[Federal Register Volume 84, Number 227 (Monday, November 25, 2019)]
[Proposed Rules]
[Pages 64788-64795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25128]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 84, No. 227 / Monday, November 25, 2019 / 
Proposed Rules  

[[Page 64788]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3550

[Docket No. RHS-19-SFH-0020]
RIN 0575-AD14


Single Family Housing Direct Loan and Grant Programs

AGENCY: Rural Housing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: Through this proposed rule, the Rural Housing Service (RHS or 
Agency) is proposing to amend its regulations to update and improve the 
direct Single-Family Housing (SFH) loans and grants programs. The 
proposed changes would increase program flexibility, allow more 
borrowers to access affordable loans, better align the programs with 
best practices, and enable the programs to be more responsive to 
economic conditions and trends.

DATES: Comments on the proposed rule must be received on or before 
January 24, 2020.

ADDRESSES: You may submit comments to this rule through the Federal 
eRulemaking Portal: Go to http://www.regulations.gov and, in the lower 
``Search Regulations and Federal Actions'' box, select ``Rural Housing 
Service'' from the agency drop-down menu, then click on ``Submit.'' In 
the Docket ID column, select RHS-19-SFH-0020 to submit or view public 
comments and to view supporting and related materials available 
electronically. Information on using Regulations.gov, including 
instructions for accessing documents, submitting comments, and viewing 
the docket after the close of the comment period, is available through 
the site's ``User Tips'' link.
    All comments will be available for public inspection online at the 
Federal eRulemaking Portal (http://www.regulations.gov).

FOR FURTHER INFORMATION CONTACT: Andrea Birmingham, Finance and Loan 
Analyst, Single Family Housing Direct Loan Division, USDA Rural 
Development, STOP 0783, 1400 Independence Ave. SW, Washington, DC 
20250-0783, Telephone: (202) 720-1489. Email: 
[email protected].

SUPPLEMENTARY INFORMATION:

Background and Proposed Changes

    In order to improve the delivery of the SFH loan programs and to 
promote consistency among the programs when appropriate, RHS is 
proposing to amend its regulations at 7 CFR part 3550 for the direct 
SFH loan and grant programs by:
    (1) Revising and adding specific definitions to Sec.  3550.10:
    a. Revise the definition of modest housing, which currently 
prohibits in-ground swimming pools. The revised definition would allow 
for the financing of existing modest homes with pools. Existing housing 
stocks are very limited in many rural areas, and this is an unnecessary 
prohibition to homeownership when an otherwise modest and affordable 
home is typical for the area but cannot be financed because of a pool. 
The proposed change promotes a degree of consistency with the SFH 
guaranteed loan program, which does not prohibit in-ground swimming 
pools. In-ground pools with new construction, or with dwellings that 
are purchased new, would still be prohibited.
    b. Remove the definition of national average area loan limit. This 
removal would complement changes proposed to Sec.  3550.52(d)(6) in a 
separate rulemaking (83 FR 44504 (August 31, 2018)).
    c. Revise the definition of the PITI ratio to include homeowner's 
association dues and other recurring, housing-related assessments. The 
change would reduce the risk of financing a property which may not be 
truly affordable to the homeowner. This risk occurs because of a PITI 
ratio which may be too low when recurring housing related costs such as 
mandatory homeowner's association dues and land lease payments are not 
taken into consideration during underwriting. This change would result 
in more accurately calculating the front end, PITI ratio for housing 
related costs; and in turn, calculating a more accurate Total Debt 
ratio on the back end. Calculating more accurate ratios will help 
ensure a loan amount is approved at an affordable level for the 
borrower.
    d. Revise the veterans' preference definition to remove obsolete 
information and streamline the definition by citing the definition of a 
veteran or a family member of a deceased service member in 42 U.S.C. 
1477.
    e. Add definition for principal residence. The definition would 
align with that used in the SFH guaranteed loan program and the 
mortgage industry.
    (2) Changing references Sec.  3550.11(a) and (b) to ``homeowner 
education'' to ``homeownership education'' for consistency, and 
removing the requirement placed on State Directors to update the list 
of homeownership education providers annually. The Agency proposes to 
require State Directors to update the list on an as-needed basis, but 
no less frequently than every three years. The proposed rule also 
specifies that the Agency would determine preferences for education 
format (i.e., online, in-person, telephone) based on effectiveness, 
availability and industry practice. The Agency would publish the 
education format preferences in a publicly available format, such as 
the program handbook. These changes would allow the Agency to be more 
responsive to changes in homeowner education course delivery and 
availability.
    (3) Revising Sec.  3550.52(a) to allow a new borrower to use new 
loan funds to purchase a dwelling from an existing RHS borrower. The 
current regulation requires the new borrower to assume the existing 
loan. Under the proposed revision, the Agency would determine if these 
transactions will be financed using an assumption of the existing RHS 
indebtedness or new loan funds, depending on funding levels as well as 
program goals and needs. This revision would allow the Agency to 
responsibly, effectively, and fully utilize funds appropriated by 
Congress without the additional steps required to process and close a 
loan assumption and subsequent new loan, thereby reducing loan 
application processing times.
    (4) Revising the packaging fee requirements in Sec.  3550.52(d)(6) 
to allow the Agency more flexibility to specify packaging fees for the 
non-certified loan application process, and to ensure non-

[[Page 64789]]

certified packaging fees reflect the level of service provided and the 
prevailing cost to provide the service.
    For the non-certified loan packaging process, the current fee may 
not exceed $350, but this limit would be revised as it does not 
necessarily reflect the time a non-certified loan packager invests in 
the packaging process. Under the proposed revision, the packaging fees 
for the non-certified loan packaging process may not exceed a limit 
determined by the Agency and is no greater than one percent of the 
national average area loan limit. The Agency will determine the exact 
limit within the one percent threshold based on factors such as the 
level of service provided and the prevailing cost to provide the 
service and will publish the exact limit in a publicly available format 
such as the program handbook.
    This rule also proposes to amend this paragraph to remove the 
language regarding a preliminary eligibility determination to 
streamline the process, and to clarify that the packaging fee is paid 
only if the loan closes.
    (5) Revising Sec.  3550.53(c) and removing (c)(1) through (3) to 
remove the overly restrictive primary residence requirements for 
military personnel and students. These requirements prohibit approving 
loans for active duty military applicants, unless they will be 
discharged within a reasonable period; and for full time students 
unless there are reasonable prospects that employment will be available 
in the area after graduation. Active duty military personnel and full-
time students provide valuable service experience, education, and civic 
and financial contributions to rural areas. Providing these applicants 
with more opportunity to own modest, decent, safe, and sanitary homes 
in rural areas would strengthen the fabric of those communities. In 
addition, removing this overly restrictive language will improve 
consistency with other Federal housing programs such as the U.S. 
Department of Housing and Urban Development and the U.S. Department of 
Veterans Affairs.
    (6) Revising Sec.  3550.53(g) and removing Sec.  3550.53(g)(1) 
through (5) to include the new definition of PITI for clarity; and to 
revise repayment ability ratio thresholds to use the same ratios for 
both low- and very-low income applicants (which will help ensure equal 
treatment of applicants across the income categories and improve the 
marketability of the program) and to increase the ratios by a small 
percentage to reflect common industry tolerances. This change, in 
conjunction with automated underwriting technology, will address risk 
layers and reduce the frequent requests for PITI ratio waivers due to 
compensating factors.
    (7) Replacing ``homeowner'' with ``homeownership'' in Sec.  
3550.53(i)for consistency within part 3550.
    (8) Revising Sec.  3550.55(c) introductory text and (c)(4) and (5) 
so that application processing priorities are applied on a regular 
basis, and not just during periods of insufficient funding. Current 
regulations only trigger priorities in application processing when 
funding is insufficient. However, applying these priorities on a 
regular basis, not just during insufficient funding, will provide clear 
processing priorities for RHS staff. In the case of applications with 
equivalent priority status that are received on the same day, 
preference will be extended to applicants qualifying for a veterans' 
preference.
    This proposed change recognizes that RHS has limited staff 
resources and that complete applications need to be prioritized for 
processing, as well as for funding when funds are limited. While the 
goal is to determine an applicant's eligibility for the program within 
30 days of receiving a complete application regardless of their 
priority ranking and the availability of funds, the priority ranking 
will direct Agency staff how to prioritize their work processes and 
better meet urgent needs. The proposed amendment would also give fourth 
priority to applications submitted via an intermediary through the 
certified application packaging process outlined in Sec.  3550.75. 
Currently, RHS may temporarily classify these applications as fourth 
priority when determined appropriate--the proposed change would make 
the fourth priority status permanent and applicable at all times. The 
change in priority does not impact the priority of any other category 
and will recognize and encourage the participation and interest of 
intermediaries in the direct SFH program. Intermediaries are valuable 
to the program by helping attract program applicants, training 
certified packagers, and performing quality assurance reviews of 
applications.
    Other priorities remain unchanged including existing customers who 
request subsequent loans to correct health and safety hazards, loans 
related to the sale of REO property or ownership transfer of an 
existing RHS financed property, hardships including applicants living 
in deficient housing for more than six months, homeowners in danger of 
losing property through foreclosure, applicants constructing dwellings 
in an approved self-help project, and applicants obtaining other funds 
in an approved leveraging proposal. Veterans' preference also remains a 
priority in accordance with 42 U.S.C. 1477. To further emphasize these 
priorities, the Agency proposes to also make funding available in 
accordance with same priorities as application processing.
    (9) Revising Sec.  3550.56(b)(3) to remove the requirement that the 
value of the site must not exceed 30 percent of the ``as improved'' 
market value of the property. The site value is not necessarily an 
indicator of whether the property is modest. Other Agency requirements 
including area loan limits, appraisals, purchase agreements, and 
construction contracts are better indicators of whether the property is 
considered modest. Site values in high cost areas typically exceed the 
30 percent threshold even in rural communities, and the frequent 
requests for waivers of this requirement impose an unnecessary 
administrative burden. This change would also be consistent with the 
guaranteed SFH loan program, which has no site value limitation.
    (10) Amending Sec.  3550.57(a) to remove the reference to in-ground 
swimming pools for existing housing under the Section 502 program, to 
align the paragraph with the revised modest housing definition in Sec.  
3550.10 of this proposed rule.
    (11) Revising Sec.  3550.59(a)(2) to remove the requirement that 
the amount of a junior lien, when it is a grant or a forgivable 
affordable housing product, may not exceed the market value by more 
than 5 percent (i.e. up to a 105% loan to value ratio). This is an 
overly restrictive requirement as it relates to grants and forgivable 
affordable housing products as these products often partially or 
completely cover the cost of rehabilitation to make the dwelling 
decent, safe, and sanitary, and a higher loan to value ratio may be 
tolerated in these instances.
    Beginning in FY 2016, RHS initiated a pilot in a limited number of 
states to allow the State Office to approve leveraging arrangements 
where the total loan-to-value was more than the 105% limitation 
identified in Sec.  3550.59(a)(2), provided:
     RHS is in the senior lien position and the RHS loan is 
fully secured (with allowable exceptions for the tax service fee, 
appraisal fee, homebuyer education and initial escrow for taxes and 
insurance);
     The junior lien is for an authorized loan purpose 
identified in Sec.  3550.52;
     The junior lien involves a grant or forgivable affordable 
housing product; and
     The grant or forgivable affordable housing product comes 
from a

[[Page 64790]]

recognized grant source such as a Community Development Block Grant or 
a HOME Investment Partnerships Program (HOME).
    The pilot has been successful because it has:
     Empowered the selected State Offices to make timely 
decisions on loans with junior liens involving a grant or forgivable 
affordable housing product, and gave the junior lien holder the 
discretion to determine a total loan-to-value that could be supported 
within their own program requirements;
     Generally improved an area's rural housing stock since the 
grants and forgivable affordable housing products are frequently used 
for rehabilitation work where the rehab cost is more than the enhanced 
value;
     Promoted consistency with the guaranteed SFH loan program, 
which states that junior liens by other parties are permitted if the 
junior liens do not adversely affect repayment ability or the security 
for the guaranteed loan; and
     Increased partnerships with nonprofits.
    The proposed amendment would codify the positive aspects of the 
pilot so that the advantages will apply program wide.
    (12) Revising Sec.  3550.67(c) to allow more small Section 502 
direct loans to be repaid in periods of up to 10 years. The current 
regulation states that only loans of $2,500 or less must not have a 
repayment period exceeding 10 years. In practice, loans of less than 
$7,500 are generally termed for 10 years or less so that the loan can 
be unsecured (i.e., no mortgage or deed of trust is required) in 
accordance with the program's guidance.
    This revision will provide the Agency flexibility in setting the 
dollar threshold for smaller loans which may have a repayment period 
that does not exceed 10 years. This threshold will be determined by the 
Agency and published in a publicly available format such as the program 
handbook and will not exceed ten percent of the national average area 
loan limit. The Agency will determine the threshold based on factors 
such as the Agency's level of tolerance for unsecured loans and the 
performance and collection of unsecured loans in the Agency's 
portfolio.
    (13) Removing the language in Sec.  3550.103(e) regarding a waiver 
of the requirement that applicants must be unable to obtain financial 
assistance at reasonable terms and conditions from non-RHS credit or 
grant sources and lack the personal resources to meet their needs. The 
regulation currently provides that this requirement may be waived if 
the household is experiencing medical expenses more than three percent 
of the household's income. The revision would remove the medical 
expense and waiver language. The authority to waive regulations on a 
case-by-case basis already exists in Sec.  3550.8, making the medical 
expense and waiver language in Sec.  3550.103(e) unnecessary. 
Furthermore, limiting the waiver of the requirement to only those 
instances in which medical expenses exceed 3 percent of the household's 
income is overly restrictive.
    (14) Revising Sec.  3550.104(c) to replace ``veterans preference'' 
with ``veterans' preference.'' This is a grammatical correction only.
    (15) Revising Sec.  3550.106(a) to remove the reference to in-
ground swimming pools for the Section 504 program, to align the 
paragraph with the revised modest housing definition in Sec.  3550.10 
of this proposed rule.
    (16) Revising Sec.  3550.108(b)(1) to modify the requirement for 
title insurance and a closing agent for certain secured Section 504 
loans of $7,500 and greater. Currently, Section 504 loans less than 
$7,500 may be closed by the Agency without title insurance and a 
closing agent; however, loans of $7,500 and greater require title 
insurance and must be closed by a closing agent. The cost for title 
insurance and a closing agent can be unaffordable for very-low income 
borrowers with loans of $7,500 and greater or can potentially decrease 
the amount of loan funds available for needed repairs or improvements. 
This revision would remove the specific dollar threshold for loans 
which would require title insurance and closing agent. Loans where the 
total section 504 indebtedness does not exceed an amount determined by 
the Agency, but no greater than twenty percent of the national average 
area loan limit, may be closed by the Agency without title insurance or 
a closing agent. The Agency will determine the maximum amount based on 
factors such as average costs for title insurance and closing agents 
compared to average housing repair costs and publish the specific 
threshold in a publicly available format such as the program handbook. 
This revision would significantly reduce loan closing costs incurred by 
the borrowers, by allowing more loans to be closed by the Rural 
Development office. This revision would also allow for responsiveness 
and adjustments based on inflationary changes.
    (17) Revising Sec.  3550.112(a) to revise the Section 504 maximum 
loan amount of $20,000, so that the sum of all outstanding section 504 
loans to one borrower and for one dwelling may not exceed an amount 
determined by the Agency, but not greater than twenty percent of the 
national average area loan limit, and published in a publicly available 
format, such as the program handbook. The Agency will determine the 
maximum amount based on factors such as average loan amount and repair 
costs. A corresponding change will also be made to Sec.  3550.112(a)(1) 
to address maximum loan amounts for transferees who assume Section 504 
loans and wish to obtain a subsequent loan. The revision allows the 
Agency greater responsiveness and flexibility to address changes to 
average repair costs.
    (18) Removing the lifetime maximum assistance of $7,500 for a 
Section 504 grant and allowing the Agency to apply a lifetime grant 
limit to any one household or one dwelling.
    (19) Revising the Section 504 loan term requirements to specify 
that the loan term will be 20 years.
    (20) Revising the recapture requirements in Sec.  3550.162(b) to 
specify when Principal Reduction Attributable to Subsidy (PRAS) is, or 
is not, collected.
    The direct loan program provides payment assistance (subsidy), 
which may include PRAS, to help borrowers meet their monthly mortgage 
loan obligations. At time of loan payoff), borrowers are required to 
repay all or a portion of the subsidy they received over the life of 
the loan. This is known as subsidy recapture. The amount of subsidy 
recapture to be repaid is based on a calculation that determines the 
amount of value appreciation (equity) the borrower has in the property 
at time of payoff. The proposed changes to the regulation specify when 
PRAS is collected. In cases where the borrower has no equity in the 
property based on the recapture calculation, PRAS will not be not 
collected. There are no changes to the current subsidy recapture 
calculation.
    (21) Revising the payment moratorium requirements in Sec.  3550.207 
to require reamortization of each loan coming off a moratorium.
    Currently, the regulation stipulates that at the end of a 
moratorium borrowers are to be provided a re-amortization if the Agency 
determines they can resume making scheduled payments, based on 
financial information provided by the borrower. Often these borrowers 
lack demonstrable repayment ability for the new installment, which then 
requires the Agency to liquidate the account. However, it should not be 
unexpected that a borrower may have difficulty demonstrating repayment 
ability at the end of a moratorium. The very purpose

[[Page 64791]]

of the moratorium is to provide temporary payment relief to borrowers 
who have experienced circumstances beyond their control such as the 
loss of at least 20 percent of their income, unexpected expenses from 
illness, injury, death in the family, etc.
    In July 2010, due to the recession, the Administrator of RHS issued 
a decision memorandum approving the re-amortization of all accounts 
following a moratorium; this decision has been supported by subsequent 
Administrators. Historical data has shown that borrowers whose loans 
are re-amortized after a moratorium, regardless of repayment ability, 
have no greater risk of becoming delinquent when compared to non-
moratorium borrowers whose loans were re-amortized.
    When comparing the borrower's repayment history 18 months after the 
moratorium/re-amortization, 81.5 percent of the borrowers made their 
required monthly payment and avoided foreclosure, making this the best 
option for the borrower and the Agency. Whereas, if the borrower's 
repayment ability would have been considered, a large percentage of 
these successful borrowers would have lost their home without being 
given a chance to demonstrate their ability to repay their mortgage.
    This revision would require reamortization after a moratorium 
regardless of repayment ability, which would reduce foreclosures and 
better serve borrowers.
    The Agency is also clarifying that all or part of the interest 
accrued during the moratorium may be forgiven in an amount that 
balances affordability to the borrower and serving the best interest of 
the government.
    (22) Revising Sec.  3550.251(c) and (d) to remove obsolete 
references and clarify the process and priorities in the sale or lease 
of Real Estate Owned (REO) properties. The revision would also clarify 
the sale or lease process and reservation periods for priority buyers 
to comply with 42 U.S.C. 11408a.
    Under 42 U.S.C. 11408a, RHS must lease or sell program and 
nonprogram inventory properties public agencies and nonprofits to 
provide transitional housing and to provide turnkey housing for tenants 
of such transitional housing and for eligible families. However, first 
priority is the sale of REO properties to Section 502 borrowers.
    The proposed changes would further align Sec.  3550.251(c) and (d) 
with 42 U.S.C. 11408a concerning the priority of the sale or lease of 
REO properties to eligible borrowers and to nonprofit organizations or 
public bodies providing transitional housing.
    The proposed action will incorporate references to 42 U.S.C. 11408a 
and its more detailed instruction on transitional housing, lease and 
purchase procedures, and the employment or participation of homeless 
(or formerly homeless) individuals for the property being leased or 
acquired. To provide the maximum flexibility, the Agency will reserve 
program REO properties for no less than 30 days for sale to program 
eligible borrowers, as well as for sale or lease to a public agency or 
nonprofit organization for transitional and turnkey housing purposes. 
Upon receipt of written notification from a public agency or nonprofit 
organization seeking to purchase or lease REO property, the Agency 
shall withdraw the property from the market for not more than 30 days 
for the purpose of negotiations. If negotiations are unsuccessful, the 
REO property will be relisted and sold in the best interest of the 
Government.
    The expected result of this rulemaking is to allow the maximum use 
of the REO properties and foster collaboration in working to address a 
national shortage of transitional housing, and to provide more 
flexibility and increased efficiency of REO property management.

Statutory Authority

    Section 510(k) of Title V the Housing Act of 1949 (42 U.S.C. 
1480(k)), as amended, authorizes the Secretary of Agriculture to 
promulgate rules and regulations as deemed necessary to carry out the 
purpose of that title.

Executive Order 12866

    The Office of Management and Budget (OMB) has designated this rule 
as not significant 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 proposed 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 Policies.'' 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, while affecting small

[[Page 64792]]

entities, will not have an adverse economic impact on small entities. 
This rule does not impose any significant new requirements on program 
recipients nor does it adversely impact proposed real estate 
transactions involving program recipients as the buyers.

Executive Order 12372, Intergovernmental Review of Federal Programs

    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.)

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order imposes requirements in the development of 
regulatory policies that have tribal implications or preempt tribal 
laws. RHS has determined that the proposed 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, this 
proposed rule is not subject to the requirements of Executive Order 
13175.

Programs Affected

    The following programs, which are listed in the Catalog of Federal 
Domestic Assistance, are affected by this proposed rule: Number 10.410, 
Very Low to Moderate Income Housing Loans (specifically Section 502 
direct loans), and Number 10.417, Very Low-Income Housing Repair Loans 
and Grants (specifically the Section 504 direct loans and grants).

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.), the information collection activities associated with 
this rule are covered under OMB Number: 0575-0172. This proposed rule 
contains no new reporting or recordkeeping requirements that would 
require approval under the Paperwork Reduction Act of 1995.

E-Government Act Compliance

    RHS is committed to complying with the E-Government Act, 44 U.S.C. 
3601 et seq., 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.

List of Subjects in 7 CFR Part 3550

    Administrative practice and procedure, Environmental impact 
statements, Fair housing, Grant programs--housing and community 
development, Housing, Loan programs--housing and community development, 
Low and moderate-income housing, Manufactured homes, Reporting and 
recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, 7 CFR part 3550 is proposed 
to be amended as follows:

PART 3550--DIRECT SINGLE FAMILY HOUSING LOANS AND GRANTS

0
1. The authority citation for part 3550 continues to read as follows:

    Authority:  5 U.S.C. 301; 42 U.S.C. 1480.

Subpart A--General

0
2. Section 3550.10 is amended by:
0
a. Revising the definition of Modest housing;
0
b. Removing the definition of National average loan limit;
0
c. Revising the definition of PITI ratio;
0
d. Adding definition Principal residence in alphabetical order; and
0
e. Removing the definition of Veterans preference and adding the 
definition Veterans' preference in its place.
    The revisions and additions read as follows:


Sec.  3550.10   Definitions.

* * * * *
    Modest housing. A property that is considered modest for the area, 
has a market value that does not exceed the applicable maximum loan 
limit as established by RHS in accordance with Sec.  3550.63, and not 
designed for income producing activities. Existing properties with in-
ground pools may be considered modest; however, in-ground pools with 
new construction or with properties which are purchased new are 
prohibited.
* * * * *
    PITI ratio. The amount paid by the borrower for principal, 
interest, taxes, insurance, and other recurring, housing related costs 
such as mandatory homeowner's association (HOA) dues, land lease 
payments (i.e. community land trusts), or other housing related 
assessments which may vary by state, divided by repayment income.
* * * * *
    Principal residence. The home domicile physically occupied by the 
owner on a permanent basis (i.e. lives there for the majority of the 
year and is the address of record for such activities as Federal income 
tax reporting, voter registration, occupational licensing, etc.).
* * * * *
    Veterans' preference. A preference extended to a veteran applying 
for a loan or grant under this part, or the families of deceased 
servicemen, who meet the criteria in 42 U.S.C. 1477.
* * * * *
0
3. In Sec.  3550.11, revise paragraphs (a) and (b) to read as follows:

[[Page 64793]]

Sec.  3550.11   State Director assessment of homeownership education.

    (a) State Directors will assess the availability of certified 
homeownership education in their respective states on an as-needed 
basis but at a minimum every three years and maintain an updated 
listing of providers and their reasonable costs.
    (b) The order of preference for homeownership education formats 
will be determined by the Agency based on factors such as industry 
practice and availability.
* * * * *

Subpart B--Section 502 Origination

0
4. In Sec.  3550.52, revise paragraphs (a) and (d)(6) to read as 
follows:


Sec.  3550.52   Loan Purposes.

* * * * *
    (a) Purchases from existing RHS borrowers. To purchase a property 
currently financed by an RHS loan, the new borrower will assume the 
existing RHS indebtedness or receive new loan funds as determined by 
the Agency. The Agency will periodically determine whether assumptions 
or new loans are appropriate on a program wide basis based on the best 
interest of the government, taking into account factors such as funding 
availability and staff resources. Regardless of the method, loan funds 
may be used for eligible costs as defined in paragraph(d) of this 
section or to permit a remaining borrower to purchase the equity of a 
departing co-borrower.
* * * * *
    (d) * * *
    (6) Packaging fees resulting from the certified loan application 
packaging process outlined in Sec.  3550.75. The Agency will determine 
the limit, based on factors such as the level of service provided and 
the prevailing cost to provide the service, and such cap will not 
exceed two percent of the national average area loan limit. Nominal 
packaging fees not resulting from the certified loan application 
process are an eligible cost provided the fee does not exceed a limit 
determined by the Agency based on the level and cost of service 
factors, but no greater than one percent of the national average area 
loan limit; the loan application packager is a nonprofit, tax exempt 
partner that received an exception to all or part of the requirements 
outlined in Sec.  3550.75 from the applicable Rural Development State 
Director; and the packager gathers and submits the information needed 
for the Agency to determine if the applicant is eligible along with a 
fully completed and signed uniform residential loan application.
* * * * *
0
5. In Sec.  3550.53, revise paragraphs (c), (g), and (i) to read as 
follows:


Sec.  3550.53   Eligibility requirements.

* * * * *
    (c) Principal residence. Applicants must agree to and have the 
ability to occupy the dwelling in accordance with the definition found 
in Sec.  3550.10. If the dwelling is being constructed or renovated, an 
adult member of the household must be available to make inspections and 
authorize progress payments as the dwelling is constructed.
* * * * *
    (g) Repayment ability. Repayment ability means applicants must 
demonstrate adequate and dependably available income. The determination 
of income dependability will include consideration of the applicant's 
history of annual income.
    (1) An applicant is considered to have repayment ability when the 
monthly amount required for payment of principal, interest, taxes, 
insurance, homeowner's association (HOA) dues and other recurring, 
housing related assessments (PITI) does not exceed thirty-five percent 
of the applicant's repayment income (PITI ratio). In addition, the 
monthly amount required to pay PITI plus recurring monthly debts must 
not exceed forty-three percent of the applicant's repayment income 
(total debt ratio).
    (2) If the applicant's PITI ratio and total debt ratio exceed the 
percentages specified by the Agency by a minimal amount, compensating 
factors may be considered. Examples of compensating factors include: 
Payment history (if applicant has historically paid a greater share of 
income for housing with the same income and debt level), savings 
history, job prospects, and adjustments for nontaxable income.
    (3) If an applicant does not meet the repayment ability 
requirements in this paragraph (g), the applicant can have another 
party join the application as a cosigner, have other household members 
join the application, or both.
* * * * *
    (i) Homeownership education. Applicants who are first-time 
homebuyers must agree to provide documentation, in the form of a 
completion certificate or letter from the provider, that a 
homeownership education course from a certified provider under Sec.  
3550.11 has been successfully completed as defined by the provider. 
Requests for exceptions to the homeownership education requirement in 
this paragraph (i) will be reviewed and granted on an individual case-
by-case basis. The State Director may grant an exception to the 
homeownership education requirement for individuals in geographic areas 
within the State where the State Director verifies that certified 
homeownership education is not reasonably available in the local area 
in any of the formats listed in Sec.  3550.11(b). Whether such 
homeownership education is reasonably available will be determined 
based on factors including, but not limited to: Distance, travel time, 
geographic obstacles, and cost. On a case-by-case basis, the State 
Director also may grant an exception, provided the applicant borrower 
documents a special need, such as a disability, that would unduly 
impede completing a homeownership course in a reasonably available 
format.
0
6. In Sec.  3550.55, revise paragraphs (c) introductory text and (c)(4) 
and (5) to read as follows:


Sec.  3550.55   Applications.

* * * * *
    (c) Selection for processing and funding. Applications will be 
selected for processing using the priorities specified in this 
paragraph (c). Within priority categories, applications will be 
processed in the order that the completed applications are received. In 
the case of applications with equivalent priority status that are 
received on the same day, preference will first be extended to 
applicants qualifying for a veterans' preference. When funds are 
limited and eligible applicants will be placed on the waiting list, the 
priorities specified in this paragraph (c) will be used to determine 
the selection of applications for available funds.
* * * * *
    (4) Fourth priority will be given to applicants seeking loans for 
the construction of dwellings in an RHS-approved Mutual Self-Help 
project, loan application packages funneled through an Agency-approved 
intermediary under the certified loan application packaging process, 
and loans that will leverage funding or financing from other sources at 
a level published in the program handbook.
    (5) Applications from applicants who do not qualify for priority 
consideration in paragraph (1), (2), (3), or (4) of this section will 
be selected for processing after all applications with priority status 
have been processed.
* * * * *


Sec.  3550.56   [Amended]

0
7. In Sec.  3550.56:

[[Page 64794]]

0
a. Add the word ``and'' at the end of paragraph (b)(1);
0
b. Remove ``; and'' and add a period in its place in paragraph (b)(2); 
and
0
c. Remove paragraph (b)(3).
0
8. In Sec.  3550.57, revise paragraph (a) introductory text to reads as 
follows:


Sec.  3550.57   Dwelling requirements.

    (a) Modest dwelling. The property must be one that is considered 
modest for the area, must not be designed for income producing 
purposes, or have a market value in excess of the applicable maximum 
loan limit, in accordance with Sec.  3550.63, unless RHS authorizes an 
exception under this paragraph (a). Existing properties with in-ground 
pools may be considered modest; however, in-ground pools with new 
construction or with properties which are purchased new are prohibited. 
An exception may be granted on a case-by-case basis to accommodate the 
specific needs of an applicant, such as to serve exceptionally large 
households or to provide reasonable accommodation for a household 
member with a disability. Any additional loan amount approved must not 
exceed the amount required to address the specific need.
* * * * *
0
9. In Sec.  3550.59, revise paragraph (a)(2) to read as follows:


Sec.  3550.59   Security requirements.

* * * * *
    (a) * * *
    (2) No liens prior to the RHS mortgage exist at the time of closing 
and no junior liens are likely to be taken immediately after or at the 
time of closing, unless the other liens are taken as part of a 
leveraging strategy or the RHS loan is essential for repairs. Any lien 
senior to the RHS lien must secure an affordable non-RHS loan. Liens 
junior to the RHS lien may be allowed at loan closing if the junior 
lien will not interfere with the purpose or repayment of the RHS loan. 
When the junior lien involves a grant or a forgivable affordable 
housing product, the total debt may exceed the market value provided:
    (i) The RHS loan is fully secured (with allowable exceptions for 
the tax service fee, appraisal fee, homebuyer education and initial 
escrow for taxes and insurance);
    (ii) The junior lien is for an authorized loan purpose identified 
in Sec.  3550.52; and
    (iii) The grant or forgivable affordable housing product comes from 
a recognized grant source such as a Community Development Block Grant 
or a HOME Investment Partnerships Program (HOME).
* * * * *
0
10. In Sec.  3550.67, revise paragraph (c) to read as follows:


Sec.  3550.67   Repayment period.

* * * * *
    (c) Ten years for loans not exceeding an amount determined by the 
Agency based on factors such as the performance of unsecured loans in 
the Agency's portfolio and the Agency's budgetary needs, but not to 
exceed ten percent of the national average area loan limit.
* * * * *

Subpart C--Section 504 Origination and Section 306C Water and Waste 
Disposal Grants

0
11. In Sec.  3550.103, revise paragraph (e) to read as follows:


Sec.  3550.103   Eligibility requirements.

* * * * *
    (e) Need and use of personal resources. Applicants must be unable 
to obtain financial assistance at reasonable terms and conditions from 
non-RHS credit or grant sources and lack the personal resources to meet 
their needs. Elderly families must use any net family assets in excess 
of $20,000 to reduce their section 504 request. Non-elderly families 
must use any net family assets in excess of $15,000 to reduce their 
section 504 request. Applicants may contribute assets in excess of the 
aforementioned amounts to further reduce their request for assistance. 
The definition of assets for the purpose of this paragraph (e) is net 
family assets as described in Sec.  3550.54, less the value of the 
dwelling and a minimum adequate site.
* * * * *
0
12. In Sec.  3550.104, revise paragraph (c) to read as follows:


Sec.  3550.104   Applications.

* * * * *
    (c) Processing priorities. When funding is not sufficient to serve 
all eligible applicants, applications for assistance to remove health 
and safety hazards will receive priority for funding. In the case of 
applications with equivalent priority status that are received on the 
same day, preference will be extended to applicants qualifying for a 
veterans' preference. After selection for processing, requests for 
assistance are funded on a first-come, first-served basis.
0
13. In Sec.  3550.106, revise paragraph (a) to read as follows:


Sec.  3550.106   Dwelling requirements.

    (a) Modest dwelling. The property must be one that is considered 
modest for the area, must not be designed for income producing 
purposes, or have a market value in excess of the applicable maximum 
loan limit, in accordance with Sec.  3550.63.
* * * * *
0
14. In Sec.  3550.108, revise paragraph (b)(1) to read as follows:


Sec.  3550.108   Security requirements (loans only).

* * * * *
    (b) * * *
    (1) Loans where the total section 504 indebtedness does not exceed 
an amount determined by the Agency based on factors such as average 
costs for title insurance and closing agents compared to average 
housing repair costs, but no greater than twenty percent of the 
national average area loan limit.
* * * * *
0
15. In Sec.  3550.112, revise paragraphs (a) introductory text, (a)(1), 
and (c) to read as follows:


Sec.  3550.112   Maximum loan and grant.

    (a) Maximum loan permitted. The sum of all outstanding section 504 
loans to one household for one dwelling may not exceed an amount 
determined by the Agency based on factors such as average loan amounts 
and repair costs, but no greater than twenty percent of the national 
average area loan limit.
    (1) Transferees who have assumed a section 504 loan and wish to 
obtain a subsequent section 504 loan are limited to the difference 
between the unpaid principal balance of the debt assumed and the 
maximum loan permitted.
* * * * *
    (c) Maximum grant. The lifetime total of the grant assistance to 
any one household for one dwelling may not exceed an amount established 
by the Agency based factors such as average lifetime grant amounts and 
repair costs, but no greater than five percent of the national average 
area loan limit. No grant can be awarded when the household has 
repayment ability for a loan.
0
16. In Sec.  3550.113, revise paragraph (b) to read as follows:


Sec.  3550.113   Rates and terms (loans only).

* * * * *
    (b) Loan term. The repayment period for all section 504 loans will 
be 20 years.

Subpart D--Regular Servicing

0
17. In Sec.  3550.162, revise paragraphs (b)(1) introductory text and 
(b)(1)(ii) to read as follows:


Sec.  3550.162   Recapture.

* * * * *
    (b) * * *

[[Page 64795]]

    (1) General. The amount to be recaptured is determined by a 
calculation specified in the borrower's subsidy repayment agreement and 
is based on the borrower's equity in the property at the time of loan 
pay off. If there is no equity based on the recapture calculation, the 
amount of principal reduction attributed to subsidy is not collected. 
The recapture calculation includes the amount of principal reduction 
attributed to subsidy plus the lesser of:
* * * * *
    (ii) A portion of the value appreciation of the property subject to 
recapture. In order for the value appreciation to be calculated, the 
borrower will provide a current appraisal, including an appraisal for 
any capital improvements, or arm's length sales contract as evidence of 
market value upon Agency request. Appraisals must meet Agency standards 
under Sec.  3550.62.
* * * * *

Subpart E--Special Servicing

0
18. In Sec.  3550.207, revise paragraphs (b)(2) and (c) and remove 
paragraph (d) to read as follows:


Sec.  3550.207   Payment moratorium.

* * * * *
    (b) * * *
    (2) At least 30 days before the moratorium is scheduled to expire, 
the borrower must provide financial information needed to process the 
re-amortization of the loan(s).
    (c) Resumption of scheduled payments. When the moratorium expires 
or is cancelled, the loan will be re-amortized to include the amount 
deferred during the moratorium and the borrower will be required to 
escrow. If the new monthly payment, after consideration of the maximum 
amount of payment subsidy available to the borrower, exceeds the 
borrower's repayment ability, all or part of the interest that has 
accrued during the moratorium may be forgiven so that the new monthly 
payment optimizes both affordability to the borrower as well as the 
best interest of the Government.

Subpart F--Post-Servicing Actions

0
19. In Sec.  3550.251:
0
a. Revise paragraphs (c)(4) and (5);
0
b. Remove paragraph (C)(6);
0
c. Revise paragraph (d)(2);
0
d. Remove paragraph (d)(3);
0
e. Redesignate paragraph (d)(4) as (d)(3).
    The revisions read as follows:


Sec.  3550.251   Property management and disposition.

* * * * *
    (c) * * *
    (4) Sale of program REO properties. For no less than 30 days after 
a program REO property is listed for sale, the property will be 
reserved for sale to eligible direct or guaranteed single family 
housing very-low, low- or moderate income applicants under this part or 
part 3555 of this title, and for sale or lease to nonprofit 
organizations or public bodies providing transitional housing and 
turnkey housing for tenants of such transitional housing in accordance 
with 42 U.S.C. 11408a. Offers from eligible direct or guaranteed single 
family housing applicants are evaluated at the listed price, not the 
offering price. Priority of offers received the same day from eligible 
direct or guaranteed single family housing applicants will be given to 
applicants qualifying for veterans' preference, cash offers from 
highest to lowest, then credit offers from highest to lowest. 
Acceptable offers of equal priority received on the same business day 
are selected by lot. After the expiration of a reservation period, REO 
properties can be bought by any buyer.
    (5) Sale by sealed bid or auction. RHS may authorize the sale of an 
REO property by sealed bid or public auction when it is in the best 
interest of the Government.
    (d) * * *
    (2) RHS shall follow the standards and procedures in 42 U.S.C. 
11408a for the sale or lease of an REO property to a public agency or 
nonprofit organization. The terms of the sale and lease, and the entity 
seeking to purchase or lease the REO property, must meet the 
requirements in 42 U.S.C. 11408a.
* * * * *

Bruce W. Lammers,
Administrator, Rural Housing Service.
[FR Doc. 2019-25128 Filed 11-22-19; 8:45 am]
 BILLING CODE 3410-XV-P