[Federal Register Volume 87, Number 25 (Monday, February 7, 2022)]
[Rules and Regulations]
[Pages 6761-6773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02470]



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 Rules and Regulations
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  Federal Register / Vol. 87, No. 25 / Monday, February 7, 2022 / Rules 
and Regulations  

[[Page 6761]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3550

[Docket No. RHS-21-SFH-0025]
RIN 0575-AD14


Direct Single Family Housing Loans and Grants Programs

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Housing Service (RHS or Agency), a Rural Development 
agency of the United States Department of Agriculture (USDA), is 
issuing a final rule to amend its Direct Single Family Housing Loans 
and Grants (DSFHLG) programs regulation. This final rule adopts most 
changes as presented in the proposed rule published on November 25, 
2019, in the Federal Register. This final rule also addresses public 
comments received by the Agency and makes some modifications based on 
consideration of those comments, including revisions to the refinancing 
provisions which will help provide relief to homeowners who have 
difficulty keeping their accounts current (e.g., coming off a payment 
moratorium), based on the availability of funds and Agency priorities.

DATES: Effective on March 9, 2022.

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

SUPPLEMENTARY INFORMATION:

I. Background

    USDA's RHS offers a variety of programs to build or improve housing 
and essential community facilities in rural areas. RHS offers loans, 
grants, and loan guarantees for single- and multi-family housing, 
childcare centers, fire and police stations, hospitals, libraries, 
nursing homes, schools, first responder vehicles and equipment, housing 
for farm laborers and much more. RHS also provides technical assistance 
loans and grants in partnership with non-profit organizations, Indian 
tribes, State and Federal Government agencies, and local communities.
    The purpose of the DSFHLG programs is to assist low-and very-low-
income applicants to obtain decent, safe, and sanitary single-family 
housing in eligible rural areas. Well built, affordable housing is 
essential to the vitality of communities in rural America. RHS Programs 
give families and individuals the opportunity to buy, build, repair, or 
own safe and affordable homes located in rural America. Eligibility for 
these loans and grants is based on income; and the income limits are 
based on household size and location.
    The DSFHLG programs are authorized by sections 502 and 504 of the 
Housing Act of 1949, as amended (42 U.S.C. 1472 and 1474). The 7 CFR 
part 3550 sets forth the requirements of the DSFHLG programs which 
includes policies regarding both loan and grant origination and 
servicing. The Section 502 Direct Loan Program provides 100 percent 
loan financing to assist low- and very low-income applicants obtain 
modest housing in eligible rural areas and payment assistance to 
increase an applicant's repayment ability. The Section 504 Loan Program 
provides one percent interest rate loans to very low-income homeowners 
in eligible rural areas to repair, improve, or modernize their home or 
to remove health and safety hazards. The Section 504 Grant Program 
provides grants to elderly very low-income homeowners in eligible rural 
areas to remove health and safety hazards, or accessibility barriers 
from their home, often in conjunction with a section 504 loan.
    Changes to the programs will 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.

II. Discussion of Relevant Public Comments

    The Agency invited public comments on the proposed rule, which was 
published on November 25, 2019, in the Federal Register (84 FR 64788). 
The 60-day comment period ended on January 24, 2020. A total of 28 
comments were received. Commenters included non-profit housing 
organizations or associations representing housing providers and 
private citizens.
    (1) Comments on the definition of modest housing (Sec.  3550.10 
Definitions) which currently prohibits in-ground swimming pools.
    The Agency received several comments on the definition of modest 
housing and the prohibition of in-ground swimming pools. Two commenters 
expressed concern that allowing for the financing of existing modest 
homes with in-ground swimming pools would create a financial burden on 
the borrower and borrowers would be unable to maintain and afford the 
costs of utility bills and pool treatments, which may increase 
foreclosures.
    In contrast, there were two comments in favor of revising the 
modest housing definition to allow in-ground swimming pools. The 
commenters both stated there is a lack of affordable housing in rural 
areas and this amendment would open the market for families looking for 
an affordable home.
    Agency Response: The Agency acknowledges these concerns related to 
the high utility costs and maintenance expenses of an in-ground 
swimming pool. However, affordable housing stock is very limited in 
many rural areas and this unnecessary prohibition may be a barrier to 
homeownership for applicants and limit access to the program. The 
revised definition of modest housing will also promote a degree of 
consistency with the guaranteed SFH loan program (which has no 
prohibition on in-ground swimming pools). Therefore, the Agency is 
adopting the proposed definition of modest housing without changes.
    (2) Comments on changing references to homeownership education and 
removing the requirement placed on State Directors to update the list 
of homeownership education providers annually, per Sec.  3550.11 State 
Director Assessment of Homeowner Education.

[[Page 6762]]

    The Agency received a comment that did not support the proposed 
rule regarding the determination of Agency preference for homeownership 
education formats. The commenter believes this change seems to signal a 
move by the Agency, now or in the future, towards a heavier emphasis on 
internet-enabled homeownership education.
    The commenter encourages the Agency to include the addition of 
``accessibility to the homebuyer'' and ``quality of education'' as 
additional factors used to determine Agency preference for homebuyer 
education formats.
    Agency Response: The Agency acknowledges the benefits of in-person 
training but adds that remote training has many benefits as well (e.g., 
self-paced, available any time, no travel costs, etc.). The preference 
factors listed in the proposed Sec.  3550.11(b)--availability and 
industry practice--are not an exclusive list and the Agency may 
consider other factors. Explicitly adding ``accessibility to the 
homebuyer'' or ``quality of education'' is unnecessary since the 
factors in the proposed Sec.  3550.11(b) are not exclusive, and quality 
issues are also addressed in Sec.  3550.11(c) and (d). The Agency is 
adopting the proposal without changes.
    (3) Comments on allowing a new borrower to use new loan funds to 
purchase a dwelling from an existing RHS borrower (Sec.  3550.52(a)).
    The Agency received a comment that supports the use of new loan 
funds to purchase a dwelling from an existing RHS borrower since self-
help housing providers have experienced borrowers having to leave the 
building group prior to finishing their home. With the change, 
processing a new loan to a new qualified borrower so they can purchase 
and finish the home with the building group is more straightforward 
than processing an assumption with a subsequent loan (if needed).
    Agency Response: This revision will allow the Agency to 
responsibly, effectively, and fully utilize funds appropriated by 
Congress without the additional steps required to process and close an 
assumption loan and subsequent loan, thereby reducing loan application 
processing time. The Agency is adopting the proposal without changes.
    (4) Comments on revising the packaging fee requirements (Sec.  
3550.52(d)(6)). One commenter states the processing fee changes seem to 
be fair and the new process of calculating the fees seem to make more 
sense. The new rule will take into consideration economy changes and 
amount of time required in processing loans which was not previously 
accounted for.
    One commenter does not oppose the increases in packaging fees to 
non-certified packagers represented in the proposed rule but wants to 
urge caution to the Agency when setting the new fee levels. 
Theoretically, despite the cap to the fee put in place by the proposed 
rule, the fee paid to non-certified packagers could exceed the fee paid 
to certified packagers who submit through an intermediary, or in a less 
extreme scenario, the fee for non-certified packager could approach or 
match the fee paid to certified packagers. In either case, the proposed 
rule could diminish the incentive for packagers to become certified.
    Agency Response: The rule change will allow the Agency more 
flexibility to specify packaging fees under the certified and non-
certified loan application process. The Agency is adopting the proposal 
with changes.
    The language in Sec.  3550.52(d)(6) will remove the restrictive 
$350 fee limit for non-certified packagers, which does not reflect the 
resources the non-certified loan packager invests in the packaging 
process. To address the concern regarding the fee level and ensure that 
the fee paid to a non-certified packager could not equal or exceed the 
current published fees resulting from the certified loan application 
packaging process, the Agency lowered the percentage and will determine 
a limit, not to exceed ``one half percent of the national average area 
loan limit'' for the non-certified process, rather than a maximum of 
one percent as was proposed.
    The Agency acknowledges the concern that the increased non-
certified fee may be a disincentive for packagers to become certified; 
however, the Agency continues to encourage loans funneled through an 
Agency-approved intermediary under the certified loan application 
packaging process by specifying these loans for priority consideration 
when being selected for processing. In addition, the language in Sec.  
3550.52(d)(6) will continue to state, ``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.'' This language 
allows the Agency to specify a higher limit for certified packaged 
loans through an intermediary. The certified packager and intermediary 
will share a portion of the fee, but the higher limit determined by the 
Agency will allow the parties to negotiate a fee structure that is 
advantageous to the certified packager and reflective to their 
experience.
    (5) Comments on revising repayment ability ratio thresholds (Sec.  
3550.53(g) Repayment ability) to use the same ratios for both low- and 
very-low income applicants. Three commenters concur with making the 
revised principal, interest, taxes, and insurance (PITI) consistent 
across income categories.
    Agency Response: The Agency is adopting the proposal with changes 
given the portfolio's new loan delinquency trends since November 2019, 
which nearly doubled by October 2020. While new loan delinquency trends 
have gradually improved since October 2020, they still exceed November 
2019 rates, which has resulted in the need for measured and gradual 
changes to the underwriting standards. The proposed rule change 
included repayment ability thresholds for both low- and very-low income 
applicants not to exceed thirty-five (35) percent for PITI, and forty-
three (43) percent for Total Debt (TD) (current maximum thresholds are 
twenty-nine (29) percent PITI and forty-one (41) percent TD for very-
low income applicants, and thirty-three (33) percent PITI and forty-one 
(41) percent TD for low-income applicants). However, the final rule 
change will only revise repayment ability thresholds to use the same 
PITI ratio of thirty-three (33) percent for both low- and very- low 
income applicants. The final rule retains the current forty-one (41) 
percent TD maximum threshold for low- and very low- income applicants. 
Adopting the same PITI ratio threshold for both low- and very low-
income applicants will help ensure equal treatment of applicants across 
the income categories and improve marketability of the program.
    (6) Comments on revising introductory text so that application 
processing priorities are applied on a regular basis, and not just 
during periods of insufficient funding (Sec.  3550.55(c)).
    One commenter does not agree that applications sent by a certified 
packager going through an intermediary should be fourth priority, but 
feels these applications should be given a higher priority and should 
be processed in conjunction with borrowers who are in need, veterans, 
or disabled, etc.
    One commenter supports making the priorities for processing of 
applications on a continual basis rather than only during periods of 
insufficient funding. They are generally supportive of including 
intermediary loan submittals to the fourth priority pool, however, they 
would like to encourage self-help

[[Page 6763]]

loan submittals be consistently prioritized and ask the full group 
funding to be a priority during periods of insufficient funding.
    One commenter supports allowing the priority processing and funding 
priority at all times to avoid packaged applications from going stale 
while awaiting eligibility at RD offices.
    Agency Response: The Agency's first, second and third loan 
application processing priorities are for applicants who have an 
especially serious need for immediate assistance and allow purchase of 
inventory properties to move more quickly before the property 
deteriorates or loses value.
    The fourth priority will encourage the participation and interest 
of intermediaries in the SFH program application process. 
Intermediaries are valuable to the program by helping attract program 
applicants, training certified packagers, and performing quality 
assurance reviews of applications.
    If applicants with equivalent priority status apply for assistance 
on the same day, applicants qualifying for a veteran's preference will 
receive priority processing, which complies with section 507 of the 
Housing Act of 1949 (42 U.S.C. 1477) which requires a preference for 
veterans. Taking into account statutory requirements for preferences, 
the Agency gives equal consideration to loan applications without 
regard to race, color, national origin, religion, sex, gender identity, 
sexual orientation, disability, age, marital status, family/parental 
status, income derived from public assistance program, political 
beliefs, or reprisal or retaliation for prior civil rights activity.
    Therefore, the Agency is adopting the proposal without changes.
    (7) Comments on revising the requirement that the value of the site 
must not exceed 30 percent of the ``as improved'' market value of the 
property (Sec.  3550.56(b)(3)). One commenter expressed the removal of 
the 30 percent rule is a welcome upgrade of the regulations.
    One commenter stated this change will better reflect overall market 
value of the subject property, not just the value of the land and 
should increase the availability of affordable housing in high-cost 
areas and throughout rural communities. Limiting the land cost, even 
when the overall appraised value is considered modest, has been a 
hinderance to the program.
    Agency Response: The Agency agrees with these comments, and the 
program has other requirements that are better indicators of whether 
the property is considered modest, such as, area loan limits, 
appraisals, purchase agreements and construction contracts. Therefore, 
the Agency is adopting the proposal without changes.
    (8) Comment on revising 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 five percent (Sec.  
3550.59(a)(2)). One commenter supports the Agency's increases to the 
loan-to-value ratio for rehab loans and grants.
    Agency Response: The Agency acknowledges the support. This will 
allow for more partnerships with nonprofits. Grants and forgivable 
affordable housing 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. 
Therefore, the Agency is adopting the proposal without changes.
    (9) Comment on revising the requirement for title insurance and a 
closing agent for certain secured Section 504 loans of $7,500 or 
greater (Sec.  3550.108(b)(1)). One commenter expressed support.
    Agency Response: The Agency acknowledges the support. This will 
significantly reduce loan closing costs incurred by the borrowers, as 
well as allow the Agency greater responsiveness and flexibility to 
address changes to average repair costs. Therefore, the Agency is 
adopting the proposal without changes.
    (10) Comment on revising 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 (Sec.  3550.112). One commenter expressed support.
    Agency Response: The Agency acknowledges the support. This will 
allow the Agency greater responsiveness and flexibility to address 
changes to average repair costs. Therefore, the Agency is adopting the 
proposal without changes.
    (11) Comments on revising the payment moratorium requirements to 
require reamortization of each loan coming off a moratorium (Sec.  
3550.207). One commenter stated that two provisions in 7 CFR 3550.207 
continue to impose unnecessary barriers to borrower's eligibility for a 
payment moratorium. The first is the prohibition on a moratorium for a 
loan that has been accelerated. Furthermore, the second is the 
requirement that the borrower's repayment income have fallen by at 
least 20 percent within the past 12 months.
    Agency Response: The Agency acknowledges the recommendation, 
although the comment is speaking to eligibility for a moratorium and 
not the proposed reamortization for every loan post-moratorium. 
However, to address the comment, the Agency clarifies that every 
borrower whose account is accelerated is/was given written and verbal 
notice of all servicing actions (including moratoriums) prior to the 
acceleration process. All servicing actions, for which the borrower may 
qualify for, are discussed with the borrower in detail prior to 
acceleration. The Agency then allows each borrower a reasonable amount 
of time (at least 30 days) to apply for any and all such servicing 
options. If the borrower does apply for any servicing options, the 
acceleration action is withdrawn until those requested servicing 
option(s) are reviewed and a determination on eligibility is provided 
to the borrower with appeal rights on all denials. In light of this 
process which occurs before acceleration, allowing a moratorium after 
acceleration would not provide any meaningful benefit. The Agency 
believes exploring other loss mitigation efforts after acceleration 
(e.g., voluntary liquidation) and requiring some type of repayment or 
conveyance is more helpful.
    The Agency acknowledges the recommendation. The Agency will proceed 
with the existing language as written and will explore the 
recommendation of modifying the criteria in the future.
    (12) Comment stating RHS needs to update its set of loss mitigation 
options to incorporate industry standards developments over the past 
decade; in particular its lack of a flexible loan modification options 
allowing for interest rate reduction and loan term extension.
    Agency Response: The Agency acknowledges the recommendation. While 
refinancing and loan modification have some key differences there are 
also a number of similarities, including the ability to reduce the 
interest rate and extend the repayment term to create more affordable 
payments for the borrower. Currently, refinancing Agency debt is only 
permitted in accordance with Sec.  3550.204 to allow the borrower to 
receive payment assistance (e.g., borrowers who were not previously 
eligible for payment assistance because the loan was approved before 
August 1, 1968, or the loan was made on above-moderate or nonprogram 
(NP) terms). More importantly, the Agency cannot offer

[[Page 6764]]

loan modifications which extend the original loan term past 33 years 
(or 38 years in very limited circumstances) because the timeframe for 
the loan is established by statute at section 502(a) of the Housing Act 
of 1949 (42 U.S.C. 1472(a)).
    While the Agency is statutorily prohibited from offering loan 
modifications that extend the original loan term beyond 33 years (or 38 
years in very limited circumstances), the Agency may amend the 
refinance regulations so that a new loan term could replace the 
original and does make such amendment with this final rule. The 
refinancing option adopted with this rule change is particularly 
important given the large number of borrowers who will be exiting a 
COVID-related payment moratorium (also referred to as COVID-related 
forbearances). Some of these moratoria lasted over a year, and a post-
moratorium reamortization agreement would not result in affordable 
monthly payments because the original loan term is limited by statute. 
In addition, the American Rescue Plan Act of 2021 provided additional 
budget authority which, given the critical need for flexibility in 
servicing direct loans, will be best directed towards refinancing and 
other loss mitigation options. The Agency is amending the regulation to 
reflect the expansion of refinancing availability (e.g., borrowers 
exiting a moratorium)--however such refinancing will be subject to the 
availability of funds and at the discretion of the Agency. In other 
words, while the final rule amendments will provide critical relief to 
borrowers in response to COVID and the Agency preserves the ability to 
provide such refinancing in the future, such refinancing is subject to 
funding availability and Agency discretion.
    In addition, the Agency would like to clarify that borrowers in 
moratorium status are not delinquent on a nontax federal debt upon 
expiration of the moratorium for purposes of the Debt Collection 
Improvement Act (DCIA) (Pub. L. 104-134) and its implementing 
regulations at 31 CFR part 285, and that a loan may be refinanced with 
a new loan following a moratorium.
    In consideration of comments received and industry practice, the 
Agency is revising Sec.  3550.52(c) and Sec.  3550.201to allow for 
broader use of circumstances under which RHS debt may be refinanced, 
subject to availability of funds and Agency priorities.
    (13) One comment related to Sec.  3550.207(c), Resumption of 
scheduled payments, suggested that the Agency needs to give borrowers 
written notices that inform them about the Agency procedures for 
assessing the forgiveness of interest.
    Agency Response: The Agency acknowledges the recommendation. The 
Agency already has a meaningful standard in place to determine if 
interest accrued during the moratorium should be forgiven. Currently, 
all borrowers requesting a moratorium are sent a Moratorium on Payment 
(Fact Sheet) outlining the moratorium process, requirements, 
procedures, and impact on future payments. The Agency will explore 
expanding this document to include the standard utilized to determine 
when moratorium interest is forgiven. The standard is whether the 
borrower can afford the new, reamortized payment without forgiveness of 
interest. If the borrower can afford a reamortized payment without 
interest forgiveness, the Agency includes the moratorium interest in 
the re-amortization process. This standard best supports the borrower's 
ability to repay the loan and the Agency's fiscal responsibility to the 
public to carry out the program in a reasonable manner. If the borrower 
does not have repayment ability when the moratorium interest is 
included in determining the new payment amount, the moratorium interest 
is forgiven in the amount required to demonstrate repayment ability. As 
previously stated, in almost all cases the moratorium interest is 
forgiven prior to the re-amortization. The Agency does not make any 
changes in the final rule in response to this comment.
    (14) One comment specific to 7 CFR 3550.207(c), Resumption of 
scheduled payments, recommends that the Agency must develop meaningful 
objective standards for evaluating whether all or part of the interest 
that has accrued during the moratorium may be forgiven.
    Agency Response: The Agency acknowledges the recommendation. 
Currently, all borrowers requesting a moratorium are sent a Moratorium 
on Payment (Fact Sheet) outlining the moratorium process, requirements, 
procedures, and impact on future payments. The Agency will explore 
expanding this document to include the criteria utilized to determine 
when moratorium interest is forgiven. However, except for a limited 
number of cases with demonstrated repayment ability, the Agency does 
forgive all interest accrued during the moratorium period. The Agency 
does not make any changes in the final rule in response to this 
comment.
    General comments on matters not within the scope of the proposed 
rule:
    (15) One commenter would like to see the 502 direct construction 
programs allow for an initial draw at closing to cover lot costs, site 
prep, and initial construction costs. Current regulations make it 
almost impossible for a 502 applicant to build.
    Agency Response: This suggestion is beyond the scope of the 
proposed rule but will be taken under consideration for future proposed 
rulemaking.
    (16) One commenter stated they are thankful for the Agency's 
efforts to bring the Direct and Guaranteed programs more in line with 
one another's regulations. A consistent issue is that the regulations 
of one program prevents them from deploying that product in scenarios 
that the other program's regulations would allow. Increasing the 
effectiveness of these programs is crucial for their region, where the 
incomes of entire communities can be depressed and where commercial 
lending can be difficult to access or entirely absent.
    Agency Response: The Agency acknowledges the need for consistency 
when appropriate; and acknowledges the need for differences based on 
the direct SFH programs' targeted audience (low- and very low-income) 
and unique features (e.g., subsidy). The Agency does not make any 
changes in the final rule in response to this comment.

III. Summary of Rule Changes

    Outlined below is the summary of changes to the 7 CFR part 3550 
regulations.

Subpart A--General

Sec.  3550.10 Definition
    The modest housing definition, which currently prohibits in-ground 
swimming pools, will be revised to allow for the financing of existing 
modest homes with swimming 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 swimming pool. The 
change promotes a degree of consistency with the guaranteed SFH loan 
program, which does not prohibit in-ground swimming pools. In-ground 
pools with new construction, or with dwellings that are purchased new, 
will still be prohibited.
    The veterans' preference definition will be revised to remove 
obsolete information and streamline the definition by citing the 
definitions of a veteran or a family member of a deceased service 
member in 42 U.S.C. 1477.

[[Page 6765]]

    A definition for principal residence will be added to this section. 
The new definition aligns with that used in the guaranteed SFH loan 
program and the mortgage industry: The primary residence definition 
will refer to the principal residence definition, and ``principal 
residence'' is defined as 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.).
    The changes noted above are substantively the same as the proposed 
rule. However, the proposed rule also included two other changes which 
are not adopted in the final rule. First, the proposed rule included 
the removal of the definition of national average area loan limit, but 
the Agency decided to keep this definition as it used as a benchmark 
for several items (e.g., packaging fees). Second, the proposed rule 
included a revision to the definition of the PITI ratio to include the 
homeowner's association (HOA) dues and other recurring housing-related 
assessments, but the Agency considered the matter further and 
determined that it cannot adopt this revision due to current automated 
system limitations. The Agency will explore other possible changes 
regarding HOA dues in the future.
Sec.  3550.11 State Director Assessment of Homeownership Education
    In this section, paragraphs (a) and (b) will be revised to change 
references to ``homeowner education'' to ``homeownership education'' 
for consistency, and remove the requirement placed on State Directors 
to update the list of homeownership education providers annually. The 
Agency will require State Directors to update the list on an as-needed 
basis, but no less frequently than every three years. The Agency will 
determine preferences for education format (i.e., online, in-person, 
telephone) based on availability and industry practice. The Agency will 
publish the education format preferences in a publicly available 
format, such as the program handbook. These changes are adopted from 
the proposed rule without change and allow the Agency to be more 
responsive to changes in homeownership education course delivery and 
availability.

Subpart B--Section 502 Origination

Sec.  3550.52 Loan Purposes
    In this section, paragraph (a) will be revised 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. This is revised so that the Agency will 
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 is adopted 
from the proposed rule without change and allows 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.
    Also, as a result of comments received on the proposed rule and 
additional consideration of various factors (e.g., the potential need 
for more flexible refinance options when budget authority and 
circumstances deemed appropriate by RHS exist), paragraph (c) 
Refinancing RHS debt will be revised so that depending on the 
availability of funds and program priorities as determined by RHS, an 
existing RHS loan may be refinanced in accordance with Sec.  3550.201 
to allow refinancing as a special servicing action including, but not 
limited to, Sec.  3550.207 to allow refinancing, including subsidy 
recapture, at the end of a moratorium. The Agency may limit the number 
of direct loans made for refinancing purposes based on the availability 
of funds and Agency priorities on market conditions and other 
appropriate factors. This revision provides the Agency with more 
flexibility pertaining to special servicing actions to reduce the 
number of borrower failures.
    Also, in this section, paragraph (d)(6) will be revised to allow 
the Agency more flexibility to specify packaging fees for the non-
certified loan application process, and to ensure non-certified 
packaging fees reflect the level of service provided and the prevailing 
cost to provide the service. This revision is adopted from the proposed 
rule with the following changes: This final rule will establish the 
limit as determined by the Agency and will be no greater than one half 
percent of the national average area loan limit, rather than one 
percent as was proposed, and the initial limit in the program handbook 
will be $750.
    For the non-certified loan packaging process, the current fee may 
not exceed $350, but this limit is being revised as it does not 
necessarily reflect the time a non-certified loan packager invests in 
the packaging process. The Agency will determine the exact limit within 
the one-half 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. For example, the current national average area loan 
limit is approximately $285,000, so the packaging fee for the non-
certified loan packaging process could not exceed $1,425. The initial 
limit in the program handbook will be $750, which is the packaging fee 
permitted for Section 504 loan applications.
    This final rule also amends 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. This revision is adopted from the proposed rule without change.
Sec.  3550.53 Eligibility Requirements
    In this section, paragraph (a) will be revised to clarify income 
eligibility requirements when refinancing existing RHS debt as a 
special servicing action, in light of the discussion above and as a 
change from the proposed rule. When an existing RHS loan is being 
refinanced as a special servicing action in the limited circumstances 
provided in the revised Sec.  3550.52 and Sec.  3550.201, the 
household's adjusted income must not exceed the applicable moderate-
income limit for the area at the time of loan approval and closing.
    Currently, Sec.  3550.53(a) requires that the household's adjusted 
income must not exceed the applicable low-income limit for the area at 
the time of loan approval and must not exceed the applicable moderate-
income limit for the area at closing. This means if an existing direct 
borrower exceeds the low-income limit at the time of loan approval for 
refinance, the Agency would be unable to approve the loan which limits 
the borrower's ability to refinance and improve their chance of success 
post-moratorium. This change provides the Agency with flexibility by 
recognizing that holding existing borrowers and new applicants to the 
same standard at time of loan approval is detrimental to the existing 
borrowers who are having difficulty keeping their accounts current and 
demonstrate that they may benefit from a refinance at more favorable 
rates and terms. It would be harmful to the existing borrower and the 
Agency to deny an opportunity to refinance, and improve the 
affordability

[[Page 6766]]

of the loan, simply because the borrower may exceed the low-income 
limit at time of approval for the refinance.
    The revision of paragraph (c) and removing paragraphs (c)(1) 
through (3) will 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 fulltime 
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 will 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. This revision is adopted from the 
proposed rule without change.
    Also, in this section, paragraphs (g)(1) through (3) will be 
revised and paragraphs (g)(4) and (5) will be removed. The revisions 
will align the repayment ability ratio thresholds for both low- and 
very-low income applicants. The revisions are adopted from the proposed 
rule with the following changes: The PITI ratio for very-low will 
increase to thirty-three percent to align with the existing low-income 
PITI ratio, rather than increasing PITI to thirty-five percent for both 
income categories as was proposed; and the total debt (TD) ratio will 
remain at forty-one percent for both income categories, rather than 
increasing it to forty-three percent for both income categories as was 
proposed.
    This will help to ensure equal treatment of applicants across the 
income categories and improve the marketability of the program, while 
being prudent about increasing risk. 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.
    The use of ``homeowner'' under this section in paragraph (i) will 
be revised by replacing with ``homeownership'' to have consistency 
within 7 CFR part 3550. This revision is adopted from the proposed rule 
without change.
Sec.  3550.55 Applications
    In this section, paragraph (c) introductory text and paragraphs 
(c)(4) and (5) will be revised to allow application processing 
priorities to be 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.
    The change recognizes fluctuation in RHS 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 amendment also gives 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 which 
will 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 Real Estate Owned (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 will also make 
funding available in accordance with same priorities as application 
processing.
    These revisions are adopted from the proposed rule without change.
Sec.  3550.56 Site Requirements
    Under this section, make revisions in paragraph (b) and remove 
(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. 
This change is consistent with the guaranteed SFH loan program, which 
has no site value limitation. This revision is adopted from the 
proposed rule without change.
Sec.  3550.57 Dwelling Requirements
    In this section, paragraph (a) will be revised 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 7 CFR 3550.10 of this rule. This revision is 
adopted from the proposed rule without change.
Sec.  3550.59 Security Requirements
    In this section, paragraph (a)(2) will be revised 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 five percent (i.e., up to a 105 percent 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 16, 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 recognized grant source such as a

[[Page 6767]]

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.
    This final rule codifies the positive aspects of the pilot so that 
the advantages will apply program wide. These revisions are adopted 
from the proposed rule without change.
Sec.  3550.67 Repayment Period
    In this section, paragraph (c) will be revised to allow more small 
Section 502 direct loans to be repaid in periods of up to ten years. 
The portfolio's new loan delinquency nearly doubled between November 
2019 to October 2020, and while new loan delinquency trends have 
gradually improved since October 2020, they still exceed November 2019 
rates. This resulted in the need for measured and gradual changes, 
therefore, the revisions are adopted from the proposed rule with the 
following change: The threshold for determining a small loan as 
determined by the Agency will not exceed eight percent of the national 
average area loan limit, rather than ten percent as was proposed. The 
eight percent parameter provides a threshold that meets the Agency's 
current practice and gives the Agency flexibility to increase the 
unsecured loan level within a reasonable amount in the future.
    The current regulation states that only loans of $2,500 or less 
must not have a repayment period exceeding ten years. In practice, 
loans of less than $7,500 are generally termed for ten 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 provides the Agency flexibility in setting the dollar 
threshold for smaller loans which may have a repayment period that does 
not exceed ten years. This threshold will be determined by the Agency 
and published in a publicly available format and will not exceed eight 
percent of the national average area loan limit. For example, the 
current national average area loan limit is approximately $285,000, so 
only loans of $22,800 or less may not have a repayment period exceeding 
ten years. During Fiscal Years 2019 and 2020, there were approximately 
67 loans for less than $23,000, with an average loan amount of $12,240. 
Of this subset of loans, there was a 22.5 percent increase in the 
average loan amount from FY 19 ($10,847) to FY 20 ($13,293). This 
highlights the need for additional flexibility as ever-increasing 
purchase and repair costs naturally increase what constitutes a 
``small'' loan. 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.

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

Sec.  3550.102 Grant and Loan Purposes
    In light of the discussion above and as a change from the proposed 
rule, the revision of paragraph (e)(5) will permit refinancing of 
existing 504 loans, depending on the availability of funds and program 
priorities as determined by RHS, in accordance with the revised Sec.  
3550.201 to allow refinancing as a special servicing action to reduce 
the number of borrower failures that result in liquidation including, 
but not limited to, Sec.  3550.207 to allow refinancing at the end of a 
moratorium. The Agency may limit the number of direct loans made for 
refinancing purposes based on the availability of funds and Agency 
priorities. market conditions and other appropriate factors. This 
revision provides the Agency with more flexibility pertaining to loss 
mitigation measures.
Sec.  3550.103 Eligibility Requirements
    Under this section, paragraph (e) will be revised to remove the 
language in 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 removes 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. This revision 
is adopted from the proposed rule without change.
Sec.  3550.104 Applications
    Paragraph (c) will be revised by replacing ``veterans preference'' 
with ``veterans' preference.'' This is a grammatical correction only 
and is adopted from the proposed rule without change.
Sec.  3550.106 Dwelling Requirements
    Paragraph (a) will be revised 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 7 CFR 3550.10 of this rule. 
This revision is adopted from the proposed rule without change.
Sec.  3550.108 Security Requirements (Loans Only)
    Paragraph (b)(1) will be revised 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 removes the specific 
dollar threshold for loans which require title insurance and a closing 
agent. Loans where the total section 504 indebtedness does not exceed 
an amount determined by the Agency, but no greater than 20 percent of 
the national average area loan limit, may be closed by the Agency 
without title insurance or a closing agent. Using this parameter gives 
flexibility to adjust for inflation over time and still results in a 
loan amount that can be closed by the Agency with minimal risk. The 
Agency will determine the maximum amount based on factors such as 
average costs for title insurance and closing agents compared to 
average housing

[[Page 6768]]

repair costs and publish the specific threshold in a publicly available 
format such as the program handbook. This revision will significantly 
reduce loan closing costs incurred by the borrowers, by allowing more 
loans to be closed by the Rural Development office. This revision will 
also allow for responsiveness and adjustments based on inflationary 
changes and is adopted from the proposed rule without change.
Sec.  3550.112 Maximum Loan and Grant
    The revision of paragraph (a) will 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. This revision is adopted from the 
proposed rule without change. An initial limit of $40,000 will be used 
in the program handbook.
    The Agency will determine the maximum amount based on factors such 
as average loan amount and repair costs. Using this parameter gives 
flexibility to adjust for inflation over time and still results in a 
total outstanding loan amount that can be acceptable to the Agency. 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. The current national average area loan limit is 
$285,000 so the maximum loan assistance could not exceed $57,000; as 
stated above, an initial limit of $40,000 will be used in the program 
handbook. The $40,000 limit is currently used under a pilot.
    The revision of paragraph (c) will remove the lifetime maximum 
assistance of $7,500 for a Section 504 grant and replace with a maximum 
lifetime limit not to exceed ten percent of the national average area 
loan limit for any one household or one dwelling versus the five 
percent outlined in the proposed rule. Since the publication of the 
proposed rule in November 2019, there have been major shifts in the 
economy. According the National Association of Home Builder's May 2021 
survey, building materials costs have on average increased 26.1 percent 
over the prior 12 months and builders are widely experiencing shortages 
in material. The higher percentage is needed given current and future 
conditions. An initial limit of $10,000 (which is currently used under 
a pilot) will be used in the program handbook. Limiting this to any one 
household will eliminate applicants from applying separately and 
receiving double grant assistance per household. In addition to 
changing the percent used, the statement ``no grant can be awarded when 
the household has repayment ability for a loan'' that appeared in the 
proposed rule was removed. It was determined to be confusing given the 
allowance for loan/grant combinations. This revision was adopted from 
the proposed rule, with the changes noted above.
Sec.  3550.113 Rates and Terms (Loans Only)
    The revision of paragraph (b) will revise the Section 504 loan term 
requirements to specify that the loan term will be 20 years. This will 
make 504 loan terms consistent, increase affordability, and maximize 
repayment ability. This revision is adopted from the proposed rule 
without change.

Subpart D--Regular Servicing

Sec.  3550.162 Recapture
    Under this section, revising the recapture requirements in 
paragraph (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 the 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 the borrower's subsidy repayment agreement and a calculation 
that determines the amount of value appreciation (equity) the borrower 
has in the property at the time of payoff. The changes to the 
regulation clarify when PRAS is collected and is consistent with the 
terms of the subsidy repayment agreements. In cases where the borrower 
has no equity in the property based on the recapture calculation, PRAS 
will not be collected. There are no changes to the current subsidy 
recapture calculation. These revisions are adopted from the proposed 
rule without change.

Subpart E--Special Servicing

Sec.  3550.201 Purpose of Special Servicing Actions
    In light of the discussion above and as a change from the proposed 
rule, this paragraph will be revised to include refinancing of RHS debt 
as a special servicing action to reduce the number of borrower failures 
that result in liquidation. Borrowers who have difficulty keeping their 
accounts current may be eligible to refinance as a special servicing 
option (e.g., exiting a moratorium, reamortization or other options are 
unaffordable). As with other special servicing options, the refinance 
special servicing option will be unavailable for accelerated accounts. 
The refinancing option adopted with this rule change is particularly 
important given the large number of borrowers who will be exiting a 
COVID-related payment moratorium (also referred to as COVID-related 
forbearances). Some of these moratoria lasted over a year, and a post-
moratorium reamortization agreement would not result in affordable 
monthly payments because the original loan term is limited by statute. 
In addition, the American Rescue Plan Act of 2021 provided additional 
budget authority which, given the critical need for flexibility in 
servicing direct loans, will be best directed towards refinancing and 
other loss mitigation options. The Agency is amending the regulation to 
reflect the expansion of refinancing availability as a special 
servicing action to help make payments more affordable (e.g., following 
a moratorium or reamortization)--however such refinancing will be 
subject to the availability of funds and at the discretion of the 
Agency. In other words, while the final rule amendments will provide 
critical relief to borrower in response to COVID and the Agency 
preserves the ability to provide such refinancing in the future, such 
refinancing is not a given due to factors such as budget authority and 
other Agency priorities.
Sec.  3550.207 Payment Moratorium
    Under this section, revising the payment moratorium requirements 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 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,

[[Page 6769]]

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 will require re-amortization after a moratorium 
regardless of repayment ability, which will 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. These revisions are adopted from the 
proposed rule without change.

Subpart F--Post-Servicing Actions

Sec.  3550.251 Property Management and Disposition
    In this section, revising paragraphs (c) and (d) to remove obsolete 
references and clarify the process and priorities in the sale or lease 
of REO properties. The revision also clarifies 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 to 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 changes will 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.
    This 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. These revisions are adopted 
from the proposed rule without change.

IV. Regulatory Information

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 final 
rule as not significant 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 this program, but if they do apply 
and are selected for funding, they must comply with the requirements 
applicable to the Federal program funds. This rule is not retroactive. 
It will not affect agreements entered into prior to the effective date 
of the rule. Before any judicial action may be brought regarding the 
provisions of this rule, the administrative appeal provisions of 7 CFR 
part 11 must be exhausted.

Unfunded Mandates Reform Act

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

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 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 final 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 
final 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

[[Page 6770]]

that this rule, while affecting small 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 document 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 final rule does not have a 
substantial direct effect on one or more Indian tribe(s) or on either 
the relationship or the distribution of powers and responsibilities 
between the Federal Government and Indian tribes. Thus, this final rule 
is not subject to the requirements of Executive Order 13175. If tribal 
leaders are interested in consulting with the Agency on this rule, they 
are encouraged to contact USDA's Office of Tribal Relations or the 
Agency's Native American Coordinator at: [email protected] to request such 
a consultation.

Programs Affected

    The following programs, which are listed in the Catalog of Federal 
Domestic Assistance, are affected by this final rule:
    Number 10.410, Very Low to Moderate Income Housing Loans 
(specifically the section 502 direct and guaranteed 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 final 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.

V. 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 https://www.usda.gov/oascr/how-to-file-a-program-discrimination-complaint 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, chapter XXXV, title 7 of 
the Code of Federal Regulations, is 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 revising the definition of ``Modest 
housing'', adding a definition for ``Principal residence'' in 
alphabetical order, and revising the definition of ``Veterans' 
preference'' to 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 is 
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.
* * * * *
    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:


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

[[Page 6771]]

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

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4. In Sec.  3550.52, revise paragraphs (a), (c), 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.
* * * * *
    (c) Refinancing RHS debt. An existing RHS loan may be refinanced in 
accordance with Sec.  3550.204 to allow the borrower to receive payment 
assistance. In addition, depending on the availability of funds and 
program priorities as determined by RHS, an existing RHS loan and the 
related subsidy recapture may be refinanced as allowed under Sec.  
3550.201.
* * * * *
    (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 half 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.
* * * * *

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5. In Sec.  3550.53, revise paragraphs (a), (c), (g), and (i) to read 
as follows:


Sec.  3550.53  Eligibility requirements.

    (a) Income eligibility. At the time of loan approval, the 
household's adjusted income must not exceed the applicable low-income 
limit for the area, and at closing, must not exceed the applicable 
moderate-income limit for the area (see Sec.  3550.54). When an 
existing RHS loan is being refinanced as a special servicing action 
under Sec.  3550.201), the household's adjusted income must not exceed 
the applicable moderate-income limit for the area at the time of loan 
approval and closing.
* * * * *
    (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, and 
insurance (PITI), does not exceed thirty-three 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-one 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.

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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

[[Page 6772]]

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 (c)(1), (2), (3), or (4) of this section 
will be selected for processing after all applications with priority 
status have been processed.
* * * * *

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7. In Sec.  3550.56, revise paragraphs (b)(1) and (2) and remove 
paragraph (b)(3).
    The revisions read as follows:


Sec.  3550.56   Site requirements.

* * * * *
    (b) * * *
    (1) The site must not be large enough to subdivide into more than 
one site under existing local zoning ordinances and
    (2) The site must not include farm service buildings, though small 
outbuildings such as a storage shed may be included.

0
8. In Sec.  3550.57, revise paragraph (a) introductory text to read 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 
area loan limit, in accordance with Sec.  3550.63, unless RHS 
authorizes an exception under this paragraph (a). 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. Existing properties with 
in-ground swimming pools may be considered modest; however, in-ground 
swimming pools with new construction or with properties which are 
purchased new are prohibited.
* * * * *

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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).
* * * * *

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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 eight percent of the national average area loan limit.
* * * * *

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

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11. In Sec.  3550.102, revise paragraph (e)(5) to read as follows:


Sec.  3550.102  Grant and loan purposes.

* * * * *
    (e) * * *
    (5) Refinance any debt or obligation of the applicant incurred 
before the date of application except for the installation and 
assessment costs of utilities; or subject to the availability of funds 
and program priorities as determined by RHS, refinance of an existing 
RHS loan in accordance with Sec.  3550.201 as a special servicing 
option, including but not limited to refinancing at the end of a 
moratorium.
* * * * *

0
12. 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
13. 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
14. 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 
area loan limit, in accordance with Sec.  3550.63.
* * * * *

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15. 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.
* * * * *

[[Page 6773]]


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16. 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 or one dwelling may not exceed ten percent of the 
national average area loan limit.

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17. 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

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


Sec.  3550.162   Recapture.

* * * * *
    (b) * * *
    (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

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19. Revise Sec.  3550.201 to read as follows:


Sec.  3550.201  Purpose of special servicing actions.

    The Rural Housing Service (RHS) may approve special servicing 
actions to reduce the number of borrower failures that result in 
liquidation. Borrowers who have difficulty keeping their accounts 
current may be eligible for one or more available servicing options 
including: Payment assistance; delinquency workout agreements that 
temporarily modify payment terms; protective advances of funds for 
taxes, insurance, and other approved costs; and payment moratoriums. 
Subject to the availability of funds and Agency priorities, refinancing 
may be available as a special servicing option in accordance with Sec.  
3550.52(c).

0
20. In Sec.  3550.207, revise paragraphs (b)(2) and (c) and remove 
paragraph (d).
    The revisions 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
21. 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.
* * * * *

Joaquin Altoro,
Administrator, Rural Housing Service.
[FR Doc. 2022-02470 Filed 2-4-22; 8:45 am]
BILLING CODE 3410-XV-P