[Federal Register Volume 81, Number 60 (Tuesday, March 29, 2016)]
[Rules and Regulations]
[Pages 17361-17365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07049]



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 Rules and Regulations
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  Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Rules 
and Regulations  

[[Page 17361]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3555

RIN 0575-AD00


Single Family Housing Guaranteed Loan Program

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Housing Service (RHS or Agency) is amending the 
current regulation for the Single Family Housing Guaranteed Loan 
Program (SFHGLP) on the subjects of lender indemnification, 
refinancing, and qualified mortgage requirements. The Agency is 
expanding its lender indemnification authority for loss claims in the 
case of fraud, misrepresentation, or noncompliance with applicable loan 
origination requirements. This action is taken to continue the Agency's 
efforts to improve and expand the risk management of the SFHGLP. The 
Agency is amending its refinancing provisions to simply require that 
the new interest rate not exceed the interest rate on the original loan 
and to add a new refinance option, ``streamlined-assist.'' Finally, the 
agency is amending its regulation to indicate that a loan guaranteed by 
RHS is a Qualified Mortgage if it meets certain requirements set forth 
by the Consumer Protection Finance Bureau (CFPB).

DATES: Effective April 28, 2016.

FOR FURTHER INFORMATION CONTACT: Lilian Lipton, Finance and Loan 
Analyst, 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) 
260-8012, email is [email protected].

SUPPLEMENTARY INFORMATION:

Classification

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

Executive Order 12988, Civil Justice Reform

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

Unfunded Mandates Reform Act

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

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It is the determination of the 
Agency that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment, and, in 
accordance with the National Environmental Policy Act of 1969, Pub. L. 
91-190, neither an Environmental Assessment nor an Environmental Impact 
Statement is required.

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 State and local 
governments. Therefore, consultation with the States is not required.

Regulatory Flexibility Act

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

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order imposes requirements on RD in the development 
of regulatory policies that have Tribal implications or preempt tribal 
laws. RD has determined that the final 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 Indian Tribes. Thus, this rule is not 
subject to the requirements of Executive Order 13175. If a Tribe 
determines that this rule has implications of which RD is not aware and 
would like to engage with RD on this rule, please contact RD's Native

[[Page 17362]]

American Coordinator at (720) 544-2911 or [email protected].

Executive Order 12372, Intergovernmental Consultation

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

Programs Affected

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

Paperwork Reduction Act

    The information collection and record keeping requirements 
contained in this regulation have been approved by OMB in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The 
assigned OMB control number is 0575-0179.

E-Government Act Compliance

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

Non-Discrimination Policy

    The U.S. Department of Agriculture (USDA) prohibits discrimination 
against its customers, employees, and applicants for employment on the 
bases of race, color, national origin, age, disability, sex, gender 
identity, religion, reprisal, and where applicable, political beliefs, 
marital status, familial or parental status, sexual orientation, or all 
or part of an individual's income is derived from any public assistance 
program, or protected genetic information in employment or in any 
program or activity conducted or funded by the Department. (Not all 
prohibited bases will apply to all programs and/or employment 
activities.)
    If you wish to file a Civil Rights program complaint of 
discrimination, complete the USDA Program Discrimination Complaint Form 
(PDF), found online at http://www.ascr.usda.gov/complaint_filing_cust.html, or at any USDA office, or call (866) 632-
9992 to request the form. You may also write a letter containing all of 
the information requested in the form. Send your completed complaint 
form or letter to us by mail at U.S. Department of Agriculture, 
Director, Office of Adjudication, 1400 Independence Avenue SW., 
Washington, DC 20250-9410, by fax (202) 690-7442 or email at 
[email protected].
    Individuals who are deaf, hard of hearing or have speech 
disabilities and you wish to file either an EEO or program complaint 
please contact USDA through the Federal Relay Service at (800) 877-8339 
or (800) 845-6136 (in Spanish).
    Persons with disabilities, who wish to file a program complaint, 
please see information above on how to contact us by mail directly or 
by email. If you require alternative means of communication for program 
information (e.g., Braille, large print, audiotape, etc.) please 
contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).

Background Information

    On March 5, 2015, RHS published a proposed rule with request for 
comments for the Single Family Housing Guaranteed Loan Program (SFHGLP) 
(80 FR 11950-11954). Rural Development received comments from seventeen 
respondents. Comments were from lenders, secondary market sources, 
builders, and other interest groups. Specific public comments and 
substantive changes from the proposed rule are addressed below in 
general order of appearance in the regulation, not based in the order 
of importance.
    One respondent requested the Agency to clarify when the rule would 
become effective and what the trigger events will be for the effective 
date of the various requirements for loan applications received by 
lenders on or after the effective date of the final rule. The final 
rule will become effective 60 days after its publication in the Federal 
Register.

Refinancing (Sec.  3555.101(d))

    Five respondents fully supported the Agency's proposal to amend its 
refinancing provisions and add the Streamlined-Assist Refinance option.
    One respondent supported the Streamlined-Assist Refinance program 
but requested that the Agency: (1) Add repayment requirements for 
remaining borrowers; (2) limit costs to principal and current interest 
charges due, reasonable and customary re-conveyance fee, and the 
upfront guarantee fee; and (3) limit refinance balance to original 
purchase loan amount. The Agency believes the Streamlined-Assist 
Refinance's purpose is to increase affordability for current borrowers 
and implementing the suggested changes will defeat the purpose of this 
option. No change is made in this provision.
    One respondent supported the addition of the Streamlined-Assist 
Refinance option but requested clarification with regards to the 
inclusion of the guarantee fee and eligible closing costs. Eligible 
loan purposes, including fees and closing costs, will remain the same 
as described on Sec.  3555.101(d) for all refinancing transactions. 
Closing costs may be included in the refinance loan amount. No change 
is made in this provision.
    One respondent requested the eligibility of non-section 502 loans 
to be refinanced through the program, such as balloon or ARM mortgage 
products, if they meet USDA eligibility requirements. The Agency does 
not have statutory authority as this request does not conform with the 
Housing Act of 1949 limits on refinancing in this program. No change is 
made in this provision.

Indemnification (Sec.  3555.108(d))

    Two respondents believe a five-year indemnification period is too 
long and requested the Agency to maintain the current lender 
indemnification period of 24 months. The Agency will continue to pursue 
a five-year indemnification period, similar to those of other federal 
agencies and as recommended by the Office of Inspector General (OIG) 
Report 04703-003-HY. The rule has been amended to clarify that the loan 
originator will be required to indemnify the Agency and not a 
subsequent holder or acquirer of the loan. No other change is made in 
this provision.
    Two respondents requested the Agency to amend its definition of 
default accounts from 30 days delinquent to 60 days. The Agency will 
maintain the 30-day definition, consistent with other federal agencies. 
No change is made in this provision.
    One respondent encouraged the Agency to add a standard of 
materiality for the underwriting defect and to specify that there must 
be a connection between the defect and the cause of default by adding 
that ``The Agency may seek indemnification if fraud or 
misrepresentation occurs in connection with the origination and the 
lender knew, or should have known about the occurrence.'' It also 
recommended the Agency to clarify that an indemnification does not 
affect the guaranty status of the loan. RHS will include the standard 
of materiality and a provision that the loan note guarantee of the 
holder will not be affected by indemnification by the originating 
lender.

[[Page 17363]]

Qualified Mortgage (Sec.  3555.109)

    Six respondents requested RHS to update program guidance to 
incorporate different points and fee limitations than those proposed. 
The Agency will remain consistent with the Consumer Financial 
Protection Bureau (CFPB) and other federal agencies in its points and 
fees limitations. No change is made in this provision.
    Two respondents requested the Agency to not adopt CFPB's 43-percent 
debt-to-income limit. The Agency had not included any debt-to-income 
limitation in the proposed rule. The CFPB debt ratio limitations do not 
apply to loans guaranteed by the Agency. Until January 20, 2021 or the 
date on which an agency rule defining qualified mortgages becomes 
effective (whichever is earlier), loans guaranteed by RHS are presumed 
to be qualified mortgages under 12 CFR 1026.43(e)(4).
    Four respondents noted that Housing Finance Agencies (HFA) loans 
are exempt from the Qualified Mortgage requirements and are 
automatically classified as Qualified Mortgages eligible for insurance 
through the SFHGLP. The Agency is amending its rule and will include 
language exempting HFAs from the Qualified Mortgage requirements.

Principal Reduction (Sec.  3555.304(d))

    One respondent wrote that the Mortgage Recovery Advance (MRA) 
already provides for principal reductions, and that by separating 
principal reduction from the MRA would complicate the process because 
loan servicers would now have to take two steps instead of only one. 
The respondent pointed out that if the PRA is eventually forgiven, it 
would become a tax liability to borrowers because the Internal Revenue 
Service (IRS) considers forgiven debt to be taxable income. Struggling 
low or moderate income borrowers may not be able to handle the 
additional tax bill. The respondent also indicated that since the PRA 
results in an unsecured loan which would not be forgiven if the 
borrower re-defaulted on their mortgage, mortgage loan servicers would 
be in a position of collecting on an unsecured loan. Mortgage loan 
servicers do not want to collect unsecured loans, and the respondent 
suggested that the agency should collect the unsecured loans.
    One respondent indicated that the use of separate notes, one for an 
MRA and one for a PRA, would complicate special loan servicing workouts 
and may confuse or overwhelm eligible borrowers. The respondent 
indicated that the Agency should consider keeping both the MRA and PRA 
amounts as secured loans to avoid the likelihood of borrower confusion. 
The respondent also questioned how the PRA would be impacted should the 
borrower attempt to pay off the loan before the three year period prior 
to eligibility for debt forgiveness. Should the PRA be forgiven, the 
respondent suggested that the Agency should report the forgiveness 
amount to the IRS, and not the servicer. The respondent wrote that 
should the PRA not be forgiven, attempts to collect the unsecured loan 
would be detrimental to borrowers recovering from financial 
difficulties. Attempts to collect unsecured PRAs, suggested the 
respondent, could ultimately be more costly to the Agency than simply 
forgiving the amounts advanced. Finally, the respondent questioned 
whether the MRA and PRA claims should be filed separately or whether 
both amounts may be submitted in the same claim. Separate filings would 
be especially complicated according to the respondent.
    Two respondents requested the Agency to eliminate the January 1, 
2001 to January 1, 2010 timeframe restriction on PRAs.
    One respondent supported the Principal Reduction Advance (PRA) 
proposal but requested that lenders have at least six months to 
implement the policy in order to allow for internal system integrations 
related to this process.
    After careful review and consideration, the Agency agrees with all 
the comments submitted, and has decided to not implement the PRA 
transaction as it had been proposed. The original MRA procedure will 
remain unaltered and the PRA will not become a separate transaction.
    Indemnification: In the Office of Inspector General (OIG) Report 
04703-003-HY, SFH GL Loss Claims, the Agency was requested to re-
evaluate the timeframe in which the Government can seek indemnification 
for noncompliance with regulations in loan origination. Present 
language in 7 CFR 3555.108(d)(1) limits the indemnification to losses 
if the payment under the guarantee was made within 24 months of loan 
closing. Origination defects which depart from Agency requirements, 
however, may cause defaults beyond 24 months from loan closing. 
Similarly, claims arising from defective originations may occur several 
years after loan closing. The change will trigger indemnification if 
the default occurs within five years from origination and the Agency 
concludes the default arose because the originator did not underwrite 
the loan according to Agency standards and guidelines, regardless of 
when the claim is paid. This is similar to how HUD and other federal 
agencies operate.
    The Agency may also seek indemnification if the Agency determines 
that fraud or misrepresentation occurred in connection with the 
origination of the loan, regardless of when the loan closed. 7 CFR 
3555.108(d)(2). This provision is being clarified to state that the 
Agency may seek indemnification in cases of fraud or misrepresentation 
regardless of when the loan closed or when the default occurred.
    In addition, the definition of ``default'' has been added to 
section 3555.10 to clarify that default is when an account is more than 
30 days overdue. This is consistent with how the term is used in the 
mortgage industry.
    Refinance: There are currently two refinance options available to 
Section 502 borrowers, and the Agency is adding a third option which 
has been successfully tested in a pilot. The Agency is amending section 
3555.101(d)(3)(i) to remove the requirement that the interest rate of a 
refinanced loan be at least 100 basis points below the original rate, 
and instead to require that the new interest rate not exceed the 
original interest loan's interest rate. The interest rate reduction 
requirement has proven problematic in rising rate environments. For 
example, in the case of divorce, the borrower may not be able to 
refinance as required by their divorce decree or judgment because they 
cannot secure an interest rate at least 1 percent lower than the first 
one.
    The definition of ``streamlined-assist refinance'' is being added 
to 7 CFR 3555.10. On February 1, 2012 RHS created a refinancing pilot 
known as the ``Rural Refinance Pilot.'' The streamlined-assist 
refinance differs from the traditional refinance options in that there 
is no appraisal or credit report requirement in most instances, as long 
as the borrower has been current on their first mortgage for the 
previous 12 months and their new interest rate is at least 1 percent 
lower than their first one. A new appraisal is required for direct loan 
borrowers who received a subsidy for the purposes of calculating 
subsidy recapture.
    The pilot was designed to assist existing Section 502 direct or 
guaranteed loan borrowers in refinancing their homes with greater ease 
in thirty-five eligible states where steep home price declines, 
unemployment and persistent poverty rates made refinancing a current

[[Page 17364]]

mortgage into more affordable terms difficult or impossible. Due to the 
success of the pilot program, RHS will adopt the pilot policy as a 
refinance option for existing Section 502 direct or guaranteed loan 
borrowers nationwide in addition to the two traditional refinance loan 
options of streamlined and non-streamlined. The special refinance loan 
option will be called ``streamlined-assist.''
    This rule amends 7 CFR 3555.101(d)(3)(vi) to include ``streamlined-
assist'' as one of three available refinance loan options in addition 
to the traditional ``streamlined'' and ``non-streamlined'' refinance 
loans. Section 3555.101(d)(3)(vi) discusses eligibility requirements 
for each streamlined and non-streamlined refinance loan. The 
streamlined-assist refinance will have the same features as the Rural 
Refinance Pilot described above. Additional eligibility criteria for 
refinance loans is discussed in Section 3555.101(d)(3).
    Qualified Mortgage: The agency is changing Section 3555.109, to 
indicate that a loan guaranteed by RHS meeting certain CFPB 
requirements is a ``Qualified Mortgage.''
    The CFPB published a ``Qualified Mortgage'' rule (12 CFR part 1026) 
which became effective January 10, 2014 and implemented in part the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (P.L. 
111-203). This rule requires creditors to make a reasonable, good faith 
determination of a consumer's repayment ability for any consumer credit 
transaction secured by a dwelling, and establishes a safe harbor from 
liability for transactions that meet the requirements for ``qualified 
mortgages.'' Currently, SFHGLP loans are considered to be qualified 
mortgages if they meet the requirements in 12 CFR 1026.43(e)(2)(i)-
(iii) and the points and fees limits in 12 CFR 1026.43(e)(3) until RHS 
promulgates its own rules regarding qualified mortgages, or January 10, 
2021, whichever is earlier. (See 12 CFR 1026.43(e)(4)).
    RHS guaranteed loans currently meet these requirements. Therefore, 
section 3555.109 is clarifying that RHS guaranteed loans which meet the 
CFPB requirements in 12 CFR 1026.43(e)(2)(i)-(iii) and 12 CFR 
1026.43(e)(3) are considered qualified mortgages.

List of Subjects in 7 CFR Part 3555

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

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

PART 3555--GUARANTEED RURAL HOUSING PROGRAM

0
1. The authority citation for part 3555 continues to read as follows:

    Authority:  5 U.S.C. 301, 7 U.S.C. 1989, 42 U.S.C. 1480, and 
Subpart E of 7 U.S.C. 1932(a).

Subpart C--Loan Requirements

0
2. Amend Sec.  3555.10 by adding definitions for ``Default''and 
``Streamlined-assist refinance'' to read as follows:


Sec.  3555.10  Definitions and abbreviations.

* * * * *
    Default. A loan is considered in default when a payment has not 
been paid after 30 days from the date it was due.
* * * * *
    Streamlined-assist refinance. A streamlined-assist refinance is an 
abbreviated method of refinancing which does not require a credit 
report, or the calculation of loan-to-value or debt-to-income ratios. 
Lenders must verify that the borrower has been current on their 
existing loan for the preceding 12 month period.
* * * * *

0
3. Section 3555.101 is amended by revising paragraphs (d)(3)(i), (ii), 
and (iv) to read as follows:


Sec.  3555.101  Loan purposes.

* * * * *
    (d) * * *
    (3) * * *
    (i) Three options for refinancing may be offered: streamlined, non-
streamlined, and streamlined-assist. Other than provided in this 
paragraph, no cash out is permitted for any refinance. Documentation 
costs and underwriting requirements of subparts D, E, and F of this 
part apply to streamlined and non-streamlined refinances.
    (A) Lenders may offer a streamlined refinance for existing Section 
502 Guaranteed loans, which does not require a new appraisal. The 
lender will pay off the balance of the existing Section 502 Guaranteed 
loan.
    (B) Lenders may offer non-streamlined refinancing for existing 
Section 502 Guaranteed or Direct loans, which requires a new and 
current market value appraisal. The amount of the new loan must be 
supported by 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.
    (C) A streamlined-assist refinance loan is a special refinance 
option available to existing Section 502 direct and guaranteed loan 
borrowers. Applicants must meet the income eligibility requirements of 
Sec.  3555.151(a), and must not have had any defaults during the 12 
month period prior to the refinance loan application. There are no 
debt-to-income calculation requirements, no credit report requirements, 
no property inspection requirements, and no loan-to-value requirements. 
There is no appraisal requirement except for Section 502 direct loan 
borrowers who have received a subsidy.
    (ii) The interest rate of the new loan must be fixed and must not 
exceed the interest rate of the original loan being refinanced.
* * * * *
    (iv) The loan security must include the same property as the 
original loan and be owned and occupied by the borrowers as their 
principal residence.
* * * * *

0
4. Amend Sec.  3555.108 by revising paragraph (d) to read as follows:


Sec.  3555.108  Full faith and credit.

* * * * *
    (d) Indemnification. The loan note guarantee will remain in effect 
for any holder of the loan who acquired it from an originating lender. 
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 originating 
lender's eligibility status in accordance with subpart B of this part 
and may also require the originating lender:
    (1) To indemnify the Agency for the loss, if the default leading to 
the payment of loss claim occurred within five (5) years of loan 
closing, when one or more of the following conditions is satisfied:
    (i) The originating lender utilized unsupported data or omitted 
material information when submitting the request for a conditional 
commitment to the Agency;
    (ii) The originating lender failed to properly verify and analyze 
the applicant's income and employment history in accordance with Agency 
guidelines;
    (iii) The originating lender failed to address property 
deficiencies identified in the appraisal or inspection report that 
affect the health and safety of the

[[Page 17365]]

occupants or the structural integrity of the property;
    (iv) The originating lender used an appraiser that was not properly 
licensed or certified, as appropriate, to make residential real estate 
appraisal in accordance with Sec.  3555.103(a); or,
    (2) To indemnify the Agency for the loss regardless of how long ago 
the loan closed or the default occurred, if the Agency determines that 
fraud or misrepresentation was involved with the origination of the 
loan.
    (3) In addition, the Agency may use any other legal remedies it has 
against the originating lender.
* * * * *

0
5. Add Sec.  3555.109 to read as follows:


Sec.  3555.109  Qualified Mortgage

    A qualified mortgage is a guaranteed loan meeting the requirements 
of this part and applicable Agency guidance, as well as the 
requirements in 12 CFR 1026.43(e)(i) through (iii) and 12 CFR 
1026.43(e)(3). An extension of credit made pursuant to a program 
administered by a State Housing Finance Agency is exempt from this 
requirement as defined in 12 CFR 1026.43(a)(3)(iv). Lenders will be 
allowed to cure unintentional errors and retain the qualified mortgage 
status if the conditions set in 12 CFR 1026.31(h) are met.

     Dated: February 18, 2016.
Tony Hernandez,
Administrator, Rural Housing Service.
[FR Doc. 2016-07049 Filed 3-28-16; 8:45 am]
BILLING CODE 3410-XV-P