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