3555.301(h) 
apply to special servicing options.
    Section 3555.10 is amended from the proposed rule to introduce in 
alphabetical order the definitions for ``Extended-term loan 
modification,'' ``Maximum allowable interest rate,'' ``Mortgage payment 
to income ratio,'' ``Mortgage recovery advance,'' and ``Total debt to 
income ratio'' as a result of this new section language.

Voluntary Liquidation (Sec.  3555.305)

    The liquidation section under the proposed rule (previously Sec.  
3555.305) has been divided into two sections--voluntary liquidation 
(Sec.  3555.305) and liquidation (Sec.  3555.306). The new Sec.  
3555.305 expands upon and clarifies the eligibility requirements for 
and methods of voluntary liquidation.
    One respondent believed the wording in proposed Sec.  3555.305 (c) 
regarding lump-sum payments in order to reinstate accelerated accounts 
would preclude the lender's ability to utilize loss mitigation 
alternatives. Rural Development removed this wording to more clearly 
reflect the lender's ability to utilize loss mitigation alternatives.
    One respondent suggested that proposed Sec.  3555.305(e) be changed 
to allow for alternative methods of voluntary liquidation when 
acceptable to Rural Development and documented by the lender. This 
suggestion is adopted in order to provide Rural Development and the 
lender with more flexibility and is included as Sec.  3555.305(e).
    One respondent noted that there are too many borrower situations 
and servicing alternatives under this section for all to be included in 
the regulations. Rural Development agrees, and the regulation has been 
changed so lenders will continue requesting concurrence from Rural 
Development, unless a waiver is provided in accordance with Sec.  
3555.301(h), to undertake the listed voluntary liquidation actions and 
other methods documented to result in savings to the Government.

Liquidation (Sec.  3555.306)

    Several respondents expressed concern about Rural Development's 
proposal to eliminate the submission of property disposition plans to 
Rural Development for concurrence prior to marketing real estate owned 
(REO) property. Some suggested that failure to obtain Agency 
concurrence could increase loss claim exposure to Rural Development or 
result in exorbitant selling fees. Rural Development agrees, and the 
regulation has been changed accordingly. Lenders will continue 
submitting property disposition plans to Rural Development for 
concurrence. As discussed above, Rural Development may provide a 
written waiver of this requirement to the lender, on a case-by-case 
basis, if the lender demonstrates that it no longer needs the 
oversight. In such cases, the lender is still required to prepare and 
maintain a disposition plan on each acquired property, and this plan 
must be available for Agency review upon request for monitoring lender 
performance.

Assistance in Natural Disasters (Sec.  3555.307)

    A new section has been added to explain agency policy during 
natural disasters. Servicers will use their general procedures to 
service affected borrower accounts, minimize delinquency, and avoid 
foreclosure. Servicers will inspect security property and service the 
account based on whether the property can be rebuilt, the status of the 
mortgage, amount of insurance proceeds, and the time needed to repair 
or reconstruct the property.

Loan Guarantee Limits (Sec.  3555.351)

    One respondent requested a clear explanation and calculation 
breakdown on guaranteed loan limits stating that this information is 
critical in order to streamline and submit correct loss claim 
documentation. This section and the calculation of the loss payment 
section (Sec.  3555.352) have been rewritten for clarity and 
administrative guidance about loss claim submissions is provided in the 
handbook.
    Subject to the loan guarantee limits, the loss claim payment is the 
difference between the total indebtedness on the loan and the net 
recovery value. The total indebtedness includes the unpaid principal 
balance, accrued interest from the last day of borrower payment to the 
settlement date, any interest on the unsatisfied principal balance 
which accrued within 90 days from the settlement date, principal and 
interest for protective advances, and reasonable and customary 
liquidation costs such as attorney fees and foreclosure costs.

Net Recovery Value (Sec.  3555.353)

    One respondent expressed concern about Rural Development's current 
acquisition resale factor in calculating net recovery value. The 
respondent stated the factor is inadequate to cover all marketing 
expenses incurred and suggested Rural Development consider reasonable 
allowances to arrive at the actual net recovery value similar to HUD. 
The acquisition resale factor is only used when the lender still has 
ownership of the REO property at the time of filing a loss claim for 
payment. The disposition cost factor is reviewed by Rural Development 
and adjusted as warranted on an area basis, but not on a case-by-case 
basis. Rural Development believes that the current factor is adequate 
to cover all marketing expenses incurred, and no change is made on this 
issue.

Loss Claim Procedures (Sec.  3555.354)

    Several respondents commented on the requirements established 
regarding REO property. Several respondents commented that 90 days from 
the foreclosure date or the end of any applicable redemption period is 
insufficient to market and sell foreclosed property. Others requested 
guidance on filing claims. Rural Development agrees that, in many 
cases, 90 days will be insufficient. After further review and 
consideration of different economic and market conditions, the 
regulation has been amended so the lender must notify Rural Development 
if the property has not been sold within 9 months from the foreclosure 
date or applicable redemption period. The 9-month period should prove 
sufficient to market and sell foreclosed property under most economic 
and market conditions. Administrative procedures relative to the 
disposition of REO and filing claims are provided in the handbook.
    One respondent requested the regulation provide evaluation criteria 
required to process a loss claim without a deficiency judgment. Section 
3555.355 lists typical circumstances in which claims would be reduced 
or denied. Further processing guidance on this issue is provided in the 
handbook.
    The period of time in which loss claims may be submitted after the 
property has been sold was increased in the final rule from 30 to 45 
days in order to provide lenders more flexibility in submitting the 
claims. Late claims

[[Page 73941]]

submitted beyond this period of time may be rejected by Rural 
Development.

Future Recovery (Sec.  3555.356)

    Three respondents discussed the calculation and administration of 
future recovery. One suggested that Rural Development should reimburse 
the lender when the sale results in a loss and two respondents 
requested clarification on the administrative process of calculating 
the amount of future recovery. Rural Development believes that since 
the lender controls the sale process, reimbursing the lender for a loss 
could encourage the lender to accept less than a fair price at the 
sale. Reimbursing Rural Development for a share of future recovery is 
justified since Rural Development's claim payment was calculated based 
on a liquidation appraisal and not on an actual sale. Guidance 
regarding the future recovery process is provided in the handbook. No 
change is made in the final rule.

List of Subjects

7 CFR Part 1980

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

7 CFR Part 3555

    Administrative practice and procedure, Conflict of interests, 
Credit, Environmental impact statements, Equal credit opportunity, Fair 
housing, Flood insurance, Home improvement, Housing, Loan programs-
Housing and community development, Low and moderate income housing, 
Manufactured homes, Mortgage insurance, Mortgages, Rural areas, 
Subsidies.
    Therefore, Chapters XVIII and XXXV, Title 7, Code of Federal 
Regulations are amended as follows:

CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE 
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT 
OF AGRICULTURE

PART 1980--GENERAL

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

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

Subpart D--[Removed and Reserved]

0
2. Subpart D of part 1980 is removed and reserved.

CHAPTER XXXV--RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE

PART 3555--GUARANTEED RURAL HOUSING PROGRAM

0
3. Part 3555, consisting of subparts A through H, is added to read as 
follows:
Subpart A--General
Sec.
3555.1 Applicability.
3555.2 Purpose.
3555.3 Civil rights.
3555.4 Mediation and appeals.
3555.5 Environmental requirements.
3555.6 State and local law.
3555.7 Exception authority.
3555.8 Conflict of interest.
3555.9 Enforcement.
3555.10 Definitions and abbreviations.
3555.11-3555.49 [Reserved]
3555.50 OMB control number.
Subpart B--Lender Participation
3555.51 Lender eligibility.
3555.52 Lender approval.
3555.53 Contracting for loan origination.
3555.54 Sale of loans to approved lenders.
3555.55-3555.99 [Reserved]
3555.100 OMB control number.
Subpart C--Loan Requirements
3555.101 Loan purposes.
3555.102 Loan restrictions.
3555.103 Maximum loan amount.
3555.104 Loan terms.
3555.105 Combination construction and permanent loans.
3555.106 [Reserved]
3555.107 Application for and issuance of the loan guarantee.
3555.108 Full faith and credit.
3555.109-3555.149 [Reserved]
3555.150 OMB control number.
Subpart D--Underwriting the Applicant.
3555.151 Eligibility requirements.
3555.152 Calculation of income and assets.
3555.153-3555.199 [Reserved]
3555.200 OMB control number.
Subpart E--Underwriting the Property
3555.201 Site requirements.
3555.202 Dwelling requirements.
3555.203 Ownership requirements.
3555.204 Security requirements.
3555.205 Special requirements for condominiums.
3555.206 Special requirements for community land trusts.
3555.207 Special requirements for Planned Unit Developments (PUDs).
3555.208 Special requirements for manufactured homes.
3555.209 Rural Energy Plus loans.
3555.210-3555.249 [Reserved]
3555.250 OMB control number.
Subpart F--Servicing Performing Loans
3555.251 Servicing responsibility.
3555.252 Required servicing actions.
3555.253 Late payment charges.
3555.254 Final payments.
3555.255 Borrower actions requiring lender approval.
3555.256 Transfer and assumptions.
3555.257 Unauthorized assistance.
3555.258-3555.299 [Reserved]
3555.300 OMB control number
Subpart G--Servicing Non-Performing Loans
3555.301 General servicing techniques.
3555.302 Protective advances.
3555.303 Traditional servicing options.
3555.304 Special servicing options.
3555.305 Voluntary liquidation.
3555.306 Liquidation.
3555.307 Assistance in natural disasters.
3555.308-3555.349 [Reserved]
3555.350 OMB control number.
Subpart H--Collecting on the Guarantee.
3555.351 Loan guarantee limits.
3555.352 Loss covered by the guarantee.
3555.353 Net recovery value.
3554.354 Loss claim procedures.
3555.355 Reducing or denying the claim.
3555.356 Future recovery.
3555.357-3555.399 [Reserved]
3555.400 OMB control number.

    Authority:  5 U.S.C. 301; 42 U.S.C. 1471 et seq.

Subpart A--General


Sec.  3555.1  Applicability.

    This part sets forth policies for the Single Family Housing 
Guaranteed Loan Program (SFHGLP) administered by USDA Rural 
Development. It addresses the requirements of section 502(h) of the 
Housing Act of 1949, as amended, and includes policies regarding 
originating, servicing, holding and liquidating SFHGLP loans. Any 
provision regarding the expenditure of funds under this part is 
contingent upon the availability of funds.


Sec.  3555.2  Purpose.

    (a) General. The purpose of the SFHGLP is to provide low- and 
moderate-income persons who will live in rural areas with an 
opportunity to own decent, safe and sanitary dwellings and related 
facilities. The SFHGLP offers applicants without sufficient resources 
to provide the necessary housing on their own account, and unable to 
secure the credit necessary for such housing from other sources upon 
terms and conditions, which the applicant can reasonably be expected to 
fulfill without the guarantee, an opportunity to acquire, build, 
rehabilitate, improve, or relocate dwellings in rural areas.
    (b) Demonstration programs. Rural Development may authorize limited 
demonstration programs as allowed by law. The objective of these 
demonstration programs will be to test new approaches to offering 
housing under the statutory authority granted to the Secretary. 
Therefore, such demonstration programs may not be

[[Page 73942]]

consistent with all of the provisions contained in this part. However, 
any statutory SFHGLP requirements will remain in effect.


Sec.  3555.3  Civil rights.

    Rural Development, lenders, and their agents must administer the 
program fairly, and in accordance with both the letter and the spirit 
of all equal opportunity, equal credit opportunity and fair housing 
legislation, and applicable executive orders. Loan guarantees, 
services, and benefits provided under this part shall not be denied to 
any person based on race, color, national origin, sex, religion, 
marital status, familial status, age (provided the applicant has the 
capacity to enter into a binding contract), handicap, receipt of income 
from public assistance, sexual orientation, or because the applicant 
has, in good faith, exercised any right under the Consumer Credit 
Protection Act (15 U.S.C. 1601 et seq.). All activities under this part 
shall be accomplished in accordance with the Fair Housing Act (42 
U.S.C. 3601-3620), the Equal Credit Opportunity Act (15 U.S.C. 1691), 
and Executive Order 11063 as amended by Executive Order 12259, as 
applicable. Rural Development's civil rights compliance requirements 
are provided in 7 CFR part 1901, subpart E.


Sec.  3555.4  Mediation and appeals.

    Whenever Rural Development makes a decision that will adversely 
affect a participant, the participant may proceed with alternative 
dispute resolution including mediation and a USDA National Appeals 
Division hearing in accordance with 7 CFR parts 1 and 11. The 
participant also may request an informal review of the adverse decision 
made by Rural Development. Except when the adverse decision applies to 
a loss claim, the applicant or borrower and the lender may participate 
in the appeal process. Adverse decisions made by the lender cannot be 
appealed unless concurrence by Rural Development was required by this 
subpart and obtained by the lender.


Sec.  3555.5  Environmental requirements.

    (a) Policy. Rural Development will consider environmental quality, 
economic, social, and other relevant factors in program development and 
decision-making processes. Rural Development will take into account 
potential environmental impacts of proposed projects by working with 
applicants, other Federal agencies, American Indian tribes, State and 
local governments, and interested citizens and organizations in order 
to formulate actions that advance the program's goals in a manner that 
will protect environmental quality.
    (b) Regulatory references. Loan processing and servicing actions 
under this part will be completed in accordance with the requirements 
of part 1940, subpart G of this title and part 1924, subpart A of this 
title, which addresses lead-based paint requirements; and any other 
Agency regulations addressing environmental requirements for the 
SFHGLP.
    (c) Agency responsibilities. Rural Development is responsible for 
compliance with all applicable environmental regulations and statutes.
    (d) Lender and loan applicant responsibilities. (1) Lenders must 
use due diligence in regard to potential environmental hazards to 
ensure the property is decent, safe and sanitary and of sufficient 
value to adequately secure the loan. The level of due diligence review 
to determine potential environmental hazards must be equivalent to the 
standards established by Fannie Mae, Freddie Mac, FHA, or the VA.
    (2) Mortgage loan transactions will be subject to the requirements 
of the 1994 National Flood Insurance Reform Act to determine if the 
dwelling is located in a Special Flood Hazard Area (SFHA).
    (3) On an as needed basis, lenders and loan applicants will assist 
Rural Development in obtaining such information as Rural Development 
needs to complete its environmental review and to cooperate in the 
resolution of environmental problems.
    (4) Lenders will become familiar with Agency environmental 
requirements, so they can advise applicants and reduce the probability 
of unacceptable applications being submitted to Rural Development.
    (5) The lender must comply with Federally mandated flood insurance 
purchase requirements. Existing dwellings in a SFHA are not eligible 
under the SFHGLP unless flood insurance through the FEMA National Flood 
Insurance Program (NFIP) is available. The lender will require the 
borrower to obtain, and maintain for the term of the mortgage, flood 
insurance for any property located in a SFHA, listing the lender as a 
loss payee.
    (6) The borrower must obtain, and continuously maintain for the 
life of the mortgage, flood insurance on the security property in an 
amount sufficient to protect the property securing the guaranteed loan. 
Flood insurance policies must be issued under the NFIP, or by a 
licensed property and casualty insurance company authorized to 
participate in NFIP's ``Write Your Own'' program.
    (7) Rural Development, will not guarantee loans for new or proposed 
homes in an SFHA unless the lender obtains a Letter of Map Amendment 
(LOMA) that removes the property form the SFHA or Letter of Map 
Revision (LOMR) that removes the property from the SFHA or obtains a 
FEMA elevation certificate that shows that the lowest habitable floor 
(including basement) of the dwelling and all related building 
improvements is built at or above the 100 year flood plain elevation in 
compliance with the NFIP.


Sec.  3555.6  State and local law.

    Lenders will comply with applicable State and local laws and 
regulations, including the laws of American Indian tribes. Supplemental 
guidance will be issued in the case of any conflict with or significant 
differences from provisions of this part.


Sec.  3555.7  Exception authority.

    The Administrator of the Agency, or a designee, may make an 
exception to any requirement or provision of this part or to address 
any omissions in this part, when the Administrator, or designee, 
determines that application of the requirement or failure to take 
action would adversely affect the Government's interest. Any exception 
must be consistent with the authorizing statute and other applicable 
laws.


Sec.  3555.8  Conflict of interest.

    (a) Applicant or borrower responsibility. The applicant or borrower 
must disclose to the lender any prohibited relationship or association 
with any Rural Development employee, and the lender must disclose that 
information to Rural Development.
    (b) Lender responsibility. The lender must disclose to Rural 
Development any prohibited relationship or association it, or any of 
its employees, has with any Rural Development employee.
    (c) Prohibited relationships and associations. Prohibited 
relationships and associations include the following:
    (1) Immediate family members, including parents and children, 
whether related by blood or marriage;
    (2) Close relatives, including grandmother, grandfather, aunt, 
uncle, sister, brother, niece, nephew, granddaughter, grandson, or 
first cousin, whether related by blood or marriage;
    (3) Any household residents;
    (4) Immediate working relationships, including coworkers in the 
same office, subordinates, and immediate supervisors; and

[[Page 73943]]

    (5) Close business associations, including business partnerships, 
joint ventures, or closely held corporations.
    (d) Result of disclosure. Disclosure of prohibited relationships 
and associations under this section will not necessarily result in 
applicant, borrower or lender ineligibility. Disclosures may result in 
reassignment with regard to the loan guarantee in question so that no 
prohibited relationships or associations exist between the Rural 
Development employees responsible for loan guarantee transactions and 
lenders, borrowers, or applicants.


Sec.  3555.9  Enforcement.

    Rural Development will take such actions as are appropriate and 
necessary to enforce the provisions of these regulations. Such actions 
will include, but not be limited to, reduction of the loss claim 
payment; termination of a lender's or servicer's participation in the 
SFHGLP; suspension and debarment of participation in this or other 
Federal programs; and, any other appropriate administrative, civil, or 
criminal actions as allowed by law. Rural Development may assess civil 
monetary penalties pursuant to Section 543 of the Housing Act of 1949, 
42 U.S.C. 1409s(b).


Sec.  3555.10  Definitions and abbreviations.

    The definitions and abbreviations in this section apply to this 
part.
    Acceleration. Demand for immediate repayment of the entire balance 
of a debt if the covenants in the promissory note, assumption 
agreement, or security instruments are breached.
    Adjusted annual income. Income from all household members who live 
or propose to live in the dwelling as their primary residence for all 
or part of the ensuing 12 months. Adjusted annual income is used to 
determine whether an applicant is income-eligible for a guaranteed 
loan, or interest assistance, if applicable. Adjusted annual income 
provides for deductions to account for varying household circumstances 
and expenses. See Sec.  3555.152(c) for a complete description of 
adjusted annual income.
    Agency. The Rural Housing Service of the U.S. Department of 
Agriculture, Rural Development.
    Agency employee. Any employee of the Rural Housing Service, or any 
employee of the Rural Development mission area who carries out SFHGLP 
functions.
    Alien. See ``Qualified alien.''
    Amortization. A gradual reduction of the mortgage debt through 
equal monthly principal and interest payments sufficient to fully repay 
the unpaid principal balance over the mortgage term.
    Amortized payment. Equal monthly payments under a fully amortized 
mortgage loan that provides for the scheduled payment of interest and 
principal over the term of the loan.
    Annual fee. A periodic amount that is based on the average annual 
scheduled unpaid principal balance of the loan and is paid by the 
servicing lender to Rural Development on an annual basis for issuance 
of a Loan Note Guarantee. The fee may be passed on to the borrower and 
included in the monthly mortgage payment of a borrower and is used when 
calculating payment ratios.
    Annual income. The income of all household members calculated 
according to Sec.  3555.152(b). Annual income is used to determine 
adjusted annual income in Sec.  3555.152(c) for program eligibility 
purposes.
    Applicant. An individual applying to a lender for a guaranteed 
loan.
    Area median income. The median income in a specific locality, 
typically a county or Metropolitan Statistical Area (MSA), as 
determined by the Department of Housing and Urban Development.
    Assumption. A method of selling real estate wherein the property 
purchaser accepts the liability for payment of an existing mortgage.
    Borrower. An individual obligated to repay the loan guaranteed 
under the Guaranteed Rural Housing loan program.
    Combination construction and permanent loan. A guaranteed loan on 
which the Rural Development guarantee becomes effective at the time 
construction of an eligible single family housing project begins.
    Community land trust. A private nonprofit community housing 
development organization that is established to acquire parcels of 
land, held in perpetuity, primarily for conveyance under long-term 
ground leases. See section 502(a)(3)(B) of the Housing Act of 1949, 42 
U.S.C. 1472(a)(3)(B), as amended.
    Conditional commitment. Rural Development's agreement that a 
proposed loan will be guaranteed if all conditions and requirements 
established by Rural Development are met.
    Condominium project. A real estate project in which each owner has 
title to a unit in a building, an undivided interest in the common 
areas of the project and sometimes the exclusive use of certain limited 
common areas. See Sec.  526(d) of the Housing Act of 1949, as amended.
    Debarment. An action taken under 2 CFR part 180 or 417 to exclude a 
person or entity from participating in Federal programs.
    Disability. See ``Person with a disability.''
    Dwelling. A house, manufactured home, or condominium unit, and 
related facilities, such as a garage or storage shed, used or to be 
used as the borrower's principal residence.
    Elderly family. An elderly family consists of one of the following:
    (1) A person who is the head, spouse, or sole member of a household 
and who is 62 years of age or older, or who is disabled, and is an 
applicant or borrower;
    (2) Two or more persons who are living together, at least one of 
whom is age 62 or older, or disabled, and who is an applicant or 
borrower; or
    (3) Where the deceased borrower or spouse in a household was at 
least 62 years old or disabled, the surviving household member shall 
continue to be classified as an elderly household for the purpose of 
determining adjusted income, even though the surviving members may not 
meet the definition of an elderly family on their own, provided:
    (i) They occupied the dwelling with the deceased household member 
at the time of the death;
    (ii) If one of the surviving household members is the spouse of the 
deceased household member, the surviving household shall be classified 
as an elderly family only until the remarriage or death of the 
surviving spouse; and
    (iii) At the time of the death of the deceased household member the 
dwelling was financed with a Guaranteed Rural Housing loan.
    Escrow account. A trust account that is established by the lender 
or its servicing agent to hold funds collected from the borrower and 
allocated for the payment of real estate taxes, special assessments, 
hazard or flood insurance premiums, and other similar expenses.
    Existing dwelling. A dwelling that does not meet the definition of 
``new dwelling''.
    Extended-term loan modification. A loan modification authorized 
under Sec.  3555.304 of this part, in which the lender reduces the 
interest rate to a level at or below the maximum allowable interest 
rate and then extends the repayment term up to a maximum of 40 years 
from the date of loan modification, but only as long as is necessary to 
achieve the targeted mortgage payment to income ratio.
    Fannie Mae. A private, shareholder-owned company with a charter 
from Congress to support the housing finance system, formerly 
officially known as the Federal National Mortgage Association.

[[Page 73944]]

    FEMA. The United States Department of Homeland Security, Federal 
Emergency Management Agency.
    FHA. The Federal Housing Administration of the United States 
Department of Housing and Urban Development.
    FHLB. Federal Home Loan Bank.
    First-time homebuyer. Individuals who meet any one of the following 
three criteria are considered first-time homebuyers:
    (1) An individual who has had no ownership interest in a principal 
residence during the three-year period ending on the date of loan 
closing.
    (2) An individual who is a displaced homemaker and who, except for 
owning a home with a spouse, has had no ownership interest in a 
principal residence during the three-year period ending on the date of 
loan closing. Displaced homemakers include any individual who is:
    (i) An adult;
    (ii) Unemployed or underemployed;
    (iii) Experiencing difficulty in obtaining or upgrading employment; 
and
    (iv) In recent years has worked primarily without remuneration to 
care for the home and family, but has not worked full-time, full-year 
in the labor force.
    (3) An individual who is a single parent and who, except for owning 
a home with a spouse, has had no ownership interest in a principal 
residence during the three-year period ending on the date of loan 
closing. Single parents include any individual who is:
    (i) Unmarried or legally separated; and
    (ii) Has custody or joint custody of one or more children, or is 
pregnant.
    Forbearance agreement. An agreement between the lender and the 
borrower providing for temporary suspension of payments or a repayment 
plan that calls for periodic payments of less than the normal monthly 
payment, periodic payments at different intervals, etc. to bring the 
account current.
    Freddie Mac. A private, shareholder owned company with a charter 
from Congress to support the housing finance system, formerly 
officially known as the Federal Home Loan Mortgage Corporation.
    Funded buydown account. An escrow account funded by the lender, 
seller, or through a third party gift, from which monthly payments are 
released directly to the lender to reduce the amount of interest on a 
loan, thereby improving an applicant's repayment ability.
    Ginnie Mae. Government National Mortgage Association, a Government-
owned corporation within HUD.
    Household. All persons routinely living in the dwelling as 
principal residence, except for live-in aides, foster children, and 
foster adults.
    Housing Act of 1949. The Act which, in part, provides the authority 
for single family housing programs, codified at 42 U.S.C. 1471 et seq.
    HUD. The United States Department of Housing and Urban Development.
    Interest assistance. Agency assistance available to eligible 
borrowers that reduces the effective interest rate on the guaranteed 
loan. Interest assistance applied to borrowers whose loans were 
approved as a subsidized guaranteed loan between April 17, 1991, and 
September 30, 1991, and who entered into interest assistance and shared 
equity agreements at loan closing.
    IRS. The Internal Revenue Service of the United States Department 
of the Treasury.
    Leasehold estate. The right to use and occupy real estate for a 
stated term and under conditions which have been conveyed by a lease.
    Lender. The entity making, holding, or servicing a loan that is 
guaranteed under the provisions of this part.
    Live-in aide. A person who:
    (1) Lives with an elderly person or a person with a disability and
    (2) Is essential to that person's care and well-being, and
    (3) Is not obligated for the person's support, and
    (4) Would not be living in the unit except to provide the support 
services.
    Loan modification. A written agreement that permanently changes an 
original note term, such as the interest rate, monthly payment, and/or 
the principal balance due to capitalization of interest or advances.
    Low-income. An adjusted income that is greater than the 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 or Metropolitan Statistical 
Area where the property is or will be located.
    Manufactured home. A structure that is built on a permanent 
foundation according to Federally Manufactured Home Construction and 
Safety Standards established by HUD and found at 24 CFR part 3280.
    Market value. The value of the property as determined by a current 
appraisal made in accordance with the Uniform Standards of Professional 
Appraisal Practices.
    Maximum allowable interest rate. For purposes of Sec.  3555.304, 
the rate established by the Agency in a Federal Register notice 
describing how to calculate the maximum allowable interest rate. If the 
maximum allowable interest rate has not been established by notice in 
the Federal Register, the maximum allowable interest rate shall be 50 
basis points greater than the most recent Freddie Mac Weekly Primary 
Mortgage Market Survey (PMMS) rate for 30-year fixed-rate mortgages 
(U.S. average), rounded to the nearest one-eighth of one percent 
(0.125%), as of the date the loan modification is executed. Weekly PMMS 
rates are published on the Freddie Mac Web site, and the Federal 
Reserve Board includes the average 30-year PMMS rate in the list of 
Selected Interest Rates that it publishes weekly in its Statistical 
Release H.15.
    Median income. The area median income, adjusted for family size, as 
established by HUD.
    Moderate income. The greater of:
    (1) 115 percent of the U.S. median family income,
    (2) The average of the state-wide and state non-metro median family 
income,
    (3) 115/80ths of the area low-income limit adjusted for household 
size for the county or MSA where the property is, or will be, located.
    Modest housing. For purposes of this part, ``modest housing'' is 
the housing that a low- or moderate-income borrower can afford based on 
their repayment ability.
    Mortgage. A form of security instrument or consensual lien on real 
property including a real estate mortgage and a deed of trust.
    Mortgage credit certificate. A certificate issued by an authorized 
State or local housing finance agency that documents a Federal income 
tax credit awarded to a first-time homebuyer and/or low- or moderate-
income homebuyer. The Federal income tax credit reduces the applicant's 
Federal income tax liability, which improves his or her repayment 
ability.
    Mortgage payment to income ratio. As used in Sec.  3555.304, this 
ratio is the monthly mortgage payment (principal, interest, taxes, and 
insurance) divided by the borrower's gross monthly income.
    Mortgage recovery advance. A mortgage recovery advance is funds 
advanced by the lender on behalf of a borrower to satisfy the 
borrower's arrearage, pay legal fees and foreclosure costs related to a 
cancelled foreclosure action, and reduce principal. Upon request, RHS 
will reimburse the lender for eligible mortgage recovery advances under 
Sec.  3555.304.
    MSA (Metropolitan Statistical Area). A geographic entity defined by 
the United States Office of Management and Budget.

[[Page 73945]]

    Net family assets. The value of assets available to a household, as 
contained in Sec.  3555.152(d).
    Net recovery value. The amount available to apply to the 
outstanding unpaid loan balance after considering the value of the 
security property and other amounts recovered, and deducting the costs 
associated with liquidation, acquisition and sale of the property. Net 
recovery value is calculated differently depending on the type of 
disposition, as contained in Sec.  3555.353.
    New dwelling. A dwelling that is to be built is under construction, 
or a dwelling that is less than one year old and has never been 
occupied. A manufactured home is considered a new unit if the 
manufacturer's date is within 12 months of the purchase contract and 
the unit has never been occupied or installed at any other location as 
otherwise provided by Rural Development.
    Participant. For the purpose of appeals, a participant is any 
individual or entity that has applied for, or whose right to 
participate in or receive a payment, loan guarantee, or other benefit, 
is affected by an Agency decision in accordance with 7 CFR 11.1.
    Person with a disability. Any person who has a physical or mental 
impairment that substantially limits one or more major life activities, 
including functions such as caring for one's self, performing manual 
tasks, walking, seeing, hearing, speaking, breathing, learning and 
working, has a record of such an impairment, or is regarded as having 
such an impairment.
    Planned Unit Development. For the purpose of this definition, a 
condominium is not a Planned Unit Development (PUD). A PUD is a 
development that has all of the following characteristics:
    (1) The individual unit owners own a parcel of land improved with a 
dwelling. This ownership is not in common with other unit owners;
    (2) The development is administered by a homeowners association 
that owns and is obligated to maintain property and improvements within 
the development (for example, greenbelts, recreation facilities and 
parking areas) for the common use and benefit of the unit owners; and
    (3) The unit owners have an automatic, non-severable interest in 
the homeowners association and pay mandatory assessments.
    Pre-foreclosure sale. A sale of property in which the lender and 
borrower agree to accept the proceeds of the sale to satisfy a 
defaulted mortgage, even though this may be less than the amount owed 
on the mortgage, in order to avoid foreclosing on the property.
    Primary residence. See ``Principal residence.''
    Principal residence. The home domicile physically occupied by the 
owner for the major portion of the year and the address of record for 
such activities as Federal income tax reporting, voter registration, 
occupational licensing, etc.
    Prior lien. A lien against the security property that is superior 
in right to the lender's debt instrument.
    Qualified alien. See the definition of the term under Section 401 
of the Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 (PRWORA) (8 U.S.C. 1641).
    Real estate taxes. Taxes and assessments estimated to be due and 
payable on the property.
    REO (Real Estate Owned). Property that formerly served as security 
for a guaranteed loan and for which the lender holds title.
    Repayment income. Used to determine whether an applicant has the 
ability to make monthly loan payments. Repayment income may include 
amounts excluded for the purpose of determining adjusted annual income. 
See Sec.  3555.152(a) for a complete description of repayment income.
    Rural area. The definition of ``rural area'' is found in section 
520 of the Housing Act of 1949, as amended.
    Rural Development. A mission area within USDA that includes the 
Rural Housing Service, the Rural Utilities Service, and the Rural 
Business-Cooperative Service.
    Scheduled payment. The monthly installment on a promissory note, as 
modified by an interest assistance agreement or forbearance agreement, 
plus escrow payments.
    Secured loan. A loan that is collateralized by property so that in 
the event of a default on the loan, the property may be sold to pay 
down the debt.
    Security instrument. The mortgage, or deed of trust, that secures 
the promissory note or assumption agreement.
    Security property. All the real property that serves as collateral 
for a guaranteed loan.
    Settlement date. The settlement date, for the purpose of loss 
calculation, is the later of the following:
    (1) Actual foreclosure date;
    (2) The closing date, if sold to a third party at the foreclosure 
sale;
    (3) The date the borrower sells the property to a third party in 
order to avoid or cure a default situation, with prior approval of the 
lender; and
    (4) When title is acquired to the security following the expiration 
of any state-required redemption or confirmation period.
    SFHGLP. Single Family Housing Guaranteed Loan Program. The SFHGLP 
guarantees loans under section 502 of the Housing Act of 1949. Under 
the guarantee, the holder of the loan note may be reimbursed by Rural 
Development for all or part of a loss incurred if a borrower defaults 
on a loan.
    Short sale. A type of voluntary liquidation (also referred to as a 
preforeclosure sale or short payoff) where a borrower and the lender 
who holds the mortgage on the property agree to sell the property at 
fair market value, but for less than the current outstanding debt 
(including any missing payments, late fees, penalties, and advances for 
taxes and the like).
    Supplemental loan. A guaranteed loan made in conjunction with a 
transfer and assumption to provide funds to complete the transaction.
    Suspension. An action taken under 2 CFR parts 180 or 417 to exclude 
a person or entity from participation in Federal programs for a 
temporary period, pending completion of an investigation of wrongdoing.
    Total debt to income ratio. Total debt to income ratio is defined 
as the borrower's monthly mortgage payment plus all recurring monthly 
debt divided by the borrower's gross monthly income.
    Unauthorized assistance. Any guaranteed loan or interest assistance 
for which there was no regulatory or statutory authorization, or for 
which the borrower was not eligible.
    United States citizen. An individual who resides as a citizen in 
any of the 50 States, the District of Columbia, the Commonwealth of 
Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, the 
Commonwealth of the Northern Marianas, the Federated States of 
Micronesia, the Republic of Palau, or the Republic of the Marshall 
Islands.
    USDA. The United States Department of Agriculture.
    U.S. non-citizen national. A person born in American Samoa or 
Swains Island on or after the date the U.S. acquired American Samoa or 
Swains Island, or a person whose parents are U.S. non-citizen 
nationals.
    VA. United States Department of Veterans Affairs.
    Veterans' preference. A preference in loan processing extended to a 
SFHGLP loan applicant who served on active duty and has been discharged 
or released from the active forces on conditions other than 
dishonorable from

[[Page 73946]]

the United States Army, Navy, Air Force, Marine Corps, or Coast Guard. 
The preference applies to the service person, or the family of a 
deceased serviceperson who died in service before the termination of 
such war or such period or era. The applicable timeframes are:
    (1) During the period of April 6, 1917, through March 31, 1921;
    (2) During the period of December 7, 1941, through December 31, 
1946;
    (3) During the period of June 27, 1950, through January 31, 1955;
    (4) For a period of more than 180 days, any part of which occurred 
after January 31, 1955, but on or before May 7, 1975;
    (5) During the period beginning August 2, 1990, and ending January 
2, 1992, provided, of course, that the veteran is otherwise eligible; 
or
    (6) During any other period as prescribed by Presidential 
proclamation or law.


Sec. Sec.  3555.11-3555.49  [Reserved]


Sec.  3555.50  OMB control number.

    The report and recordkeeping requirements contained in this subpart 
have been approved by the Office of Management and Budget and have been 
assigned OMB control number 0575-0179.

Subpart B--Lender Participation


Sec.  3555.51  Lender eligibility.

    A lender must meet the requirements described in this section to be 
approved for participation in the SFHGLP.
    (a) Ability to underwrite and service loans. The lender must have a 
demonstrated ability to underwrite and service single-family home 
loans. A lender will be considered to have such a demonstrated ability 
if it qualifies as one of the following:
    (1) A State Housing Agency;
    (2) A lender approved as a supervised or nonsupervised mortgagee by 
HUD with direct endorsement authority for submission of applications 
for Federal Housing Mortgage Insurance;
    (3) A supervised or nonsupervised mortgagee with authority to close 
VA-guaranteed loans on the automatic basis;
    (4) A lender approved by Fannie Mae for single-family loans;
    (5) A lender approved by Freddie Mac for single-family loans;
    (6) A Farm Credit System institution that provides documentation of 
its ability to underwrite and service single-family loans. Lenders who 
are a Farm Credit System lender with direct lending authority meet 
demonstrated ability;
    (7) A lender participating in other Rural Development or Farm 
Service Agency guaranteed loan programs that provide documentation of 
its ability to underwrite and service single family loans. 
Documentation criteria for other Rural Development or Farm Service 
Agency guarantee loan programs require an active lender agreement; or
    (8) A Federally supervised lender that provides documentation of 
its ability to originate, underwrite and service single-family loans. 
Acceptable sources of supervision include:
    (i) Being a member of the Federal Reserve System;
    (ii) The Federal Deposit Insurance Corporation (FDIC);
    (iii) The National Credit Union Administration (NCUA);
    (iv) The Office of Thrift Supervision (OTS);
    (v) The Office of the Comptroller of the Currency (OCC).
    (vi) The Federal Housing Finance Board regulating lenders within 
the Home Loan Bank FHLB system.
    (9) A lender may demonstrate its ability to originate and 
underwrite loans by submitting appropriate documentation, examples of 
which include, but are not limited to:
    (i) A summary of residential mortgage lending activity.
    (ii) Written criteria outlining the lender's policy and procedures 
for originating, underwriting and closing residential mortgage loans.
    (iii) Evidence of an experienced loan underwriter on staff.
    (iv) Certification the lender will contract with an Agency-approved 
lender meeting the criteria to participate in the program as a 
servicer.
    (10) A lender may demonstrate its ability to service loans by 
submitting appropriate documentation, examples of which include, but 
are not limited to:
    (i) Evidence of a written plan when contracting for escrow 
services.
    (ii) Evidence the lender has serviced single-family residential 
mortgage loans in the year prior to request lender approval to 
participate in the SFHGLP.
    (b) SFHGLP participation requirements. Lenders and their agents 
must comply with the following requirements:
    (1) Keep up to date, and comply with, all Agency regulations and 
handbooks, including all amendments and revisions of program 
requirements and policies. Lenders who originate a minimal number 
loans, as determined by the Agency, in a 24 month time frame may be 
required to take updated training to ensure a lender's continued 
knowledge of the program;
    (2) Regularly check Rural Development's Web site for new issuances 
related to the program;
    (3) Underwrite loans according to Rural Development regulations and 
process and approve loans in accordance with program instructions;
    (4) Review loan applications for accuracy and completeness,
    (5) Ensure that applicant income limits are not exceeded;
    (6) Ensure that borrowers have adequate loan repayment ability and 
acceptable credit histories;
    (7) Ensure that loss claims include only supportable costs;
    (8) Cooperate fully with Agency reporting and monitoring 
requirements;
    (9) Comply with limitations on loan purposes, loan limitations, 
interest rates, and loan terms;
    (10) Inform Rural Development immediately after the sale, transfer, 
or change of servicers of any Agency guaranteed loan;
    (11) Maintain reasonable and prudent business practices consistent 
with generally accepted mortgage industry standards, such as 
maintaining fidelity bonding;
    (12) Remain responsible for servicing even if servicing has been 
contracted to a third party;
    (13) Use Rural Development, HUD, Fannie Mae, or Freddie Mac forms, 
unless otherwise approved by Rural Development;
    (14) Maintain eligibility under paragraph (a) of this section;
    (15) Notify Rural Development if there are any material changes in 
organization or practices;
    (16) Be neither debarred nor suspended from participation in 
Federal programs, not debarred, suspended or sanctioned under state 
licensing and certification laws and regulation;
    (17) Notify Rural Development in the event of its bankruptcy or 
insolvency;
    (18) Remain free from default and delinquency on any debt owed to 
the Federal government;
    (19) Allow Rural Development or its representative access to the 
lender's records, including, but not limited to, records necessary for 
on-site and desk reviews of the lender's operation and the operations 
of any of its agents to verify compliance with Agency regulations and 
guidelines;
    (20) Maintain adequate operational quality control and reporting 
procedures to prevent mortgage fraud;
    (21) Maintain complete loan files with all required documentation 
that is accessible by the Agency upon request for review; and
    (22) Execute a lender's agreement provided by Rural Development.


Sec.  3555.52  Lender approval.

    (a) Initial approval. The lender must apply for and receive 
approval from

[[Page 73947]]

Rural Development to participate in the SFHGLP. Application forms are 
available from Rural Development.
    (b) Conditions of approval. The lender must provide evidence to 
support their ability to originate, underwrite and/or service SFHGLP 
loans as outlined in Sec.  3555.51(a), including evidence of the 
lender's internal loan criteria and quality control. New lenders will 
be subject to mandatory training prior to lender approval in accordance 
with Agency procedures.
    (c) Termination of approval. Lender approval may be terminated in 
any of the following situations:
    (1) Lapse of any eligibility requirement. In the event that a 
lender fails to meet any of the requirements described in Sec.  
3555.51, the lender must notify Rural Development immediately. Rural 
Development may terminate the lender's approval upon written notice and 
in accordance with the lender's agreement. The Agency may take other 
appropriate corrective action due to non-compliance with any of the 
requirements in this part and the lender's agreement. A lender whose 
approval has been terminated must sell any SFHGLP loans it holds to an 
approved lender immediately, and in no event later than 6 months, after 
termination of approval.
    (2) Voluntary withdrawal. The lender may choose to end 
participation in the SFHGLP at any time. If the withdrawing lender has 
originated SFHGLP loans and obtained conditional commitments but has 
not closed the loans, or is holding or servicing SFHGLP loans, the 
lender must make arrangements prior to withdrawing for the transfer of 
such loans to lenders approved to participate in the SFHGLP.


Sec.  3555.53  Contracting for loan origination.

    Lenders may contract with mortgage brokers, non-approved lenders, 
or other entities for loan origination services, closing services, or 
both, provided the loan is transferred immediately after closing to an 
Agency approved lender to which the guarantee will be issued. The 
approved lender is responsible for ensuring that the loan is properly 
underwritten, obtaining the conditional commitment, ensuring that the 
loan is properly closed, and ensuring that all closing costs, 
financing, and settlement fees meet Agency program requirements.


Sec.  3555.54  Sale of loans to approved lenders.

    Lenders may sell SFHGLP loans only to other Agency-approved 
lenders, Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. In 
such a sale, the purchasing lender acquires all rights of the selling 
lender under the Loan Note Guarantee, and assumes all of the selling 
lender's obligations contained in any note, security instrument, or 
Loan Note Guarantee in connection with the loan purchased. The 
purchasing lender may be subject to any defenses, claims, or offsets 
that Rural Development would have had against the selling lender if the 
selling lender had continued to hold the loan. The lender must notify 
Rural Development immediately upon the sale or transfer of servicing of 
a SFHGLP loan.


Sec. Sec.  3555.55--3555.99  [Reserved]


Sec.  3555.  100 OMB control number.

    The report and recordkeeping requirements contained in this subpart 
have been approved by the Office of Management and Budget and have been 
assigned OMB control number 0575-0179.

Subpart C--Loan Requirements


Sec.  3555.101  Loan purposes.

    Loan funds must be used to acquire a new or existing dwelling to be 
used by the applicant as a principal residence.
    (a) Eligible purposes. Loan funds may be used for:
    (1) The construction or purchase of a new dwelling;
    (2) The cost of acquisition of an existing dwelling;
    (3) The cost of repairs associated with the acquisition of an 
existing dwelling; or
    (4) Acquisition and relocation of an existing dwelling.
    (b) Eligible costs. Loan funds also may be used to pay for the 
following items associated with the acquisition of a dwelling:
    (1) Purchase and installation of essential household equipment in 
the dwelling such as wall-to-wall carpeting, ovens, ranges, 
refrigerators, washing machines, clothes dryers, heating and cooling 
equipment, and other similar items as long as the equipment is conveyed 
with the dwelling and such items are typically included in the purchase 
of similar dwellings in the area.
    (2) Purchase and installation of energy-saving measures.
    (3) Site preparation including grading, foundation, plantings, 
seeding or sodding, trees, walks, fences, and driveways to the home.
    (4) A supplemental loan to provide funds for seller equity or 
essential repairs when an existing guaranteed loan is assumed 
simultaneously.
    (5) Special design features or equipment when necessary because of 
a physical disability of the applicant or a member of the household.
    (6) Loan funds may be used to pay for reasonable and customary 
expenses related to obtaining the loan. Allowable loan expenses 
include:
    (i) Legal, architectural, and engineering fees;
    (ii) Title exam, title clearance and title insurance;
    (iii) Transfer taxes and recordation fees;
    (iv) Appraisal, property inspection, surveying, environmental, tax 
monitoring, and technical services;
    (v) Homeownership education.
    (vi) For low-income borrowers only, reasonable and customary loan 
discount points to reduce the note interest rate from the rate 
authorized in Sec.  3555.104(a).
    (vii) Reasonable and customary non-recurring closing costs 
associated with the mortgage transaction that do not exceed those 
charged other applicants by the lender for similar transactions such as 
FHA-insured or VA-guaranteed first mortgage loans. If the lender does 
not participate in such programs, the loan closing costs may not exceed 
those charged other applicants by the lender for a similar loan program 
that requires conventional mortgage insurance or guarantee. Allowable 
closing costs include the actual cost of credit reports, the loan 
origination fee, settlement fee, deposit verification fees, document 
preparation fees (if performed by a third party not controlled by the 
lender), and other reasonable and customary costs as determined by 
Rural Development. Payment of finder's fees or placement fees for the 
referral of an applicant to the lender is prohibited.
    (viii) Reasonable connection fees, assessments, or the pro rata 
installment costs for utilities such as water, sewer, electricity and 
gas for which the borrower is responsible.
    (ix) The prorated portion of real estate taxes that is due and 
payable on the property at the time of closing and to establish escrow 
accounts for real estate taxes, hazard and flood insurance premiums, 
and related costs.
    (x) The amount of the loan up-front guarantee fee required by Sec.  
3555.107(h).
    (xi) The cost of establishing a cushion in the mortgage escrow 
account for payment of the annual fee required by Sec.  3555.108(g), 
not to exceed 2 months.
    (xii) If the seller or other third party pays any of the costs 
described in this section, the amount of the costs paid by the seller 
or other third party may not be included in the loan amount to be 
guaranteed.
    (c) Combination construction and permanent loan. Loan funds may be

[[Page 73948]]

used and Rural Development will guarantee a ``combination construction 
and permanent loan'' as defined at Sec.  3555.10, during the term of 
construction and prior to the borrower occupying the property, subject 
to the conditions in Sec.  3555.105.
    (d) Refinancing. Refinancing is permitted only in the following 
situations:
    (1) The loan may be used for permanent financing when temporary 
financing to construct a new dwelling, or to purchase and improve an 
existing dwelling, is arranged as a part of the loan package.
    (2) In the case of loans for a site on which a dwelling is not 
constructed prior to issuance of the Loan Note Guarantee, refinancing 
is permitted if:
    (i) The site is free and clear of debt;
    (ii) The debt to be refinanced was incurred for the sole purpose of 
purchasing the site;
    (iii) The applicant is unable to acquire adequate housing without 
refinancing; and
    (iv) An appropriate dwelling will be constructed on the site.
    (3) The loan is a present Section 502 Direct or guaranteed loan, 
authorized under the Housing Act of 1949 subject to the following 
additional requirements:
    (i) The interest rate of the new loan must be fixed. The rate of 
the new loan must be at least 100 basis points below the original rate 
of the loan refinanced.
    (ii) The loan security must include the same property as the 
original loan and be owned and occupied by the borrowers as their 
principal residence.
    (iii) Existing borrowers seeking to refinance must have 
demonstrated their ability to meet payment demands by maintaining a 
current account for the 180 days prior to application.
    (iv) Borrowers may be added to or deleted from a refinance 
transaction. At least one of the borrowers (primary or co-borrower(s)) 
must remain to qualify as a refinance transaction. All applicants who 
will be a party to the note must meet eligibility requirements.
    (v) The maximum loan amount cannot exceed the balance of the loan 
being refinanced including accrued interest, the guarantee fee, and 
reasonable and customary closing costs. When a direct loan is 
refinanced, any recapture amount owed may be included in the loan 
amount or deferred as long as the recapture amount takes a subordinate 
lien position to the new SFHGLP loan. A discount on the recapture 
amount may be offered if the borrower does not defer recapture or 
includes the recapture amount in the new loan.
    (vi) Two options for refinancing can be offered. Lenders may offer 
a streamlined refinance for existing Section 502 Guaranteed loans, 
which does not require a new appraisal. Streamlined financing may not 
be available for existing Section 502 Direct loans. The lender will pay 
off the balance of the existing Section 502 Guaranteed loan. The new 
loan amount cannot include any closing costs or lender fees. The 
refinance up-front guarantee fee as established by the Agency can be 
included in the loan to be refinanced to the extent financing does not 
exceed the original loan amount. Lenders may offer non-streamlined 
refinancing for existing Section 502 Guaranteed or Direct loans, which 
requires a new and current market value appraisal. The new loan may 
include the principal and interest of the existing Agency loan, 
reasonable closing costs and lenders fees to extent there is sufficient 
equity in the property as determined by an appraisal. The appraised 
value may be exceeded by the amount of up-front guarantee fee financed, 
if any, when using the non-streamlined option. Documentation, costs, 
and underwriting requirements of subparts D, E, and F of this part 
apply to refinances.
    (vii) Lenders may require property inspections and/or repairs as a 
condition to loan approval. Expenses related to property inspections 
and repairs required of the lender may not be financed into the new 
loan amount.
    (viii) The lender pays a guarantee fee as established by the 
Agency.
    (ix) The refinance loan may be subject to an annual fee as 
established by the Agency; and
    (x) The Agency may limit the number of guaranteed loans made for 
refinancing purposes based on market conditions and other appropriate 
factors.


Sec.  3555.102  Loan restrictions.

    A guarantee will not be issued if loan funds are to be used for:
    (a) Existing manufactured homes. Purchase of an existing 
manufactured home, except as provided in Sec.  3555.208(b)(3);
    (b) Income producing land or buildings. Purchase or improvement of 
land or buildings that are typically used principally for income-
producing purposes;
    (c) Business or income-producing enterprise. Purchase or the 
construction of buildings which are largely or in part specifically 
designed to accommodate a business or income-producing enterprise;
    (d) Loan discount points. Loan discount points, except as provided 
in Sec.  3555.101(b)(6)(vi);
    (e) Refinancing. Refinancing, except as provided in Sec.  
3555.101(d);
    (f) Buydown. Establishing a buydown account;
    (g) Lease. Payments on a lease; or
    (h) Seller concessions. Purchasing a home if the seller, or other 
interested third party, contributes more than 6 percent, unless 
otherwise provided by the Agency, of the property's sales price toward 
the purchaser's mortgage financing costs, closing costs, escrow 
accounts, furniture or other giveaways.


Sec.  3555.103  Maximum loan amount.

    The amount of the loan must not exceed the lesser of:
    (a) Market value. The market value of the property as determined by 
an appraisal that meets Agency requirements plus the amount of the up-
front loan guarantee fee required by Sec.  3555.107(f), or
    (b) Purchase price and acquisition costs. The total of the purchase 
price and all eligible acquisition costs as permitted by Sec.  
3555.101.
    (c) Newly constructed dwelling--limited to 90 percent. A newly 
constructed dwelling that does not meet the definition of an existing 
dwelling, as defined at Sec.  3555.10, and cannot meet the inspection 
and warranty requirements of Sec.  3555.202(a) of this subpart is 
limited to 90 percent of the present market value. The dwelling must 
meet or exceed the International Energy Conservation Code (IECC) in 
effect at the time of construction.


Sec.  3555.104  Loan terms.

    (a) Interest rate. The loan must be written at an interest rate 
that:
    (1) Is fixed over the term of the loan;
    (2) Shall be negotiated between the lender and borrower to allow 
the borrower to obtain the best available rate available;
    (3) Does not exceed the greater of the Fannie Mae or Freddie Mac 
rate for 30 year fixed rate conventional loans, as authorized in 
Exhibit B of subpart A of part 1810 of this chapter (RD Instruction 
440.1, available in any Rural Development office) or online at: http://www.rurdev.usda.gov/rd_instructions.html and
    (4) If the interest rate increases between the time of the issuance 
of the conditional commitment and the loan closing, the lender will 
note the change in the loan closing package and submit appropriate 
updated documentation and underwriting analysis to confirm that the 
applicant is still eligible.
    (b) Repayment period. The term of the loan may not exceed 30 years.

[[Page 73949]]

Adjustable rate mortgages, balloon term mortgages or mortgages 
requiring prepayment penalties are ineligible terms.
    (c) Repayment schedule. Amortized payments will be due and payable 
monthly.
    (d) Negative amortization. The loan note must not provide for 
interest on interest.


Sec.  3555.105  Combination construction and permanent loans.

    Guarantees of combination construction and permanent loans are 
subject to the following conditions:
    (a) Lender requirements. In addition to other lender requirements 
of this part, lenders seeking guarantees of combination construction 
and permanent loans must:
    (1) Have two or more years experience making and administering 
construction loans.
    (2) Submit an executed construction contract with each loan 
application package.
    (3) Review and approve construction contractors or builders. The 
lender will conduct due diligence investigations to determine that the 
contractor or builder meets the minimum requirements in paragraph (b) 
of this section. Evidence of the contractor or builder's compliance 
must be made available by the lender upon request of the Agency.
    (4) Close the loan prior to the start of construction with proceeds 
disbursed to cover the cost of, or balance owed on, the land and the 
balance into escrow.
    (5) Pay out monies from escrow to the builder during construction. 
The lender must obtain written approval from the borrower before each 
draw payment is provided to the builder. The borrower and lender are 
jointly responsible for approving disbursements during the construction 
phase. The lender must ensure that the appropriate work has been 
completed prior to releasing each draw. The Agency may require the 
lender to submit a draw and disbursement ledger for any loan guarantee 
upon request.
    (6) Obtain documentation that confirms the construction of the 
subject property is complete.
    (b) Contractor or builder requirements. Contractors or builders of 
homes financed with guaranteed combination construction and permanent 
loans must at least have:
    (1) Two or more years experience building or constructing all 
aspects of single family dwellings similar to the type of project being 
proposed;
    (2) State-issued construction or contractor licenses, as required 
by State or local law;
    (3) Insurance for commercial general liability of at least 
$500,000;
    (4) Acceptable credit histories free of judgments, collections, or 
liens related to previous projects the contractor was involved with in 
the past;
    (5) No criminal history based on a criminal background check 
conducted by the lender;
    (6) Limited to 25 units per year unless approved by the Agency; and
    (7) Contractors or builders who are constructing their own 
residence are ineligible.
    (c) Use of loan funds. (1) The loan is to finance the construction 
and purchase of a single family housing residence. Condominiums and 
manufactured homes are ineligible for combination construction and 
permanent loans.
    (2) The loan amount may include:
    (i) The price of the lot.
    (ii) Reasonable and customary construction costs related to the 
construction administration, such as architectural and engineering 
fees, building permits and fees, surveys, title updates, contingency 
reserves, not exceeding a percentage specified by the Agency of the 
cost of construction, draw control and inspection fees, builder's risk 
insurance or course of construction insurance, and landscaping costs;
    (iii) Reasonable and customary closing costs as defined at Sec.  
3555.101; and
    (3) Funds remaining after full disbursement of construction costs 
will be applied by the lender as a principal payment. Borrowers are not 
to receive funds after closing except that the borrower may receive 
funds remaining from certain unused prepaid expenses if the borrower 
used personal, non-loan funds to pay those expenses.
    (d) Terms. The following terms apply to guarantees of combination 
construction and permanent loans:
    (1) The interest rate for the construction and permanent loan will 
be established in accordance with Sec.  3555.104 at the time the rate 
is locked, which must occur prior to closing.
    (2) The fair market value of the proposed property to be 
constructed will be used to establish the maximum loan amount.
    (3) Annual guarantee fees will begin in the month immediately 
following loan closing and will not be affected by loan reamortization 
following the completion of construction. Lenders may fund a lender 
imposed escrow account for borrower payment of the annual fee in 
accordance with Sec.  3555.101(b)(6)(xi), as an eligible loan purpose, 
provided the market value of the property is not exceeded.
    (4) Interest on the construction loan is payable monthly either 
directly from the borrower or indirectly drawn from an established 
interest reserve. Real estate taxes and property insurance due during 
the construction period may also be paid using the same draw process. 
The annual fee will be due and payable from the lender on the 1st of 
the month following the anniversary date the construction to permanent 
loan closed.
    (5) Initial payment of the regularly scheduled (amortized) 
principal and interest payment may be postponed up to one year, if 
necessary, based upon the construction period. Local conditions and the 
proposed construction contract may dictate the term.
    (6) The loan will be modified and re-amortized to achieve full 
repayment within its remaining term once construction is complete. 
Within a reasonable time, as specified by the Agency, after the final 
inspection, the borrower will begin making regularly scheduled 
(amortized) principal and interest payments once the loan is re-
amortized.
    (e) Mortgage file documentation. Standard industry credit and 
verification documents may be utilized when processing and closing the 
loan and must be dated within a reasonable time, specified by the 
Agency, of the closing in order to be considered valid. In addition to 
documentation noted at Sec.  3555.202(a), lenders must obtain and 
retain evidence:
    (1) The actual cost to construct the subject dwelling;
    (2) The acquisition, transfer of ownership, and/or ownership of 
land;
    (3) Certification of construction completion and that construction 
costs have been fully drawn;
    (4) Closing costs;
    (5) Certification that property is free and clear of all other 
liens after conversion to permanent loan;
    (6) Required inspections and warranties; and
    (7) Loan modification agreement when construction is complete 
confirming the existence of the permanent loan and the amortizing 
interest rate on the loan.
    (f) Loan Note Guarantee. The Loan Note Guarantee will be issued 
after closing of the construction loan without waiting for complete 
construction of the subject property upon:
    (1) Request by the approved lender;
    (2) The lender's submission of the closing documentation acceptable 
to Rural Development demonstrating that the loan was properly closed;
    (3) Payment of the guarantee fee; and
    (4) The lender's compliance with other requirements under Sec.  
3555.107.

[[Page 73950]]

    (g) Unplanned changes during construction. Should an unplanned 
change occur with the borrower or contractor preventing completion of 
construction, the lender remains responsible for completion of 
improvements satisfactory to Rural Development. The loan will be 
serviced in accordance with subparts F and G of this part.
    (h) Reservation of funding. Rural Development reserves the right to 
limit the number or amount of loans guaranteed under this section based 
on market conditions and other factors it considers appropriate, such 
as loan and portfolio performance.


Sec.  3555.106  [Reserved]


Sec.  3555.107  Application for and issuance of the loan guarantee.

    (a) Processing of applications. Except as provided in this section, 
Rural Development will process loan guarantee applications in the order 
that completed applications are received. Application forms and 
instruction procedures are available at any Rural Development office.
    (1) If analysis of the utilization of funds during the fiscal year 
indicates that, at the rate of current utilization, funds may not be 
sufficient to sustain that level of activity for the remainder of the 
fiscal year, the Agency may determine a shortage of funds exists.
    (2) When there is a shortage of funds, the Agency will limit SFHGLP 
loans to first-time homebuyers or veterans. First-time homebuyers and 
veterans will be served in the order their applications are received.
    (b) Automated underwriting. Rural Development will offer approved 
lenders an automated system, if available; to process Rural Development 
guaranteed loans under this part. The automated underwriting system is 
a tool to help evaluate credit risk, but does not substitute or replace 
the careful judgment of experienced underwriters, and shall not be the 
exclusive basis for a determination on whether to extend credit. The 
lender must apply for and receive approval from Rural Development to 
utilize the automated underwriting system. Application forms are 
available from Rural Development. Lenders using the automated 
underwriting system shall do so in accordance with SFHGLP regulations 
and guidelines. Rural Development reserves the right to terminate the 
lender's use of the automated underwriting system.
    (1) Lenders who utilize the Rural Development automated 
underwriting system remain responsible for ensuring all data is true 
and accurately represented.
    (2) Full documentation and verification, in accordance with 
Subparts C, D and E of this part, will be retained in the lender's 
permanent loan file and must confirm the applicant's eligibility, 
creditworthiness, repayment ability, eligible loan purpose, sufficient 
collateral, and all other regulatory requirements.
    (3) Lenders who utilize the Rural Development automated 
underwriting system will be subject to indemnification requirements in 
accordance with Sec.  3555.108.
    (4) If a loan receives an ``Accept'' underwriting recommendation, 
the lender is generally permitted to submit minimal documentation 
including the appraisal, flood hazard determination and fully executed 
request for guarantee, unless the lender is instructed to provide other 
documentation.
    (5) Loan requests that receive a ``Refer'' or ``Refer with 
Caution'' underwriting recommendation require further review and manual 
underwriting by the lender to determine whether the applicant meets 
SFHGLP eligibility requirements.
    (6) Lenders who utilize Rural Development's automated underwriting 
system will validate findings, based upon the output report of the 
underwriting system.
    (7) The final submission of the last scoring event must be retained 
in the lender's permanent loan file.
    (c) Manual underwriting. Lenders may utilize a manual underwriting 
method. Full documentation and verification, in accordance with 
Subparts C, D and E of this part will be submitted to Rural Development 
when requesting a guarantee and maintained in the lender's file. The 
documentation will confirm the applicant's eligibility, 
creditworthiness, repayment ability, eligible loan purpose, adequate 
collateral, and satisfaction of other regulatory requirements.
    (d) Appraisals. The lender must supply a current appraisal report 
of the property for which the guarantee is requested.
    (1) Appraisals must be conducted in accordance with the Uniform 
Standards of Professional Appraisal Practices.
    (2) Approved lenders are responsible for selecting a qualified 
appraiser and the integrity, accuracy and thoroughness of the 
appraisals used to support their loan guarantee request.
    (3) The appraiser must report all readily observable property 
deficiencies, potential environmental hazards, as well as any adverse 
conditions discovered performing the research involved in completing 
the appraisal.
    (4) The Agency will conduct reviews of the appraisals prior to 
issuance of the conditional commitment, and other reviews may be 
conducted to ensure overall quality of appraisals. The lender is 
responsible for correcting any appraisal deficiencies reported by the 
Agency.
    (5) The Agency may determine an appraiser ineligible to conduct 
appraisals for SFHGLP due to the failure to comply with applicable 
requirements and regulations. Appraisals from the ineligible appraisers 
will not be accepted.
    (6) Use of an alternative approach to value for appraisals 
performed in remote rural areas, on tribal lands, or where a lack of 
market activity exists may be accepted at the Agency's discretion.
    (7) The validity period of an appraisal will be 120 days, unless 
otherwise provided by the Agency.
    (e) Environmental requirements. The lender and Rural Development 
will meet all environmental responsibilities in accordance with Sec.  
3555.5.
    (f) Issuance of a conditional commitment. The lender must 
demonstrate that all the general loan, applicant, and site eligibility 
requirements of this part are met before Rural Development will issue a 
conditional commitment. The lender, however, may obtain any required 
property inspection reports, such as a well test or construction phase 
inspections, if applicable and not needed for environmental compliance, 
after the issuance of the conditional commitment, but prior to loan 
closing.
    (1) The conditional commitment will expire in 90 days from 
issuance, unless new construction is involved.
    (2) The expiration of a conditional commitment may coincide with 
projected completion of new construction.
    (3) An extension may be granted if the loan cannot be closed due to 
circumstances beyond the lender's control.
    (4) Lenders may accept or decline the conditional commitment, or 
submit requests for changes with adequate support and documentation to 
be reviewed by the Agency.
    (g) Loan guarantee fee. The lender must pay a nonrefundable up-
front guarantee fee, the cost of which may be passed on to the 
borrower. The up-front guarantee fee will not exceed 3.5 percent of the 
principal obligation. The current guarantee fee is available at any 
Rural Development office and may change periodically. Notice of a 
change

[[Page 73951]]

in fee will be published as authorized in Exhibit K of subpart A of 
part 1810 of this chapter (RD Instruction 440.1, available in any Rural 
Development office) or online at:  http://www.rurdev.usda.gov/rd_instructions.html. Once the guarantee has been issued, the fee will not 
be refunded.
    (h) Annual fee. The Agency may impose an annual fee of the lender 
not to exceed 0.5 percent of the average annual scheduled unpaid 
principal balance of the loan for the life of the loan to allow the 
Agency to reduce the up-front guarantee in Sec.  3555.107(g). The 
annual fee will be applicable to purchase and refinance loan 
transactions. The annual fee may be passed on to the borrower by the 
lender. The Agency may assess a late charge to the lender if the annual 
fee is not paid by the due date, and the late charge may be passed on 
to the borrower. Further administrative guidance is provided in the 
handbook.
    (i) Proper closing and requesting the loan note guarantee. The 
lender must ensure that any loan to be guaranteed is properly closed 
using documents acceptable to Rural Development.
    (1) Within 30 days of loan closing, the lender must request 
issuance of a loan guarantee.
    (2) The lender will certify the loan was closed in accordance with 
the conditional commitment and that no major changes have taken place 
since issuance of a commitment, except any changes specifically 
approved by the Agency.
    (3) The lender will maintain evidence of hazard insurance and, if 
applicable, flood insurance.
    (4) Evidence of documentation supporting the properly closed loan 
may be submitted to the Agency through regular mail, express mail, 
facsimile or secure email. Rural Development may offer approved lenders 
an automated method of submitting properly closed loans.
    (5) Lenders will submit full documentation supporting a closed loan 
or evidence of self-certification status, as described in this section. 
Self-certified lenders must still submit the settlement statement and 
promissory note. Lenders must obtain written authorization from the 
Agency prior to submitting evidence of self-certification in lieu of 
full documentation. Authorization for self-certification may be granted 
by the Agency if:
    (i) The lender has an active lender agreement.
    (ii) The lender is actively engaged in originating SFHGLP loans and 
has closed a minimum of 10 loans in the past 12 months.
    (iii) The lender has successfully submitted 10 consecutive loan 
closing to the Agency that were in compliance with loan closing 
requirements and procedures.
    (iv) The lender agrees to retain evidence of confirmed closing 
conditions in accordance with the issued conditional commitment in the 
lender's permanent loan file.
    (j) Issuance of the guarantee. The loan guarantee does not take 
effect until:
    (1) The lender transmits the required up-front guarantee fee, the 
lender certification form provided by Rural Development, and loan 
closing documents to Rural Development;
    (2) The lender meets all other conditions set out in the 
conditional commitment;
    (3) The loan is current at the time the lender requests the loan 
guarantee;
    (4) Any construction or rehabilitation, is complete except for 
development described in Sec. Sec.  3555.101(c) and 3555.202(c); and
    (5) Rural Development issues the loan guarantee document.


Sec.  3555.108  Full faith and credit.

    (a) General. 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.
    (b) Interest. A note that provides for the payment of interest on 
interest, however, shall not be guaranteed. If the note to which the 
Loan Note Guarantee is attached or relates provides for the payment of 
interest on interest, then the Loan Note Guarantee is void. 
Notwithstanding the prohibition of interest on interest, interest may 
be capitalized in connection with re-amortization under subpart G of 
this part.
    (c) Violations. The Loan Note Guarantee will be unenforceable by 
the lender to the extent any loss is occasioned by violation of usury 
laws, civil rights laws, negligent servicing, failure to obtain the 
required security or use of loan funds for unauthorized purposes, 
regardless of the time at which Rural Development 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.
    (d) Indemnification. If the Agency determines that a lender did not 
originate a loan in accordance with the requirements in this part and 
the Agency pays a claim under the loan guarantee, the Agency may revoke 
the lender's eligibility status in accordance with subpart B of this 
part and may also require the lender:
    (1) To indemnify the Agency for the loss, if the payment under the 
guarantee was made within 24 months of loan closing; or:
    (2) To indemnify the Agency for the loss regardless of how long ago 
the loan closed, if the Agency determines that fraud or 
misrepresentation was involved in connection with the origination of 
the loan.


Sec. Sec.  3555.109-3555.149  [Reserved]


Sec.  3555.150  OMB control number.

    The report and recordkeeping requirements contained in this subpart 
are currently with the Office of Management and Budget under review and 
awaiting approval.

Subpart D--Underwriting the Applicant


Sec.  3555.151  Eligibility requirements.

    (a) Income eligibility. At the time of loan approval, the 
household's adjusted income must not exceed the applicable moderate 
income limit. The lender is responsible for documenting the household's 
income to determine eligibility for the SFHGLP.
    (b) Citizenship status. Applicants must provide evidence acceptable 
to the Agency of their status as United States citizens, U.S. non-
citizen nationals, or qualified aliens, as defined in Sec.  3555.10.
    (c) Principal residence. Applicants must agree and have the ability 
to occupy the dwelling as their principal residence. The Agency may 
require evidence of this ability. Rural Development will not guarantee 
loans for investment properties, or temporary, short-term housing.
    (d) Adequate dwelling. The dwelling must be modest, decent, safe, 
and sanitary.
    (e) Eligibility of current homeowners. Current homeowners may be 
eligible for guaranteed home loans under this part if all the following 
conditions are met:
    (1) The applicants are not financially responsible for another 
Agency guaranteed or direct home loan by the

[[Page 73952]]

time the guaranteed home loan is closed;
    (2) The current home no longer adequately meets the applicants' 
needs;
    (3) The applicants will occupy the home financed with the SFHGLP 
loan as their primary residence;
    (4) The applicants are without sufficient resources or credit to 
obtain the dwelling on their own without the guarantee;
    (5) No more than one single family housing dwelling other than the 
one associated with the current loan request may be retained; and
    (6) The applicants must be financially qualified to own more than 
one home. In order for net rental income from the retained dwelling to 
be considered for the applicant's repayment ability, the consistency of 
the rental income must be demonstrated for at least the previous 24 
months, and the current lease must be for a term of at least 12 months 
after the loan is closed.
    (f) Legal capacity. Applicants must have the legal capacity to 
incur the loan obligation, or have a court-appointed guardian or 
conservator who is empowered to obligate the applicant in real estate 
matters.
    (g) Suspension or debarment. Applicants who are suspended or 
debarred from participation in Federal programs under 2 CFR parts 180 
and 417 are not eligible for loan guarantees.
    (h) Repayment ability. Applicants must demonstrate adequate 
repayment ability. Lenders must maintain documentation supporting the 
repayment ability analysis in the loan file. Refer to Sec.  3555.152(a) 
for further information.
    (1) A repayment ratio will be used to determine an applicant's 
ability to repay a loan. The Agency will utilize two ratios, principal, 
interest, taxes and insurance (PITI) ratio and total debt (TD) ratio, 
to determine adequate repayment for the requested loan. The Agency 
reserves the right to consider calculation of a single ratio in 
determining repayment for the requested loan.
    (i) An applicant is considered to have adequate repayment ability 
when the monthly amount required for payment of PITI, homeowners' 
association dues, the monthly calculation of an annual fee, as 
applicable, and other real estate assessments does not exceed 29 
percent of the applicant's repayment income and the monthly amount of 
PITI plus recurring monthly debts (total debt) does not exceed 41 
percent of the applicant's repayment income.
    (ii) For home purchases under the Rural Energy Plus provision of 
Sec.  3555.209, the Agency reserves the right to allow flexibility in 
the PITI and TD ratio. The handbook will define what flexibilities can 
be extended.
    (iii) Contributions to personal income taxes, retirement accounts 
(including the repayment of personal loans from those retirement 
accounts), savings (including repayment of loans secured by such 
funds), the cost to commute, membership fees in unions or like 
organizations, childcare or other voluntary obligations will not be 
considered in the TD ratio.
    (iv) Except for obligations specifically excluded by State law, the 
debts of non-purchasing spouse must be included in the applicant's 
repayment ratios if the applicant resides in a community property 
state.
    (2) The repayment ratio may exceed the percentage specified in 
paragraph (h)(1) of this section if certain compensating factors exist. 
The handbook will define when a debt ratio may be granted. The 
automated underwriting system will take into account any compensating 
factors in determining whether the variance is appropriate. For 
manually underwritten loans, the lender must document compensating 
factors demonstrating that the household has higher repayment ability 
based on its capacity, willingness and ability to pay mortgage payments 
in a timely manner. The presence of compensating factors does not 
strengthen a ratio exception when multiple layers of risk, such as a 
marginal credit history, are present in the application. Acceptable 
compensating factors and supporting documentation for a proposed debt 
ratio waiver will be further defined and clarified in the handbook. 
Compensating factors include, but are not limited to:
    (i) A credit score at an acceptable level of 680 or higher for any 
applicants, unless otherwise provided by the Agency. The Agency 
reserves the right to change the acceptable level of credit score.
    (ii) A minimal increase in housing expense, i.e. the current rent 
payment is comparable to the proposed mortgage loan payment PITI and if 
applicable, homeowner association dues.
    (iii) The demonstrated ability to accumulate savings and cash 
reserves post loan closing.
    (iv) Continuous employment with a current primary employer.
    (3) Loan ratio exceptions require written approval by Rural 
Development, or acceptance by an Agency approved automated underwriting 
system. Flexibilities surrounding loan ratio exceptions will be further 
clarified in the handbook. Lenders with loans accepted by an Agency 
approved automated underwriting system need not submit documentation 
for the need for a ratio waiver.
    (4) If an applicant does not meet the repayment ability 
requirements, the applicant can increase repayment ability by having 
other eligible household members join the application.
    (5) Mortgage Credit Certificates may be considered in determining 
an applicant's repayment ability.
    (6) Section 8 Homeownership Vouchers may be used in determining an 
applicant's repayment ability. The monthly subsidy may be treated as 
repayment income in accordance with Sec.  3555.152(a) or offset in the 
PITI.
    (7) A funded buydown account may be used to reduce the borrower's 
monthly mortgage payment during the early years of repayment when all 
of the following requirements are met:
    (i) The loan will be underwritten at the note rate.
    (ii) The interest rate may be bought down to no more than 2 
percentage points below the note rate.
    (iii) The interest rate paid by the borrower may increase no more 
frequently than annually.
    (iv) The interest rate paid by the borrower may increase no more 
than 1 percentage point annually.
    (v) Funds must be placed in an escrow account with monthly releases 
scheduled directly to the lender.
    (vi) Funds must be placed with a Federal- or state-regulated 
lender.
    (vii) The escrow account must be fully funded for the buydown 
period.
    (viii) The borrower is not permitted to use personal funds or funds 
borrowed from another source to establish the escrow account for the 
buydown.
    (ix) The borrower must not be required to borrow or repay the 
funds.
    (i) Credit qualifications. Applicants generally must have a 
verifiable credit history that indicates a reasonable ability and 
willingness to meet their debt obligations as evidenced by an 
acceptable credit score, a credit report from a recognized credit 
repository meeting the requirements of Fannie Mae, Freddie Mac, FHA or 
VA, and other credit qualifications satisfactory to Rural Development.
    (1) Except as provided in paragraph (i)(6) of this section, the 
applicant's credit history must demonstrate a past willingness and 
ability to meet credit obligations to enable the lender to evaluate 
each applicant and draw a logical conclusion about the applicant's 
commitment and ability to handling financial obligations successfully 
and ability to make payments on the new mortgage obligation.

[[Page 73953]]

    (2) Loans acceptance by an Agency approved automated underwriting 
system eliminates the need for the lender to submit documentation of 
the credit qualification decision as loan approval requirements will be 
incorporated in the automated system.
    (3) For manually underwritten loans, lenders must submit 
documentation of the credit qualification decision. Lenders will use 
credit scores to manually underwrite loan mortgage requests. Lenders 
are required to validate the credit scores utilized in the underwriting 
determination. Indicators of significant derogatory credit will require 
further review and documentation of that review. Indicators of 
significant derogatory credit include, but are not limited to:
    (i) A foreclosure that has been completed in the 36 months prior to 
application by the applicant.
    (ii) A bankruptcy in which debts were discharged within 36 months 
prior to the date of application by the applicant. Applicants who have 
completed a bankruptcy debt restructuring plan must have completed the 
plan and demonstrated a willingness to meet obligations when due for 
greater than the 12 months prior to the date of application by the 
applicant.
    (iii) One rent or mortgage payment paid 30 or more days late within 
the last 12 months prior to application by the applicant.
    (iv) A previous Agency loan that resulted in a loss to the 
Government.
    (4) When evidence of significant derogatory credit is present, 
lenders may consider extenuating circumstances, including but not 
limited to, whether the problems were caused by factors temporary in 
nature, if the circumstances leading to the derogatory credit were 
beyond the control of the applicant, and if the loan would 
significantly reduce the applicant's housing expenses.
    (5) In all cases, the applicant cannot have an outstanding Federal 
judgment, other than a judgment obtained in the United States Tax 
Court, or a delinquent non-tax Federal debt that has not been paid in 
full or otherwise satisfied.
    (6) For applicants without an established credit history, 
alternative methods may be used to evidence an applicant's willingness 
to pay, such as a non-traditional mortgage credit report or multiple 
independent verifications of trade references.
    (7) A credit report for a non-purchasing spouse must be obtained in 
order to determine the debt-to-income ratio referenced at Sec.  
3555.151(h) if the applicant resides in a community property state.
    (8) Lenders are encouraged to offer or provide for home ownership 
counseling. Lenders may require first-time homebuyers to undergo such 
counseling if it is reasonably available in the local area. When home 
ownership counseling is provided or sponsored by Rural Development or 
another Federal agency in the local area, the Lender must require the 
borrower to successfully complete the course.
    (j) Obtaining credit. The applicant must be unable to obtain 
traditional conventional mortgage credit, as defined by the Agency, for 
the subject loan.


Sec.  3555.152  Calculation of income and assets.

    The lender must obtain and maintain documentation in the loan file 
supporting the lender's determination of all income and assets 
described in this section.
    (a) Repayment income. Repayment income is the amount of adequate 
and stable income from all sources that parties to the promissory note 
are expected to receive. Repayment income is used to determine the 
applicant's ability to repay a loan.
    (1) The lender must examine the applicant's past income record for 
at least the past 2 years and any applicable training and/or education. 
The Agency may require additional information and documentation from 
self-employed applicants and applicants employed by businesses owned by 
family members.
    (2) The lender must establish an applicant's anticipated amount of 
repayment income and the likelihood of its continuance for at least the 
next 3 years to determine an applicant's capacity to repay a requested 
mortgage loan in accordance with Sec.  3555.151(h)(1).
    (3) Income may not be used in calculating an applicant's ratios if 
it is from any source that cannot be verified, is not stable, or is 
likely not to continue.
    (4) The following types of income are examples of income not 
included in repayment income:
    (i) Any student financial aid received by household members for 
tuition, fees, books, equipment, materials, and transportation;
    (ii) Amounts received that are specifically for, or in 
reimbursement of the cost of medical expenses for any family member;
    (iii) Temporary, nonrecurring, or sporadic income (including 
gifts);
    (iv) Lump sum additions to family assets such as inheritances, 
capital gains, insurance payments and personal or property settlements;
    (v) Payments for the care of foster children or adults; and
    (vi) Supplemental Nutrition Assistance Program payments.
    (b) Annual income. Annual income is the income of all household 
members, regardless of whether they will be parties to the promissory 
note.
    (1) Applicants must provide the income, expense and household 
information necessary to enable the lender to make income 
determinations.
    (2) Lenders must verify employment and income information provided 
by the applicant for all household members. Lenders will verify the 
income for each adult household member for the previous 2 years. 
Written or oral verifications provided by third-party sources or 
documents prepared by third-party sources are acceptable. Lenders must 
project the expected annual income for the next 12 months from the 
verified sources.
    (3) The lender remains responsible for the quality and accuracy of 
all information used to establish a household's eligibility.
    (4) Household income from all sources including, but not limited 
to, income from temporarily absent household members, allowances for 
tax-exempt income and net family assets as defined in paragraph (d) of 
this section are to be considered in the calculation of annual income.
    (5) The following sources of income will not be considered in the 
calculation of annual income:
    (i) Earned income of persons under the age of 18 unless they are an 
applicant or a spouse of a member of the household;
    (ii) Payments received for the care of foster children or foster 
adults and incomes received by foster children or foster adults who 
live in the household;
    (iii) Amounts granted for, or in reimbursement of, the cost of 
medical expenses;
    (iv) Earnings of each full-time student 18 years of age or older, 
except the head of household or spouse, that are in excess of any 
amount determined pursuant to HUD definition of annual income at 24 CFR 
5.609(c);
    (v) Temporary, nonrecurring, or sporadic income (including gifts);
    (vi) Lump sum additions to family assets such as inheritances; 
capital gains; insurance payments under health, accident, or worker's 
compensation policies; settlements for personal or property losses; and 
deferred periodic payments of supplemental social security income and 
Social Security benefits received in a lump sum;
    (vii) Any earned income tax credit;
    (viii) Adoption assistance in excess of any amount determined 
pursuant to

[[Page 73954]]

HUD's definition of annual income at 24 CFR 5.609(c);
    (ix) Amounts received by the family in the form of refunds or 
rebates under State or local law for property taxes paid on the 
dwelling;
    (x) Amounts paid by a State agency to a family with a 
developmentally disabled family member living at home to offset the 
cost of services and equipment needed to keep the developmentally 
disabled family member at home;
    (xi) The full amount of any student financial aid;
    (xii) Any other revenue exempted by a Federal statute, a list of 
which is available from any Rural Development office;
    (xiii) Income received by live-in aides, regardless of whether the 
live-in aide is paid by the family or a social service program;
    (ix) Employer-provided fringe benefit packages unless reported as 
taxable income; and
    (x) Amounts received through the Supplemental Nutrition Assistance 
Program.
    (c) Adjusted annual income. Adjusted annual income is used to 
determine program eligibility and is annual income as defined in 
paragraph (b) of this section, less any of the following verified 
deductions for which the household is eligible.
    (1) A reduction for each family member, except the head of 
household or spouse, who is under 18 years of age, 18 years of age or 
older with a disability, or a full-time student, the amount of which 
will be determined pursuant to HUD definition of adjusted income at 24 
CFR 5.611.
    (2) A deduction of reasonable expenses for the care of a child 12 
years of age or under that:
    (i) Enables a family member to work, to actively seek work, or to 
further a member's education;
    (ii) Are not reimbursed or paid by another source; and
    (iii) In the case of expenses to enable a family member to work, do 
not exceed the amount of income, including the value of any health 
benefits, earned by the family member enabled to work. If the child 
care provider is a household member, the cost of the children's care 
cannot be deducted.
    (3) A deduction of reasonable expenses related to the care of 
household members with disabilities that:
    (i) Enable a family member or the individual with disabilities to 
work, to actively seek work, or to further a member's education;
    (ii) Are not reimbursed from insurance or another source; and
    (iii) Are in excess of 3 percent of the household's annual income 
and do not exceed the amount of earned income included in annual income 
by the person who is able to work as a result of the expenses.
    (4) For any elderly family, a deduction in the amount determined 
pursuant to HUD definition of adjusted income at 24 CFR 5.611.
    (5) For elderly and disabled families only, a deduction for 
household medical expenses that are not reimbursed from insurance or 
another source and which, in combination with any expenses related to 
the care of household members with disabilities described in paragraph 
(c)(3) of this section, are in excess of 3 percent of the household's 
annual income.
    (d) Net family assets. For the purpose of computing annual income, 
the net family assets of all household members must be included in the 
calculation of annual income. Lenders must document and verify assets 
of all household members.
    (1) Net family assets include, but are not limited to, the actual 
or imputed income from:
    (i) Equity in real property or other capital investments, other 
than the dwelling or site;
    (ii) Cash on hand and funds in savings or checking accounts;
    (iii) Amounts in trust accounts that are available to the 
household;
    (iv) Stocks, bonds, and other forms of capital investments that is 
accessible to the applicant without retiring or terminating employment;
    (v) Lump sum receipts such as lottery winnings, capital gains, and 
inheritances;
    (vi) Personal property held as an investment; and
    (vii) Any value, in excess of the consideration received, for any 
business or household assets disposed of for less than fair market 
value during the 2 years preceding the income determination. The value 
of assets disposed of for less than fair market value shall not be 
considered if they were disposed of as a result of foreclosure, 
bankruptcy, or a divorce or separation settlement.
    (2) Net family assets for the purpose of calculating annual income 
do not include:
    (i) Interest in American Indian restricted land;
    (ii) Cash on hand which will be used to reduce the amount of the 
loan;
    (iii) The value of necessary items of personal property;
    (iv) Assets that are part of the business, trade, or farming 
operation of any member of the household who is actively engaged in 
such operation;
    (v) Amounts in voluntary retirement plans such as individual 
retirement accounts (IRAs), 401(k) plans, and Keogh accounts (except at 
the time interest assistance is initially granted);
    (vi) The value of an irrevocable trust fund or any other trust over 
which no member of the household has control;
    (vii) Cash value of life insurance policies; and
    (viii) Other amounts deemed by the Agency not to constitute net 
family assets.


Sec. Sec.  3555.153-3555.199  [Reserved]


Sec.  3555.200  OMB control number.

    The report and recordkeeping requirements contained in this subpart 
are currently with the Office of Management and Budget under review and 
awaiting approval.

Subpart E--Underwriting the Property


Sec.  3555.201  Site requirements.

    (a) Rural areas. Rural Development will only guarantee loans made 
in rural areas designated as rural by Rural Development. However, if a 
rural area designation is changed to nonrural:
    (1) Existing conditional commitments in the former rural area will 
be honored;
    (2) A supplemental loan may be made in accordance with Sec.  
3555.101 in conjunction with a transfer and assumption of a guaranteed 
loan;
    (3) Loan requests where the application and purchase contract was 
complete prior to the area designation change may be approved; and
    (4) REO property sales and transfers with assumption may be 
processed.
    (b) Site standards. Sites must be modest and developed in 
accordance with any standards imposed by a State or local government 
and must meet all of the following requirements.
    (1) The site size must be typical for the area.
    (2) The site must not include income-producing land or buildings to 
be used principally for income-producing purposes. Vacant land without 
eligible residential improvements, or property used primarily for 
agriculture, farming or commercial enterprise is ineligible for a loan 
guarantee.
    (3) The site must be contiguous to and have direct access from a 
street, road, or driveway. Streets and roads must be hard surfaced or 
all weather surfaced and legally enforceable arrangements must be in 
place to ensure that needed maintenance will be provided.
    (4) The site must be supported by adequate utilities and water and 
wastewater disposal systems. Certain water and wastewater systems that 
are privately-owned may be acceptable if

[[Page 73955]]

the lender determines that the systems are adequate, safe, compliant 
with applicable codes and requirements, and the cost or feasibility to 
connect to a public or community system is not reasonable. Certain 
community-owned water and wastewater systems may be acceptable if the 
lender determines that the systems are adequate, safe, and compliance 
with applicable codes and requirements. The Agency may require 
inspections on individual, central, or privately-owned and operated 
water or waste systems.


Sec.  3555.202  Dwelling requirements.

    (a) New dwellings. New dwellings must be constructed in accordance 
with certified plans and specifications, and must meet or exceed the 
International Energy Conservation Code (IECC) in effect at the time of 
construction. The lender must obtain and retain evidence of 
construction costs, inspection reports, certifications, and builder 
warranties acceptable to Rural Development.
    (b) Existing dwellings. Existing dwellings are considered to meet 
the following criteria when inspected and certified as meeting HUD 
requirements for one-to-four unit dwellings in accordance with Agency 
guidelines:
    (1) Be structurally sound;
    (2) Be functionally adequate;
    (3) Be in good repair, or to be placed in good repair with loan 
funds; and
    (4) Have adequate and safe electrical, heating, plumbing, water, 
and wastewater disposal systems.
    (c) Escrow account for exterior or interior development. This 
paragraph does not apply if the development is related to a 
``combination construction and permanent loan'' under Sec.  
3555.101(c). If a dwelling is complete with the exception of interior 
or exterior development work, Rural Development may issue the Loan Note 
Guarantee on the loan if the following conditions are met:
    (1) The incomplete work does not affect the habitability of the 
dwelling, nor the health or safety of the housing occupants.
    (2) The cost of any remaining interior or exterior work is not 
greater than 10 percent of the final loan amount.
    (3) An escrow account is funded in an amount sufficient to assure 
the completion of the remaining work. This figure must be at least 100 
percent of the cost of completion but may be higher if the lender 
determines a higher amount is needed.
    (4) The builder or a licensed contractor has executed a contract 
providing for completion of the planned development within 180 days of 
loan closing. If the borrower will be completing the planned 
development on an existing dwelling without the services of a 
contractor, the requirement for an executed contract is waived when all 
of the following conditions are met:
    (i) The estimated cost to complete the work is less than 10 percent 
of the total loan amount;
    (ii) The escrow amount is less than or equal to $10,000; and
    (iii) The lender has determined the borrower has the knowledge and 
skills necessary to complete the work.
    (5) The lender may release escrowed funds only after obtaining a 
final inspection report acknowledged by the borrower and indicating all 
planned development has been satisfactorily completed.
    (6) The lender remains responsible to ensure a final inspection is 
performed and required repairs are completed.
    (7) The settlement statement reflects the amounts escrowed.


Sec.  3555.203  Ownership requirements.

    After the loan is closed, the borrower must have an acceptable 
ownership interest in the property as evidenced by one of the 
following:
    (a) Fee-simple ownership. Acceptable fee-simple ownership is 
evidenced by a fully marketable title with a deed vesting a fee-simple 
interest in the property to the borrower.
    (b) Secured leasehold interest. Loans may be guaranteed on 
leasehold properties. If the conditions in this subsection are met:
    (1) The applicant is unable to obtain fee simple title to the 
property;
    (2) Such leaseholds are fully marketable in the area, except in the 
case of properties located on American Indian restricted land;
    (3) The lease has an unexpired term of at least 45 years from the 
date of loan closing, except in the case of properties located on 
American Indian restricted land where the lease must have an unexpired 
term at least equal to the term of the loan. Leases on American Indian 
restricted land for period of 25 years which are renewable for a second 
25 year period are permissible as are leases of a longer duration;
    (4) The mortgage must cover both the property improvements and the 
leasehold interest in the land;
    (5) The leasehold estate must constitute real property, be subject 
to the mortgage lien, be insured by a title policy, be assignable or 
transferable and cannot be terminated except for nonpayment of lease 
rents; and
    (6) The lease must be recorded in the appropriate local real estate 
records.


Sec.  3555.204  Security requirements.

    Rural Development will only guarantee loans that are adequately 
secured. A loan will be considered adequately secured only when all of 
the following requirements are met:
    (a) Recorded security document. The lender obtains at closing, a 
mortgage on all required ownership and leasehold interests in the 
security property and ensures that the loan is properly closed.
    (b) Prior liens. No liens prior to the guaranteed mortgage exist 
except in conjunction with a supplemental loan for transfer and 
assumption. The guaranteed loan must have first lien position at 
closing. Junior liens by other parties are permitted as long as the 
junior liens do not adversely affect repayment ability or the security 
for the guaranteed loan.
    (c) Adequate security. Existing and proposed property improvements 
are completely on the site and do not encroach on adjoining property.
    (d) Collateral. All collateral secures the entire loan.


Sec.  3555.205  Special requirements for condominiums.

    Loans may be guaranteed for condominium units in condominium 
projects that meet all the requirements of this part, as well as the 
standards for condominium standards established by HUD, Fannie Mae, VA, 
or Freddie Mac, including those related to self-certification, 
warranty, underwriting, and ineligible condominium projects.


Sec.  3555.206  Special requirements for community land trusts.

    A community land trust must meet the definition in accordance with 
Sec.  3555.10 and other requirements described in this subpart. Loans 
may be guaranteed for dwellings on land owned by a community land trust 
only if:
    (a) Rural Development review. Rural Development reviews and accepts 
any restrictions imposed by the community land trust on the property or 
applicant before loan closing. The Agency may place conditions on the 
approval of restrictions on resale price and rights of first refusal.
    (b) Foreclosure termination. The community land trust automatically 
and permanently terminates upon foreclosure or acceptance by the lender 
of a deed in lieu of foreclosure.
    (c) Organization. The organization must meet the definition of a 
community land trust as defined in the Housing Act of 1949 and the 
following requirements:
    (1) Be organized under State or local laws.

[[Page 73956]]

    (2) Members, founders, contributors or individuals cannot benefit 
from any part of net earnings of the organization.
    (3) The organization must be dedicated to decent affordable housing 
for low-and moderate-income people.
    (4) Comply with financial accountability.
    (d) Lender documentation. The lender's file must contains 
documentation that the community land trust has community support, 
local market acceptance and 2 years of prior experience in providing 
affordable housing.
    (e) Appraisals. A property located on a site owned by a community 
land trust must be appraised as leasehold interest and meet the 
provisions of Sec.  3555.203.


Sec.  3555.207  Special requirements for Planned Unit Developments 
(PUDs).

    Loans may be guaranteed for PUDs that meet all of the requirements 
of this part, as well as the criteria for PUDs established by HUD, VA, 
Fannie Mae, or Freddie Mac.


Sec.  3555.208  Special requirements for manufactured homes.

    Loans may be guaranteed for manufactured homes if all the 
requirements in this section are met.
    (a) Eligible costs. In addition to the loan purposes described in 
Sec.  3555.101, Rural Development may guarantee a loan used for the 
following purposes related to manufactured homes when a real estate 
mortgage covers both the unit and the site:
    (1) Purchase of a new manufactured home, transportation, permanent 
foundation, and installation costs of the manufactured home, and 
purchase of an eligible site if not already owned by the applicant; and
    (2) Site development work properly completed to HUD, state and 
local government standards, as well as, the manufacturer's requirements 
for installation on a permanent foundation.
    (b) Loan restrictions. The following loan restrictions are in 
addition to the loan restrictions contained in Sec.  3555.102:
    (1) A loan will not be guaranteed if it is used to purchase a site 
without also financing a new unit.
    (2) A loan will not be guaranteed if it is used to purchase 
furniture, including but not limited to: movable articles of personal 
property such as drapes, beds, bedding, chairs, sofas, divans, lamps, 
tables, televisions, radios, and stereo sets. Furniture does not 
include wall-to-wall carpeting, refrigerators, ovens, ranges, washing 
machines, clothes dryers, heating or cooling equipment, or other 
similar items.
    (3) A loan will not be guaranteed to purchase an existing 
manufactured home and site unless:
    (i) The unit and site are already financed with an Agency direct 
single family or guaranteed loan;
    (ii) The unit and site are being sold by Rural Development as REO 
property;
    (iii) The unit and site are being sold from the lender's inventory, 
and the loan for which the unit and site served as security was a loan 
guaranteed by Rural Development; or
    (iv) The unit was installed on its initial installation site on a 
permanent foundation complying with the manufacturer's and HUD 
installation standards.
    (4) A loan will not be guaranteed for repairs to an existing unit, 
unless the unit meets the requirements of Sec.  3555.208(b)(3).
    (5) A loan will not be guaranteed for the purchase of an existing 
manufactured home that has been moved from another site.
    (c) Construction and development. (1) To be an eligible unit, the 
new unit must have a floor space of not less than 400 square feet.
    (2) The unit must be properly installed on a permanent foundation 
according to HUD standards, and the manufacturer's requirements for 
installation on a permanent foundation. A certification of proper 
foundation is required.
    (3) All wheels, axles, towing hitches and running gear must be 
removed from the manufactured home.
    (4) Unit construction must conform to the Federal Manufactured Home 
Construction and Safety Standards (FMHCSS) and be constructed in 
compliance with the HUD heating and cooling requirements for the State 
in which the unit will be located. Any alterations, such as garage 
construction, as a new unit must comply with FMHCSS.
    (5) The site development, installation and set-up must conform to 
the HUD requirements and the manufacturer's requirements for a 
permanent installation.
    (6) The unit must meet or exceed the IECC in effect at the time of 
construction.
    (7) The lender must maintain documentation of construction plans 
and required certifications.
    (d) Warranty requirements. (1) The applicant must receive a 
warranty in accordance with HUD requirements for new manufactured homes 
on permanent foundations.
    (2) The warranty must identify the unit by serial number.
    (3) The lender and applicant must obtain certification that the 
manufactured home has sustained no hidden damage during transportation 
and, if manufactured in separate sections that the sections were 
properly joined and sealed according to the manufacturer's 
specifications.
    (4) The manufactured home must be affixed with a data plate, placed 
inside the unit, and a certification label, affixed to each 
transportable section at the tail-light end of each unit which 
indicates that the home was designed and built in accordance with HUD's 
construction and safety standards in effect on the date the home was 
manufactured.
    (5) The lender must retain a copy of all manufacturers' warranties 
in the lender file.
    (e) HUD requirements. The FMHCSS and HUD requirements may be found 
at http://www.access.gpo.gov/nara/cfr/waisidx_04/24cfr3280_04.html.
    (f) Title and lien requirements. To be eligible for the SFHGLP, the 
following conditions must be met and documented in the lender's file:
    (1) A manufactured home loan must be secured by a perfected lien on 
real property consisting of the manufactured home and the land;
    (2) The manufactured home must be taxed as real estate as 
applicable under State law, including relevant statutes, regulations, 
and judicial decisions;
    (3) The security instrument must be recorded in the land records 
and must identify the encumbered property as including both the home 
and the land;
    (4) If applicable State law so permits, any certificate of title to 
the manufactured home must be surrendered to the appropriate State 
government authority. If the certificate of title cannot be 
surrendered, the lender must indicate its lien on the certificate;
    (5) The mortgage must be covered by a standard real property title 
insurance policy and any other endorsement required in the applicable 
jurisdiction for manufactured home ensuring the manufactured home is 
part of the real property that secures the loan; and
    (6) The borrower must acknowledge the unit is a fixture and part of 
the real estate securing the mortgage.


Sec.  3555.209  Rural Energy Plus loans.

    Loans guaranteed under Rural Energy Plus provisions are for the 
purchase of energy-efficient homes. Homes that meet the most current 
IECC standards including existing homes that are retrofitted to those 
standards are eligible. Energy-efficient homes result in lower utility 
bills, conserve energy, and thus, make more income available for 
monthly debt obligations. For loans

[[Page 73957]]

guaranteed under this subpart, the lender will certify that the home 
meets the most current IECC standards. The Handbook will define what 
further flexibilities can be extended.


Sec. Sec.  3555.210-3555.249  [Reserved]


Sec.  3555.250  OMB control number.

    The report and recordkeeping requirements contained in this subpart 
are currently with the Office of Management and Budget under review and 
awaiting approval.

Subpart F--Servicing Performing Loans


Sec.  3555.251  Servicing responsibility.

    (a) Servicing action. Lenders must perform those servicing actions 
that a reasonable and prudent lender would perform in servicing its own 
portfolio of non-guaranteed loans.
    (b) Third party servicer. A lender may contract with a third party 
to service its loans, but the servicing lender of record remains 
responsible for the quality and completeness of the servicing.
    (c) Transfer of servicing. Rural Development may require a lender 
to transfer its loan servicing activities to an approved lender if 
Rural Development determines that the lender has failed to provide 
acceptable servicing.
    (d) Non-compliance. Lenders who fail to comply with Agency 
requirements or program guidelines may be subject to withdrawal of 
lender approval, denial and/or reduction in loss claims, withdrawal of 
the loan guarantee and/or indemnification in accordance with Sec.  
3555.108(d).


Sec.  3555.252  Required servicing actions.

    Lender servicing responsibility includes, but is not limited to, 
the following actions.
    (a) Collecting regularly scheduled payments. Lender must collect 
regularly scheduled loan payments and apply them to the borrower's 
account.
    (b) Payment of taxes and insurance. Lenders must ensure that real 
estate taxes, assessments, and flood and hazard insurance premiums for 
all property that secures a guaranteed loan are paid on schedule.
    (1) Establish escrow account. Lenders with the capacity to escrow 
funds must establish escrow accounts for all guaranteed loans for the 
payment of taxes and insurance. Escrow accounts must be administered in 
accordance with the Real Estate Settlement and Procedures Act (RESPA) 
of 1974, and insured by the FDIC or the NCUA.
    (2) Plan and responsibility of lender to ensure payment. Lenders 
that do not have the capacity to escrow funds must implement 
procedures, subject to Agency approval, to ensure the borrower pays 
such obligations on a timely basis. In addition, such lenders must 
accept the responsibility for payment of taxes and insurance that comes 
due prior to liquidation. Rural Development will not include any taxes 
or insurance amounts that accrued prior to acceleration in any 
potential loss claim. Rural Development may revoke the acceptance of 
the lender's plan if loan performance indicates that delinquency and 
loss rates are being affected by the lender's inability to escrow for 
taxes, assessment, and insurance. This alternative is not available to 
lenders who contract for servicing.
    (c) Insurance. (1) Until the loan is paid in full, lenders must 
ensure that borrowers maintain hazard and flood insurance as required, 
on property securing guaranteed loans. The insurance must be issued by 
companies in amounts, and on terms and conditions, acceptable to Rural 
Development. Flood insurance through the National Flood Insurance 
Program must be maintained for all property located in special flood or 
mudslide areas identified by FEMA and must be consistent with mortgage 
industry standards, as determined by the Agency.
    (2) Lenders must ensure that borrowers immediately notify them of 
any loss or damage to insured property securing guaranteed loans and 
collect the amount of the loss from the insurance company. Unless the 
borrower pays off the guaranteed loan using the insurance proceeds, the 
following requirements must be met:
    (i) All repairs and replacements using the insurance proceeds must 
be planned, performed, and inspected in accordance with Agency 
construction requirements and procedures.
    (ii) When insurance funds remain after payments for all repairs, 
replacements, and other authorized disbursements have been made, the 
funds must be applied in the following order: prior liens (including 
past-due property taxes); past-due amounts; protective advances; and 
released to the borrower if the lender's debt is adequately secured.
    (3) If the insurance claim is de minimis as determined by the 
Agency, the lender may release the funds directly to the borrower to 
advance funds to contractors, provided that the account is current and 
the borrower has a history of timely payments; the borrower occupies 
the property; and the borrower executes an affidavit agreeing to apply 
the funds for repairs or reconstruction of the dwelling.
    (d) Credit reporting. The lender must notify a credit repository of 
each new guaranteed loan, must identify the loan as guaranteed by Rural 
Development, and must report to that repository whenever any account 
becomes more than 30 calendar days past due.
    (e) Bankruptcy actions. The lender is responsible for monitoring 
and taking all appropriate and prudent actions during bankruptcy 
proceedings to protect the borrower and Government's interest, in 
accordance with Sec.  3555.306(d).


Sec.  3555.253  Late payment charges.

    Late payment charges will not be covered by the guarantee and 
cannot be added to the principal and interest due under any guaranteed 
note.
    (a) Maximum amount. Any late payment charge must be reasonable and 
customary for the area.
    (b) Loans with interest assistance. The lender must not charge a 
late fee if the only unpaid portion of the borrower's scheduled payment 
is interest assistance owed by Rural Development.


Sec.  3555.254  Final payments.

    Lenders may release security instruments only after full payment of 
all amounts owed, including any recapture, has been received and 
verified.


Sec.  3555.255  Borrower actions requiring lender approval.

    (a) Mineral leases. A lender may consent to the lease of mineral 
rights and subordinate its lien to the lessee's rights and interests in 
the mineral activity if the security property will remain suitable as a 
residence, the lender's security interest will not be adversely 
affected, and Rural Development's environmental requirements are met. 
Concurrence by Rural Development prior to consenting to the lease of 
mineral rights is required, unless otherwise provided by the Agency. 
Subordination of guaranteed loans to a mineral lease does not entitle 
the leaseholder to any proceeds from the sale of the security property.
    (1) If the proposed activity is likely to decrease the value of the 
security property, the lender may consent to the lease only if the 
borrower assigns 100 percent of the income from the lease to the lender 
to be applied to reduce the principal balance, and the total rent to be 
paid is at least equal to the estimated decrease in the market value of 
the security property.
    (2) If the proposed activity is not likely to decrease the value of 
the security property, the lender may consent to the lease if the 
borrower

[[Page 73958]]

agrees to use any damage compensation received from the lessee to 
repair damage to the site or dwelling, or to assign it to the lender to 
be applied to reduce the principal balance.
    (b) Partial release of security property. A lender may consent to 
transactions affecting a security property, such as selling or 
exchanging security property or granting of a right-of-way across the 
security property, and grant a partial release, provided that the 
following conditions are met.
    (1) The borrower will receive adequate compensation, and either 
make a reduction to the principal balance or make improvements to the 
security property, in order to maintain the current loan-to-value ratio 
for the guaranteed loan.
    (i) For sale of security property, the borrower must receive cash 
in an amount equal to or greater than the value of the security 
property being sold or interests being conveyed.
    (ii) For exchange of security property, the borrower must receive 
another parcel of property with value equal to or greater than that 
being disposed of.
    (iii) For granting an easement or right-of-way, the borrower must 
receive benefits that are equal to or greater than the value of the 
security property being disposed of or interests being conveyed.
    (2) An appraisal of the security property will be conducted by the 
lender if the most current appraisal is more than 1 year old or if it 
does not reflect current market value.
    (3) The security property, after the transaction is completed, will 
continue to be an adequate, safe, and sanitary dwelling.
    (4) Repayment of the guaranteed debt will not be jeopardized.
    (5) When exchange of all or part of the security property is 
involved, title clearance will be obtained before release of the 
existing security.
    (6) Proceeds from the sale of a portion of the security property, 
granting an easement or right-of-way, damage compensation, and all 
similar transactions requiring the lender's consent, will be used in 
the following order:
    (i) To pay customary and reasonable costs related to the 
transaction that must be paid by the borrower.
    (ii) To be applied on a prior lien debt, if any.
    (iii) To be applied to the guaranteed indebtedness or used for 
improvements to the security property consistent with the purposes and 
limitations applicable for use of guaranteed loan funds. The lender 
must ensure that the proceeds are used as planned.
    (7) The lender will seek Agency concurrence, unless otherwise 
provided by the Agency, by submitting documentation supporting the 
borrower's reason for request, the proposed use of the land with 
supporting plans, specifications, cost estimates, surveys, disclosures 
of restrictions, legal description modification, title clearance 
related to the transaction request, as applicable, and any other 
documents necessary for the Agency to make a determination.


Sec.  3555.256  Transfer and assumptions.

    (a) Transfer without assumption. (1) The lender must notify Rural 
Development if the borrower transfers the security property and the 
transferee does not assume the debt.
    (2) Except as described in paragraph (d) of this section, if a 
security property is transferred with the lender's knowledge without 
assumption of the debt, Rural Development will void the guarantee.
    (b) Transfer with assumption. (1) The lender must obtain Agency 
approval before consenting to a transfer with an assumption of the 
outstanding debt.
    (2) Rural Development may approve a transfer with an assumption of 
the outstanding debt if the following conditions are met:
    (i) The transferee must assume the entire outstanding debt and 
acquire all property securing the guaranteed loan balance; however, the 
transferor must remain personally liable. The transferor must pay any 
recapture as a result of interest subsidy granted, if applicable, owed 
at the time of the transfer and assumption.
    (ii) The transferee must meet the eligibility requirements 
described in subpart D of this part.
    (iii) The property must meet the site and dwelling requirements 
described in subpart E of this part, or be brought to those standards 
prior to the transfer. Guaranteed loans secured by properties located 
in areas that have ceased to be rural may be assumed notwithstanding 
the fact that the property is located in a non-rural area.
    (iv) The priority of the existing lien securing the guaranteed loan 
must be maintained or improved.
    (v) Any new rates and terms must not exceed the rates and terms 
allowed for new loans under this part, and the interest rate must not 
exceed the interest rate on the initial loan.
    (vi) A new guarantee fee, calculated based on the remaining 
principal balance, must be paid to Rural Development in accordance with 
Sec.  3555.107(f).
    (vii) If additional financing is required to complete the transfer 
and assumption or to make needed repairs, Rural Development may approve 
a supplemental guaranteed loan provided adequate security exists.
    (viii) The lender must verify and document their permanent file in 
accordance with subpart C of this part.
    (ix) A written request supported by the lender demonstrating the 
applicant's credit worthiness, income eligibility and underwriting 
analysis must be submitted to the Agency for approval of a transfer and 
assumption.
    (x) The lender may close the loan in accordance with Sec.  
3555.107.
    (c) Transfer without approval. If a lender becomes aware that a 
borrower has transferred a property without approval, the lender must 
take one of the following actions:
    (1) Notify Rural Development and continue the loan without the 
guarantee; or
    (2) Obtain Agency approval for the transfer with assumption; or
    (3) Liquidate the guaranteed loan and submit a claim for any loss.
    (d) Transfer without triggering the due-on-sale clause. (1) The 
following types of transfers do not trigger due-on-sale clauses in 
security instruments:
    (i) A transfer from the borrower to a spouse or children not 
resulting from the death of the borrower;
    (ii) A transfer to a relative, joint tenant, or tenant by the 
entirety resulting from the death of the borrower;
    (iii) A transfer to a spouse or ex-spouse resulting from a divorce 
decree, legal separation agreement, or property settlement agreement;
    (iv) A transfer to a person other than a deceased borrower's spouse 
who wishes to assume the loan for the benefit of persons who were 
dependent on the deceased borrower at the time of death, if the 
dwelling will be occupied by one or more persons who were dependent on 
the borrower at the time of death, and there is a reasonable prospect 
of repayment; or
    (v) A transfer into an inter vivos trust in which the borrower does 
not transfer rights of occupancy in the property.
    (2) When a transferee obtains a property with a guaranteed loan 
through a transfer that does not trigger the due-on-sale clause:
    (i) The lender will notify Rural Development of the transfer;
    (ii) Rural Development will continue with the guarantee, whether or 
not the transferee assumes the guaranteed loan;
    (iii) The transferee may assume the guaranteed loan on the rates 
and terms contained in the promissory note. If the account is past due 
at the time an

[[Page 73959]]

assumption agreement is executed, the loan may be re-amortized to bring 
the account current;
    (iv) The transferee may assume the guaranteed loan under new rates 
and terms if the transferee applies and is eligible.
    (3) Any subsequent transfer of title, except upon the death of the 
inheritor or between inheritors to consolidate title, will trigger the 
due-on-sale clause.


Sec.  3555.257  Unauthorized assistance.

    (a) Unauthorized assistance due to false information. (1) If the 
borrower receives a guaranteed loan based on false information provided 
by the borrower, Rural Development may require the lender to accelerate 
the guaranteed loan. After the lender accelerates the loan upon 
request, the lender may submit a claim for any loss. If the lender 
fails to accelerate the loan upon request, Rural Development may reduce 
or void the guarantee.
    (2) If the borrower receives a guaranteed loan based on false 
information provided by the lender, Rural Development may void the 
guarantee subject to the provisions of Sec.  3555.108.
    (3) If the borrower or lender provides false information, Rural 
Development may pursue criminal and civil false claim actions, 
suspension and/or debarment, and take all other appropriate action.
    (b) Unauthorized assistance due to inaccurate information. Rural 
Development will honor a guarantee for a loan made to an applicant who 
receives a guaranteed loan based on inaccurate information if the 
applicant was eligible to receive the guaranteed loan at the time it 
was made, and if the loan funds were used only for eligible loan 
purposes.


Sec. Sec.  3555.258-3555.299  [Reserved]


Sec.  3555.300  OMB control number.

    The report and recordkeeping requirements contained in this subpart 
are currently with the Office of Management and Budget under review and 
awaiting approval.

Subpart G--Servicing Non-Performing Loans


Sec.  3555.301  General servicing techniques.

    In accordance with industry standards and as provided by the 
Agency:
    (a) Prompt action. Lenders shall take prompt action to collect 
overdue amounts from borrowers to bring a delinquent loan current in as 
short a time as possible to avoid foreclosure to the extent possible 
and minimize losses.
    (b) Evaluation of borrower. Lenders must evaluate loans and take 
appropriate loss mitigation actions in an effort to resolve any 
repayment problems and provide borrowers with the maximum opportunity 
to become successful homeowners.
    (c) Prompt contact. In the event of default, the lender shall 
promptly contact the borrower within a timeframe specified by the 
Agency.
    (d) Determine ability to cure. The lender must make a reasonable 
effort to obtain from the borrower information regarding the reason for 
default, the borrower's current financial situation and any other 
necessary information to evaluate the borrower's ability to cure the 
default and determine a feasible plan for collection, and/or 
alternatives to foreclosure.
    (e) Communication. Before an account becomes 2 months past due and 
if there is no payment arrangement in place, the lender must send a 
certified letter to the borrower requesting an interview for the 
purpose of resolving the past due account.
    (f) Prior to liquidation. Before an account becomes 2 months past 
due or before initiating liquidation, the lender must assess the 
physical condition of the property, determine whether it is occupied, 
and take necessary steps to protect the property.
    (g) Maintain documentation. The lender must maintain documentation 
demonstrating that requirements in this subpart have been met and what 
steps have been taken to save a mortgage prior to making a decision to 
foreclose.
    (h) Formal servicing plan. The lender must obtain Agency 
concurrence of a formal servicing plan when a borrower's account is 90 
days or more delinquent and a method other than foreclosure is 
recommended to resolve the delinquency. Rural Development may issue a 
written waiver of the need for concurrence for some or all servicing 
actions by a lender, on a case-by-case basis, if the lender 
demonstrates that it no longer needs the oversight. This may be 
demonstrated by the lender's portfolio performance including, but not 
limited to, lower than average delinquency rates, foreclosure rates, or 
loss claim rates. Rural Development may revoke such waiver at any time, 
upon notice and without appeal rights.


Sec.  3555.302  Protective advances.

    Lenders may pay the following expenses necessary to protect the 
security property and charge the cost against the borrower's account.
    (a) Advances for taxes and insurance. Without prior Agency 
concurrence, lenders may advance funds to pay past due real estate 
taxes, hazard and flood insurance premiums, and other related costs.
    (b) Advances for costs other than taxes and insurance. Protective 
advances for costs other than taxes and insurance, such as emergency 
repairs, can be made only if the borrower cannot, or will not, obtain 
an additional loan or reimbursement from an insurer or the borrower has 
abandoned the property. The lender must determine that any repairs 
funded by protective advances are cost effective. Repairs funded by 
protective advances must be planned, performed and inspected in 
accordance with Sec.  3555.202 and as further described by the Agency. 
The lender must obtain prior Agency concurrence or a waiver of 
concurrence as provided for in Sec.  3555.301(h) before issuing 
protective advances under this paragraph only for protective advances 
of a significant amount as specified by the Agency.


Sec.  3555.303  Traditional servicing options.

    (a) Eligibility. To be eligible for traditional servicing, all the 
following conditions must be met:
    (1) The borrower presently occupies the property;
    (2) The borrower is in default or facing imminent default for an 
involuntary reason. A borrower is ``facing imminent default'' if that 
borrower is current or less than 30 days past due on the mortgage 
obligation and is experiencing a significant reduction in income or 
some other hardship that will prevent him or her from making the next 
required payment on the mortgage during the month in which it is due. 
The borrower must be able to document the cause of the imminent 
default, which may include, but is not limited to, one or more of the 
following types of hardship:
    (i) A reduction in or loss of income that was supporting the 
mortgage loan;
    (ii) A change in household financial circumstances;
    (3) The borrower demonstrates a reasonable ability to support 
repayment of the debt in the future;
    (4) There are no adverse property conditions that inhibit the 
inhabitability or use of the property; and
    (5) The borrower has not received assistance due to the submission 
of false information by the borrower.
    (b) Servicing options. The lender must consider traditional 
servicing options in the following order to resolve the borrower's 
default or imminent default:
    (1) Repayment agreement. A repayment agreement is an informal plan 
lasting 3 months or less to cure short-term delinquencies.

[[Page 73960]]

    (2) Special forbearance agreement. A special forbearance agreement 
is a longer-term formal plan to cure a delinquency not to exceed the 
equivalent of 12 months of PITI. The agreement may gradually increase 
monthly payments in an amount sufficient to repay the arrearage over a 
reasonable amount of time and/or temporarily reduce or suspend payments 
for a short period. If the borrower is at least 3 months delinquent, 
the special forbearance agreement may resume normal payments for 
several months followed by a loan modification.
    (3) Loan modification plan. A loan modification is a permanent 
change in one or more of the terms of a loan that results in a payment 
the borrower can afford and allows the loan to be brought current.
    (i) Loan modifications may include a reduction in the interest 
rate, even below the market rate if necessary.
    (ii) Loan modifications may capitalize all or a portion of the 
arrearage (PITI) and/or reamortization of the balance due. 
Capitalization may also include foreclosure fees and costs, tax and 
insurance advances, past due annual fees imposed by the lender, but not 
late charges or lender fees.
    (iii) If necessary to demonstrate repayment ability, the loan term 
after reamortization may be extended for up to 30 years from the date 
of the loan modification. However, the Rural Development guarantee is 
only effective 30 years from the origination date, and if the loan term 
is extended beyond the 30 year loan term from the date of origination, 
the guarantee will not apply beyond the original 30 year loan term.
    (iv) The lender's lien priority cannot be adversely affected by 
providing a loan modification.
    (c) Terms of loan note guarantee. Use of traditional servicing 
options does not change the terms of the loan note guarantee.


Sec.  3555.304  Special servicing options.

    (a) General. (1) Lenders must exhaust traditional servicing options 
outlined in this part or have determined that use of traditional 
servicing options would not resolve the delinquency, prior to special 
servicing options. Lenders must exhaust special servicing options prior 
to liquidation in accordance with Sec. Sec.  3555.305 or 3555.306.
    (2) Lenders must obtain Agency concurrence or a waiver as provided 
in Sec.  3555.301(h) before implementing any special servicing options.
    (3) Use of special loan servicing does not change the terms of the 
loan note guarantee.
    (4) Special servicing options shall be used in the order 
established in this section to bring the borrower's mortgage payment to 
income ratio as close as possible to, but not less than, 31 percent.
    (b) Conditions for special servicing options. In addition to the 
requirements in Sec.  3555.303(a), the following conditions apply to 
all special loan servicing:
    (1) The borrower's total debt to income ratio following the special 
loan servicing must not exceed 55 percent. Prior to servicing a 
borrower's account with special loan servicing, the lender must verify 
the borrower's income and total debt.
    (2) The borrower must successfully complete a trial payment plan of 
sufficient duration, as determined by the Agency, to demonstrate that 
the borrower will be able to make regularly scheduled payments as 
modified by the special loan servicing.
    (3) Expenses related to special loan servicing including, but not 
limited to, title search and recording fees shall not be charged to the 
borrower. However, if a foreclosure was initiated and canceled prior to 
special loan servicing, legal fees and costs for work performed in 
relation to the foreclosure costs before the cancellation date may be 
charged to the borrower.
    (4) Capitalization of late charges and lender fees is not permitted 
in the special loan servicing option.
    (c) Extended-term loan modification. The Lender may modify the loan 
by reducing the interest rate to a level at or below the maximum 
allowable interest rate and extending the repayment term up to a 
maximum of 40 years from the date of loan modification.
    (1) The interest rate must be fixed.
    (2) The Agency may establish the maximum allowable interest rate by 
publishing a notice of a change in interest rate will be published as 
authorized in Exhibit B of subpart A of part 1810 of this chapter (RD 
Instruction 440.1, available in any Rural Development office) or online 
at: http://www.rurdev.usda.gov/rd_instructions.html. If the maximum 
allowable interest rate has not been so established, it shall be 50 
basis points greater than the most recent Freddie Mac Weekly Primary 
Mortgage Market Survey (PMMS) rate for 30-year fixed-rate mortgages 
(U.S. average), rounded to the nearest one-eighth of one percent 
(0.125%), as of the date the loan modification is executed.
    (3) The term shall be extended only as long as is necessary to 
achieve the targeted mortgage payment to income ratio after the 
interest rate has been fixed at a level at or below the maximum 
allowable rate.
    (4) If the targeted mortgage payment to income ratio cannot be 
achieved using an extended-term loan modification alone, the lender may 
consider a mortgage recovery advance under this section in addition to 
the extended-term loan modification.
    (d) Mortgage recovery advance. (1) The maximum amount of a mortgage 
recovery advance is the sum of arrearages not to exceed 12 months of 
PITI, annual fees, legal fees and foreclosure costs related to a 
cancelled foreclosure action, and principal reduction.
    (2) The maximum amount of a mortgage recovery advance is 30 percent 
of the unpaid principal balance as of the date of default, minus any 
arrearages advanced to cure the default and any foreclosure costs 
incurred to that point. The Agency may change the maximum amount of 
mortgage recovery advance by publication in the Federal Register.
    (3) The principal deferment amount for a specific case shall be 
limited to the amount that will bring the borrower's total monthly 
mortgage payment to 31 percent of gross monthly income.
    (4) The lender may file a claim pursuant to Subpart H of this part 
for reimbursement of reasonable title search and/or recording fees in 
connection with the promissory note and mortgage or deed-of-trust, not 
to exceed a maximum amount specified by the Agency.
    (5) Prior to making a mortgage recovery advance, the lender must 
perform an escrow analysis to ensure that the payment made on behalf of 
the borrower accurately reflects the escrow amount required for taxes 
and insurance.
    (6) The following terms apply to the repayment of mortgage recovery 
advances:
    (i) The mortgage recovery advance note and subordinate mortgage or 
deed-of-trust shall be interest-free.
    (ii) Borrowers are not required to make any monthly or periodic 
payments on the mortgage recovery advance note; however, borrowers may 
voluntarily submit partial payments without incurring any prepayment 
penalty.
    (iii) The due date for the mortgage recovery advance note shall be 
the due date of the guaranteed note held by the lender, as modified by 
the special loan servicing. Prior to the due date on the mortgage 
recovery advance note, payment in full under the note is due at the 
earlier of the following:
    (A) When the first lien mortgage and the guaranteed note are paid 
off; or

[[Page 73961]]

    (B) When the borrower transfers title to the property by voluntary 
or involuntary means.
    (iv) Repayment of all or part of the mortgage recovery advance must 
be remitted directly to the Agency by the borrower.
    (v) The Agency will collect this Federal debt from the borrower by 
any available means if the mortgage recovery advance is not repaid 
based on the terms outlined in the promissory note and mortgage or 
deed-of-trust.
    (7) The lender may request reimbursement from the Agency for a 
mortgage recovery advance. A fully supported and documented claim for 
reimbursement must be submitted to the Agency within 60 days of the 
advance being executed by the borrower. The borrower must execute a 
promissory note payable to the Agency and a mortgage or deed-of-trust 
in recordable form perfecting a lien naming the Agency as the secured 
party for the amount of the mortgage recovery advance. The lender shall 
properly record the mortgage or deed-of-trust in the appropriate local 
real estate records and provide the original promissory note to the 
Agency.
    (8) A loss claim filed by a lender will be adjusted by any amount 
of mortgage recovery advance reimbursed to the lender by the Agency.


Sec.  3555.305  Voluntary liquidation.

    The lender must have exhausted the servicing options outlined in 
Sec. Sec.  3555.302 through 3555.304 to cure the delinquency before 
considering voluntary liquidation. The methods of voluntary liquidation 
of the security property outlined in this section may be used to 
protect the interests of the Government. The lender must obtain prior 
Agency concurrence or a waiver as provided by Sec.  3555.301(h).
    (a) Eligibility. To be eligible for voluntary liquidation, the 
following conditions must be met:
    (1) The loan must be at least 30 days delinquent;
    (2) The default was caused by an involuntary reason; and
    (3) The borrower must presently occupy the property except in 
situations where the borrower does not occupy the property due to the 
same involuntary reason that led to the default.
    (b) Pre-foreclosure or short sale. The borrower may sell the 
security property for a price that represents its fair market value. 
The sale price, less any reasonable and customary sale or closing costs 
incurred by the borrower, must be applied to the borrower's account.
    (c) Deed in lieu of foreclosure. The lender may accept a deed in 
lieu of foreclosure if it will result in a lesser loss claim than if 
foreclosure occurs.
    (d) Offer by junior lienholder. If a junior lienholder makes an 
offer in the amount of at least the anticipated net recovery value, as 
calculated in accordance with Sec.  3555.353, the lender may assign the 
note and mortgage to the junior lienholder.
    (e) Other methods of voluntary liquidation. The lender may propose 
other methods of voluntary liquidation that are consistent with this 
section if the lender fully documents how the proposal will result in a 
savings to the Government.


Sec.  3555.306  Liquidation.

    (a) General. (1) When a lender determines that a borrower is unable 
or unwilling to meet loan obligations with servicing options under this 
subpart, the lender must accelerate the guaranteed loan and, if 
necessary, foreclose.
    (2) Prior to acceleration the lender must have advised the 
borrower, in writing, of available foreclosure avoidance options and 
the borrower must have failed to request such options.
    (3) The lender must accelerate the guaranteed loan, with a demand 
letter, when the account is three scheduled payments past due unless 
there is a reasonable prospect of resolving the delinquency through 
another method.
    (4) The borrower is responsible for all expenses associated with 
liquidation and acquisition.
    (b) Foreclosure. (1) The lender must initiate foreclosure within 90 
calendar days of the decision to liquidate unless Federal, State, or 
local law requires that foreclosure action be delayed. When there is a 
legal delay (such as bankruptcy), foreclosure must be initiated within 
90 calendar days after it becomes possible to do so. Foreclosure 
initiation begins with the first public action required by law such as 
filing a complaint or petition, recording a notice of default, or 
publication of a notice of sale.
    (2) Lenders must exercise due diligence in completing the 
liquidation process to ensure the foreclosure is cost effective, 
expeditious, and completed in an efficient manner, as otherwise 
provided by the Agency. The lender must choose the foreclosure method 
representing the best interest of the Federal Government.
    (3) The lender's decision to bid at foreclosure and any bid amount 
will be based upon the property value, whether the property value is 
sufficient to cover the existing debt and incurred costs, and any 
potential to recover a deficiency. The lender will encourage third 
party bidding at a foreclosure sale when the total debt, including the 
cost of acquiring, managing and disposing of the property, if acquired, 
is greater than the gross proceeds expected from a foreclosure sale at 
market value.
    (c) Reinstatement of accounts. Unless State law imposes other 
requirements, the lender may reinstate an accelerated account only if 
the borrower:
    (1) Pays, or makes acceptable arrangements to pay, all past-due 
amounts, any protective advances, and any foreclosure-related costs 
incurred by the lender; and
    (2) Has the ability to continue making scheduled payments on the 
guaranteed loan.
    (d) Bankruptcy. (1) When a borrower files a petition in bankruptcy, 
the lender must suspend collection and foreclosure actions in 
accordance with Title 11 of the United States Code.
    (2) The lender may accept conveyance of security property by the 
trustee in the bankruptcy, or the borrower, if the bankruptcy court has 
approved the transaction, and the lender will acquire title free of all 
liens and encumbrances except the lender's liens.
    (3) Whenever possible after the borrower has filed for protection 
under Chapter 7 of Title 11 of the United States Code, a reaffirmation 
agreement will be signed by the borrower and approved by the bankruptcy 
court prior to discharge, if the lender and the borrower decide to 
continue with the loan.
    (4) The lender must protect the guaranteed loan debt and all 
collateral securing the loan in bankruptcy proceedings.
    (5) The lender can include principal and interest lost as a result 
of bankruptcy proceedings in any claim filed in accordance with Sec.  
3555.354.
    (e) Maintain condition of security property. The lender must make 
reasonable and prudent efforts to ensure that the condition of the 
security property is maintained during any liquidation, acquisition, 
and sale of the property. These efforts include, but are not limited 
to, periodic inspections, performing necessary repairs, winterization, 
securing the property, removing debris, yard maintenance and ensuring 
the continuance of property insurance. The lender must identify, 
determine the cause, and document any environmental hazard affecting 
the value of the security property. The lender must retain a record of 
all efforts to maintain the condition of the security property.

[[Page 73962]]

    (f) Managing and disposing of REO property. Lenders will 
expeditiously gain possession of the REO property in a manner designed 
to ensure maximum recovery as follows.
    (1) The lender must prepare and maintain a disposition plan on all 
acquired properties. The lender will submit the property disposition 
plan and any subsequent changes for Agency concurrence in a timely 
manner as specified by the Agency. The lender may obtain a waiver of 
the concurrence requirement as provided for in Sec.  355.5301(h). The 
plan will include the proposed method for sale of the property, the 
estimated value based on an appraisal, minimum sale price, itemized 
estimated costs of the sale, and any other information that could 
impact the amount of loss on the loan.
    (2) The lender will make all reasonable efforts to sell the 
property within 9 months from the later of either the foreclosure sale 
or expiration of any redemption period. The Agency may grant an 
extension of the permissible marketing period in limited circumstances 
including, but not limited to, when a separate legal action is 
necessary to gain possession of the property following foreclosure or 
when the lender has or is in final negotiation for a firm purchase 
agreement. If the property is on American Indian restricted land, an 
additional 3 month marketing period is permitted.
    (3) The lender must notify the Agency when the property has not 
been sold within 30 days of the expiration of the permissible marketing 
period. If the REO remains unsold at the end of the permissible 
marketing period, the Agency will order a liquidation value appraisal 
and apply an acquisition and management resale factor to estimate 
holding and disposition cost. Interest expenses accrued beyond 90 days 
of the foreclosure sale date or expiration of any redemption period, 
whichever is later, will be the responsibility of the lender and not 
covered by the guarantee.
    (g) Debt settlement reporting. The lender must report to the IRS 
and all national credit reporting repositories any debt settled through 
liquidation.


Sec.  3555.307  Assistance in natural disasters.

    (a) Policy. Servicers must utilize general procedures available 
under this subpart for servicing borrowers affected by natural 
disasters, as supplemented by Rural Development, to minimize 
delinquencies and avoid foreclosure.
    (b) Evaluating the damage. Servicers are expected to inspect a 
security property whenever they have reason to believe the property has 
been damaged.
    (c) Special relief measures. The servicer must evaluate on an 
individual case basis a mortgage that is (or becomes) seriously 
delinquent as the result of the borrower's incurring extraordinary 
damages or expenses related to the natural disaster. The servicer 
should document its individual mortgage file regarding all servicing 
actions taken during this time period. The lender must consider all 
special relief alternatives for disaster assistance available to the 
borrower prior to suspending collection and foreclosure activities. 
Servicing actions suspended as a result of the natural disaster will 
expire 90 days from the declaration date of the natural disaster, 
unless otherwise extended by the Agency.
    (d) Insurance claim settlements. Prior to release of hazard 
insurance proceeds because of damage caused by a natural disaster, 
servicers must complete a cost and benefit analysis on a case-by-case 
basis to determine if the property can be repaired or rebuilt. The 
servicer's actions must be based on the status of the mortgage, the 
amount of insurance proceeds, and the length of time required repairing 
or reconstructing the property, and the market conditions in the area. 
If the property will not be repaired or rebuilt, the insurance proceeds 
must be applied to the unpaid principal loan balance.


Sec. Sec.  3555.308-3555.349  [Reserved]


Sec.  3555.350  OMB control number.

    The report and recordkeeping requirements contained in this subpart 
are currently with the Office of Management and Budget under review and 
awaiting approval.

Subpart H--Collecting on the Guarantee


Sec.  3555.351  Loan guarantee limits.

    (a) Original loan amount. For the purposes of this section, the 
term ``Original Loan Amount'' means the original promissory note amount 
minus any loans funds not actually disbursed to the borrower or on 
behalf of the borrower at the time the SFHGLP loan was made or 
thereafter.
    (b) Maximum loss payment. The maximum payment for a loss sustained 
by the lender under the SFHGLP is the lesser of:
    (1) 90 percent of the Original Loan Amount; or
    (2) 100 percent of any loss equal to or less than 35 percent of the 
Original Loan Amount plus 85 percent of any remaining loss up to 65 
percent of the Original Loan Amount.


Sec.  3555.352  Loss covered by the guarantee.

    Subject to Sec.  3555.351, the loss claim payment will be 
calculated as the difference between the Total Indebtedness on the loan 
and the Net Recovery Value calculated according to Sec.  3555.353. The 
Total Indebtedness on the loan includes:
    (a) Principal balance. The unpaid principal balance;
    (b) Accrued interest. Accrued interest at the guaranteed loan note 
rate from the last day interest was paid by the borrower to the 
settlement date, as defined at Sec.  3555.10;
    (c) Additional interest. Additional interest on the unsatisfied 
principal accrued from the settlement date to the date the claim is 
paid, but not more than 90 days from the settlement date;
    (d) Protective advances. Principal and interest for protective 
advances, as described in Sec.  3555.303; and
    (e) Liquidation costs. Reasonable and customary liquidation costs, 
such as attorney fees and foreclosure costs. Annual fees advanced by 
the lender to the Agency are ineligible for reimbursement when 
calculating the loss payment, as otherwise provided by the Agency.


Sec.  3555.353  Net recovery value.

    The net recovery value of the property is determined differently 
for properties that have been sold than for properties that remain in 
the lender's inventory at the time the loss claim is filed.
    (a) Actual net recovery value. For a property that has been sold 
when a loss claim is filed, net recovery value is calculated as 
follows:
    (1) The proceeds from the sale plus any other amounts recovered, 
minus
    (2) The amount of actual liquidation and disposition costs provided 
those costs are reasonable and customary for the area. Costs incurred 
by in-house staff may not be included.
    (b) Anticipated net recovery value. For a property that has not 
sold when a loss claim is filed, net recovery value is calculated as 
follows:
    (1) The value of the property as determined by an Agency 
liquidation appraisal. The value should be determined as if the 
property would be sold without the market exposure it would ordinarily 
receive in a normal transaction, or within 90 days, minus;
    (2) The amount of actual liquidation expenses and estimated 
disposition costs that are reasonable and customary for the area. Costs 
incurred by in-house staff may not be included.
    (i) Actual liquidation expenses are the amount of attorney fees and 
costs, etc. incurred to acquire title to the property.
    (ii) Estimated disposition costs are calculated by Rural 
Development using

[[Page 73963]]

reasonable and customary cost factors appropriate for the area 
(available in any Rural Development office).


Sec.  3555.354  Loss claim procedures.

    Rural Development may offer authorized lenders a web-based 
automated system to calculate, submit or update a loss claim request 
and/or future recovery subject to the requirements of Sec.  3555.356. 
Manual paper loss claims may continue to be submitted by some lenders. 
Lenders must make a thorough review of all receipts and expenses prior 
to submitting a loss claim request. Supplemental adjustments to the 
initial claim may be considered, as provided by the Agency.
    (a) Sold property. For property that has been sold, the lender must 
submit a loss claim within 45 calendar days of the sale. Late claims 
made beyond this period of time may be rejected or reduced by Rural 
Development. Instructions and forms may be obtained from Rural 
Development.
    (b) REO. If the property has not been sold, the lender must take 
the following steps:
    (1) Notify Rural Development that the property has not been sold so 
that Rural Development may request an appraisal.
    (i) If the property is not located on American Indian restricted 
land, the lender must notify Rural Development if the property has not 
been sold within 9 months of foreclosure, or from the end of any 
applicable redemption period, whichever is later.
    (ii) If the property is located on American Indian restricted land, 
the lender must notify Rural Development if the property has not been 
sold within 12 months of foreclosure, or from the end of any redemption 
period, whichever is later.
    (2) Upon notification that the property has not been sold, Rural 
Development will obtain an appraisal at the Agency's expense and 
provide a liquidation value to the lender. The lender must submit a 
loss claim within 30 calendar days of receiving the liquidation value 
from Rural Development. Late claims made beyond this period of time 
will be rejected.
    (c) Deficiency judgments. The lender must enforce any judgment for 
which there are current prospects of collection before submitting a 
loss claim, and amounts collected must be applied against the 
outstanding debt. Rural Development will process the loss claim if 
there are no current prospects for collection.


Sec.  3555.355  Reducing or denying the claim.

    (a) Determination of loss payment. Subject to the requirements of 
Sec.  3555.108, if Rural Development determines that the amount of the 
loss was increased due to the lender's failure to comply with the 
conditions of the Loan Note Guarantee, the Agency may reduce or deny 
any loss claim by the portion of the loss determined was caused by the 
lender's action or failure to act. The circumstances under which loss 
claims may be denied or reduced include, but are not limited to, the 
following lender actions:
    (1) Failure to adhere to required servicing and liquidation 
procedures as set forth in Agency regulations and guidance, including 
the payment of real estate taxes or hazard insurance when due;
    (2) Failure to report defaulted loans to Rural Development within 
required timeframes;
    (3) Failure to ensure that the security property is adequately 
maintained during liquidation;
    (4) Delay in filing a loss claim;
    (5) Claiming unauthorized expenses;
    (6) Providing unauthorized assistance;
    (7) Failure to obtain the required security or maintain the 
security position;
    (8) Violating usury laws;
    (9) Negligence, gross negligence or misrepresentation; or
    (10) Committing fraud, or failing to report knowledge of fraud or 
false information.
    (b) Disputes. If the lender disputes the loss claim amount 
determined by Rural Development, Rural Development will pay the 
undisputed portion of the loss claim, and the lender may appeal the 
decision in accordance with Sec.  3555.4.


Sec.  3555.356  Future recovery.

    The lender must notify the Agency upon sale of an REO property. If 
the lender recovers additional funds after the loss claim has been 
paid, the proceeds will be distributed so that the total loss to the 
Government is equivalent to the loss that would have been incurred had 
the recovered amount been included in the initial loss calculation.


Sec. Sec.  3555.357-3555.399  [Reserved]


Sec.  3555.400  OMB control number.

    The report and recordkeeping requirements contained in this subpart 
are currently with the Office of Management and Budget under review and 
awaiting approval.

    Dated: November 26, 2013.
Douglas J. O' Brien,
Acting Under Secretary, Rural Development.
    Dated: November 26, 2013.
Michael Scuse,
Acting Under Secretary, Farm and Foreign Agricultural Services.
[FR Doc. 2013-29084 Filed 12-6-13; 8:45 am]
BILLING CODE 3410-XV-P