[Federal Register Volume 84, Number 140 (Monday, July 22, 2019)]
[Rules and Regulations]
[Pages 35003-35007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15450]



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

  Federal Register / Vol. 84, No. 140 / Monday, July 22, 2019 / Rules 
and Regulations  

[[Page 35003]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3555

RIN 0575-AD10


Single Family Housing Guaranteed Loan Program

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Housing Service (RHS or Agency) published a proposed 
rule on June 20, 2018 to amend the current regulation for the Single-
Family Housing Guaranteed Loan Program (SFHGLP) Single Close 
Combination Construction to Permanent Loans (aka ``single close 
loans''), and now adopts the proposed changes in this final rule with 
some modifications. As proposed, the Agency will amend the regulation 
to ease the financial costs of interim construction financing for non-
depository lenders (warehouse line of credit lenders or warehouse 
lenders) by allowing a temporary interest rate higher than the 
permanent note rate for interim construction financing, remove the 
requirement for loan modification or re-amortization once construction 
is complete, and allow for the reserve of regularly scheduled 
principal, interest, taxes and insurance (PITI) payments during the 
construction period. The final rule clarifies that the PITI reserve is 
an eligible use of single close loan funds. In addition, based on 
comments received, the Agency will allow single close loans for the 
rehabilitation of existing dwellings upon their purchase and eliminate 
maximum interest rate cap requirements for all SFHGLP loans. For 
clarity and completeness, the final rule also provides a definition of 
a warehouse lender and updates lender mortgage record retention 
requirements.

DATES: Effective on August 21, 2019.

FOR FURTHER INFORMATION CONTACT: Kate Jensen, 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: (503) 894-2382, email 
is [email protected].

SUPPLEMENTARY INFORMATION: 

Executive Order 12866, Classification

    This rule has been determined to be non-significant and therefore 
was not reviewed by the Office of Management and Budget (OMB) under 
Executive Order 12866.

Executive Order 12988, Civil Justice Reform

    This final 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 SFHGLP, but if they do apply and 
are selected for funding, they must comply with the requirements 
applicable to the Federal program funds. This final 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 1970, 
subpart A, ``Environmental Programs.'' 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, Public 
Law 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

    Executive Order 13175 imposes requirements on RHS in the 
development of regulatory policies that have Tribal implications or 
preempt tribal laws. RHS 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,

[[Page 35004]]

this final rule is not subject to the requirements of Executive Order 
13175. If a Tribe determines that this rule has implications of which 
RHS is not aware and would like to engage with RHS on this rule, please 
contact USDA's Native American Coordinator at (720) 544-2911 or 
[email protected].

Executive Order 12372, Intergovernmental Review of Federal Programs

    These loans are subject to the provisions of Executive Order 12372, 
which require intergovernmental consultation with State and local 
officials. RHS conducts intergovernmental consultations for each SFHGLP 
loan in accordance with 2 CFR part 415, subpart C.

Programs Affected

    The program affected by this regulation 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. Chapter 35). The 
assigned OMB control number is 0570-0179.

E-Government Act Compliance

    The Agency 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

    In accordance with Federal civil rights law and U.S. Department of 
Agriculture (USDA) civil rights regulations and policies, the USDA, its 
Agencies, offices, and employees, and institutions participating in or 
administering USDA programs are prohibited from discriminating based on 
race, color, national origin, religion, sex, gender identity (including 
gender expression), sexual orientation, disability, age, marital 
status, family/parental status, income derived from a public assistance 
program, political beliefs, or reprisal or retaliation for prior civil 
rights activity, in any program or activity conducted or funded by USDA 
(not all bases apply to all programs). Remedies and complaint filing 
deadlines vary by program or incident.
    Persons with disabilities who require alternative means of 
communication for program information (e.g., Braille, large print, 
audiotape, American Sign Language, etc.) should contact the responsible 
Agency or USDA's TARGET Center at (202) 720-2600 (voice and TTY) or 
contact USDA through the Federal Relay Service at (800) 877-8339. 
Additionally, program information may be made available in languages 
other than English.
    To file a program discrimination complaint, complete the USDA 
Program Discrimination Complaint Form, AD-3027, found online at http://www.ascr.usda.gov/complaint_filing_cust.html and at any USDA office or 
write a letter addressed to USDA and provide in the letter all of the 
information requested in the form. To request a copy of the complaint 
form, call (866) 632-9992. Submit your completed form or letter to USDA 
by:
    (1) Mail: U.S. Department of Agriculture, Office of the Assistant 
Secretary for Civil Rights, 1400 Independence Avenue SW, Washington, DC 
20250-9410;
    (2) Fax: (202) 690-7442; or
    (3) Email: [email protected].
    USDA is an equal opportunity provider, employer, and lender.

Background Information

    The Agency is amending its regulations to provide increased 
flexibility in loan terms to facilitate and encourage single close 
loans, which will stimulate new construction, rehabilitation, and 
homeownership in rural areas. Currently, warehouse lenders have 
considerable difficulty making affordable guaranteed single close loans 
because of the inability to cover construction costs and make payments 
to secondary market investors during the construction period. The 
proposed rule (83 FR 28547) sought to address these challenges through 
the following:
     Allow warehouse lenders the flexibility to charge a 
temporary and higher interest rate to cover their line of credit costs 
during construction as an eligible loan purpose. The temporary higher 
interest rate for the single close loan program would be limited to the 
construction period and must revert to the underlying promissory note 
rate or lower for the balance of the loan.
     Permit all lenders to create a reserve account for a up to 
12 months of a borrower's regularly scheduled PITI payments from the 
original loan closing to make the loan payments during the construction 
period. This would make the process more affordable to the borrower who 
will not have to make both their existing housing payment and the 
construction loan payment at the same time during construction. While 
this change is available to all lenders, it will be predominantly 
utilized by those lenders who immediately securitize a loan after loan 
closing. The PITI reserve is intended solely for the use of making the 
borrower's fully amortized PITI payment during the construction period. 
The PITI reserve cannot be combined with any other reserve account and 
should any funds remain in the PITI reserve after construction is 
complete the lender is required to apply the excess funds as a 
principal payment.
     Remove the requirement for a loan modification or re-
amortization at the end of the construction period, allowing loans to 
remain in mortgage backed securities without interruption.
    In addition to adopting the proposed changes above, the final rule 
also makes several other changes based on comments received in response 
to the proposed rule. First, single close loan purposes will include 
rehabilitation when the property being purchased requires 
rehabilitation to meet program standards. Second, the final rule adds 
the definition of a warehouse lender. Third, the final rule updates 
lender mortgage record retention requirements to include single close 
construction documentation. Lastly, the final rule will update the 
regulation to eliminate the maximum interest rate cap for all SFHGLP 
loans to allow lenders the increased ability to extend credit to 
eligible applicants. This change is based on comments received in 
response to the proposed rule as well as the Request for Information 
(RFI) on August 17, 2018 (83 FR 41056) reduction or elimination of the 
interest rate cap.
    These actions are taken to provide low- and moderate-income 
households in rural areas greater opportunities to acquire affordable 
newly constructed homes or rehabilitate an existing home, provide 
greater cost efficiency during construction, and increase viability in 
the secondary mortgage markets. These changes will expand affordable 
housing opportunities for rural borrowers and local builders as well as 
the economic viability of rural communities. Each change and Agency 
response to any comments to the proposed rule is discussed below. 
Topics are addressed below in order of appearance in the regulation, 
not based in order of predominance.


Sec.  3555.104  Loan Terms

    Nine respondents fully supported the Agency's proposal to add 
provisions allowing an increased interest rate for interim construction 
financing during

[[Page 35005]]

the construction period. This provision will increase participation in 
the single close loan program by lenders who utilize a warehouse line 
of credit during construction.
    One respondent replied unfavorably to the Agency's proposal to 
allow a higher rate of interest during the construction period, 
expressing concern that the current interest rate cap should stay in 
place to ensure customers falling within the lower income brackets have 
a chance at becoming homeowners. The Agency appreciates the comment; 
however, if warehouse lenders cannot recover their construction costs, 
they will not make such loans at all, since the current regulations are 
too restrictive. The changes do not take away existing loan 
opportunities from customers--rather, the changes allow single close 
loans to become available to more borrowers. In addition, lenders must 
still underwrite loans in accordance with existing regulations and 
guidance on applicant income, debt ratios, repayment ability, and other 
aspects that contribute to affordable loans and successful 
homeownership. Loans are also subject to the disclosure requirements of 
the Real Estate Settlement Procedures Act (RESPA) and the Truth in 
Lending Act (TILA).
    Allowing the higher interest rate during the construction period 
will expand opportunities for warehouse lenders to participate in the 
SFHGLP increasing competition in the marketplace. Encouraging new 
construction increases affordable housing opportunities in rural 
communities removing barriers to homeownership for low- to moderate-
income applicants. The higher interest rate would be for a limited time 
and amortized on the loan advances, not the entire loan amount, and the 
interest costs can be included as an eligible loan purpose.
    Therefore, the Agency is finalizing the proposal to allow a higher 
interest rate for warehouse lender interim construction financing 
accrued during the construction period up to twelve months. The 
interest rate must revert to a rate that is no higher than the 
promissory note rate once the construction period has ended. The Agency 
clarifies in the final rule that the higher interest rate for interim 
construction financing is only available for loans made by warehouse 
lenders. In addition, the Agency retains the authority to establish a 
maximum interest rate in the handbook as necessary to further program 
goals and protect the best interest of the government.
    Two respondents recommended the Agency to raise or remove the 
maximum interest rate cap program wide for all SFHGLP loans, not just 
for the single close loans. Both respondents commented that raising or 
removing the current interest rate cap provides lenders the flexibility 
to offer reasonable rates to their clients or participate in a 
concurrent affordable housing product offered by a Housing Finance 
Agency (HFA). In response to the RFI which sought opinion regarding the 
reduction or elimination of the interest rate cap for all SFHGLP loans, 
most comments were in favor of eliminating the interest rate cap, 
citing the inability of the HFAs to adequately price the SFHGLP 
product. The Agency agrees with the comments and will revise section 
3555.10 and 3555.104(a)(3) to eliminate the maximum interest rate cap, 
and instead require approved lenders and borrowers to negotiate the 
best interest rate in compliance with all applicable laws. The change 
is also consistent with policies of other federal mortgage credit 
programs, such as the Department of Veterans Affairs and Department of 
Housing and Urban Development. All loans must still meet program 
underwriting requirements and are subject to RESPA and TILA.


Sec.  3555.105  Combination Construction and Permanent Loans

    Nine respondents fully supported the Agency's proposal to allow a 
reserve of up to 12 months of the borrower's regularly scheduled PITI 
payments during the construction period.
    The proposed rule used ``reserve'' and ``escrow'' interchangeably 
when discussing this PITI account. Based on feedback regarding industry 
standards, the final rule refers to the PITI account as a ``reserve'', 
not an ``escrow''. The PITI reserve is separate from the construction 
escrow and the two accounts must not be combined.
    One respondent supported the regulation changes for the single 
close option but requested clarification on fair market appraisal value 
and the appraiser's ability to use the cost approach to determine fair 
market value. The respondent expressed concern that the inclusion of a 
reserve account for twelve months PITI payments as an eligible loan 
cost could potentially increase the loan amount over the fair market 
appraised value, forcing the borrower to incur out of pocket expenses. 
The Agency agrees that in some circumstances the home may not appraise 
for the full value of the dwelling and construction. In such cases, a 
conditional commitment will not be issued, the loan will not be closed, 
construction will not be initiated, and the borrower will not incur out 
of pocket expenses; however, when the appraiser has been fully informed 
of all the hard and soft costs for the new construction, including any 
reserves, the homes are more likely to appraise for the complete cost 
or value of the new construction. No change is made to the provision.
    One respondent requested the Agency to allow the use of the cost 
approach to determine the fair market value of single close 
construction properties. The respondent believes the appraiser should 
determine if the cost approach or sales comparison approach will best 
determine property value. Currently, the Agency considers the sales 
comparison approach (also referred to as the market value approach) as 
the principal method for appraisers to determine their opinion of 
value. However, the Uniform Standards of Professional Appraisal 
Practices (USPAP) also provide for appraisers to use the cost approach 
to value. The Agency agrees the cost approach is a useful tool for 
appraisers to use. While the current regulation can encompass both cost 
approach and sales comparison approach, the Agency will update Sec.  
3555.105(d)(2) to reiterate that appraisals must be conducted in 
accordance with USPAP and clarify in the handbook that either the cost 
or market value approach is acceptable. No other change is made in this 
provision.
    One respondent requested the Agency to provide clear guidance 
addressing the collection and financing of the PITI reserve account 
along with any refund policy for the PITI reserve account should the 
property sell within twelve months. Typically, a property will not be 
sold within the construction period without extenuating circumstances. 
Under Sec.  3555.105(g), in the event of unplanned changes during 
construction, a lender remains responsible for completion of 
improvements satisfactory to Rural Development, and that the loan will 
be serviced in accordance with applicable regulations. As explained in 
Chapter 12 of Handbook 3555, all available funds in the construction 
escrow account would be used to complete the project and remaining 
funds would be applied as a principal reduction. This final rule 
clarifies such policy in Sec.  3555.105(g) and extends the policy to 
any remaining PITI reserve funds. Therefore, under the final rule, in 
the event of unplanned changes preventing completion of construction, 
the lender must complete improvements to the satisfaction of Rural 
Development and apply any remaining PITI reserve and construction 
escrow funds (after satisfactory

[[Page 35006]]

improvements are complete) as a principal reduction. The lender would 
proceed with loan servicing options as appropriate. The Agency is also 
amending Sec.  3555.105(e) to require mortgage file documentation 
evidencing the lender's use of any remaining PITI reserve or 
construction escrow funds for principal reduction.
    One respondent requested the Agency to provide additional guidance 
for the distribution of loan funds during construction and 
clarification on whether the lender or servicer will be responsible for 
the distribution of those funds. It is the responsibility of the lender 
to pay out monies from escrow to the builder during construction upon 
written approval from the borrower and to document that the appropriate 
work was completed in accordance with Sec.  3555.105(a)(5). No change 
is made in this provision.
    One respondent supported the changes to the single close loan 
program but requested the Agency to remove the requirement to conduct 
individual credit checks on contractors. Section 3555.105(b) does not 
require individual credit checks on contractors; however, the Agency 
will clarify the administrative guidance (Handbook 3555 Chapter 12) 
providing options to determine and document a builder's credit history. 
No change is made in this provision.
    Three respondents fully supported the Agency's proposed amendments 
to the single close loan program and requested the Agency to extend the 
program to include rehabilitation loans. The Agency agrees with the 
comments submitted and will amend the language in Sec.  3555.105(c) and 
Sec.  3555.105(e) to include rehabilitation with the purchase of an 
existing dwelling as an allowable single close loan purpose.
    After careful review and consideration of the comments submitted, 
the Agency decided the addition of rehabilitation in the single close 
loan program will increase inventory options and expand construction 
opportunities for rural applicants and lenders. The revisions allow the 
lender to finance the rehabilitation and purchase of an existing 
dwelling, to recapture interest accrued on a business line of credit 
during construction, and to reserve the entire regularly scheduled 
fully amortized PITI payment for the construction period. Allowable 
rehabilitation costs are those required to bring the dwelling into 
compliance with program standards. The need for these types of repairs 
are typically mentioned in the appraisal or inspection report. Single 
close loans may not be used to finance standalone rehabilitation 
without purchase of the dwelling that will be rehabilitated.
    Current regulation prohibits the use of single close loans for 
condominiums. While SFHGLP loans are rarely used for condominiums in 
general, the Agency will clarify in this final rule that 
``condominiums'' ineligible for single close loans include detached and 
site condominiums. The clarification is made in response to evolving 
types of condominiums, all of which are still excluded from single 
close loan purposes.
    The Agency is updating the mortgage file documentation requirements 
in Sec.  3555.105(e) to reflect the addition of rehabilitation as an 
allowable single close loan purpose.
    Overall, the regulatory revisions will reduce the burden of 
construction financing on small and medium sized lenders, streamline 
and expand the program, and provide lenders the ability to quickly 
transfer closed loans to program investors.

List of Subjects in 7 CFR Part 3555

    Home improvement, Loan Programs--Housing and community development, 
Eligible loan purpose, Construction, Loan terms, Mortgages, Rural 
areas.

    Therefore, chapter XXXV, 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; 42 U.S.C. 1471 et seq.

Subpart C--Loan Requirements

0
2. Amend Sec.  3555.10 by removing the definition of ``maximum 
allowable interest rate'' and adding the definition of ``warehouse 
lender'' in alphabetical order to read as follows:


Sec.  3555.10   Definitions and abbreviations.

* * * * *
    Warehouse lender. A non-depository lender who utilizes short-term 
revolving lines of credit to finance loan origination and or 
construction financing.

0
3. Amend Sec.  3555.104 by revising paragraphs (a)(2) through (4) to 
read as follows:


Sec.  3555.104  Loan terms.

    (a) * * *
    (2) Shall be negotiated between the lender and the borrower to 
allow the borrower to obtain the best available rate in compliance with 
all applicable laws.
    (3) If the interest rate increases between the time of the issuance 
of the conditional commitment and the loan closing, the lender will 
submit appropriate documentation and underwriting analysis to confirm 
that the applicant is still eligible.
    (4) The warehouse lender may charge an interest rate for interim 
construction financing that exceeds the underlying promissory note 
rate. After construction ends, the interest rate must revert to a rate 
that is no higher than the underlying promissory note rate. The Agency 
reserves the right to establish a maximum amount for the interim 
construction financing interest rate in the handbook, as necessary to 
further program goals and protect the best interests of the government.
* * * * *

0
4. Amend Sec.  3555.105 by:
0
a. Revising paragraph (c)(1);
0
b. Adding paragraph (c)(2)(iv);
0
c. Revising paragraph (d)(2);
0
d. Adding paragraph (d)(7);
0
e. Revising paragraph (e)(1)
0
f. Removing ``and'' from the end of (e)(6);
0
g. Revising paragraph (e)(7);
0
h. Adding paragraph (e)(8); and
0
i. Revising paragraph (g).
    The revisions and additions read as follows:


Sec.  3555.105  Combination construction and permanent loans.

* * * * *
    (c) * * *
    (1) The loan is to finance the purchase of real estate and 
construction of a single family dwelling or the purchase and required 
rehabilitation of an existing single family dwelling. Condominiums, 
including detached condominiums and site condominiums, are ineligible 
for combination construction and permanent loans.
    (2) * * *
    (iv) The costs of an interim construction financing interest rate 
and PITI reserve under Sec.  3555.104(e) and Sec.  3555.105(d)(7), 
respectively.
    (d) * * *
    (2) The fair market value as determined by a licensed or certified 
appraiser in accordance with regulation 3555.107(d) will be used to 
establish the maximum loan amount.
* * * * *
    (7) Lenders may fund a reserve account for up to 12 months of 
regularly scheduled (amortized) principal and interest payments along 
with taxes and insurance (PITI). In such cases, a loan modification is 
not required after

[[Page 35007]]

construction is complete. Funds remaining in the PITI reserve after 
construction is complete will be applied by the lender as a principal 
payment.
    (e) * * *
    (1) The actual cost to construct or rehabilitate the subject 
dwelling.
* * * * *
    (7) Loan modification agreement, once construction is complete, 
confirming the existence of a permanent loan and the amortizing 
interest rate on the loan; and
    (8) Evidence that all funds remaining in the construction escrow or 
PITI reserve accounts have been applied as a principal curtailment once 
construction or rehabilitation is complete.
* * * * *
    (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. Funds 
remaining in all PITI reserve and construction escrow accounts after 
full disbursement of construction costs will be applied by the lender 
as a principal payment.
* * * * *

Bruce W. Lammers,
Administrator, Rural Housing Service.
[FR Doc. 2019-15450 Filed 7-19-19; 8:45 am]
 BILLING CODE 3410-XV-P