[Federal Register Volume 60, Number 208 (Friday, October 27, 1995)]
[Rules and Regulations]
[Pages 55112-55147]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 95-26553]




[[Page 55111]]

_______________________________________________________________________

Part III





Department of Agriculture





_______________________________________________________________________
Rural Housing and Community Development Service

Rural Business and Cooperative Development Service

Rural Utilities Service

Consolidated Farm Service Agency
_______________________________________________________________________



7 CFR Parts 1900, 1910, 1924, et al.



Single Family Rural Housing Loans: Final Rule

Federal Register / Vol. 60, No. 208 / Friday, October 27, 1995 / 
Rules and Regulations

[[Page 55112]]


DEPARTMENT OF AGRICULTURE

Rural Housing and Community Development Service
Rural Business and Cooperative Development Service
Rural Utilities Service
Consolidated Farm Service Agency

7 CFR Parts 1900, 1910, 1924, 1940, 1944, 1950, 1951, 1955, and 
1965

RIN 0575-AB16 and RIN 0575-AA35


Single Family Rural Housing Loans

AGENCIES: Rural Housing and Community Development Service, Rural 
Business and Cooperative Development Service, Rural Utilities Service, 
and Consolidated Farm Service Agency; USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Housing and Community Development Service (RHCDS) is 
amending the regulations on Single Family Rural Housing Loans. Under 
the reorganization of the Department of Agriculture, RHCDS is the 
successor to the former Farmers Home Administration (FmHA) for the 
administration of rural housing (RH) programs under title V of the 
Housing Act of 1949. References to RHCDS will also include actions of 
FmHA prior to the reorganization. Regulations regarding Receiving and 
Processing Applications, Borrower Supervision, Servicing, and 
Collection of Single Family Housing Loan Accounts, and Security 
Servicing for Single Family Rural Housing Loans are also impacted by 
the proposed revisions. This action is taken to implement the 
provisions of section 315 of the Housing and Community Development Act 
of 1987, Pub. L. 100-242, to improve the delivery of the program to the 
public, provide for the orderly processing of loan applications, reduce 
workload of RHCDS field staffs, and to conform the RH direct loan 
program under section 502 of the Housing Act of 1949 with the 
Guaranteed Rural Housing Loan program and industry standards.

EFFECTIVE DATE: October 27, 1995.

FOR FURTHER INFORMATION CONTACT: Betsy McDaniel, Senior Loan 
Specialist, Rural Housing and Community Development Service, USDA, Room 
5346-S, South Agriculture Building, 14th and Independence SW, 
Washington, DC 20250, Telephone (202) 720-1486.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been reviewed under Executive Order 12866 and the 
Office of Management and Budget has determined that this is a 
``significant regulatory action.'' The rule provides significant 
changes which are customer friendly and have reduced the paperwork 
burden. Additionally, the cost of the program is reduced as a direct 
result of changing the method of subsidy determination. Size and cost 
containment restrictions on properties have been removed to allow 
applicants to chose a dwelling that meets their needs within their 
repayment ability. The result of this rule serves to limit the rate of 
subsidy and encourage the applicant to purchase a modestly priced 
property within their repayment ability.

Regulatory Flexibility Act

    This final rule has been reviewed with respect to the Regulatory 
Flexibility Act (5 U.S.C. 601-612). The undersigned has determined that 
this action will not have a significant economic impact on a 
substantial number of small entities since the regulatory changes 
affect RHCDS processing of section 502 loans and individual applicant 
eligibility for the program.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It is the determination of RHCDS 
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 1949, Pub. L. 
91-190, an Environmental Impact Statement is not required.

Programs Affected

    This program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.410, Low Income Housing Loans.

Intergovernmental Consultation

    For the reason set forth in the final rule related notice to 7 CFR 
part 3015, subpart V, 48 FR 29115, June 24, 1983, this program is 
excluded from the scope of Executive Order 12372 which requires 
intergovernmental consultation with state and local officials.

Civil Justice Reform

    This final rule has been reviewed under Executive Order 12778, 
Civil Justice Reform. In accordance with this rule: (1) all state and 
local laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3)pursuant to the Department of Agriculture Reorganization Act of 
1994, Public Law 103-354 (October 13, 1994), administrative appeal 
proceedings must be exhausted before bringing suit in court challenging 
actions taken under this rule unless those regulations specifically 
allow bringing suit at an earlier time.

Paperwork Reduction Act

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) under the provisions of 44 U.S.C. chapter 35 and have been 
assigned OMB control 0575-0059 in accordance with the Paperwork 
Reduction Act of 1980. The collection requirements have been reduced as 
a result of reducing the need for Form FmHA 1944-3, Budget and/or 
Financial Statement for loanmaking decisions relating to the 
applicant's repayment ability. The Agency is now relying on the use of 
ratios for determining repayment ability. The total reduction in burden 
is 247,000 hours, or 19 percent as a direct result of the changes in 
this rule. These results are in keeping with the National Performance 
Review goal of reducing burden imposed on the public by Government 
programs. This final rule does not impose any new information 
collection or recordkeeping requirement in addition to those approved 
by OMB.

Regulatory Reform: Less Burdensome or More Efficient Alternatives

    The Department of Agriculture is committed to carrying out its 
statutory and regulatory mandates in a manner that best serves the 
public interest. Therefore, where legal discretion permits, the 
Department actively seeks to promulgate regulations that promote 
economic growth, create jobs, are minimally burdensome and are easy for 
the public to understand, use or comply with. In short, the Department 
is committed to issuing regulations that maximize the net benefits to 
society and minimize costs imposed by those regulations. The Department 
has utilized comments and suggestions from the public to develop this 
regulation in accordance with these principles.

Background

    Section 534 of the Housing Act of 1949 requires that all rules and 
regulations issued pursuant to that Act will be effective 30 days from 
the publication date. The one exception is for a rule or regulation 
issued on an emergency basis. This action is effective 

[[Page 55113]]
immediately. The justification for the immediate effectiveness of this 
regulation is based on the administrative problems and expense to 
operate the program which will arise if the funding for the Fiscal Year 
1996 single family housing loan program is commenced under the old part 
1944, subpart A, regulation and shortly after the beginning of the 
fiscal year a complete and inconsistent revision becomes effective, 
with the new requirements and new provisions. Secondly, the Agency's 
budget for Fiscal Year 1996 was submitted in anticipation that the 
revised regulation would become effective on October 1, 1995. The 
revised regulation reduces the cost of the program by decreasing the 
subsidy and therefore makes more money available for additional loans 
from the appropriated funds to assist low-income families. The most 
effective way to avoid undue expense of operating the program and 
inconsistencies is to apply the new rule to all loans made during the 
new fiscal year. For the same reasons the Agency finds that good cause 
exists for an immediate effective date under section 553 of the 
Administrative Procedure Act.
    This final rule incorporates two proposed rules and includes issues 
and comments from both. Both proposed rules are being finalized in this 
single final rule. The proposed rule published in the Federal Register 
(60 FR 25629) on May 12, 1995, provided for a 60-day comment period 
which ended on July 11, 1995. This proposed rule was a complete 
revision of the entire regulation and incorporates the appropriate 
changes from the first proposed rule published in the Federal Register 
(58 FR 507) on January 6, 1993. The Agency wishes to thank all of the 
commenters who responded to the proposed rules. The comments were 
helpful in formulating this final rule.

Proposed Rule Published on May 12, 1995

    This proposed rule proposed a complete revision to the regulation 
with major changes in determining the amount of maximum dollar 
limitation for the property financed, use of ratios to determine 
repayment ability, changes to the calculation of payment assistance, 
and revisions to the procedures for loan processing.
    Interested persons have been afforded an opportunity to participate 
in the making of this rule. Due consideration has been given to the 52 
comments received. Twenty six comments were from RHCDS or other federal 
agency personnel. Twenty six comments were received from groups 
representing various public and private interest groups.
    Many respondents issued strong support for the rule and requested 
that it be published as written. Other respondents were in support of 
the rule with particular suggested revisions. Several negative comments 
were received opposing the use of ratios as a replacement for the use 
of family budgets. Others supported the use of ratios with suggested 
changes to other percentages. Other negative comments were received 
regarding payment assistance calculations. These comments were reviewed 
and adjustments made. Other negative comments were received on 
restricting the loan amount so as not to exceed 85 percent of the 
maximum dollar limitation established under section 203(b) of the 
National Housing Act (12 U.S.C. Sec. 1709). These comments were 
considered and changes made to allow the maximum amount under this law.
    The proposed rule used the term ``monthly obligation to income'' 
(MOTI) defined as the principal, interest, taxes, insurance, (PITI) and 
homeowner and other assessments, and long term obligations. This term 
is generally not consistent with that used in the private sector and in 
subpart D of part 1980, Guaranteed Rural Housing Program. In order to 
be consistent, RHCDS has revised the final rule to change the term for 
this ratio from ``MOTI'' to ``total debt'' (TD).
    Other administrative changes were made to the final rule as a 
result of comments received. RHCDS has defined ``participation loans'' 
and ``payment assistance'' in the definition section and has changed 
the term ``disabled person'' to ``person with a disability.''
    Eleven comments were in favor of the use of ratios to determine 
repayment ability in lieu of the use of family budgets. Seven of these 
respondents felt the provisions of allowing the use of family budgets 
in unusual circumstances is not reasonable and too inconsistent to 
administer effectively. RHCDS concurs with these comments and has 
removed this language and replaced it with language describing 
compensating factors which may be used for exceptions to ratios. Family 
budgets may be used when an applicant presents documented evidence of 
having met housing related costs in the past six months that are equal 
to or greater than the projected housing costs after approval of the 
proposed loan. Several respondents felt that an applicant should 
provide documented evidence of having met housing related costs in the 
past 12 months. RHCDS has considered this comment and has made the 
decision not to adopt it at this time because the proposed requirement 
of six months provides sufficient documentation to demonstrate 
repayment ability. A family budget may be used in conjunction with the 
ratios in justifying the need for allowing compensating factors.
    Three respondents from high cost areas were concerned about the 
effect the PITI and TD ratios would have on the amount of loan that can 
be made and stated it would curtail loan making in the respondents' 
States. RHCDS has provided for these situations by allowing the use of 
documented evidence of having met related costs in the past 6 months 
that are equal to or greater than the projected housing costs after 
approval of the proposed loan.
    Ten respondents contend the changes in this rule are not conducive 
to participation loans with other lenders, particularly with the change 
in the way payment assistance is calculated and the use of ratios to 
determine repayment ability. It was suggested that the ratios for 
participation loans be increased to 33 percent for principal, interest, 
taxes and insurance and 38 percent for total debt. RHCDS considered 
this request and made a determination that a revision to the ratios 
would be advantageous and justified the revision based on comments from 
affordable lenders in the industry. The Agency decided to use ratios of 
33 percent PITI and 38 percent TD for all loans to low-income 
applicants (as opposed to very low-income applicants), whether such 
loans are participation loans or are fully RHCDS funded direct section 
502 loans. Because very low-income applicants have less flexibility in 
covering their basic living expenses, the Agency will use a 29 percent 
PITI ratio and a 38 percent TD ratio for all RHCDS section 502 direct 
rural housing loans for very low-income applicants. This will assist 
very low- and low-income applicants while allowing for a reasonable 
percentage of income for housing payments. For participation loans the 
PITI ratio will include the applicant's payments of principal and 
interest on the participation loan.
    Participation loans will be obtained by those low-income families 
with higher incomes who can better afford a higher PITI ratio of 33 
percent. This ratio will give some flexibility to participation loans 
charging market interest rates. Payment assistance in connection with 
the RHCDS portion of a participation loan will always be based on the 
equivalent interest rate matching the applicant's percent of median 
income. The payment ``floors'' 

[[Page 55114]]
will not be considered because in most cases the applicant will be 
exceeding the ``floors'' when including the participation loan. The 
change in ratios has been adopted in the final rule. Applicants 
receiving a participation loan are not eligible for deferred mortgage 
assistance.
    Payment assistance subsidy is based the greater of either an 
equivalent interest rate based on the applicant's percentage of median 
income or on a minimum ``floor'' percentage of the applicant's adjusted 
income for principal, interest, taxes, and insurance. Other shelter 
costs such as utilities and maintenance, are not included as part of 
the calculation of subsidy. The Agency, in revising the regulation to 
streamline the process and model the regulations after industry 
practices, decided, like private industry, that other shelter costs are 
paid by the applicant over and above the PITI and TD expenses.
    Twenty comments were received on the calculation of payment 
assistance and the use of ``floors,'' which are the minimum percentages 
of adjusted family income for PITI. Ten respondents were completely in 
favor with the change as proposed. Several respondents had conducted 
their own studies based on data supplied from various section 502 user 
organizations in different geographic locations. The other respondents 
opposing the change used these studies as their basis for opposition. 
The studies showed that the impact was most severe for those with 
income between 50.01 and 65 percent of median. These respondents 
advised the use of step increases for the percentages of adjusted 
family income at 22, 23, 24, 25, and 26 percent. Their study showed 
that some applicants/borrowers will pay more than 30 percent for total 
shelter costs which includes PITI, utilities and maintenance.
    RHCDS has considered these comments and has determined there is 
merit to making a change in the determination of payment assistance for 
the 50.01 to 65 percent of median income category mentioned in the 
preceding paragraph. The abrupt jump from 22 to 26 percent of adjusted 
family income could cause undue hardship to these applicants and 
borrowers and could possibly result in increased delinquency and 
foreclosure rates. RHCDS has adopted the use of an additional ``floor'' 
of 24 percent of adjusted family income for applicants falling above 50 
and at or below 65 percent of median income.
    Twenty nine comments were received on restricting the loan amount 
so as not to exceed 85 percent of the maximum dollar limitation 
established under section 203(b) of the National Housing Act (12 U.S.C. 
Sec. 1709). The majority of respondents felt 85 percent was too 
restrictive for their local market and would only provide financing for 
existing homes in their communities. The respondents were concerned 
that RHCDS financing could not be provided for new construction based 
on this cap. Several respondents were concerned that RHCDS would not be 
providing decent, safe and sanitary housing for eligible applicants as 
a result of this change. One respondent stated this change would 
effectively stop the program delivery in the respondents' particular 
community because there is no existing housing meeting decent, safe, 
and sanitary requirements falling at or below the prescribed loan 
maximum. All of these respondents wanted the cap to be set at 100 
percent of the maximum dollar limitation established under section 
203(b) of the National Housing Act (12 U.S.C. Sec. 1709). Several 
respondents stated that the maximum dollar limitation established under 
section 203(b) is defined as modest housing by HUD and the section 502 
Guaranteed Rural Housing program and that to limit this amount for the 
direct program is without reason and unfounded.
    The Agency has considered these comments and has made the decision 
to increase the amount to the full amount of the maximum dollar 
limitation established under section 203(b). This decision was made 
because in most cases the limiting factor in the amount of the loan 
will be the affordability issue based on the percentage of the 
applicant's income as determined by the ratios. Loan amounts will be 
limited by the applicant's income and this change should not increase 
the cost of the program overall. There are provisions for exceptions to 
this limitation by the Administrator in rare circumstances.
    Another respondent was concerned that 85 percent is too high in the 
respondent's community and will present opportunities for unnecessarily 
high loan amounts. RHCDS, in making this change, considered this 
possibility but has determined it will not affect the majority of 
applicants because of the use of ratios to determine repayment ability. 
An approved applicant will be presented a ``Certificate of 
Eligibility'' which states the amount of loan the applicant qualifies 
for based on current income and debt information. An applicant will be 
able to select a property that best suits the applicant's needs based 
on the applicant's resources.
    Three respondents were concerned that RHCDS employees will no 
longer do inspections of existing properties to determine repairs 
needed to make a house financed structurally sound and functionally 
adequate. Another respondent was concerned that a third party 
inspection would cause undue hardship on the buyer and seller to pay. 
Third party inspections are not required and RHCDS will continue to 
inspect the property if a third party disinterested party has not done 
an inspection to determine if there is adequate security for the loan; 
however, the buyer has always had the right to obtain his or her own 
inspections to protect the buyer's interests.
    We received nine comments from natural gas distributors applauding 
the elimination of ``prohibited features'' in the existing 7 CFR 
Sec. 1944.16(e) particularly the prohibition in paragraph (6) ``Central 
air conditioning systems separate and apart from heat pumps.'' The 
natural gas industry has felt for a long time that this regulation was 
biased in the favor of electric space and water heating and has 
resulted in higher heating costs for consumers.
    Two respondents were in favor of including loan packaging fees as 
an eligible loan purpose; however, they were both concerned with 
allowing State Directors discretion to determine what is reasonable 
within their jurisdiction. They continued by stating that in the past 
some State Directors and housing staffs opposed packaging fees. RHCDS 
believes the sections 1944.3(a)(17)(ii)(A), (B), and (C) give adequate 
guidance to allow geographic flexibility. RHCDS has added a sentence to 
Sec. 1944.3(a)(17)(iii) to prohibit the amount from exceeding the 
amount prescribed in exhibit B of subpart B of part 1944.
    One respondent commented that the RHCDS requirements for lending on 
manufactured homes are too restrictive and that any HUD approved unit 
should be accepted. No significant changes were proposed to be made to 
the existing regulations regarding manufactured housing. The 
requirements currently are, and have been since the inception of this 
authority, that the new unit must be built to the Federal Manufactured 
Home Construction and Safety Standards (FMHCSS) and RHCDS thermal 
requirements. FMHCSS standards are commonly known as the HUD standards 
for the construction, design, and performance of a manufactured home 
which meets the needs of the public including the need for quality, 
durability, and safety.
    Eleven comments were received on the subject of deferred mortgage 
assistance. Two respondents stated that 

[[Page 55115]]
the program is unreliable, difficult to interpret and puts the 
recipient in a worse position at the end of 15 years. They both 
recommended removing the entire section and eliminating deferred 
mortgage assistance. The deferred mortgage program provides a means of 
getting a home for applicants who would not otherwise qualify, however, 
it is correct that in many cases the borrower will owe a great deal on 
the property when it is sold due to interest credit recapture. This 
results from the tremendous reduction in interest received while making 
deferred payments. While RHCDS admits this assistance is potentially 
burdensome, there is a need for this type of assistance for very low-
income applicants. At this time the section will not be eliminated.
    Several respondents were concerned with the wording which allows 
deferred mortgage assistance to continue to a qualified borrower 
provided it is renewed without interruption. The intent of section 
502(g) of the Housing Act of 1949 is to make this assistance available 
to qualified applicants at loan closing. RHCDS has determined that 
deferred mortgage assistance can be continued uninterrupted for up to 
15 years. The purpose of deferred mortgage assistance is for very low-
income applicants to obtain a loan initially. There are other servicing 
options available to borrowers whose deferred mortgage assistance has 
expired or whose income made them no longer eligible.
    Two comments were received on the calculation of annual income. One 
respondent agreed with the use of historical data based on the previous 
12 months or the last fiscal year when a projection could not logically 
be made. This decision by RHCDS is consistent with the private lending 
community.
    Another respondent was concerned in Sec. 1944.5(b) that persons 
seeking, but unable to find employment would have to use projected 
income from former employment. The intent of this paragraph is to 
prevent excluding income from employers that historically lay off 
seasonal employees and then rehire them at a later date. Annual family 
income should include projected income from this type of situation if 
the applicant or coapplicant has a recent history of this type of 
employment. An example of this would be a factory that seasonally shuts 
down production and lays employees off. These employees are later 
rehired to continue in the same job. If there is recent history of an 
applicant's employment at this factory, then this income should be 
included based on historical information unless the applicant provides 
a statement that the person does not intend to resume employment in the 
foreseeable future or during the terms of the payment assistance 
agreement.
    Two comments were received regarding credit history review, 
specifically related to collection accounts. The first respondent felt 
Sec. 1944.9(f)(1)(ix) was too liberal in allowing an applicant to have 
collection accounts which were paid in full within 3 months prior to 
application. The respondent stated the limit should be increased to at 
least 6 months. RHCDS has considered this comment and has made the 
determination that the regulation as proposed provides a sufficient 
time period for satisfying unresolved collection accounts.
    The second respondent agreed with the changes made to Sec. 1944.9 
to make credit history requirements more reasonable; however, the 
respondent wanted clarification on Sec. 1944.9(f)(1)(viii). Upon review 
by RHCDS, it was noted that under certain circumstances this section 
and the following section seemed to be incompatible. A decision was 
made to eliminate this sentence entirely and renumber the paragraphs of 
this section. Another respondent wanted clarification on when 
bankruptcy will not indicate unacceptable credit history. The Agency 
considered this and adopted the respondent's proposed language in 
Sec. 1944.9(f)(2)(ii). Another respondent wanted clarification on 
Sec. 1944.9(f)(2)(iii) regarding the timeframe for satisfied judgments. 
Clarification was made in this section that a judgment satisfied more 
than 12 months before the date of application would not be considered 
unacceptable credit history.
    One respondent commented that if RHCDS intends to emulate the 
private industry then Sec. 1944.8(a)(2) should be changed to require an 
applicant to be employed at one place of employment for at least 12 
months prior to submitting the application. RHCDS does not require 
income to be obtained only from employment. Additionally, commercial 
residential mortgage lenders do not require 12 month employment history 
with one employer prior to application. Each case must be evaluated to 
determine if the situation was beyond the applicant's control or if the 
change in employment was to better the applicant's situation. Also, an 
applicant who did not have any break in employment and paid all bills 
when due demonstrates an adequate, dependable income.
    Two comments were received regarding the use of section 502 funds 
to refinance existing mortgages for applicants. These comments fully 
supported the removal of the provision that a debt has to be delinquent 
to be eligible for refinancing.
    One respondent commented that the wording in Sec. 1944.17(a)(2) was 
confusing and could be misconstrued in relation to participation loans. 
It was suggested that the wording be changed to clarify the maximum 
loan amount when there is a senior loan. The Agency has considered this 
suggestion but has determined that the wording provides the necessary 
language to convey the maximum loan amount when there is a lien in a 
senior position to the RHCDS debt.
    Two respondents commented that to change the language in the 
application processing section to ``rejected'' in Sec. 1944.27(d)(2) is 
not customer-friendly. The use of the word ``withdrawn'' was suggested 
as an alternative. The Agency has considered this change and has 
adopted it in the final rule. A similar suggestion was made in 
Sec. 1944.27(f) to change the wording from ``the borrower/applicant 
will submit to a personal interview with RHCDS'' to ``RHCDS will 
conduct a personal interview with an applicant.'' This suggested 
language was incorporated in the final rule.
    Comments were received regarding net family assets. A respondent 
commented on the statement in the preamble of the proposed rule where 
the Agency allowed that the provision of a net family asset limit for 
receiving payment assistance is removed. The respondent commented that 
the Agency still defines net family assets. The Agency will continue to 
include as income either the actual derived income from all family 
assets or a percentage of the value of such assets based on the current 
passbook savings rate. Another respondent wanted more examples on 
inclusions to net family assets. The Agency considered this and 
determined that the broad description already defining net family 
assets is the most appropriate method of description for interpretation 
on a nationwide basis.
    In the preamble to the proposed rule the Agency requested comments 
on the idea of implementing a 20-year balloon payment using the 33 or 
38 year amortization period. This concept was not included as part of 
the proposed rule other than in the preamble. Of the nine comments 
received, the comments were evenly split between support and opposition 
to this proposal. RHCDS has chosen not to implement the 20-year balloon 
payment provision at this time.
    Three comments were received regarding rates and terms as written 
in the proposed rule. Two respondents were concerned about the 
provision 

[[Page 55116]]
where RHCDS will charge the lower of the two interest rates in effect 
at the time of loan approval or loan closing. The comments were 
concerned that lenders should have the ability to lock into a rate when 
they have a commitment from a secondary lender. The final rule has not 
been changed as this process is only for the RHCDS loan. A 
participation lender will treat their portion of the loan the same as 
any other loan they would be making. The other respondent wanted a 
provision added for a 15-year term for loans of $7,500 or less to be 
written with a best mortgage obtainable. The Agency considered this 
request and has elected not to adopt this suggestion at this time so as 
to better protect the Government's interest.
    Seven comments were received regarding the use of HUD Handbook 
4905-1 for repairs to existing properties. All respondents were opposed 
to using this handbook as it is rarely used by HUD anymore and 
establishes yet another guideline which is adequately covered in 
existing instructions. The Agency considered these comments and made 
the decision to remove the use of this handbook and replace it with a 
reference to subpart A of part 1924.
    A comment was received regarding the definition of household or 
family concerning the language ``* * * all other persons who will make 
the applicant's dwelling their primary residence for all or part of the 
next 12 months * * *'' It was suggested that the wording be changed to 
prevent the possibility of the borrower renting out a portion of the 
site for the placement of a mobile home or other dwelling on the 
property. The wording has been changed to clarify that the income from 
the entire property financed with a section 502 loan will be included 
in the income eligibility determination.
    Six comments were received on site requirements. Several 
respondents commented that the paragraph under minimum adequate site, 
Sec. 1944.11(c), would be more comprehensible if the sentences were 
reversed. The Agency considered this request and made the suggested 
change to the paragraph. Also changes were made to be consistent with 
the Agency's recent change to its regulation in subpart C of part 1924 
of title 7. One respondent was concerned with the Agency's new 
description of minimum adequate site. The Agency determined this 
description would reduce the administrative burden on its field offices 
in requesting waivers for properties that exceed 1 acre. This criteria 
for a minimum adequate site also lessens the ability of local 
government to use zoning requirements for lot size to deter agency 
financed single family housing.
    The Agency received a number of comments regarding the 
unavailability of exhibit J in the published regulation regarding 
income exempted by Federal statute. This exhibit merely restates and 
summarizes Federal law and will not be published in the final rule; 
however, it is available in any Rural Economic and Community 
Development (RECD) field office. This is income which applicable 
Federal law provides cannot be used to determine eligibility for the 
loan or eligibility for payment assistance.
    There were eight comments on rural area determinations. Most of the 
respondents were in favor of the more frequent reviews allowed by the 
revision to this section. Several respondents stated that RHCDS 
assistance should not be available in communities with populations 
between 10,000 and 20,000 and objected to the term ``buffer'' zone. The 
Agency has determined this type of provision is advisable to avoid 
untenable situations where a loan would be made on one side of a street 
and not on the other. Another respondent stated that in the 
respondent's particular county one town is ineligible due to population 
while another town is eligible but has Class I soils where subdivisions 
are being developed. Pursuant to title V of the Housing Act of 1949, 
the rural area eligibility is based on population and is unrelated to 
soil type.
    Two respondents supported public notification when an area is being 
changed from rural to nonrural. Further, these respondents had concerns 
regarding applications and conditional commitments already submitted 
for financing in these redesignated areas in the community. The Agency 
has allowed provisions for continuing with applications in areas 
converted from rural to nonrural that were on hand prior to the 
redesignation, new and existing conditional commitments received prior 
to the redesignation, inventory properties, and subsequent loans.
    One respondent wanted a provision for loans to be made for the 
purchase of a dwelling located on land owned by a community land trust. 
The Agency is complying with the law and has added provisions in 
Sec. 1944.15(a)(4) and Sec. 1944.42 giving guidance on this subject.
    One respondent wanted approval for planned unit developments and 
homeowners associations to be at the State Director level. This was the 
intent of the proposed rule and only if there is professional 
management employed will it be necessary to receive National Office 
approval. The wording was changed in Sec. 1944.3(b)(16) to clarify this 
requirement.
    One respondent was concerned that Agency personnel under 
Sec. 1944.18(b)(2) and (3) would require mortgage insurance as security 
on American Indian land. The Agency has stated this as an example but 
clearly implies this is not the only form of security which will be 
accepted. No change was made to this paragraph.
    One respondent stated that an appraisal fee should be waived when 
RHCDS uses another lender's appraisal in conjunction with a section 502 
participation loan. The Agency has made the decision that it will lend 
up to $280 over the market value which includes funding for the 
appraisal fee. The money may be used at settlement to reimburse the 
applicant for the appraisal done by the participation lender for which 
the applicant previously paid.
    One respondent commented that the definition of real estate taxes, 
which provides for reducing the amount due by any tax exemption 
available to the applicant, as too cumbersome in multi-county field 
offices. The respondent stated that the applicant should be counseled 
regarding the availability of tax exemptions. The Agency concurs that 
counseling the applicant is a part of the application process but does 
not agree that the exemption should only be used if the applicant has 
claimed it. It is the RECD field office's responsibility to know what 
tax exemptions are available in order to counsel applicants.
    We received three comments regarding income from minors and 
students. The Department of Housing and Urban Development (HUD) 
recently changed its income eligibility restrictions. The Agency has 
made the final rule consistent with the HUD final rule which includes 
that income over $480 from a full-time student is not included. 
Additionally, the Agency has added Sec. 1944.5(f) to designate income 
which will not be included in annual income nor will it be considered 
in determining repayment ability. These are: income from live-in aides, 
income from minors, and income for educational scholarships.
    One respondent discussed Sec. 1944.8(a)(3)(i) using 5 percent of 
the current balance on all revolving credit cards and suggested that 
the minimum payment on all credit cards with activity in the past 3 
months be used. The Agency considered this comment and has decided to 
not change this requirement at this time. Five percent of the current 
balance is usually more than the minimum payment due and 

[[Page 55117]]
provides some means for paying off the credit card debt. However, the 
Agency does not want to use debt which is historical and not currently 
owed to determine the total debt ratio as this is not an equitable 
arrangement for the applicant.
    One comment was received regarding alien status under 
Sec. 1944.9(c) and recent changes made by the Immigration and 
Naturalization Service (INS). It is the Agency's policy that loans will 
only be made to United States citizens and those categories of non-
citizens covered in Section 501(b) of the Housing Act of 1949.
    Four comments were received regarding when repairs are to be done 
to existing houses. The proposed rule stated repairs must be done after 
loan closing. The Agency considered the comments received and has made 
a change to allow the buyer and the seller agree among themselves to 
work out when and by whom the repairs will be done, and provide 
documentation to that effect to the RECD field office. All parties 
concerned must understand that prior to obligation of funds, there is a 
risk in putting money into the property in case funding is not 
available at a later date.
    Five comments were received regarding the provision that the date 
of loan closing is the date the mortgage is recorded rather than the 
date the note and mortgage are signed. The actual date of closing is 
the date the mortgage is recorded and not the date the note and 
mortgage are signed.
    Several comments were received related to loan purposes 
(Sec. 1944.3). One respondent questioned the need for allowing housing 
to be occupied by a farm manager, tenants, sharecroppers, or farm 
laborers and the apparent redundancy with the Agency's Farm Labor 
Housing regulations. The Agency has made the determination to maintain 
this provision under loan purposes in the section 502 program.
    Several comments were received including lender's fees in 
connection with participation loans. Respondents recommended that the 
wording be changed to be consistent with that used in subpart D of part 
1980. The Agency considered this recommendations and has adopted the 
same language as in subpart D of part 1980.
    A respondent remarked that a paragraph was removed from the loan 
restrictions section regarding an applicant having the ability to carry 
out the required obligations of the loan, and maintaining a former 
residence in a responsible manner. This paragraph was not deleted but 
was moved to Sec. 1944.9(h).
    Nine comments were received regarding participation loans. The 
general consensus was the proposed rule was silent to any provision 
other than lender fees. The respondents remarked that for this program 
to be successful provisions would have to be made to fund these loans 
as a priority. The final rule has incorporated funding priority for 
participation loans.
    Several comments were received regarding mutual self-help housing. 
Two respondents commented that the language in Sec. 1944.38 indicates 
only low-income applicants may build their homes by this method. The 
words low-income have been removed as this was not the intent; the 
program is available to both very low- and low-income applicants. 
Several respondents supported the addition of personal liability 
insurance for self-help borrowers as an eligible loan purpose.
    Two comments were received regarding conditional commitments. One 
respondent stated the subtitle to Sec. 1944.45(d) was misleading and 
did not convey the proper message for cases where the property is 
presold to an applicant and the seller is submitting the package. The 
Agency considered this comment and agreed that the wording was 
misleading. The wording has been changed for clarification. Another 
respondent questioned the reimbursement of the appraisal fee at loan 
closing. The applicant will be charged for the appraisal and since this 
amount is included in the conditional commitment contractor's fee, the 
contractor should logically be reimbursed for the appraisal.
    One respondent commented that requirements for graduating borrowers 
had been removed and should be included in the regulation as required 
by subpart F of part 1951. The Agency considered this comment and has 
included a paragraph on graduation requirements in Sec. 1944.44.
    Three respondents commented on the use of HUD's Credit Alert 
Interactive Voice Response System (CAIVRS). They were all in agreement 
that an application should be held in suspense rather than rejected 
upon identification by CAIVRS of a delinquent Federal debt. The Agency 
agrees applicants will have to contact the Federal agency in question 
to resolve the delinquency and during this time the application will be 
held in suspense.
    One commenter disagreed with the proposal to change subpart J of 
part 1944, paragraph 1944.457 (a)(2), which increases the section 504 
grant limit from $5,000 to $7,500. The commenter stated that very often 
an individual applicant would be able to use $7,500 to remove health 
and safety hazards, and this will cause the grant funds per grantee to 
increase. The commenter was concerned that unless there is going to be 
additional funding the Agency will not be able to assist as many 
families with this program. The Agency does not propose to change this 
revision because of this comment. The commenter's statement is correct, 
and the Agency has already considered this downside. The Agency 
believes this change is justified because inflation has increased more 
than the additional $2,500 since the $5,000 limit was established. 
There are more cases each year where $5,000 will not remove all the 
health and safety hazards.
    One commenter agreed with the changes proposed in subpart J of part 
1944, Sec. 1944.461. However, the commenter suggested that the wording 
in (b) and (c) of that section, ``loans of $2,500 or more'' be changed 
to ``loans that exceed $2,500'' to be consistent with section 502 
regulations. The commenter also suggested that paragraph (b)(1) of that 
section be changed to clarify that subsequent section 504 loans are 
secured by a mortgage only when the subsequent and existing section 504 
loan balance will exceed $2,500.
    The Agency cannot change this wording to ``loans that exceed 
$2,500'' as section 504(a) of the Housing Act of 1949 exempts only 
loans for ``less than $2,500'' from security requirements. We 
considered changing the section 502 regulation; however, that wording 
is simpler and would cause even more confusion than just leaving it 
alone. However, we do agree with the spirit of the last part of the 
commenter's suggestion and are changing the wording in paragraph (b)(1) 
to clarify that a mortgage will be taken when the subsequent and 
existing section 504 loan balance will be $2,500 or more.
    One commenter agreed with the changes proposed in subpart J of part 
1944, Sec. 1944.463. However, the commenter suggested that changes be 
made in paragraphs (d) and (e) of that section to clarify that 
appraisals and title clearance are only required when the total section 
504 indebtedness exceeds $7,500. The Agency agrees with the commenter 
and the changes are being made in paragraphs (d) and (e) to clarify 
that total section 504 indebtedness is all that is considered.
    Three comments were received regarding the proposed changes to 
subpart G of part 1951. One comment objected to the provision stated in 
Sec. 1951.313(e)(2)(ii) whereby payment assistance would not be renewed 
if the borrower's income exceeded the 

[[Page 55118]]
moderate income limit for the area. The wording has been deleted from 
the final rule. Another respondent was concerned that the 
reorganization of offices would hinder the ability of RHCDS staff to 
hold personal interviews with borrowers to renew payment assistance. 
The Agency is aware of the reduction in staff in many areas of the 
country; however, this provision is being left in the final rule. 
Payment assistance renewals may be contracted out and the contractor 
will perform the direct borrower interview; although the ultimate 
decision on the continuation of and amount of payment assistance will 
remain with the Agency.
    Sixteen comments were received on differing aspects of the 
provisions governing the calculation of applicant income. One 
respondent referred to the definition of live-in aides under section 
1944.2(4) and requested that it be expanded. The commenter notes that, 
in many cases, live-in aides are actually household members who have 
gotten a divorce from their spouse in order to receive the financial 
resources needed to provide him or her essential care services. Under 
the regulations as currently written and present definition of terms, 
the former spouse's/live-in aide's income would not be counted as 
household annual income. The respondent feels that live-in aide's 
income should be considered in determining an applicant's annual income 
even if the aide is an ex-spouse providing essential care services. 
RHCDS does not concur with this recommended revision. While the 
respondent's observations may have merit, RHCDS is unable to make 
revisions to the provisions governing the definition of live-in aide 
and the exclusion of live-in aide's income from consideration. RHCDS is 
required under section 501(b)(5) of the Housing Act of 1949 to use the 
income guidelines and formulae established by HUD and the provisions in 
question were adopted in response to recent revisions to HUD's income 
guidelines and formulae. Another respondent referred to section 
1944.5(d)(2)(v) and suggested that RHCDS should cite the specific 
Internal Revenue Service (IRS) publication related to allowable 
business expenses deductions. RHCDS does not concur with this 
recommendation. IRS publications may change on a periodic basis due to 
revisions to taxation legislation and/or regulatory revisions initiated 
by that Agency and, therefore, it would be inappropriate for RHCDS to 
cite any particular publication, as this information could easily 
become invalidated in the future. Information about IRS publications 
can easily be obtained from the IRS if needed.
    One commenter requested clarification of section 1944.5(e)(1), 
which states that payments received for the care of foster children or 
foster adults will not be included in annual income but will be 
considered in determining repayment ability, in cases where foster care 
payments may be the sole source of household income. This respondent 
also considers foster care payments analogous to welfare payments and 
feels that it is not equitable for one form of assistance to be 
considered income while the other is not. Whether or not the 
respondent's observations have merit, they are immaterial since RHCDS 
is unable to make revisions to the provisions governing foster care 
income. RHCDS is required to use the income guidelines and formulae 
established by (HUD) and the provisions in question were adopted in 
response to recent revisions to HUD's income guidelines and formulae.
    One comment was received recommending that RHCDS provided a 
deduction from annual income for child support payments. Agency 
regulations include periodic allowances such as child support payments 
received in an applicant's household as a part of the applicant's gross 
annual income. However, child support payments are considered a 
financial obligation and, therefore, RHCDS does not concur that payment 
of child support by an applicant or other adult household member to a 
former spouse should be included in the Agency's guidelines as a 
deductible item in determining annual adjusted income. Child support 
payments made to an outside household are considered analogous to debts 
from bills or other miscellaneous expenses.
    Six comments were received expressing concern about the provisions 
under Sec. 1944.5(e)(2), which states that the income of an applicant's 
spouse who has been living separately from that applicant, or spousal 
income when court proceedings for a divorce or legal separation have 
been commenced, will not be included in annual income but will be 
considered in determining repayment ability. Four of these respondents 
recommended that the term ``living apart'' be removed from this 
provision, and the other commenters recommended that a minimum 
separation time be included to provide greater guidance in those cases 
where applicants and their spouses are apart or that the section be 
otherwise clarified. RHCDS does not concur with these recommendations. 
RHCDS must be a prudent lender, but, as a part of its supervisory 
credit mission and the Department's goal to be customer friendly, the 
Agency must have the flexibility to accommodate adverse situations that 
its applicants may face. The Agency believes that these provisions are 
reasonable and that they will not present an undue burden to loan 
approval officials who are processing applications.
    Two comments were received regarding the provisions under sections 
1944.5(e)(6) and 1944.6(d)(1), which deal with the consideration of 
medical expenses. One of these respondents noted that the language 
under Sec. 1944.6(d)(1), stating that amounts which are granted 
specifically for, or in reimbursement of, the cost of medical expenses 
will not be included in annual income could be construed to include 
insurance premiums paid by the employer, and recommended clarification 
of this provision. RHCDS is unable to concur with this recommended 
revision. While the respondent's observations may have merit, the 
provision in question was adopted in response to recent revisions to 
HUD's income guidelines and formulae. The second commenter questioned 
why the medical expenses deduction is open only to elderly families, 
expressed concern that this may constitute discrimination, and 
recommended that the medical expenses deduction be open to all 
applicants. Again, while the respondent's observations may have merit, 
RHCDS is unable to make revisions to the provisions governing the 
definition of an elderly family or the provisions that limit the 
medical expenses deduction only to elderly families. RHCDS is required 
to use the income guidelines and formulae established by HUD and the 
provisions in question were adopted in response to recent revisions to 
HUD's income guidelines and formulae.
    Four comments were received regarding the various provisions 
governing the consideration of loan co-signers. Two of these 
respondents recommended that RHCDS revise Sec. 1944.8(c) so that co-
signers will be required to meet the same creditworthiness requirements 
as applicants. The third respondent recommended that an applicant's 
principal, interest, taxes and insurance (PITI) be used in determining 
the co-signer's monthly obligations to income (MOTI) ratio. The fourth 
commenter recommended that entities be allowed to serve as loan co-
signers as well as individuals. RHCDS has carefully considered all of 
these suggestions and concurs with the commenters' recommendations. 
Section 1944.8(c) has 

[[Page 55119]]
been revised to incorporate these comments.
    Three comments were received regarding differing aspects of the 
provisions under Sec. 1944.9(f), which deal with the evaluation of 
applicant credit history, and the respondents generally favored the 
revisions to this section. However, one comment was received objecting 
to Sec. 1944.9(f)(4)(ii), which requires RHCDS personnel, in cases 
where an applicant disputes credit information received from an on-line 
profile credit report made at the time of application, to determine if 
the applicant has subsequently provided conclusive proof that the 
report is in error. The commenter feels that errors could occur in 
interpreting creditor correspondence or court documents and the like 
which applicants submit to disprove the on-line report, and that 
misinterpretations of this type of information could lead to erroneous 
conclusions on RHCDS' part. The respondent recommends that the 
applicant be responsible for ensuring the veracity of materials used to 
invalidate information contained in the on-line report. RHCDS does not 
concur with this recommendation. The Agency recognizes that the 
information contained in such profile reports may not be complete or 
accurate. The use of profile reports is intended as an initial tool to 
assist applicants, who are in the preliminary stages of the 
consideration process, in removing any potential problems that could 
adversely affect them during the later stages of consideration, so that 
their chances of obtaining RHCDS credit are enhanced. A standard 
mortgage credit report must be requested at a later stage in the 
consideration process, and, therefore, we believe that it is 
appropriate for the loan approval official to use good judgment in 
reviewing materials submitted by the applicant to dispute erroneous 
profile report information.
    One comment was received suggesting that RHCDS expand 
Sec. 1944.9(f)(2)(ii), which outlines the circumstances under which a 
bankruptcy will not be considered an indication of an unacceptable 
credit history, to include specific information on the Chapter 7 and 
Chapter 13 bankruptcy processes. RHCDS concurs with this recommendation 
and has incorporated the respondent's proposed language in the final 
rule.
    One comment was received objecting to the provisions contained 
under Sec. 1944.9(g), which outline the circumstances under which an 
applicant may be considered for additional credit if the applicant had 
a previous RHCDS debt which was settled, if the applicant was released 
from personal liability for the debt, or if the applicant is currently 
under consideration for debt settlement. The respondent feels that any 
applicant who is being considered for debt settlement under subpart B 
of part 1956 or was granted a debt settlement under this subpart should 
be ineligible for further assistance from RHCDS. RHCDS does not concur 
with this recommendation. The language under this section both clearly 
delineates and limits the circumstances under which an applicant who 
has not been successful with a present or previous RHCDS debt may be 
considered for additional credit. In such cases, the applicant must 
clearly demonstrate that the applicant's failure to meet the loan 
obligation was due to circumstances beyond the applicant's control and 
that the underlying reasons which created those circumstances will not 
reoccur. This is consistent with RHCDS' mission of assisting those 
individuals and families who have been denied economic advancement and 
who are unable to obtain conventional credit.
    Thirteen comments were received on differing aspects of the 
provisions governing the processing of applications. One respondent 
referred to Sec. 1944.27(a)(1) specifically with respect to Form FmHA 
410-4, ``Application for Rural Housing Assistance (Nonfarm Tract) 
Uniform Residential Loan Application'' (URLA), and recommended that the 
URLA be completely revised for a number of reasons. While the 
commenter's suggestions may have merit, the URLA itself was not a part 
of the proposed rule and, therefore, it is not under consideration for 
revision as a part of the final rule process at this time. However, we 
will keep the respondent's comments on file should the URLA become 
subject to review in the future.
    Two comments were received recommending that Secs. 1944.27(b)(2) 
and 1944.27(d)(1) be revised to indicate that a processing priority 
will be provided to applicants who are leveraging RHCDS funds with 
other resources and, accordingly, that Sec. 1944.26 be revised to 
include a set-aside reserve for leveraging purposes. RHCDS concurs with 
these respondents' recommendations and has adopted them in the final 
rule.
    One comment was received recommending minor, grammatical 
improvements to Sec. 1944.27(b)(4) and (b)(5). RHCDS has revised this 
section for greater clarity.
    Two comments were received recommending that RHCDS conduct an 
application ``open season,'' whereby public notice would be issued 
advertising a specific timeframe in which applications would be 
accepted in RECD field offices for processing within any given fiscal 
year. These respondents felt that, in light of the reduced allocations 
for the program, an open season would facilitate application processing 
and assist in the reduction of application backlogs. RHCDS is unable to 
concur with this recommendation. A revision to the program of this 
nature which would permit rejection of applications made outside of 
specific dates would not be consistent with the mission of giving very 
low- and low-income applicants an opportunity for home ownership which 
is not provided through any other means.
    Seven comments were received objecting to the provisions contained 
under Sec. 1944.27(c)(1)(ii), regarding the requirement that where 
there are more than 50 unprocessed applications on hand, the RHCDS loan 
approval official will inform each applicant, at least every 6 months, 
of the current funding status and provide an estimate of when the loan 
is to be processed, and these respondents generally felt that this 
requirement would be unduly burdensome on field office personnel. RHCDS 
does not concur with the recommendation that this provision be removed. 
In order to provide the best possible service to RHCDS customers, RHCDS 
personnel have a responsibility to keep applicants informed of the 
status of their application and the potential availability of funds. 
Since the notification process occurs only on a biannual basis, RHCDS 
does not agree that it would be an undue burden for its field offices 
to prepare and circulate such routine correspondence with its 
applicants. One comment was received requesting further clarification 
of Sec. 1944.27(c)(1)(ii) regarding the number of biannual notices to 
be provided to applicants, and whether applicants have the right to 
request an appeal if they should fail to respond to the biannual notice 
regarding their continued interest in participating in the program. 
This section clearly states that notification will be provided at least 
every 6 months to each applicant whose application has not been 
processed when there are more than 50 unprocessed applications on hand. 
Thus, as long as the number of unprocessed applications exceeds 50, 
there would be no limit on the number of biannual notices that could 
potentially be provided. The failure of an applicant to respond will be 
considered withdrawal of the application by the applicant.
    One comment was received recommending that RHCDS add language to 
Sec. 1944.27(c) to require the screening of all applicants for 
eligibility 

[[Page 55120]]
under the Guaranteed Rural Housing (GRH) loan program, and that any 
applicant found eligible under the GRH program would be disqualified 
for a direct loan with payment assistance. RHCDS does not concur with 
this recommendation. Under the procedure, assessing an applicant's 
ability to obtain other credit is required during the applicant 
interview, which is conducted after all information needed to make a 
determination of eligibility has been obtained. Therefore, RHCDS does 
not feel that further additions to Sec. 1944.27(c) are needed at this 
time.
    One comment was received objecting to the provisions under 
Sec. 1944.27(e)(1)(v) which require applicants to provide a copy of the 
divorce decree or other legal document in order for RHCDS to verify the 
amount of alimony or child support payments, and the respondent noted 
that this information should not be solicited by RHCDS because this 
action would constitute discrimination against divorced persons. In 
order to provide financial assistance only to applicants who need it 
and in the amounts needed, RHCDS is required under law to verify 
applicant income, including alimony or child support payments, to 
determine the applicant's and eligibility for program assistance, and, 
therefore, requesting a copy of a divorce decree or other legal 
document is not considered a discriminatory act, provided the request 
is solely for the purpose of verifying income. Loan approval officials 
cannot require this information from all applicants who are divorced; 
it may be required only when it is necessary to verify alimony or child 
support payments received. Loan approval officials should consider 
obtaining other means of verification, such as checks, etc., when it is 
feasible to do so.
    One comment was received recommending that, prior to filing an 
application, direct loan applicants should be required to take a 
``Homebuyers' Education'' course, similar to provisions included under 
subpart 1980-D as a part of the GRH program. While RHCDS agrees that 
this type of course is beneficial to potential homeowners, and, in 
fact, is requiring homebuyers' education in association with the direct 
loan program as a pilot initiative in a small number of states, we are 
unable to require such a measure at this time on a nationwide basis due 
to budgetary constraints. We encourage RHCDS loan approval officials to 
counsel their applicants on the homebuyers' education programs 
available to them within their communities.
    One comment was received suggesting that Sec. 1944.27(f)(1) be 
revised to include partial participation loans when discussing other 
credit options with applicants during the applicant interview. RHCDS 
does not concur with this recommendation; however, it is expected that 
loan approval officials in states with active partial participation 
loan programs will routinely discuss participation options with 
applicants.
    Two comments were received regarding Sec. 1944.27(b)(5) regarding 
the use of an on-line profile credit report as one of the steps to 
process applications. Both commenters felt that the use of on-line 
profile credit reports have merit, but that RHCDS loan approval 
officials should be provided with the latitude to make an eligibility 
determination on the basis of the information contained in the profile 
report if it contains adverse information. RHCDS does not concur with 
this recommendation. The information contained in the profile report 
may not be complete or accurate and, therefore, it would be 
inappropriate and premature for the loan approval official to proceed 
with an eligibility determination on the basis of such a report. The 
use of profile reports is intended as a tool to assist applicants, who 
are in the preliminary stages of the consideration process, in removing 
any potential problems that could adversely affect them during the 
latter stages of consideration so that their chances of obtaining RHCDS 
credit are enhanced.
    Seven comments were in favor of the requirement that all applicants 
will be required to submit a complete, legible copy of their most 
recently filed Federal income tax return to verify income. Three of 
these respondents felt that the provision requiring returns to be 
stored in a secure place separate from the loan docket to prevent any 
wrongful release of the tax return information is a cumbersome and 
inconvenient requirement, with one of the commenters who objected to 
this provision noting that RHCDS' files are already protected under the 
Privacy Act of 1974 and, thus, are secure and not made available to the 
public. RHCDS does not concur with the comments that the separate 
storage of tax return information is unnecessary.
    Two of the respondents requested clarification of this provision, 
questioning who would be responsible for the separate maintenance of 
the returns and, further, noting that RHCDS already controls its 
applicant files and restricts access to those files. In order to assure 
the confidentiality of this information the Agency has determined that 
it is necessary for field offices to store tax return information 
separately in a locked storage facility as a result of Internal Revenue 
Service procedures governing taxpayer information.
    One respondent recommended that RHCDS revise this provision and 
include language to require applicants to submit a copy of their most 
recent W-2 Form in addition to their return. RHCDS does not concur with 
this recommendation. W-2 Forms do not necessarily contain all 
information concerning an applicant's income. For example, certain 
types of business income not derived through the applicant's employer 
will not be revealed on the W-2 Form. For this reason, RHCDS believes 
that the applicant's tax returns are a more reliable tool for RHCDS' 
purposes and that they are a better source of comprehensive income 
information.
    Another respondent recommended that RHCDS revise Sec. 1944.27(a)(1) 
to indicate that a completed application will consist of Form FmHA 410-
4, ``Application for Rural Housing Assistance (Nonfarm Tract) Uniform 
Residential Loan application'' (hereinafter called URLA) properly 
filled out, dated, and signed; an RHCDS form for verifying employment 
signed by the applicant or household member for each employer, all of 
which are available in any RECD field office; and a complete, legible 
copy of the applicant's most recently filed income tax return. The 
commenter suggests that this change would be consistent with the 
language included under Sec. 1944.27(e) and industry standards. RHCDS 
does not concur with this suggestion. RHCDS does not believe that an 
applicant's tax return should be required to constitute a completed 
application because a tax return is not necessary in order to make a 
preliminary determination of eligibility for assistance. The tax return 
is intended to be used during the application processing phase as a 
means of verifying applicant income.
    Five comments were received on the provisions contained in the 
proposed rule governing the issuance of a certificate of eligibility to 
applicants. Two of the respondents were in favor of the certificate, 
but felt that it should be issued to all eligible applicants and that 
applicants who submit packaged applications which already contain 
information necessary to complete a real estate appraisal should not be 
excluded from receipt of such a certificate. RHCDS does not concur with 
this recommendation. The certificate of eligibility provides an 
applicant who has not submitted a contract for a house, information 
that is necessary to 

[[Page 55121]]
complete an appraisal and the amount of loan the applicant can afford 
based on current income and ratios. It is expected that packagers 
participating in the program who are responsible for assisting 
applicants in preparing applications in connection with the sale of a 
specific house will be well familiar with the program and will advise 
their clients of the eligibility requirements of an RHCDS loan, as well 
as the maximum loan amount that the applicants will be able to afford. 
Applicants who submit packaged applications in connection with the 
information necessary to complete a real estate appraisal will be 
provided written notice of their eligibility by the loan approval 
official rather than the certificate of eligibility.
    Two respondents were opposed to the certificate and felt that it 
would be a cumbersome process that would remove processing flexibility 
from RHCDS personnel. These commenters recommended that this provision 
be removed. RHCDS does not concur with this recommendation. RHCDS 
believes that the certificate of eligibility is a better method of 
providing applicants with information concerning their loan repayment 
and affordability limits. The certificate is designed to provide 
information tailored to each individual applicant.
    One respondent expressed concern over the certificate of 
eligibility in terms of the provisions that allow a maximum of two 60-
day extensions to applicants if they are unable to provide the 
information needed to complete a real estate appraisal within 90 days, 
but satisfactorily demonstrate to RHCDS that they are actively working 
on compiling the information requested. The commenter recommended that 
the provisions authoring extensions be removed. RHCDS does not concur 
with this request. The Agency's requirements governing the suitability 
of dwellings to be financed under the program have been substantially 
revised to provide applicants greater flexibility in locating 
appropriate housing. Because RHCDS' property requirements are more 
relaxed under the new guidelines, extensions to prolong the viability 
of certificates of eligibility should not be necessary on a frequent 
basis, and we expect that loan approval officials will exercise this 
authority only under very limited circumstances.

Proposed Rule Published on January 6, 1993

    Twelve comments were received from a variety of sources on this 
proposed rule, including six RHCDS employees. This rule proposed 
changes to eligibility restrictions, determination of annual income and 
payment assistance, and loan processing and servicing procedures.
    The following changes were made in the final rule due to the 
comments received: (1) Earned income tax credits will be excluded in 
the determination of annual income; (2) income exempted by Federal 
statutes cannot be used to withhold an applicant's eligibility for 
assistance; (3) Income exclusion for Nazi victims has been included in 
this final rule; (4) The requirement that RHCDS post the selected Rural 
Housing applicants' names has been eliminated; (5) RHCDS's applicants 
are to submit Federal income tax returns as part of a completed loan 
application; and (6) revisions to the payment assistance regulation 
have been made.
    All comments submitted with respect to this proposed rule were 
given due consideration and are discussed further in the following 
paragraphs:
    One commenter indicated that the definition of income in 
Sec. 1944.5(f)(3) needs to be revised in accordance with section 479B 
of the Higher Education Technical Amendments of 1987, Public Law 100-
50, Act, as well as the changes required in Section 103 of the Housing 
and Community Development Act of 1992, Public Law 102-550. RHCDS agrees 
with this and has adopted the changes as final rule. This policy is 
consistent with current HUD regulations.
    Regarding Sec. 1944.5(e)(8) on earned income tax credit, section 
11111(b) of the Omnibus Budget Reconciliation Act of 1990, Public Law 
101-508, provided that the earned income tax credit may not be treated 
as income for purposes of title V of the Housing Act of 1949. One 
comment was received from an RHCDS employee. The employee supported the 
elimination of Earned Income Tax Credit as income because it caused the 
field offices to estimate earned income. This section excludes treating 
any earned income tax credit as income and is being adopted as a final 
rule.
    Referencing Sec. 1944.5(e)(7) on income exclusion for Nazi victims, 
Public Law 103-286, August 1, 1994, provided that payments made to 
individuals because of their status as victims of Nazi persecution must 
be disregarded in determining eligibility for and the amount of 
benefits under any federally assisted program which provides benefits 
or services based, in whole or in part, on need. We are therefore, 
adopting and including this exclusion in the final rule.
    Of the three comments received regarding removing the posting of 
selected applicants' names on RECD field office bulletin boards, the 
majority of commenters supported the provision as proposed. One 
commenter stated loan officers can simply refer applicants to real 
estate brokers and contractors when the applicants are informed of 
their selection for processing. Two commenters supported the proposal, 
but expressed concern about the unavailability of services. They felt 
that the instruction should be revised to provide notice to the public 
that applicants, or their representative, upon request, may obtain a 
list of such applicants, including date of application and priority 
listed. Under the Freedom of Information Act (FOIA) as interpreted in 
United States Department of Justice v. Reporters Committee for Freedom 
of the Press, 489 U.S. 749 (1989), RHCDS applicants have a right to 
privacy and publication of names of related RHCDS selected applicants 
who must have low- or very low- income violates this right.
    The payment assistance regulation under Sec. 1944.34 is being 
updated and discrepancies with previously published regulations are 
removed in the final rule. Revisions to the payment assistance 
regulation are made to: (1) Provide a method for the verification of 
income from sources other than employment to make verification of 
miscellaneous income easier for the RHCDS personnel; (2) allow existing 
borrowers whose incomes have risen above the Department of Housing and 
Urban Development's yearly published low income levels to continue to 
receive payment assistance; (3) revise the effective period of the 
payment assistance agreement in situations where the borrower is 
unemployed; (4) ensure that the Agency handles a reduction in income 
consistently between the servicing regulations and the payment 
assistance regulation; and (5) remove the provision for canceling 
payment assistance benefits to a family that improved its property 
beyond what is considered to be modest for the area.
    The following material discusses the amendments to payment 
assistance by sections:
    Of the three comments received on Sec. 1951.313(f) regarding the 
cancellation of payment assistance agreements (reasons for 
cancellation), all commenters requested clarification regarding 
cancellation of payment assistance agreements when a borrower is living 
in a nursing home, but the borrower's household goods remain in their 
dwelling financed by RHCDS. Several commenters pointed out that 
sometimes a stay in a nursing home or other care facility is temporary. 
One commenter stated that non-occupancy should be defined. RHCDS has 
analyzed 

[[Page 55122]]
all comments received on this proposal and based on that analysis and 
its own review, we are providing additional guidance as follows: (1) 
While nursing homes and specialized care facilities are considered full 
time residences, only indefinite and prolonged stays should be 
considered as non-occupancy of the dwelling. A short term or 
specifically limited stay at full-care facilities that does not exceed 
6 months, such as when an individual is recuperating from a serious 
accident or illness, should not be grounds for terminating payment 
assistance. If the stay at a special facility exceeds 6 months, the 
borrower must supply appropriate medical documentation to support this 
situation.
    Section 1951.313(f)(1) on indicators of non-occupancy is being 
amended to state that the primary indicators of non-occupancy are when 
the borrower and his or her household belongings are absent from the 
property and the borrower fails to maintain the property or to arrange 
for its care. Several comments were received on the various indicators 
of non-occupancy and clarification was requested. In listing various 
indicators of non-occupancy, it was intended that the loan approval 
official should consider the circumstances and obtain information, as 
needed, to determine the appropriate action.
    One comment was received on Sec. 1951.313(f)(3) concerning a 
borrower who provides fraudulent or materially inaccurate financial 
information in connection with a payment assistance application/
renewal. The commenter recommended that this provision be eliminated 
because it conflicts with existing regulations (7 CFR section 
1951.608(b)(2) of subpart M of part 1951) and because it grants RHCDS 
staff too much discretion in determining when information is materially 
inaccurate or fraudulently provided. RHCDS disagrees and we are not 
amending this section. The Departmental appeals procedure will provide 
for a review of the materiality of inaccurate or fraudulently provided 
information.

Other Affected Regulations

    Due to the revisions in the final rule to subpart A of part 1944, 
conforming changes were necessary to the following regulations as 
noted.

List of Subjects in 7 CFR Parts 1900, 1910, 1924, 1940, 1944, 1950, 
1951, 1955, and 1965

    Loan programs--Agriculture, Loan programs--Housing and community 
development, Low and moderate income housing, Rural areas.
    Therefore, chapter XVIII, title 7, Code of Federal Regulations, is 
amended as follows:
    1. The authority citation for parts 1900, 1950, 1951, 1955, and 
1965 is revised to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.

CHAPTER XVIII--[AMENDED]

    2. 7 CFR chapter XVIII is amended by removing the words ``interest 
credit'' and adding in their place, the words ``payment assistance'', 
in the following places:
    a. Sec. 1950.105(c)
    b. Sec. 1965.26(c)(2) introductory text
    c. Sec. 1965.26(c)(3) (2 times)


Sec. 1955.66  [Amended]

    3. Section 1955.66(e)(2) is amended by removing the words 
``interest credits'' and adding in their place, the words ``payment 
assistance''.
    4. Section 1900.52(l) is added to read as follows:


Sec. 1900.52  Definitions.

* * * * *
    (l) Interest credit. The terms ``interest credit'' and ``interest 
credit assistance,'' as they relate to Single Family Housing (SFH), are 
interchangeable with the term ``payment assistance.'' Payment 
assistance is the generic term for the subsidy provided to eligible SFH 
borrowers to reduce mortgage payments.

PART 1910--GENERAL

    5. The authority citation for part 1910 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.

Subpart A--Receiving and Processing Applications

    6. Section 1910.1(d) is added to read as follows:


Sec. 1910.1  General.

* * * * *
    (d) The terms ``interest credit'' and ``interest credit 
assistance,'' as they relate to Single Family Housing (SFH), are 
interchangeable with the term ``payment assistance.'' Payment 
assistance is the generic term for the subsidy provided to eligible SFH 
borrowers to reduce mortgage payments.
    7. Section 1910.4(a) is revised to read as follows:


Sec. 1910.4  Processing applications.

* * * * *
    (a) Completed RH applications. Completed applications are those as 
described in Sec. 1944.27 (copies available in any RECD office), and 
all applications for Rural Housing loans will be processed as outlined 
in that instruction.
* * * * *
    8. Section 1910.5 is amended in paragraph (c)(6) by revising the 
reference ``Sec. 1944.4(c)'' to read ``Sec. 1944.9,'' and revising 
``FmHA or its successor agency under Public Law 103-354'' to read 
``CFSA or RHCDS,'' and by adding paragraph (e) to read as follows:.


Sec. 1910.5  Evaluating applications.

* * * * *
    (e) Delinquency on a Federal debt. The Department of Housing and 
Urban Development Credit Alert Interactive Voice Response System 
(CAIVRS) will be used to help determine if an applicant is delinquent 
on any Federal debt.


Sec. 1910.6  [Amended]

    9. Section 1910.6 is amended in the first sentence of paragraph (g) 
introductory by revising the words ``Rural Housing'' to read ``RH'' and 
by revising the reference ``Sec. 1944.26'' to read ``Sec. 1944.27,'' by 
revising the words ``section 41'' to ``section 44'' in the second 
sentence of paragraph (g)(1) and by revising the words ``section 41 of 
Form FmHA'' to read ``section 44 of Form FmHA 1940-1;'' in paragraph 
(j).

PART 1924--CONSTRUCTION AND REPAIR

    10. The authority citation for part 1924 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.

Subpart A--Planning and Performing Construction and Other 
Development


Sec. 1924.6   [Amended]

    11. Section 1924.6(c) introductory text is amended in the first 
sentence by removing the words ``Exhibit E of.''


Sec. 1924.9   [Amended]

    12. Section 1924.9(a) is amended in the second sentence by revising 
the references ``Sec. 1944.17(a)(2)(iv)'' to read 
``Sec. 1944.17(a)(2)(iii)'' and ``subpart A of part 2024 of this 
chapter (available in any FmHA or its successor agency under Public Law 
103-354 office)'' to read ``FmHA Instruction 2024-A (available in any 
RECD field office),'' and by revising ``FmHA'' to read ``RHCDS'' in the 
fourth and sixth (2 places) sentences.

PART 1940--GENERAL

    13. The authority citation for part 1940 is revised to read as 
follows:


[[Page 55123]]

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.

Subpart I--Truth in Lending--Real Estate Settlement Procedures


Sec. 1940.401   [Amended]

    14. Section 1940.401(c)(3)(ii) is amended by revising the reference 
``Sec. 1951.314'' to ``Sec. 1951.315.''

Subpart S--Accountability Requirements of Persons Paid To Influence 
the Making of an FmHA Housing Loan and/or Grant

    15. Section 1940.903 is amended by removing the definitions of 
``FmHA'' and ``FmHA housing loan and/or grant'' by adding new 
definitions of ``Interest Credit'' and ``RHCDS housing loan and/or 
grant'' in alphabetical order to read as follows:


Sec. 1940.903   Definitions

* * * * *
    Interest credit. The terms ``interest credit'' and ``interest 
credit assistance,'' as they relate to Single Family Housing (SFH), are 
interchangeable with the term ``payment assistance.'' Payment 
assistance is the generic term for the subsidy provided to eligible SFH 
borrowers to reduce mortgage payments.
* * * * *
    RHCDS housing loan and/or grant. Any loan: insured; direct or 
guaranteed, made pursuant to the Housing Act of 1949, as amended. The 
term includes rental assistance (RA) and interest credits. The term 
does not include contracts, such as procurement contracts, which are 
subject to the Federal Acquisition Regulation (FAR).
* * * * *

PART 1944--HOUSING

    16. The authority citation for Part 1944 is revised to read as 
follows:

    Authority: 5 U.S.C. 301, 7 U.S.C. 1989, and 42 U.S.C. 1480.

    17. Subpart A of part 1944 is revised to read as follows:
Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and 
Authorizations
Sec.
1944.1  General.
1944.2  Definitions.
1944.3  Loan purposes.
1944.4  Loan restrictions.
1944.5  Annual income.
1944.6  Adjusted annual income.
1944.7  [Reserved]
1944.8  Income eligibility requirements.
1944.9  Other eligibility requirements.
1944.10  Rural area designation.
1944.11  Site requirements.
1944.12  Environmental requirements.
1944.13  National flood insurance.
1944.14  [Reserved]
1944.15  Ownership requirements.
1944.16  Dwelling requirements.
1944.17  Maximum loan amounts.
1944.18  Security requirements.
1944.19-1944.21  [Reserved]
1944.22  Refinancing non-RHCDS debts.
1944.23  [Reserved]
1944.24  Technical services.
1944.25  Rates and terms.
1944.26  Fund allocation.
1944.27  Application processing.
1944.28-1944.30  [Reserved]
1944.31  Loan approval.
1944.32  [Reserved]
1944.33  Loan closing.
1944.34  Payment assistance.
1944.35  Deferred mortgage payments.
1944.36  [Reserved]
1944.37  Subsequent section 502 RH loans.
1944.38  Mutual Self-Help Housing loans.
1944.39  RH loans to RHCDS employees and loan closing officials.
1944.40  [Reserved]
1944.41  Housing demonstration programs.
1944.42  Condominium and community land trust requirements.
1944.43  [Reserved]
1944.44  Borrower graduation.
1944.45  Conditional commitments.
1944.46  Appeals.
1944.47-1944.48  [Reserved]
1944.49  Administrative instructions.
1944.50  OMB control number.

PART 1944--HOUSING

Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and 
Authorizations


Sec. 1944.1   General.

    This subpart sets forth the policies and procedures and delegates 
authority for making section 502 Rural Housing (RH) loans to 
individuals under section 502 of title V of the Housing Act of 1949, as 
amended. The objective of section 502 RH loans is to provide eligible 
persons who will live in rural areas with an opportunity to own 
adequate but modest, decent, safe, and sanitary dwellings and related 
facilities. The requirements of subpart E of part 1901 will be applied 
as appropriate. Loans and services provided under this subpart shall 
not be denied to any person or applicant based on race, sex, national 
origin, color, religion, marital status, familial status, age, physical 
or mental disability (applicant must possess the capacity to enter into 
a legal contract for services or have a court appointed guardian or 
conservator empowered to obligate the applicant in real estate 
matters), receipt of income from public assistance, or because the 
applicant or borrower has, in good faith, exercised any right under the 
Consumer Credit Protection Act, 15 U.S.C. Sec. 1601 et seq.
    (a) In compliance with the Fair Housing Act as amended and the 
Americans with Disabilities Act of 1990, reasonable accommodation must 
be given to individuals who are developmentally disabled so that they 
have the opportunity to become successful homeowners. When an applicant 
or an applicant's representative indicates the existence of a 
disability during the loan process, e.g., by requesting the Rural 
Housing and Community Development Service (RHCDS) disability deduction 
to income due to mental or physical disability or through verification 
of income from a Federal or state government source because of mental 
or physical disability, RHCDS must ask the applicant or the applicant's 
representative what reasonable accommodation should be made in order 
for the loan to be processed. The reasonable accommodation request must 
be provided to RHCDS by the applicant or the applicant's 
representative. Reasonable accommodation can include allowing a court 
appointed guardian or conservator to execute appropriate loan making 
and loan closing documents on behalf of the applicant; the court order 
must show that the guardian or conservator has the power and 
responsibility to obligate the applicant in real estate matters and a 
copy of the court order must be made a part of the loan docket.
    (b) Any processing or servicing activity conducted pursuant to this 
subpart involving authorized assistance to RHCDS employees, members of 
their families, known close relatives, or business or close personal 
associates, is subject to the provisions of subpart D of part 1900. 
Applicants for this assistance are required to identify any known 
relationship or association with an RHCDS employee.
    (c) RHCDS will collect fees for credit reports, real estate 
appraisals, and conditional commitment applications when appropriate. 
RHCDS may use its own employees or other agents or institutions in 
carrying out its responsibilities under this subpart.


Sec. 1944.2  Definitions.

    The following definitions apply to this subpart:
    Annual payment borrowers. Borrowers who signed promissory notes 
providing for annual payments, including borrowers converted to monthly 
payments through the use of Form FmHA 1951-34, ``Direct Payment Plan 
Change.''
    Certificate of Eligibility. Certificate issued by RHCDS to 
applicants who have received a final determination of 

[[Page 55124]]
eligibility after verification of all income. Applicants can present 
this to real estate agents, builders, and sellers to indicate their 
eligibility for an RH loan in the amount set forth on the certificate.
    Conditional commitment. Assurance from RHCDS, in exchange for a 
specific fee, to an owner, qualified builder, or dealer-contractor that 
a dwelling offered for sale will be acceptable for purchase by a 
qualified RH loan applicant under specified limited conditions.
    Cosigner. A party who joins in the execution of a promissory note 
to compensate for any deficiency in the borrower's repayment ability. 
The cosigner becomes jointly liable to comply with the terms of the 
note in the event of the borrower's default, but is not entitled to any 
interest in the security or borrower rights. If the security is 
transferred to the cosigner, the cosigner may assume the RHCDS 
indebtedness on program or nonprogram (NP) terms, as applicable.
    Deficient housing. A dwelling which meets one or more of the 
following conditions:
    (1) Lacks complete plumbing; i.e. no bathtub or shower, wash basin, 
flush toilet, or hot running water for the exclusive use of the 
occupant;
    (2) Lacks adequate heating;
    (3) Is physically deteriorated or structurally unsound; i.e. roof 
leaks, falling plaster or sheetrock, extensive termite or wood rot 
damage, dangerous electrical service; or
    (4) Overcrowding situations which will be corrected after loan 
closing; i.e., more than 2 persons per bedroom.
    Elderly family. An elderly family consists of one of the following:
    (1) A person who is the head, spouse, or sole member of a family 
and who is 62 years of age or older, or who is disabled, and is the 
applicant or borrower or the coapplicant or coborrower; or
    (2) Two or more persons who are living together, at least one of 
whom is age 62 or older, or disabled, and who is the applicant or 
borrower or coapplicant or coborrower; or
    (3) In the case of a family where the deceased borrower, 
coborrower, or spouse, was at least 62 years old, or disabled, the 
surviving household member shall continue to be classified as an 
``elderly family'' for the purpose of determining adjusted income even 
though the surviving members may not meet the definition of elderly 
family on their own, provided:
    (i) They occupied the dwelling with the deceased family member at 
the time of the death; and
    (ii) If one of the surviving family members is the spouse of the 
deceased family member, the surviving family shall be classified as an 
elderly family only until the remarriage of the surviving spouse; and
    (iii) At the time of the death of the deceased family member, the 
dwelling was financed under title V of the Housing Act of 1949.
    Equivalent interest rate. The interest rate charged under payment 
assistance. It is determined by a comparison of the borrower's adjusted 
annual income to the median income for the area where the security 
property is located, based on income figures published by the 
Department of Housing and Urban Development (HUD) as reflected in 
exhibit C (available in any RECD field office).
    Existing dwelling. A dwelling which is:
    (1) More than 1 year old; or
    (2) Less than 1 year old but the dwelling is covered by an approved 
10-year warranty plan as described in subpart A of part 1924 and the 
contractor provides complete plans and specifications, together with a 
certification that construction was completed in compliance with said 
plans and specifications, applicable building codes, and thermal 
performance standards (TPS) for new construction. In addition, the 
contractor must provide evidence that the contractor meets any 
licensing requirements in the state and is an approved builder in good 
standing under the approved 10-year warranty plan.
    Extended family. A family unit comprised of adult relatives who 
live together with the other members of the household, for reasons of 
physical dependency, economics, or social custom, who, under other 
circumstances, could maintain separate households. An example would be 
parents living with their adult children.
    Farm. Includes the total acreage of one or more tracts of land 
which:
    (1) Is owned by the applicant;
    (2) Is operated as a single unit;
    (3) Is in agricultural production; and
    (4) Annually will produce agricultural commodities for sale and 
home use with a gross annual value equivalent to $400 in 1944.
    Floor. A minimum percentage of adjusted family income which the 
borrower must pay for principal, interest, taxes and insurance.
    Full-time student. A person who is carrying a subject load that is 
considered full-time for day students (excluding correspondence 
courses) under the standards and practices of the educational 
institution attended. An educational institution includes a vocational 
school with a diploma or certificate program, as well as an institution 
offering a college degree.
    Homeowners association. An association of individual unit owners 
that is responsible for the common property and improvements for the 
benefit of all the individual owners, and enforcement of the 
organization's rules and regulations.
    Household or family. The applicant, coapplicant, and all other 
persons who will make the applicant's dwelling their primary residence 
for all or part of the next 12 months (excluding foster children placed 
in the home and live-in aides). Children who are members of the family, 
but have been removed and placed in foster care, will be counted as 
residents of the household. Children who are subject to a joint custody 
agreement and live in the unit at least 50 percent of the time are 
considered to be household members.
    HUD. The Department of Housing and Urban Development.
    Income. Income limits, the definitions of which are included below 
in order from the lowest to the highest are contained in exhibit C 
(available in any RECD office).
    (1) Very low-income. An adjusted annual income that does not exceed 
the very low-income limit according to size of household as established 
by HUD for the county or MSA where the property is or will be located.
    (2) Low-income. An adjusted annual income greater than the very 
low-income limit but that does not exceed the low income limit 
according to size of household as established by HUD for the county or 
MSA where the property is or will be located.
    (3) Moderate-income. An adjusted annual income greater than the 
low-income limit but that does not exceed the maximum limit for 
moderate-income households.
    (4) Above moderate-income. An adjusted annual income that exceeds 
the maximum limit for moderate-income households.
    Insurance. The insurance required by RHCDS as a condition of loan 
approval, including homeowners insurance, fire and extended coverage 
insurance including flood insurance, when applicable.
    Insured warranty. Plan which offers new homeowners varying degrees 
of protection against builder default or major structural defects in 
their home.
    Live-in aides. Persons living in the household for the sole purpose 
of providing essential care and well being for an elderly, or household 
member 

[[Page 55125]]
who is disabled. Live-in aides cannot be related to a household member 
and would not be living in the unit except to provide essential 
supportive services.
    Market value. For the purposes of this instruction, market value is 
defined as the appraised value of the property as improved.
    Median income. An adjusted median annual income for the size of 
household as established by HUD for the county or MSA where the 
property is or will be located.
    Metropolitan Statistical Area (MSA). MSAs are defined according to 
a set of detailed standards prepared by the Federal Committee on MSAs. 
An area qualifies as an MSA if it contains a city of at least 50,000 
population or an urbanized area of at least 50,000 with a total 
metropolitan population of at least 100,000. MSAs are defined in terms 
of entire counties, except in the six New England States where they are 
defined in terms of cities and towns. An MSA may also include 
additional counties having strong economic and social ties to the 
central county. The term Standard Metropolitan Statistical Area (SMSA) 
was in use prior to the June 30, 1983, effective date of the MSA 
terminology.
    Minor. For the purposes of determining adjusted annual income, this 
definition is restricted to persons under 18 years of age. Neither the 
head of household nor spouse may be counted as a minor. Foster children 
are not counted as minors for determining annual or adjusted annual 
income.
    Monthly payment borrowers. Borrowers who signed promissory notes 
providing for payment of monthly installments.
    MSA. Metropolitan Statistical Area.
    Net family assets. Include:
    (1) The value of equity in real property (other than the dwelling 
or site); cash on hand; savings; checking accounts; demand deposits; 
and the market value of stocks, bonds, and other forms of capital 
investments, including voluntary retirement plans that are accessible 
to the applicant such as individual retirement accounts (IRAs), 401(k) 
plans, and Keogh accounts, as well as amounts that can be withdrawn 
from other retirement and pension funds without retiring or terminating 
employment, but exclude:
    (i) Interests in American Indian trust land,
    (ii) Cash on hand which will be used to reduce the amount of the 
loan,
    (iii) The value of necessary items of personal property such as 
furniture and automobile,
    (iv) The assets that are a part of the business, trade, or farming 
operation in the case of any member of the household who is actively 
engaged in such operation, and
    (v) The value of a trust fund that has been established where the 
trust is not revocable by, or under the control of, any member of the 
household, so long as the fund continues to be held in trust.
    (2) The value of any business or household assets disposed of by a 
member of the household for less than fair market value (including 
disposition in trust, but not in a foreclosure or bankruptcy sale) 
during the 2 years preceding the date of application, in excess of the 
consideration received therefore. In the case of a disposition as part 
of a separation or divorce settlement, the disposition shall not be 
considered to be for less than fair market value if the household 
member receives important consideration not measurable in dollar terms.
    Nonfarm tract. A parcel of land that is not a farm and is located 
in a rural area, or a building site that is part of a farm, and which 
secures an RH loan in accordance with Sec. 1944.18(b)(10).
    Payment assistance. The generic term for the subsidy provided to 
eligible borrowers to reduce mortgage payments. This term is used 
interchangeably with the terms ``interest credit,'' ``interest credit 
assistance,'' and ``payment assistance in the form of interest 
credit.''
    Participation loan. A loan that is made by another lender in 
conjunction and simultaneously with a loan made under this part.
    Person with a disability. A person who is unable to engage in any 
substantially gainful activity by reason of any medically determinable 
physical or mental impairment expected to result in death or which: is 
expected to be of long or indefinite duration; substantially impede his 
or her ability to live independently; and is of such a nature that the 
person's ability to live independently could be improved by more 
suitable housing conditions. In the case of an individual who has 
attained the age of 55 and is blind, disability is defined as inability 
by reason of such blindness to engage in any substantially gainful 
activity requiring skills or abilities comparable to those of any 
gainful activity in which the individual has previously engaged with 
some regularity over a substantial period of time. Receipt of veteran's 
benefits for disability, whether service-oriented or otherwise, does 
not automatically establish disability. A person with a disability also 
includes a person with a developmental disability. A developmental 
disability means a severe, chronic disability of a person which:
    (1) Is attributable to a mental or physical impairment or 
combination of mental and physical impairments;
    (2) Is manifested before the person attains age 22;
    (3) Is likely to continue indefinitely;
    (4) Results in substantial functional limitations in three or more 
of the following areas of major life activity:
    (i) Self-care,
    (ii) Receptive and expressive language,
    (iii) Learning,
    (iv) Mobility,
    (v) Self-direction,
    (vi) Capacity for independent living, or
    (vii) Economic self-sufficiency; and
    (5) Reflects the person's need for a combination and sequence of 
special care, treatment, or other services which are of lifelong or 
extended duration, and are individually planned and coordinated.
    Place. An area containing a concentration of inhabitants within a 
determinable unincorporated area.
    Real estate taxes. The amount of real taxes and the annual portion 
of assessments estimated to be due and payable on the dwelling and the 
dwelling site, reduced by the amount of any tax exemption available to 
the borrower, regardless of whether such an exemption is actually 
claimed. Tax exemptions may include such things as homestead 
exemptions, special exemptions for low-income families, senior 
citizens, veterans, and others.
    Rehabilitation. Major repairs and improvements to existing 
dwellings such as the installation or completion of bathroom 
facilities, installation of major items of equipment, additions, or 
structural changes.
    RHCDS. Rural Housing and Community Development Service.
    Senior citizen. Is a person who is 62 years of age or older.
    Town. Is a municipality similar to a city but does not include a 
New England-type town which resembles a township or county in most 
states.
    Urban area. Either a town, village, city, place, or any associated 
combination thereof which, with the immediately adjacent densely 
settled areas, has a population in excess of the limits prescribed in 
Sec. 1944.10(a)(2) (i) and (ii).


Sec. 1944.3  Loan purposes.

    (a) A loan may be made to an eligible applicant for the following 
purposes:
    (1) To buy, build, rehabilitate, improve, or relocate a dwelling 
and provide related facilities for use by the applicant as a permanent 
residence;
    (2) To buy, build, rehabilitate, improve, or relocate a dwelling, 
and 

[[Page 55126]]
provide related facilities for a farm owner to provide housing to be 
occupied by the farm manager, tenants, sharecroppers, or farm laborers; 
and
    (3) To refinance secured debts or unsecured debts as provided in 
Sec. 1944.22, except the Agency will not refinance debts for 
manufactured homes;
    (b) A loan made under paragraph (a) (1) or (2) of this section may 
be used to:
    (1) Purchase, in fee title, a minimum adequate site, as outlined in 
Sec. 1944.11 on which the improvements are or will be located, if the 
applicant does not own an adequate site;
    (2) Pay reasonable acquisition costs for a leasehold interest in a 
minimum adequate site at the time of making the initial RH loan;
    (3) Provide an adequate and safe water supply or an adequate 
wastewater disposal facility;
    (4) Provide site preparation, including grading, foundation 
plantings, seeding or sodding of lawns, trees, walks, yard fences, and 
driveways to building sites;
    (5) Purchase and install essential equipment in the dwelling 
including items such as a range, refrigerator, clothes washer or 
clothes dryer, if these items are normally sold with dwellings in the 
area, and if purchase of these items is not the primary purpose of the 
loan;
    (6) Provide special design features or equipment when necessary 
because of physical disability of the applicant or of a member of the 
household;
    (7) Purchase and install approved energy saving measures and 
approved furnaces and space heaters which use a type of fuel that is 
commonly used, and is economical and dependably available;
    (8) Provide storm cellars and similar protective structures;
    (9) Pay incidental expenses such as legal fees, costs of title 
clearance, and loan closing services; appraisal, surveying, 
environmental, and tax monitoring; personal liability insurance fees 
for self-help housing applicants; and incidental expenses authorized in 
exhibit G (available in any RECD field office);
    (10) Pay lender charges and fees in connection with participation 
loans, (except as provided in Sec. 1944.4), provided they are the same 
as those charged other applicants for similar types of transactions;
    (11) Pay reasonable connection fees for utilities such as water, 
sewer, electricity, and gas, which are required to be paid by the 
applicant and which cannot be paid from other funds;
    (12) Pay the applicant's share of Social Security taxes and similar 
taxes for labor hired by the applicant in connection with making the 
planned improvements;
    (13) Pay real estate taxes which are due and payable on the 
building and site owned by the applicant at the time of closing an 
initial loan, if this amount is not a part of the loan;
    (14) Establish escrow accounts for the payment of real estate taxes 
and property insurance premiums in those states where the use of escrow 
accounts is authorized by the National office;
    (15) Provide living area for all members of the applicant's 
household, including ``extended family;''
    (16) Finance the purchase of single family housing units located in 
a condominium development, community land trust, or planned unit 
development with a homeowners association. If professional management 
is employed (prior National office approval is required);
    (17) Pay fees for the development and packaging of loan 
applications and related actions to public and private nonprofit 
organizations which are tax exempt under the Internal Revenue Code of 
1986 (except when restricted under Sec. 1944.4) when:
    (i) The loan has been packaged in accordance with exhibit A 
(available in any RECD field office) and the limitations of 
Sec. 1944.17; and
    (ii) The charges are reasonable considering:
    (A) The amount and purpose of the assistance;
    (B) The repayment ability of the recipient; and
    (C) The cost of similar services in the same or a similar rural 
area.
    (iii) The State Director may issue a State Supplement outlining 
what is considered a reasonable amount for the jurisdiction. In no case 
may the amount exceed that found in exhibit B of subpart B of part 1944 
(available in any RECD office).


Sec. 1944.4  Loan restrictions.

    Loan funds may not be used to:
    (a) Make a new loan to pay off existing RHCDS debts in lieu of a 
transfer with assumption.
    (b) Refinance:
    (1) RHCDS debts, except as authorized under Sec. 1951.316.
    (2) Debts on a manufactured home.
    (c) Purchase or improve income-producing land, or buildings to be 
used principally for income-producing purposes, or buildings not 
essential for RH purposes, or buy or build buildings which are either 
largely, or in part, specifically designed to accommodate a business or 
income-producing enterprise. (Home based operations such as child care, 
home/beauty product sales, the production of crafts, etc., that do not 
require specifically designed features to accommodate the enterprise, 
are not restricted under this subpart; however, housing related 
expenses such as mortgage interest, real estate taxes, and insurance, 
which may be claimed as business expense deductions for income tax 
purposes, will not be allowed when determining annual income for RHCDS 
assistance.)
    (d) Pay fees, charges, or commissions, such as finders' fees, fees 
for packaging the application (except as provided in Sec. 1944.3), or 
placement fees for the referral of a prospective applicant to RHCDS.
    (e) Pay packaging fees (as provided under Sec. 1944.3) for the 
purchase of an RHCDS inventory property or where the packager is 
receiving a grant under subpart B of part 1944.
    (f) Improve the entry of a homestead entryman or desert entryman 
prior to receipt of patent.
    (g) Finance manufactured homes which are not constructed and 
installed in accordance with exhibit F of this subpart and exhibit J of 
subpart A of part 1924. (Both exhibits are available in any RECD field 
office.)


Sec. 1944.5  Annual income.

    Annual income determinations will be thoroughly documented in the 
case file. Historical data based on the past 12 months or last fiscal 
year may be used if a determination of expected income cannot logically 
be made. Annual income will be calculated as follows:
    (a) Current verified income, either part-time or full-time, 
received by the applicant and all adult members of the household 
including the spouse is derived by multiplying:
    (1) An hourly wage by 2080 hours (for part-time employment use 
anticipated annual hours); or
    (2) A weekly wage by 52 weeks; or
    (3) A biweekly wage by 26 weeks; or
    (4) A monthly wage by 12 months or a bimonthly wage by 24 pay 
periods.
    (b) If the spouse or any other adult member of the household is not 
presently employed but there is a recent history of such employment, 
that person's income will be projected unless the applicant or the 
person involved signs a statement that the person is not presently 
employed and does not intend to resume employment in the foreseeable 
future, or, if payment assistance is involved, during the term of the 
payment assistance agreement.
    (c) Income from such sources as seasonal work of less than 12 
months duration, commissions, overtime, bonuses, and unemployment 
compensation will be computed as the 

[[Page 55127]]
estimated annual amount of such income for the ensuing 12 months. 
Temporary income such as unemployment benefits, worker's compensation, 
etc., will be projected over 12 months when computing payment 
assistance on an annual basis. Historical data based on the past 12 
months may be used if a determination of expected income cannot 
logically be made.
    (d) The following are included in annual income:
    (1) The gross amount, before any payroll deductions, of wages and 
salaries, overtime pay, commissions, fees, tips, bonuses, and other 
compensations for personal services of all adult members of the 
household. If a cost of living allowance or a proposed increase in 
income has been estimated to take place on or before loan approval, 
loan closing, or the effective date of the payment assistance 
agreement, it will be included as income.
    (2) The net income from the operation of a farm, business, or 
profession. The following provisions apply:
    (i) Expenditures for business or farm expansion, capital 
improvements, or payments of principal on capital indebtedness shall 
not be used as deductions in determining income. A deduction is allowed 
in the manner prescribed by Internal Revenue Service (IRS) regulations 
only for interest paid in amortizing capital indebtedness.
    (ii) Farm and nonfarm business losses are considered ``0'' in 
determining annual income.
    (iii) A deduction, based on straight line depreciation, is allowed 
in the manner prescribed by IRS regulations for the exhaustion, wear 
and tear, and obsolescence of depreciable property used in the 
operation of a trade, farm, or business by a member of the household. 
The deduction must be based on an itemized schedule showing the amount 
of straight line depreciation.
    (iv) Any withdrawal of cash or assets from the operation of a farm, 
business, or profession will be included in income, except to the 
extent the withdrawal is reimbursement of cash or assets invested in 
the operation by a member of the household.
    (v) A deduction is allowed for verified business expenses, such as 
lodging, meals, and fuel, for business trips made by salaried 
employees, such as long-distance truck drivers, who must meet these 
expenses without reimbursement.
    (vi) Housing related expenses for the property being financed such 
as mortgage interest, real estate taxes, and insurance, which may be 
claimed as business expense deductions for income tax purposes, will 
not be deducted from annual income.
    (3) Interest, dividends, and other net income of any kind from real 
or personal property, including:
    (i) The share received by adult members of the household from 
income distributed from a trust fund.
    (ii) Any withdrawal of cash or assets from an investment except to 
the extent the withdrawal is reimbursement of cash or assets invested 
by a member of the household.
    (iii) Where the household has net family assets, as defined in 
Sec. 1944.2, in excess of $5,000, the greater of the actual income 
derived from all net family assets or a percentage of the value of such 
assets based on the current passbook savings rate, as determined by 
RHCDS.
    (4) The full amount of periodic payments received from Social 
Security (including Social Security received by adults on behalf of 
minors or by minors intended for their own support), annuities, 
insurance policies, retirement funds, pensions, disability or death 
benefits, and other similar types of periodic receipts. Amounts 
received from the United States Government which are attributable to 
underpayment of benefits for one or more prior months shall be excluded 
in the calculation of annual income as provided in 42 U.S.C. 1382b.
    (5) Payments in lieu of earnings, such as unemployment and 
disability compensation, worker's compensation, and severance pay.
    (6) Public assistance except as indicated in exhibit H (available 
in any RECD field office).
    (7) Periodic allowances, such as:
    (i) Alimony and child support awarded in a divorce decree or 
separation agreement, unless the applicant certifies the payments are 
not received, and the applicant provides documentation to RHCDS that a 
reasonable effort has been made to collect the payments through the 
official entity responsible for enforcing such payments; or
    (ii) Recurring monetary gifts or contributions from someone who is 
not a member of the household.
    (8) All regular pay, special pay (except for persons exposed to 
hostile fire), and allowances of a member of the armed forces who is 
the applicant or spouse, whether or not that family member lives in the 
home.
    (e) The following are not included in annual income but may be 
considered in determining repayment ability:
    (1) Payments received for the care of foster children or foster 
adults (usually individuals with disabilities, unrelated to the 
applicant, who are unable to live alone);
    (2) The income of an applicant's spouse, when the spouse has been 
living apart from the applicant for less than 3 months (for reasons 
other than military or work assignment), but not if court proceedings 
for divorce or legal separation have commenced;
    (3) Temporary, nonrecurring, or sporadic income (including gifts);
    (4) Lump-sum additions to family assets such as inheritances, 
capital gains, insurance payments included under health, accident, 
hazard, or worker's compensation policies, and settlements for personal 
or property losses (except as provided in paragraph (d)(5) of this 
section);
    (5) Amounts which are granted specifically for, or in reimbursement 
of, the cost of medical expenses;
    (6) Earnings in excess of $480 for each full-time student 18 years 
old or older (excluding the head of household and spouse);
    (7) Reparation payments paid by a foreign government arising out of 
the Holocaust. If an applicant for an RHCDS loan was deemed ineligible 
because the applicant's income exceeded the low income (moderate income 
for guaranteed loans) because of the applicant's Nazi persecution 
benefits, the RHCDS approval official should notify the applicant to 
reapply for a loan;
    (8) Any earned income tax credit;
    (9) Adoption assistance payments in excess of $480 per adopted 
child;
    (10) Deferred periodic payments of supplemental security income and 
Social Security benefits that are received in a lump sum;
    (11) Amounts received by the family in the form of refunds or 
rebates under state or local law for property taxes paid on the 
dwelling unit;
    (12) Amounts paid by a State agency to a family with a 
developmentally disabled family member living at home to offset the 
cost of services and equipment needed to keep the developmentally 
disabled family member at home; and
    (13) Any other revenue which a Federal statute exempts shall not be 
considered income or used as a basis for determining eligibility for an 
RHCDS loan, payment assistance, or denying or reducing Federal 
financial assistance or benefits to which the recipient would otherwise 
be entitled. Additional financial assistance which is considered exempt 
income under Federal statutes. (See exhibit H available in any RECD 
field office).
    (f) The following will not be counted when calculating annual 
income and 

[[Page 55128]]
will not be considered in determination of repayment ability:
    (1) Income of live-in aides as described in 1944.2.
    (2) Income from employment of minors (including foster children) 
under 18 years of age. The applicant, coapplicant, or spouse may never 
be considered minors.
    (3) The full amount of student financial assistance paid directly 
to the student or to the educational institution.


Sec. 1944.6  Adjusted annual income.

    Adjusted annual income is annual income as determined in 
Sec. 1944.5 less the following:
    (a) A deduction of $480 for each member of the family residing in 
the household, as defined by Sec. 1944.2, other than the applicant, 
coapplicant, or spouse who is:
    (1) Under 18 years of age; or
    (2) Eighteen years of age or older and is disabled; or
    (3) A full-time student, aged 18 or older.
    (b) A deduction of $400 for any elderly family.
    (c) A deduction for the care of minors 12 years of age or under, to 
the extent necessary to enable a member of the applicant's family to be 
gainfully employed or to further the applicant's education. The 
deduction will be based only on moneys reasonably anticipated to be 
paid for care services and, if caused by employment, must not exceed 
the amount of income received from such employment. Payments for these 
services may not be made to persons whom the applicant is entitled to 
claim as dependents for income tax purposes.
    (d) A deduction of the amount by which the aggregate of the 
following expenses of the household exceeds 3 percent of gross annual 
income:
    (1) Medical expenses for any elderly family. This includes medical 
expenses, for any household member, the applicant anticipates incurring 
over the ensuing 12 months which are not covered by insurance. Examples 
of medical expenses are dental expenses, prescription medicines, 
medical insurance premiums, eyeglasses, hearing aids and batteries, the 
cost of home nursing care, the costs of transportation to and from 
medical treatment, monthly payments on accumulated major medical bills, 
and cost of full-time nursing or institutional care which cannot be 
provided in the home for a member of the household; and
    (2) Reasonable attendant care and auxiliary apparatus expenses for 
each member of any household who is disabled to the extent necessary to 
enable any member of such household (including such member who is 
disabled) to be employed.


Sec. 1944.7  [Reserved]


Sec. 1944.8  Income eligibility requirements.

    (a) Repayment ability. An applicant is eligible for a section 502 
RH loan only if the following requirements are met:
    (1) Income limit. The adjusted annual income as defined in 
Sec. 1944.6 at the time of loan approval does not exceed the applicable 
income limit. (See exhibit C available in any RECD field office).
    (2) Adequate and dependable income. The applicant (and coapplicant 
if applicable) has adequate and dependably available income. The 
determination of income dependability will include consideration of the 
applicant's past history of annual income and the history of the 
typical annual income of others in the area with similar types of 
employment. Such income must be sufficient to meet the income ratios 
described in Sec. 1944.8(a)(3), as modified by Sec. Sec. 1944.34 and 
1944.35.
    (3) Determining repayment ability. In considering whether the 
applicant has adequate repayment ability, RHCDS must calculate the 
principal, interest, taxes, and insurance (PITI) and total debt (TD) 
ratios. If a participation loan is involved, the PITI will also include 
the principal and interest payments on the participation loan. The PITI 
ratio is calculated by dividing the monthly PITI for the proposed loan 
(less any payment assistance for which the applicant may qualify) by 
the gross monthly family income. The TD ratio is calculated by dividing 
the applicant's monthly obligations by total gross monthly family 
income.
    (i) Total monthly debt consists of the PITI for the proposed loan 
(less any payment assistance for which the applicant may qualify), 
homeowner and other assessments, and long term obligations. Long term 
obligations include those obligations such as alimony, child support, 
child care, and other obligations with a remaining repayment period of 
more than 6 months, other shorter term obligations that are considered 
to have a significant impact on repayment ability, plus 5 percent of 
the current balance on all revolving credit cards.
    (ii) Income, for the purpose of determining these ratios, includes 
the total gross monthly income of the applicant, coapplicant, and any 
other member of the household who will be a party to the note, 
including any income that may be excepted under Sec. 1944.5.
    (iii) The very low-income applicant is considered to have repayment 
ability when the proposed PITI and TD ratios are less than or equal to 
a PITI ratio of 29 percent and a TD ratio of 38 percent; however, the 
low-income applicant is considered to have repayment ability when the 
proposed PITI and TD ratios are less than or equal to a PITI ratio of 
33 percent and a TD ratio of 38 percent as defined in 
Sec. 1944.8(a)(3). Very low-income applicants whose PITI ratio exceeds 
the authorized ratio shall be considered for deferred mortgage 
assistance as provided in Sec. 1944.35.
    (iv) When the ratios do not support repayment of the proposed loan, 
at the applicant's request, RHCDS may make an exception to the above 
income ratio calculations under the following circumstances or 
compensating factors:
    (A) When the applicant presents documented evidence of having met 
housing related costs in the past 6 months that are equal to or greater 
than the projected housing costs after approval of the proposed loan. 
These housing costs must have been maintained when the applicant's 
household income was equal to or less than the current annual income, 
and the applicant's household debt load was equal to or greater than 
the current debt load. Projected housing costs will include the RHCDS 
monthly payment after application of any payment assistance for which 
the applicant may qualify, projected real estate taxes and assessments, 
premiums for required property and flood insurance, estimated utility 
and maintenance costs, and any other costs expected to be incurred with 
home ownership.
    (B) If the applicant's TD ratio and/or PITI ratio exceed the 
maximum authorized ratio, the State Director may allow a higher ratio 
based on compensating factors. Acceptable compensating factors include, 
but are not limited to, the applicant has recently entered a 
profession, in which the applicant has adequate schooling, that would 
historically lead to significant pay increases, the applicant has 
accumulated savings which, when added to the applicant's housing 
expense shows a capacity to make payments on the proposed loan, and the 
availability of overtime income to increase the applicant's income. A 
low TD ratio, by itself, does not compensate for a high PITI ratio.
    (b) Additional coapplicant. Applicants applying who do not meet the 
requirements of paragraph (a)(2) of this section will be considered 
ineligible unless other adults in the household have adequate income 
and wish to join in the application as a coapplicant. The 

[[Page 55129]]
combined incomes and obligations shall then be considered in 
determining repayment ability.
    (c) Cosigner. RHCDS will also consider the use of a cosigner when 
the applicant applying for assistance does not meet the requirements of 
paragraph (a)(2) of this section. Cosigners must have adequate and 
dependably available income sufficient to repay the applicant's monthly 
installment with applicable payment assistance. Cosigners are subject 
to the same determination of repayment ability outlined in paragraph 
(a)(3) of this section as the applicant, with the amount of the 
applicant's monthly installment with applicable payment assistance 
considered as part of the cosigner's PITI ratio.
    The cosigner may be an individual or an entity but may not be a 
member of the applicant's household.


Sec. 1944.9  Other eligibility requirements.

    In addition to the income eligibility requirements of Sec. 1944.8, 
the applicant must:
    (a) Qualify as one of the following:
    (1) A person who does not own a dwelling, (except for refinancing 
purposes), or owns a dwelling which is not structurally sound, 
functionally adequate, or large enough to accommodate the needs of the 
applicant, or,
    (2) A farmowner without decent, safe, and sanitary housing for the 
farmowner's own use or for the use of farm tenants, sharecroppers, farm 
laborers, or farm manager.
    (b) Be without sufficient resources to provide the necessary 
housing or related facilities, and be unable to secure the necessary 
credit from other sources upon terms and conditions which the applicant 
could reasonably be expected to fulfill.
    (1) If the applicant has only an undivided interest in the land to 
be improved, those co-owners whose execution of the mortgage is 
required under Sec. 1944.18(b)(8) must also be unable to provide the 
improvement with their own resources or obtain the necessary credit 
elsewhere, either individually or jointly with the applicant.
    (2) Applicants are expected to reduce the need for loan funds by 
utilizing available nonessential assets and/or cash on hand; however, 
IRAs, Simplified Employee Pensions (SEPs), 401(k) plans, and similar 
personal retirement accounts do not have to be liquidated when 
considering other resources. Reasonable reserves may be retained for 
unforeseen events.
    (3) RHCDS will provide information on area lenders participating in 
the section 502 guaranteed RH loan program and section 502 
participation RH loan program to all applicants who are required to 
seek other credit.
    (c) Be a natural person (individual) who resides as a citizen in 
any of the 50 States, the Commonwealth of Puerto Rico, the U.S. Virgin 
Islands, Guam, American Samoa, the Commonwealth of the Northern 
Marianas, the Federated States of Micronesia, the Republic of Palau, or 
the Republic of the Marshall Islands, or a noncitizen who resides in 
one of the foregoing areas after being legally admitted in one of the 
alien entry categories set forth in section 214 of the Housing and 
Community Development Act of 1980, 42 U.S.C. 1436a. An applicant who is 
not a United States citizen is required to submit evidence that the 
applicant has been lawfully admitted to the country as a resident in 
one of the categories specified in the preceding sentence. Verification 
is only required when the applicant is not a U.S. citizen.
    (d) Possess legal capacity to incur the loan obligation (or have a 
court appointed guardian or conservator who is empowered to obligate 
the applicant in real estate matters), and have reached the legal age 
of majority in the State, or have had the disability of minority 
removed.
    (e) Have the potential ability to personally occupy the home on a 
permanent basis. Due to the probability of transfer, or moving after 
graduation, military personnel on active duty and full-time students 
will not be granted loans unless:
    (1) The applicant, if military personnel, will be discharged at an 
early date (usually within 1 year). The family must continue to occupy 
the home in case the borrower is transferred to another duty station 
before discharge;
    (2) The applicant intends to make the home a permanent residence 
and there are reasonable prospects that employment will be available in 
the area after graduation; and
    (3) An adult member of the household will be available to make 
inspections as the home is being constructed and to sign checks for 
work performed.
    (f) Have a credit history which indicates a reasonable ability and 
willingness to meet obligations as they become due.
    (1) Any or all of the following are indicators of an unacceptable 
credit history unless RHCDS determines that the cause was beyond the 
applicant's control (except for Federal judgments described in 
paragraph (f)(1)(i) of this section), and satisfies the criteria in 
paragraph (f)(3) of this section:
    (i) An outstanding judgment obtained by the United States in a 
Federal Court (other than the United States Tax Court), which has been 
recorded, shall cause the applicant to be ineligible for any loan or 
grant until the judgment is paid in full or otherwise satisfied. RHCDS 
loan or grant funds may not be used to satisfy the judgment. The 
Administrator may waive the rejection of an application based on 
verification of an outstanding Federal judgment upon specific 
determination that it is in the best interest of the Government to do 
so. Verification of delinquent Federal debt and processing of 
applications with such debt must comply with Sec. 1944.27(b)(4).
    (ii) Incidents of more than two debt payments being more than 30 
days late if the incidents have occurred within the last 12 months. 
This includes more than two late payments on a single account. 
Instances of more than two late payments may be waived in the event 
that the RHCDS loan will result in a significant reduction in shelter 
costs, which will contribute to improved debt payment ability.
    (iii) Loss of security due to a foreclosure if the foreclosure has 
been completed within the last 36 months.
    (iv) An outstanding IRS tax lien.
    (v) Other outstanding tax liens with no satisfactory arrangements 
for payments.
    (vi) A court-created or affirmed obligation (judgment), caused by 
non-payment, that is currently outstanding or has been outstanding 
within the last 12 months, not including hospital or State motor 
vehicle liens described under Sec. 1944.17.
    (vii) Two or more rent payments paid 30 days or more past due, that 
have occurred within the last 2 years. Notwithstanding the previous 
sentence, if there have been no other credit problems in the 
applicant's last 2 years general credit history, only the past rental 
year will be considered. Instances of more than two late payments may 
be waived in the event that the RHCDS loan will result in a significant 
reduction in shelter costs, which will contribute to improved debt 
payment capability.
    (viii) Collection accounts outstanding with no satisfactory, 
reasonable arrangements for repayment, or collection accounts which 
have been outstanding within the last 12 months which were paid in full 
within 6 months of an eligibility determination for RHCDS assistance, 
where there is no record of regular payments being 

[[Page 55130]]
maintained on the account prior to receipt of the final payment.
    (ix) Non-Agency debts written off within the last 36 months.
    (x) Agency debts (including debts to predecessors of the Agency) 
which were debt settled pursuant to subpart B of part 1956, or by 
release from personal liability under subpart A of part 1955 or subpart 
C of part 1965, or debt settlement is being considered except where the 
conditions of paragraph (g) of this section can be met.
    (2) The following will not indicate an unacceptable credit history:
    (i) ``No history'' of credit transactions by the applicant.
    (ii) A bankruptcy in which the debts were discharged (Chapter 7) 
more than 36 months prior to the date of the application or where an 
applicant successfully completed a bankruptcy debt restructuring plan 
or Chapter 13 plan, and has demonstrated a willingness to meet 
obligations when due for the past 12 months prior to the date of 
application.
    (iii) A judgment satisfied more than 12 months before the date of 
application, or foreclosure with no monetary loss which was completed 
more than 12 months before the date of application.
    (3) When an applicant has an unacceptable credit history, an 
exception may be considered by the loan approval official (except for 
Federal judgments described in paragraph (f)(1)(i) of this section) 
when the applicant provides documentation that:
    (i) The circumstances were of a temporary nature, were beyond the 
applicant's control, and have been removed. Examples: loss of job; 
delay or reduction in benefits, or other loss of income; increased 
expenses due to illness, death, etc.
    (ii) The adverse action or delinquency was the result of a refusal 
to make full payment because of defective goods or services or as a 
result of some other justifiable dispute relating to the goods or 
services purchased or contracted for.
    (4) Applicants will be advised of adverse credit which is 
discovered as a result of an on-line profile credit report at the time 
of application and will be provided the telephone number and address of 
the credit repository so that the applicant may contact the repository 
directly to correct the negative or incorrect information or discuss 
the circumstances of the credit problem with the RHCDS staff. 
Applicants will not be rejected on the basis of information contained 
in an on-line credit report; however, once a full written credit report 
is received by RHCDS, it will be the responsibility of the applicant to 
work directly with the credit repository to correct any erroneous 
credit bureau records. The credit history cannot be determined 
satisfactory until:
    (i) The credit repository issues a corrected report, showing that 
the error has been removed, or
    (ii) The credit repository has not issued a corrected report within 
30 days of the applicant's submission of disputed credit information 
but the applicant submits conclusive proof, acceptable to RHCDS, that 
the report is in error, such as creditor correspondence, court 
documents, etc.
    (g) Meet the following conditions if the applicant had any previous 
RHCDS debt settled pursuant to subpart B of part 1956, or by release 
from personal liability under subpart A of part 1955 or subpart C of 
part 1965, or debt settlement is being considered:
    (1) RHCDS must determine that failure to pay the debt was the 
result of circumstances beyond the applicant's control, or the 
conditions which necessitated the debt settlement or release, other 
than weather hazards, disasters, or price fluctuations, have been or 
will be removed by making the loan, and
    (2) Before causing the applicant to incur any expense in connection 
with the loan, with the exception of the cost of a credit report, RHCDS 
must determine the applicant's eligibility and notify the applicant of 
same.
    (h) Have the ability to carry out the required obligations of the 
loan. If the applicant has demonstrated inability to do so by recent 
failure to maintain a former residence in a habitable and responsible 
manner, or by unauthorized conversion or alteration of the structure, 
or by creating a public nuisance in or around a former residence, RHCDS 
must determine that the reasons contributing to such inability have 
been removed and are not likely to recur.
    (i) Provide accurate and truthful application and financial 
information to RHCDS at the time of application. Applicants who have 
failed to fully disclose financial and application information will be 
denied program assistance.


Sec. 1944.10  Rural area designation.

    (a) For the purposes of this subpart, a rural area is:
    (1) Open country which is not part of or associated with an urban 
area.
    (2) Any town, village, city, or place, including the immediately 
adjacent densely settled area, which is not part of or associated with 
an urban area and which:
    (i) Has a population not in excess of 10,000 if it is rural in 
character, or
    (ii) Has a population in excess of 10,000 but not in excess of 
20,000, and
    (A) Is not contained within an MSA, and
    (B) Has a serious lack of mortgage credit for low- and moderate-
income households as determined by the Secretary of Agriculture and the 
Secretary of HUD.
    (3) An area classified as a rural area prior to October 1, 1990, 
(even if within an MSA), with a population exceeding 10,000, but not in 
excess of 25,000, which is rural in character, and has a serious lack 
of mortgage credit for low- and moderate-income families. This is 
effective through receipt of census data for the year 2000.
    (b) A determination that open country, or any town, village, city, 
or place is not part of or associated with an urban area must include a 
finding that any densely populated section of the area in question is 
separated from the densely populated section of any adjacent urban area 
by open spaces. Open spaces include undeveloped, agricultural, or 
sparsely settled areas. Other spaces such as physical barriers (e.g., 
rivers, canals), public parks, commercial and industrial developments, 
small areas reserved for recreational purposes, recognized open spaces 
for which development is planned, and similar nonresidential areas, are 
not considered open spaces for the purpose of this program. RHCDS files 
must contain documentation that local planning boards, where available, 
were contacted at the time of each review to verify that areas 
considered as open spaces are not scheduled for development in the next 
5 years.
    (c) Two or more towns, villages, cities, and places may have 
contiguous boundaries, and each be considered separately if they are 
not otherwise associated with each other, and their densely populated 
areas are not contiguous, as determined after consideration of 
paragraphs (a) and (b) of this section.
    (d) Population count in any area will be taken from the decennial 
U.S. Census of Population, national population updates published by the 
Bureau of the Census, any special population census conducted by the 
Bureau of the Census, and the following:
    (1) Significant new development on the periphery of ineligible 
areas which requires a change in boundaries.
    (2) Redesignation of corporate limits by local authorities which 
affects the eligibility status of an area.
    (e) In determining population count for area eligibility, 
consideration must 

[[Page 55131]]
be given to developed areas in counties or states which are contiguous 
to, and, therefore, a part of developed areas in other counties or 
states. This determination must be made in agreement between the State 
Directors concerned.
    (f) In order to ensure that the RH program is limited to eligible 
areas, RHCDS will periodically review areas under their jurisdiction. 
If the review shows that an area is not rural, RHCDS will limit the RH 
program in that area after the date of the decision, to the loan 
purposes prescribed in paragraph (i) of this section.
    (g) [Reserved]
    (h) [Reserved]
    (i) If an area designation is changed from rural to nonrural, loans 
may be made only in the following instances:
    (1) Applications received by RHCDS prior to the change of 
designation may be processed.
    (2) New conditional commitments may be issued and existing 
conditional commitments will be honored only in conjunction with the 
approval of RH loan applications which were received prior to the date 
the area was designated nonrural.
    (3) Inventory property sales and transfers by assumption may be 
processed in such areas as authorized by Sec. 1955.103 or 
Sec. 1965.126, respectively.
    (4) Subsequent loans may be made on property in an area where the 
designation was changed from rural to nonrural after the initial loan 
was made:
    (i) To make necessary repairs.
    (ii) To pay equity in connection with an assumption and transfer of 
an RH loan.


Sec. 1944.11  Site requirements.

    (a) Location. The property on which the loan is made must be 
located in a designated rural area as defined in Sec. 1944.10, or in an 
area where the designation has been changed as provided in 
Sec. 1944.10(i) and must also meet the requirements of Secs. 1944.12 
and 1944.13. A nonfarm tract to be purchased or improved with loan 
funds must not include farm service buildings; however, a small 
outbuilding such as a storage shed may be included.
    (b) Access. The property must be contiguous to and have direct 
access from a street, road, or driveway that meets the applicable 
requirements of Sec. 1924.115(b).
    (c) Minimum adequate site. The site must be of a size that it 
cannot be subdivided into two or more adequate sites under existing 
zoning ordinance requirements for the area. A site on which a loan is 
to be made must have an adequate water and/or wastewater disposal 
system, other related facilities, and a yard, or those items must be 
provided with loan funds.
    (1) The water and/or wastewater disposal system whether individual, 
central or privately owned and operated must meet the applicable water 
and wastewater disposal system requirements of subpart C of part 1924 
as well as the design requirements of the state Department of Health or 
comparable reviewing and regulatory agency.
    (2) Written verification must be obtained from the regulatory 
agency that the wastewater disposal systems comply with the Safe Water 
Drinking Act and the Clean Water Act, respectively. There must be 
assurance of continuous service at reasonable rates for central water 
and wastewater disposal systems. A system owned or operated by a 
private party must have a legally irrevocable agreement which allows 
interested third parties to enforce the obligation of the operator to 
provide satisfactory service at reasonable rates.


Sec. 1944.12  Environmental requirements.

    All applications shall receive the appropriate level of 
environmental review in accordance with subpart G of part 1940.


Sec. 1944.13  National flood insurance.

    Flood insurance in accordance with 7 CFR part 1806, subpart B must 
be obtained and maintained for the life of the loan for all property 
located in a special flood hazard area as determined by the Federal 
Emergency Management Agency (FEMA). If flood insurance is not available 
in a special flood hazard area, the property is not eligible for 
federal financial assistance.


Sec. 1944.14  [Reserved]


Sec. 1944.15  Ownership requirements.

    (a) After the loan is closed, the borrower must have an interest in 
the property to be purchased, improved, or refinanced, which qualifies 
as one of the following:
    (1) Full marketable title with a deed vesting a fee interest in the 
property to the borrower. (The buyer and the seller will convert the 
purchaser's interest under a recorded land purchase contract to a deed/
mortgage situation with full marketable title prior to loan closing.)
    (2) An undivided interest if the co-owners meet the security 
requirements imposed by Sec. 1944.18(b)(8).
    (3) A life estate interest with rights of present possession, 
control, and beneficial use of the property if the remaindermen meet 
the security requirements imposed by Sec. 1944.18(b)(9).
    (4) Leasehold interest, including loans made for the purchase of a 
dwelling located on land owned by a community land trust as described 
in Sec. 1944.42, if all of the following conditions are met:
    (i) The applicant is unable to obtain fee title to the property and 
the rent charged for the lease does not exceed the rate being paid for 
similar leases.
    (ii) The lessor owns the fee simple title. This provision does not 
apply to American Indians with leasehold interests on tribal allotted 
or trust land.
    (iii) Neither the leasehold nor the fee simple title is subject to 
a prior lien unless RHCDS authorizes acceptance of the prior lien prior 
to approval of the loan. The amount of the RH loan plus any prior liens 
shall not exceed the market value of the leasehold.
    (iv) The lease is in writing and contains the following provisions:
    (A) The lessor's consent to the RH mortgage.
    (B) Reasonable security of tenure. The borrower's interest must not 
be subject to summary forfeiture or cancellation.
    (C) The right of RHCDS to foreclose the RH mortgage and sell 
without restrictions that would adversely affect the market value of 
the security.
    (D) The right of RHCDS to bid at foreclosure sale or to accept 
voluntary conveyance of the security in lieu of foreclosure.
    (E) The right of RHCDS, after acquiring the leasehold through 
foreclosure or voluntary conveyance in lieu of foreclosure, or in event 
of abandonment by the borrower, to occupy the property or sublet it, 
and to sell for cash or credit. In case of an inventory property sale 
of the leasehold, the right of RHCDS to take a mortgage with rights 
similar to those under the original RH mortgage.
    (F) The right of the borrower, in the event of default or inability 
to continue with the lease and the RH loan, to transfer the leasehold, 
subject to the RH mortgage, to an eligible transferee with assumption 
of the RH debt.
    (G) Advance written notice of at least 90 days to RHCDS of the 
lessor's intention to cancel or terminate the lease.
    (H) Negotiated provisions as to the liability of RHCDS for unpaid 
rentals or other charges accrued at the time RHCDS acquires possession 
of the property or title to the leasehold, and those which become due 
during RHCDS's possession or ownership, pending further servicing or 
liquidation.
    (v) An unexpired term which is at least 150 percent of the term of 
the RHCDS loan, unless the RHCDS loan is guaranteed by a public 
authority, Indian tribe, or Indian Housing Authority, in 

[[Page 55132]]
which case the unexpired term of the lease must be at least 2 years 
longer than the repayment period of the loan; Provided that: in no 
event may the unexpired term of the lease be less than 15 years.
    (5) Possessory rights on an American Indian reservation or State-
owned land if the security requirements imposed by Sec. 1944.18 are 
met.
    (6) The interest of an American Indian in land held in severalty 
under trust patents or deeds containing restrictions against alienation 
if the security requirements imposed by Sec. 1944.18(b)(3) are met.
    (b) If an applicant's title to any part of the property does not 
qualify as an ownership interest under paragraph (a) of this section, 
an RH loan may nevertheless be made, if:
    (1) The defect cannot be cured at a reasonable cost, and
    (2) No improvements to be constructed or repaired with loan funds 
will be located on the parcel to which title is defective, and
    (3) No security value will be accorded to the parcel to which title 
is defective.


Sec. 1944.16  Dwelling requirements.

    Dwellings financed must provide modest, decent, safe, and sanitary 
housing. Costs of dwellings financed cannot exceed the maximum dollar 
limitation established under section 203(b) of the National Housing Act 
(12 U.S.C. 1709) (available from any HUD office) for the area in which 
the property is located unless authorized by RHCDS under 
Sec. 1944.17(g). Loans shall not be approved for dwellings containing 
in-ground swimming pools or structures designed for income-producing 
facilities or purposes.
    (a) New dwellings. Construction must meet the requirements 
contained in subpart A of part 1924 including the thermal performance 
standards for new construction outlined in exhibit D of subpart A of 
part 1924.
    (b) Existing dwellings. Consideration should be given to financing 
existing dwellings in areas with a good supply of competitively priced, 
suitable housing. Homes financed should be affordable to the applicant, 
including operating and maintenance costs.
    (1) Loans will not be made on an existing manufactured home unless 
it is already financed by RHCDS or is being sold from RHCDS inventory.
    (2) Existing homes, including those already financed with an 
existing section 502 direct loan, must be inspected by RHCDS or by a 
disinterested third party inspector satisfactory to RHCDS who will 
determine and certify to RHCDS and the applicant that the dwelling 
meets the criteria outlined in paragraphs (b)(2)(i), (ii), and (iii) of 
this section. The sales agreement must identify the party (i.e., 
purchaser or seller) who has accepted responsibility for obtaining and 
paying for these inspections and certifications. Inspections are not 
required on public water and wastewater disposal systems. RHCDS 
inventory property will be inspected and repaired in accordance with 
subpart B of part 1955. The inspector will:
    (i) Determine and certify to RHCDS and the applicant that the 
dwelling is structurally sound, functionally adequate, in good repair, 
or will be placed in good repair with loan funds, and meets the 
``General'' requirements in Guide 2 of subpart A of part 1924 
(available in any RECD field office).
    (ii) Certify to RHCDS and the applicant that the dwelling meets 
thermal performance standards for existing dwellings required in 
exhibit D of subpart A of part 1924.
    (iii) Certify to RHCDS and the applicant that the dwelling has 
adequate electrical, heating, plumbing, water, and wastewater disposal 
systems, and is free of termites and other wood damaging pests and 
organisms.
    (c) Repairs. Any dwelling repaired with RH funds must be 
structurally sound, functionally adequate, and be placed in good repair 
with loan funds. If the loan is not more than $7,500 and is scheduled 
for repayment in not more than 15 years from the date of the note, the 
dwelling, after repair, may lack some equipment or features such as a 
complete bath, kitchen cabinets, closets, or completed finished 
interior in some rooms. Such dwellings must meet the housing needs of 
the applicant and provide decent, safe, and sanitary living conditions 
when the improvements financed with the loan are completed. Repairs 
required as a condition of loan approval will be performed in 
accordance with subpart A of part 1924. The applicant in cooperation 
with the seller will establish and provide documentation regarding who 
is responsible for the required repairs and when the repairs will be 
completed for RHCDS inspection. Repairs on manufactured homes are 
limited to those financed by a subsequent loan for existing homes 
currently financed with a section 502 RH loan, inventory property 
sales, and transfers.
    (d) Improvements. Improvements financed with loan funds must be on 
land which, after loan closing, is part of a tract owned by the 
borrower in accordance with Sec. 1944.15(a), or on an easement 
appurtenant to such a tract.
    (e) Manufactured homes. Exhibit F (available in any RECD field 
office) contains supplemental information concerning construction 
requirements for manufactured homes.


Sec. 1944.17  Maximum loan amounts.

    The amount of the loan may not exceed the maximum dollar limitation 
of section 203(b) of the National Housing Act (12 U.S.C. 1709) 
(available from any HUD office) unless authorized by RHCDS as an 
exception. Applicants are expected to reduce the need for loan funds by 
using available non-essential assets including cash on hand as outlined 
under Sec. 1944.9.
    (a) The amount will be the lesser of the cost of:
    (1) The acquisition and any necessary development or
    (2) The market value of the security, less the unpaid principal 
balance and past-due interest of any other liens against the security 
property, plus an appraisal fee, for the following types of dwellings:
    (i) An existing dwelling, as described in Sec. 1944.2, including 
one being financed by transfer or inventory property sale, except as 
provided in exhibit F (available in any RECD field office).
    (ii) A new dwelling when any one of the following conditions exist:
    (A) A conditional commitment was issued in accordance with 
Sec. 1944.45.
    (B) The RH loan will be closed prior to the start of construction, 
and construction conforms to the requirements contained in subpart A of 
part 1924.
    (C) The required construction inspections were made by the Federal 
Housing Administration (FHA) or Veterans Administration (VA). If 
qualified under this paragraph, a complete set of plans and 
specifications must be submitted together with copies of construction 
phase inspection reports or certification by FHA or VA indicating the 
dwelling was built in accordance with approved plans and 
specifications. The builder will also furnish a certification of 
compliance with RHCDS thermal standards for new construction. (See 
exhibit D of subpart A of part 1924 available in any RECD office.)
    (D) The manufactured home and site meet the requirements. (See 
exhibits F and J of subpart A of part 1924 available in any RECD 
office.)
    (b) A loan will be limited to 90 percent of the market value of the 
security, plus an appraisal fee, for any dwelling that does not meet 
the requirements of paragraph (a) of this section, with the exception 
of manufactured housing units. 

[[Page 55133]]

    (c) Notwithstanding the provisions of paragraph (a) of this 
section, a loan on a dwelling which causes the total secured 
indebtedness to exceed the requirements of paragraph (a) of this 
section, may be made when the excess indebtedness is all or part of a 
lien held by a public body (except for a lien arising out of a judgment 
against the applicant in favor of the United States in a Federal Court 
other than the United States Tax Court), hospital, or welfare 
institution for advances made for medical bills, welfare payments, or 
provided:
    (1) The applicant is unable to settle or compromise such lien 
sufficiently to avoid exceeding the market value;
    (2) The lien securing the excess amount will at all times be 
inferior to the RHCDS mortgage securing the initial loan and any 
subsequent loan or advances determined by the RHCDS to be reasonably 
necessary to carry out the purpose of the initial loan or to protect 
the Government's financial interest;
    (3) The existence of the excess lien will not jeopardize the 
security or servicing so as to preclude the making of a sound RH loan;
    (4) The applicant has the ability to meet any payments on the 
excess debt as they become due or are likely to become due.
    (d) Notwithstanding the provisions of paragraph (a) of this 
section, when a subsequent loan for closing costs only is made 
simultaneously with an inventory property sale (as provided in 
Sec. 1955.117(f)) or a transfer, the total indebtedness may exceed the 
sale price or market value of the security property, whichever is less, 
by no more than 1 percent.
    (e) Notwithstanding the provisions of paragraph (a) of this 
section, when RHCDS is refinancing the loan of an existing RHCDS 
borrower in accordance with Sec. 1951.316, the debt may exceed the 
market value of the security property to the extent necessary to 
refinance the borrower's outstanding indebtedness plus closing costs 
required in connection with the refinancing.
    (f) Notwithstanding the provisions of paragraph (a) of this 
section, when a subsequent loan is needed for repairs essential to 
protect the Government's security interest, the total RHCDS 
indebtedness may exceed the market value of the security by no more 
than the amount of the subsequent loan consisting of the cost of 
essential repairs and reasonable closing costs.
    (g) RHCDS may grant exceptions to allow the amount of the loan to 
exceed the maximum dollar limitation of section 203(b) of the National 
Housing Act (12 U.S.C. 1709) under the following conditions:
    (1) RHCDS may increase the loan amount in selected areas when the 
existing mortgage limit is insufficient to provide adequate housing for 
applicants and modest housing costs in the area exceed maximum loan 
limits or where different maximum loan limits exist in adjacent areas 
of the same community, for example: One limit on one side of the street 
compared to a higher limit on the other side.
    (2) RHCDS may increase the loan amount where necessary to 
accommodate the specific needs of the family such as a larger home to 
correct overcrowding situations for exceptionally large households and 
reasonable accommodation for a household member who is disabled. When 
the request is to allow reasonable accommodation for a household member 
who is disabled, the additional loan amount will not exceed the cost of 
the special features provided and the amount of the appraisal fee.


Sec. 1944.18  Security requirements.

    (a) Adequate security. Except as provided below, to protect the 
interests of RHCDS, all loans must be adequately secured. Except as 
provided in Sec. 1944.17(c) and paragraph (b) of this section, a loan 
is adequately secured only when all of the following requirements are 
met:
    (1) RHCDS obtains at closing a mortgage on all ownership interests 
in the entire tract.
    (2) No liens prior to the RHCDS mortgage exist at the time of 
closing, and no junior liens are likely to be taken immediately 
subsequent to or at the time of closing.
    (3) The provisions of subpart B of part 1927 regarding title 
clearance and the use of legal services are complied with.
    (4) The property improvements and proposed improvements are totally 
on the site and do not encroach on adjoining property. RHCDS may 
require a survey, at the buyer's or seller's expense.
    (b) Exceptions. Exceptions to the usual security requirements will 
be made only as follows:
    (1) Note only. A loan of $2,500 or less, scheduled for repayment in 
not more than 10 years from the date of the note, that is not subject 
to recapture of subsidy in accordance with subpart I of part 1951, may 
be secured by the borrower's promissory note alone when RHCDS 
determines that:
    (i) The applicant has a credit history which indicates an ability 
and willingness to pay debts when they are due;
    (ii) The applicant will have sufficient income to readily meet all 
obligations; and
    (iii) The applicant's equity in the real estate as improved, 
equals, or exceeds the amount of the proposed loan.
    (2) Mortgage insurance. When the applicant is the holder of 
possessory rights on an American Indian reservation or State-owned 
land, adequate security is required. This may include mortgage 
insurance guaranteeing payment from a State agency or American Indian 
tribe. States will issue a State Supplement covering special security 
and title clearance requirements needed for loans of this type.
    (3) American Indian land. American Indian land in trust or 
restricted status acquired with an RH loan will remain in trust or 
restricted status. These mortgages must be approved by the Secretary of 
the Interior. A State Supplement will be issued to prescribe the 
actions to be taken by RHCDS personnel to implement the making of loans 
under such conditions.
    (4) Best mortgage obtainable. Loans of $7,500 or less scheduled for 
repayment in not more than 15 years from the date of the note and 
subsequent loans made for minimal essential repairs necessary to 
preserve the Government's security must be secured by a mortgage, 
except as provided in paragraph (b)(1) of this section, but title 
clearance and the use of legal services in accordance with subpart B of 
part 1927 are not required unless the loan approval official determines 
that the procedures in subpart B of part 1927 are necessary to assure 
repayment or accomplish the objective of the loan. Evidence of 
ownership must be in accordance with Sec. 1944.24(d)(2).
    (5) Leasehold. When the applicant owns only a leasehold interest 
will treat the lessee's interest like any other type of ownership 
interest in determining whether a mortgage on the leasehold is 
required. The lease must meet the requirements of 
Sec. 1944.15(a)(5)(iv) and (v). In any state in which applicants are 
likely to own a leasehold interest, the State Director will issue a 
state supplement outlining the technical requirements for making such 
loans.
    (6) Security by junior lien. RHCDS may take a junior mortgage as 
security for an RH loan if the tract, which will secure the RHCDS 
mortgage, provides adequate security for the entire prior lien debt and 
the RH loan, and
    (i) The prior mortgage does not contain provisions that may 
jeopardize the RHCDS security position or the applicant's ability to 
repay the loan, such as provisions for future advances, 

[[Page 55134]]
forfeiture, cancellation, foreclosure without adequate notice to junior 
lienholders, attorney's fees exceeding those customary for the area in 
cases of foreclosure; or
    (ii) Such provisions are satisfactorily limited, modified, or 
waived; and
    (iii) The conditions set forth in subpart B of part 1927 are met.
    (7) Liens junior to RHCDS lien. Liens junior to the RHCDS lien will 
be allowed at closing or immediately subsequent to closing only when:
    (i) The junior lien will not interfere with the purpose or 
repayment of the RH loan, and
    (ii) The total amount of the RH loan, the junior lien, and any 
prior liens will not exceed the market value of the security except as 
provided in Sec. 1944.17(c), and
    (iii) The conditions set forth in subpart B of part 1927 are met.
    (8) Undivided interest. When the applicant owns an undivided 
interest in the property, the co-owners' interests need not be included 
in the mortgage in the following instances:
    (i) When one or more of the co-owners are not legally competent 
(and there is no representative who can legally consent to the 
mortgage) or cannot be located, or the ownership rights are divided 
among such a large number of co-owners that it is not practical for all 
their interests to be mortgaged, the mortgaging of interests not 
exceeding 50 percent may be excluded from the security requirements 
upon prior approval by RHCDS. All legally competent co-owners using or 
occupying the property will be required to sign the mortgage. Co-owners 
will be required to sign the note when necessary for a sound loan or to 
obtain the required security. The loan may not exceed the value of the 
percentage of the market value of the property represented by the 
interests of the owners who sign the mortgage. In determining such 
value, consideration will be given to any adverse effect which might 
result from sale of the mortgaged interests separately from the 
nonmortgaged interests.
    (ii) When the applicant owns only an undivided interest in a 
building site which will be a part of the farm, the interest of the 
applicant's co-owners may be excluded from the security requirements 
upon approval by RHCDS if:
    (A) The market value of the jointly owned tract is at least equal 
to the debts against it (including the RHCDS loan), and
    (B) The applicant's participation in the joint ownership of part of 
the farm and its operations has been and is likely to continue to be 
successful.
    (9) Life estate. When the applicant owns a life estate interest in 
the property, the remainder interests need not be included in the 
mortgage if one or more of the persons holding remainder interests are 
not legally competent (and there is no representative who can legally 
consent to the mortgage) or cannot be located, or if the remainder 
rights are divided among such a large number of people that it is not 
practicable to obtain the signatures of all the remainder interests. In 
the instance of numerous heirs, the mortgaging of remainder interests, 
not exceeding 50 percent of the total remainder interest may be 
excluded from the security requirements upon prior approval by RHCDS. 
In such cases, the loan may not exceed the value of the property 
interests owned by the persons executing the mortgage.
    (10) Farm dwelling. When the applicant is the owner of a farm, a 
mortgage may be taken only on the dwelling and dwelling site provided 
the following conditions can be met:
    (i) The tract to be mortgaged must not include farm service 
buildings, must be in a good residential location, be otherwise 
suitable as a residential type of nonfarm tract, provide adequate 
security for the loan, be contiguous to and have direct access to a 
public road, or
    (ii) The tract to be mortgaged must contain at least enough land to 
clearly provide adequate security for the loan and to make the tract 
readily saleable in the area.
    (11) Land purchase contract. When the ownership interest is by 
virtue of a land purchase contract (as described in Sec. 1927.52), the 
ownership interest must be converted to a deed/mortgage interest prior 
to loan closing and meet the conditions of Sec. 1944.22(b)(6) prior to 
loan closing.
    (c) Additional security. When necessary to supplement the 
applicant's equity in the farm or nonfarm tract on which the dwelling 
is located, or to facilitate servicing of the loan, RHCDS may also 
require a mortgage on other real estate owned by the applicant.
    (d) Assignment of income from real estate to be mortgaged. Income 
to be received by the applicant from royalties, leases, or other 
existing agreements under which the value of the real estate security 
will be depreciated will be assigned and disposed of in accordance with 
applicable portions of subpart C of part 1965, and the provisions for 
written consent of any prior lienholder. In small nonfarm tract cases, 
RHCDS may authorize withholding transmittal of assignments to lessees 
for execution until production begins.


Secs. 1944.19-1944.21  [Reserved]


Sec. 1944.22  Refinancing non-RHCDS debts.

    (a) Loan funds may be used for refinancing non-RHCDS debts on a 
dwelling (except for manufactured homes) if the debt was incurred by 
the applicant prior to the date the application was filed and the 
following conditions can be met:
    (1) The debt was incurred for purposes for which a section 502 RH 
loan could be made or is a protective advance by the mortgagee for 
items covered by the mortgage to be refinanced, including accrued 
interest, insurance premiums, real estate tax advances, or preliminary 
foreclosure costs.
    (2) The debt must be a lien against the property which will be 
security for the RH loan. The promissory note and security instrument 
for the debt to be refinanced must represent rates and terms that were 
typical and customary for long-term residential financing in the area 
at the time the debt was incurred.
    (3) A loan to refinance a qualified secured debt may also include 
short-term or unsecured debts, if necessary to establish a sound 
repayment ability, if such short-term or unsecured debts were incurred 
for authorized section 502 RH loan purposes and are not a significant 
portion of the loan.
    (4) Payments on the debt are so seriously delinquent or, if not 
delinquent, it must be evident that the applicant will be unable to 
continue to maintain payments, for reasons beyond the control of the 
applicant, and the applicant is likely to lose the dwelling at an early 
date if the debt is not refinanced. Such delinquency must be due to 
loss of employment or household income, illness, other similar events, 
or unforeseen circumstances.
    (5) A statement must be obtained from the creditor for each debt to 
be refinanced showing the purpose for which the debt was incurred, the 
date on which it was incurred, the final due date, interest rate, 
amount and frequency of installments, unpaid principal and accrued 
interest, and amount of delinquency, if any.
    (6) Refinancing such debts will not jeopardize the required 
priority of the RHCDS security instrument.
    (b) Loan funds may be used for refinancing non-RHCDS debts on a 
building site without a dwelling when the applicant is unable to pay 
the debt from personal resources and failure to authorize the use of RH 
funds to pay 

[[Page 55135]]
such costs would prevent the applicant from acquiring decent, safe, and 
sanitary housing and the following conditions can be met:
    (1) The site meets the conditions prescribed in Sec. 1944.11(c).
    (2) The debt was incurred prior to the date of application for the 
sole purpose of purchasing the site.
    (3) The debt is a lien against the property which will be used as 
security for the RH loan. The promissory note and security instrument 
for the debt represent rates and terms that were typical and customary 
for short-term residential financing in the area at the time the debt 
was incurred.
    (4) The refinancing loan will include adequate funds for 
constructing a modest dwelling on the site for the use of the 
applicant, which conforms with the requirements of Sec. 1944.16(a).
    (5) A statement must be obtained from the creditor for each debt to 
be refinanced showing the purpose for which the debt was incurred, the 
date on which it was incurred, the final date due, interest rate, 
amount and frequency of installments, unpaid principal and accrued 
interest, and amount of delinquency, if any.
    (6) Refinancing such debts will not jeopardize the required 
priority of the RHCDS security instrument.
    (c) If a loan of $5,000 or more is necessary for repairs to correct 
major deficiencies and make the dwelling decent, safe, and sanitary, an 
existing lien which meets the requirements of paragraphs (a)(l), (2), 
(3), and (5) of this section may be refinanced regardless of 
delinquency, if necessary for the applicant to have repayment ability 
for the existing loan and the requested loan for repairs.
    (d) Debts or costs incurred after the date of application may be 
refinanced if the costs were incurred for:
    (1) Fees for legal, and other technical services, or
    (2) Materials, construction, or site acquisition.
    (e) RHCDS may authorize the use of RH funds to pay costs provided 
for in paragraphs (d) (1) and (2) of this section only when RHCDS 
retains the same lien priority as the debt to be refinanced and all of 
the following conditions exist:
    (1) The costs were incurred after the applicant filed a written 
application for a loan but before the loan was closed. In the event of 
a subsequent loan to complete improvements previously planned, the 
costs must have been incurred after the initial loan was closed.
    (2) The applicant is unable to pay such costs from personal 
resources or to obtain credit from other sources, and failure to 
authorize the use of RH funds to pay such costs would jeopardize the 
applicant's capability of repaying the loan.
    (3) The construction or repair work conforms to that shown on the 
building plans and specifications or the RHCDS Development Plan, when 
applicable, and the costs were incurred for authorized section 502 RH 
loan purposes.


Sec. 1944.23  [Reserved]


Sec. 1944.24  Technical services.

    (a) Planning and performing construction work. Any construction 
work will be planned and completed in accordance with subpart A of part 
1924 or a lesser standard as may be prescribed by RHCDS for 
demonstration type loans.
    (b) Planning and performing site development work. Any site 
development will be planned and completed in accordance with subpart C 
of part 1924, except as provided for manufactured homes in exhibit J of 
subpart A of part 1924.
    (c) Appraisals. Appraisals will be required as follows:
    (1) When a mortgage will be taken to secure a total indebtedness of 
more than $15,000, an appraisal of the security property will be made 
to ensure that the security requirements of the Agency are satisfied. 
The loan can exceed the market value of the security by the amount of 
an appraisal fee. A fee will be charged for each application for a 
section 502 RH loan when an appraisal is needed for initial and 
subsequent loans and assumptions. Fees will be waived for appraisals 
done for subsequent loans to existing borrowers for minimal essential 
repairs that are necessary to protect the Government's security 
property. The fee will be collected at loan closing by the closing 
agent.
    (2) When the total indebtedness will be $15,000 or less, an 
appraisal of the real estate or leasehold interest is not required 
unless RHCDS is uncertain as to the adequacy of the security.
    (3) Real estate mortgaged as additional security will be appraised 
when it represents a substantial portion of the security for the loan 
or when requested by the loan approving official.
    (d) Title clearance and legal services.
    (1) When real estate will be taken as security (including a 
mortgage on a leasehold), except on a best mortgage obtainable basis, 
title clearance and legal services for making and closing the loan will 
be provided in accordance with subpart B of part 1927. Title clearance 
and legal services will not be requested until the loan is approved.
    (2) When real estate will not be mortgaged or when the best real 
estate mortgage obtainable is taken as security without title clearance 
or use of legal services, the applicant will be required to submit 
evidence of ownership of the farm or nonfarm tract. When RHCDS is 
uncertain as to whether or not the applicant is a qualified owner, such 
action will be taken as RHCDS considers necessary, such as requiring 
the applicant to furnish additional information. No loan will be made 
if RHCDS has actual knowledge that the applicant does not have valid 
title to the property.


Sec. 1944.25  Rates and terms.

    (a) Interest rate. The interest rate charged by RHCDS will be the 
lower of the rates in effect at the time of loan approval or loan 
closing. Interest rates are specified in exhibit B of FmHA Instruction 
440.1 (available in any RECD field office).
    (b) Amortization. Loans will be scheduled for repayment over a 
period that will not exceed the expected useful life of the property as 
a dwelling. Only one of the amortization periods listed in this 
paragraph may be used for a borrower. Each loan will be scheduled for 
repayment from the date of the promissory note, for a period not to 
exceed one of the following as applicable:
    (1) Thirty-three years for initial and subsequent loans.
    (2) Thirty-eight years for initial loans (subsequent loans may be 
made for a period not to exceed the remaining years of the initial 
loan) when the following conditions are met:
    (i) Adjusted annual income does not exceed 60 percent of the median 
income for the area as reflected in exhibit C, (available in any RECD 
field office), and
    (ii) The longer term is necessary to show repayment ability, with 
or without mortgage payment deferral.
    (3) Thirty years for manufactured homes.
    (4) Ten years for loans not exceeding $2,500 which are not secured 
by a real estate mortgage.
    (c) Payment assistance. Applicants may be eligible for a non-cash 
credit which may reduce the applicant's scheduled payment to a level 
equivalent to amortizing the loan to as low as 1 percent. The policies 
for granting and servicing payment assistance are set forth in 
Sec. 1944.34 and subpart G of part 1951, respectively.


Sec. 1944.26  Fund allocation.

    State Directors will maintain an adequate reserve to fund hardship 
applications, servicing type loans, the 

[[Page 55136]]
State's portion of funds for Mutual Self-Help Housing loans and the 
RHCDS portion of participation loans. Reserve funds will be used for:
    (a) Hardship applications.
    (1) Hardship as determined by the State Director on a case-by-case 
basis, including applications from persons living in deficient housing 
as defined in Sec. 1944.2, for more than 6 months.
    (2) Refinancing non-RHCDS debts in accordance with Sec. 1944.22(a) 
and RHCDS debts in accordance with Sec. 1951.316.
    (b) Servicing type loans.
    (1) Financing for the purchase of Government-owned inventory 
properties;
    (2) Subsequent loans for essential improvements or repairs;
    (3) Subsequent loans in connection with inventory property sales or 
transfers with assumption of the RHCDS indebtedness.
    (c) Mutual Self-Help Housing loans. Homes must be located in an 
RHCDS approved self-help project.
    (d) Participation loans. Loans made by RHCDS in conjunction with 
another lender for the purchase of a dwelling.


Sec. 1944.27  Application processing.

    (a) Accepting applications. RHCDS will accept completed 
applications in accordance with subpart A of part 1910.
    (1) Complete applications. A completed application will consist of 
Form FmHA 410-4, ``Application for Rural Housing Assistance (Nonfarm 
Tract) Uniform Residential Loan Application,'' (URLA) and an RHCDS form 
for verifying employment, for each employer, all of which are available 
in any RECD field office.
    (2) Incomplete applications. If the application is not dated and 
signed or sections are not properly completed, it may be returned for 
completion.
    (3) Packaged applications. Builders, brokers, contractors, the 
applicant, and others, including not-for-profit organizations, may 
package loan applications in accordance with exhibit A (available in 
any RECD field office). Builders and sellers holding conditional 
commitments may also assist applicants in applying for an RH loan.
    (b) Processing steps.
    (1) [Reserved]
    (2) Complete applications will be processed in the order received, 
in accordance with subpart A of part 1910 and subpart E of part 1901, 
except that preference will be given to applications for Mutual Self-
Help Housing loans, loan servicing purposes, purchase of an inventory 
property, assumption of an existing RHCDS loan, and to applicants who 
qualify as a hardship, as outlined in Sec. 1944.26. Veterans 
preference, as outlined in subpart A of part 1910, will apply.
    (3) [Reserved]
    (4) If HUD's Credit Alert Interactive Voice Response System 
(CAIVRS) identifies a delinquent Federal debt, RHCDS will immediately 
suspend processing of the application and the applicant will be 
notified in writing of the suspension and will be asked to contact the 
appropriate Federal agency, at the telephone number provided by CAIVRS, 
to resolve the delinquency. When the applicant provides RHCDS with 
official documentation that the delinquency has been paid in full or 
otherwise resolved, processing of the application will be continued. 
After 30 days from the suspension notification, if CAIVRS indicates the 
existence of an unsatisfied judgment in the favor of the United States, 
or if the applicant remains delinquent on a Federal debt and is unable 
to resolve the delinquency, the applicant will be rejected. The RHCDS 
Administrator may grant an exception to this requirement if it is in 
the best interest of the Government to do so.
    (5) If an on-line profile credit report, where available, reveals 
adverse credit information, the applicant will be given the opportunity 
to correct the adverse information. Applications will not be rejected 
or withdrawal encouraged based on information provided in the on-line 
credit report. This service is provided for the sole purpose of 
providing assistance to the applicant by identifying any credit 
problems at the beginning of the loan process and to clarify the 
difference between eligibility for program assistance and loan 
approval.
    (c) Determination of eligibility and notification to applicant. 
Eligibility determination will be made regardless of ranking or funding 
levels. If an applicant is determined ineligible because the 
applicant's income is too high, RHCDS may advise the applicant that 
applicant may qualify for the purchase of a Government inventory 
property or the assumption of an existing RHCDS borrower's loan on NP 
terms and may be counseled regarding the RH guaranteed loan program. If 
an applicant is given an adverse decision, the applicant will be given 
appeal rights to the Departmental National Appeals Division under Pub. 
L. 103-354.
    (1) Delayed processing. When available loan funds are not adequate 
to complete the processing of all applications as they are received, or 
a large backlog of applications exists which prohibits immediate 
processing of the application, a preliminary determination of 
eligibility may be made based on the information provided by the 
applicant.
    (i) If available funds are not adequate, applicants who appear 
eligible at the time of application will be advised in writing within 
30 days of filing of the application of their preliminary eligibility 
determination and the estimated waiting period. They should be further 
advised that a final determination of eligibility will be made when 
loan funds are available for the processing of their application.
    (ii) Where there are more than 50 unprocessed applications on hand, 
RHCDS will inform each applicant, at least every 6 months, of the 
current funding status and provide an estimate of when the loan is 
anticipated to be processed. At that time, the applicant should be 
advised to contact RHCDS if they are still interested in funding, and 
that the application will be withdrawn in 30 days if there is no 
response.
    (2) Immediate processing. Where there is no backlog, available loan 
funds are adequate, and the application can be processed in a timely 
manner, RHCDS shall make a preliminary determination of eligibility 
based on information submitted by the applicant and will request 
additional information as necessary to make a final determination of 
eligibility.
    (i) On-line profile credit reports may be used to allow a means for 
the loan approval official to determine if there is adverse credit 
information on the applicant's record prior to payment of the credit 
report fee.
    (ii) The age of the applicant will not be considered except as 
provided in Sec. 1944.9.
    (iii) Repayment ability will be evaluated in accordance with 
Sec. 1944.8.
    (iv) RHCDS will apply the objective standards of credit evaluation, 
outlined in Sec. 1944.9, for each applicant. All applications will be 
considered under the same standards.
    (v) [Reserved]
    (d) Selection for processing.
    (1) Completed applications for a reserve funding category, as set 
out in Sec. 1944.26, as well as applications for the assumption of an 
existing RHCDS loan, will be processed upon receipt.
    (2) All other completed applications will be selected for 
processing in the order received, as funding becomes available. 
Selected applicants have 30 days to provide information required under 
paragraph (e) of this section (including any fees for credit reports) 
for a final determination of eligibility. Selected applicants who do 
not respond to this 30-day notice will be withdrawn. Applications 
selected will be funded in 

[[Page 55137]]
the order that information is received, until all available loan funds 
are exhausted. Selected applicants who respond affirmatively to the 
first notice, but who are not funded within the quarter will be held 
over and counted as a selected applicant for the next quarterly 
allotment and will be so notified in writing. If all requested 
information is not received within 45 days after the second written 
selection notification, the application will be withdrawn.
    (e) Verification of information.
    (1) Income verification. All applicants will be required to submit 
a complete, legible copy of their most recently filed Federal income 
tax return (showing the applicant's signature) unless exempted from 
filing a return. In cases where a tax preparer has provided the 
applicant with copies of the return which was filed, one of the copies 
with the original signature of the tax preparer should be submitted. In 
Puerto Rico, applicants must submit a signed photocopy of the most 
recently filed State income tax returns. Applicants who do not have 
photocopies of their filed Federal returns should contact their 
Regional Internal Revenue Service. In addition to copies of tax 
returns, other income verification may be required.
    (i) Applicants will complete such forms as required by RHCDS. A 
form will be used to verify employment income of each applicant except 
for self-employment.
    (ii) RHCDS may confirm reported wages and earnings, including 
``non-taxable income'' with the Department of Labor or similar agency 
where this information is available.
    (iii) Applicants deriving their income from a farming or business 
enterprise, must provide current documentation of income and expenses. 
This information must not be older than the previous fiscal year.
    (iv) Applicants must provide a copy of the most recent award or 
benefit letter prepared and signed by the authorizing agency to verify 
Social Security, pension, and disability income. In addition, the Cost-
of-Living (COLA) in Social Security Benefits and Supplemental Security 
Income Payments Notice, Social Security Benefit Statement, Forms SSA-
1099 and SSA-1042, or Notice of Change in Benefits may be required for 
documentation of Social Security and Supplemental Security Income.
    (v) The applicant must provide a copy of the divorce decree or 
other legal document indicating the amount of the payments to verify 
alimony and child support payments. When the applicant states that less 
than the amount awarded is received, RHCDS may request documentation 
from the official entity through which payments are received, or other 
third parties capable of providing the verification when payment is not 
made through an official entity, indicating the dates and amounts of 
payments made to the applicant during the previous 12 months.
    (vi) Income information that cannot be obtained by use of forms 
provided by RHCDS will be obtained in writing from knowledgeable third 
parties to the extent possible. When it is not feasible to verify 
income through third parties, RHCDS may accept an affidavit from the 
applicant; in the case of child support or alimony, the affidavit must 
state the effort made to collect the amount awarded, and the amounts 
and dates of payments received during the previous 12 months.
    (2) Verification of alien status. Aliens are required to present 
documentation of their status. Exhibit B (available in any RECD field 
office) outlines the acceptable forms of documentation.
    (3) Verification of disability. Form FmHA 1944-4, ``Certification 
of Disability or Handicap,'' is used to verify disability in cases 
where State Review Boards or Social Security records are not available. 
When Form FmHA 1944-4 contains information which could affect the 
applicant's eligibility, the applicant may be required to furnish a 
physician's written opinion regarding the applicant's capacity to incur 
the loan obligation.
    (f) Applicant interview. After verification of all information 
necessary for making a final determination of eligibility but prior to 
issuance of the Certificate of Eligibility, RHCDS will conduct a 
personal interview with the applicant. The applicant may be accompanied 
by an advisor but the applicant or court appointed guardian or 
conservator must be personally responsive to all questions or issues 
during the interview. During the interview, RHCDS and the applicant 
will:
    (1) Verify information concerning persons who will occupy the 
dwelling and on whose income eligibility for the loan and payment 
assistance is based. Applicants who may be able to obtain other credit 
will be told they are expected to apply for same from a lender making 
loans for similar purposes. If requested, the applicant will have the 
lender indicate the amount, interest rate, and terms of housing credit 
the lender would be willing to extend to the applicant.
    (2) Reach an understanding that failure of the applicants to fully 
disclose financial and application information or material 
falsification or concealment of such information will result in a 
denial of assistance and possible penalties.
    (g) Issuance of ``Certificate of Eligibility.'' Once all 
information has been verified and eligibility has been determined, a 
``Certificate of Eligibility'' will be issued to all applicants 
selected for further processing. The certificate will be valid for a 
period not to exceed 90 days. The certificate will not be issued to 
applicants who have submitted packaged applications that already 
contain information necessary to complete a real estate appraisal.
    (1) Appraisals. After the Certificate of Eligibility is issued the 
applicant has 90 days to provide information needed to complete the 
real estate appraisal on the property to be financed.
    (i) Information requested will include a copy of the option or 
sales agreement; a legal description of the property; a direction map; 
certified building plans and specifications or repair estimates as 
appropriate; copies of existing surveys, title information, and tax 
bills; and other information deemed necessary by the appraiser.
    (ii) The applicant must advise RHCDS if they wish to have the cost 
of the real estate appraisal included in the loan funds.
    (iii) Appraisals will generally be completed within 30 days of the 
date information requested is received.
    (2) Environmental review. The Agency must complete the 
environmental review process pursuant to subpart G of part 1940 prior 
to loan approval or obligation, whichever occurs first.
    (3) Extensions or withdrawals. At the end of 90 days, if the 
applicant has not submitted the information requested, the application 
will be deemed withdrawn unless an extension is approved based on 
evidence that the applicant is actively working on supplying the 
necessary information. A maximum of two 60-day extensions can be 
approved.
    (h) Appeals. If the decision on the applicant's request for 
assistance is unfavorable, the applicant will be notified of the 
appropriate appeal rights under Pub. L. 103-354 to the National Appeals 
Division. The applicant will be notified that a new application may be 
filed when curative action is taken to remove the reasons for 
rejection.
    (i) Accountability. Applicants should be made aware of the 
accountability requirements of persons paid to influence the making of 
an RHCDS housing loan or grant as set out in subpart S of part 1940.

[[Page 55138]]



Secs. 1944.28-1944.30  [Reserved]


Sec. 1944.31  Loan approval.

    (a) RHCDS employees are authorized to approve or disapprove loans, 
as delegated, in accordance with subpart A of part 1901.
    (b) All loan approvals are subject to the availability of funds.
    (c) [Reserved]
    (d) [Reserved]
    (e) If title evidence is required in accordance with subpart B of 
part 1927 or in accordance with any special requirements for the loan 
but is not included in the docket, the loan may be approved subject to 
the applicant furnishing the required title evidence. When the 
applicant furnishes required title evidence, RHCDS will proceed with 
processing the loan. In those cases in which the title evidence does 
not comply with the conditions specified, the docket will be 
reconsidered by the approval official.


Sec. 1944.32  [Reserved]


Sec. 1944.33  Loan closing.

    (a) Reverification of income. If a loan made on program terms will 
be closed or the payment assistance agreement will be executed more 
than 90 days after the date of the last verification of employment, or 
if there is evidence to indicate the applicant's financial status has 
changed significantly, the applicant's income will be reverified in 
accordance with Sec. 1944.27 and the amount of payment assistance will 
be determined on the basis of the applicant's new income, based on the 
schedules contained at Sec. 1944.34(c). If the adjusted income is such 
that the applicant is no longer eligible for payment assistance, the 
loan may be closed if there is documented evidence to clearly indicate 
other credit is not available and the applicant has adequate repayment 
ability based on the revised income for the proposed loan. Payment 
assistance may be granted if the applicant's income was at or below the 
low-income level at the time of loan approval but payment assistance 
will not be granted if the adjusted income exceeds the moderate-income 
limit set forth in exhibit C (available in any RECD field office).
    (b) Promissory note. An RHCDS approved ``Promissory Note'' will be 
prepared and signed in accordance with subpart B of part 1927. Payments 
of principal and interest will be deferred during the period the 
dwelling is not suitable for occupancy as a residence because of 
construction or repairs. If the loan is closed before any funds are 
advanced by RHCDS or loan funds are distributed by multiple advance, 
accrued interest is added to principal and repaid in regular amortized 
installments (payment alternative I) after the deferment period. The 
monthly payment provision will be used for all applicants except those 
who are existing RHCDS borrowers with previous loans which were made on 
an annual payment basis. If the annual payment provision is used and 
installments are not to be deferred, the amount of the first 
installment will be determined by RHCDS after considering the immediate 
debt paying ability of the applicant. The amount of the first 
installment may not be less than an amount equal to interest on the 
loan from the date of loan closing to the next January 1.
    (c) Real estate mortgage. An RHCDS approved real estate mortgage 
form will be used for loans to be secured by a real estate mortgage.
    (d) Collection of the first installment. If the annual payment 
provision of the note is used and payments are not to be deferred, the 
first installment of a loan closed during December will be paid at the 
time of loan closing.
    (e) Homeowners or fire and extended coverage insurance. Buildings 
on the property taken as security for the loan will be insured in 
accordance with subparts A and B of part 1806. The policy and a paid 
receipt for 1 full year's premium must be presented by the applicant at 
loan closing.
    (i) Effective date of loan closing. A loan secured by a real estate 
mortgage is closed when the mortgage is filed for record and the 
expected lien is obtained. In other cases, a loan is closed when the 
applicant executes the note and any other required instruments.


Sec. 1944.34  Payment assistance.

    (a) General. It is the policy of RHCDS to grant payment assistance 
on loans to qualified applicants to assist them in obtaining and 
retaining decent, safe, and sanitary dwellings and related facilities. 
This section pertains to the granting of payment assistance connected 
with loan making activities. All other provisions dealing with payment 
assistance are contained in subparts G and I of part 1951.
    (b) Approval authority. Officials who are authorized to approve 
section 502 RH loans are also authorized to approve payment assistance.
    (c) Amount of payment assistance. Payment assistance granted will 
be the difference between the installment due on the promissory note 
and the amount the greater of the payment amortized at the equivalent 
interest rate related to the applicant's income or the payment 
calculated based on the floor related to the applicant's income.
    (1) The floor is a minimum percentage of adjusted family income 
which the borrower must pay for PITI as follows:
    (i) Very low-income borrowers will pay a minimum of 22 percent;
    (ii) Low-income borrowers with adjusted family income below 65 
percent of median income will pay a minimum of 24 percent;
    (iii) Low-income borrowers with incomes between 65 percent to 80 
percent of median will pay a minimum of 26 percent.
    (2) The equivalent interest rate is determined by a comparison of 
the borrower's adjusted annual income as determined in Sec. 1944.6 to 
the median income for the area where the security property is located, 
based on income figures published by HUD as reflected in exhibit C 
(available in any RECD field office). The following chart is to be used 
for determining the equivalent interest rate paid by the applicant when 
eligible for payment assistance, for loan making and loan servicing for 
loans closed after the effective date of this subpart. In determining 
percentages, rounding should not be used.

                           Percentage of Median Income and Equivalent Rate of Interest                          
----------------------------------------------------------------------------------------------------------------
                                    When the applicant's adjusted income is:                                    
-----------------------------------------------------------------------------------------------------------------
                                                                                    Then the equivalent rate of 
         Equal to or more than                        But less than                        interest is**        
----------------------------------------------------------------------------------------------------------------
00 percent -..........................  50.01 percent of median income..........  1 percent.                    
50.01 percent.........................  55 percent of median income.............  2 percent.                    
55 percent............................  60 percent of median income.............  3 percent.                    
60 percent............................  65 percent of median income.............  4 percent.                    
65 percent............................  70 percent of median income.............  5 percent.                    

[[Page 55139]]
                                                                                                                
70 percent............................  75 percent of median income.............  6 percent.                    
75 percent............................  80.01 percent of median income..........  6.5 percent.                  
80.01 percent.........................  90 percent of median income.............  7.5 percent.                  
90 percent............................  100 percent of median income............  8.5 percent.                  
100 percent...........................  110 percent of median income............  9 percent.                    
110 percent...........................  Or more than median income..............  9.5 percent.                  
----------------------------------------------------------------------------------------------------------------
**Or note rate, whichever is less; in no case will the effective interest rate be less than 1 percent except as 
  provided in Sec. 1944.35.                                                                                     


    (3) Payments for existing borrowers receiving subsequent loans 
approved after the effective date of this publication or whose loans 
are being reamortized with a change in the term will be determined 
under payment assistance.
    (4) Present RHCDS borrowers who are currently receiving payment 
assistance as of the effective date of this subpart, will continue to 
be reviewed under the system in effect prior to the effective date of 
this issuance. Any other exception to the use of these interest rates 
or minimum percentages of adjusted family income will be made by the 
RHCDS Administrator under paragraph (h) of this section. Median income 
is that reflected in exhibit C (available in any RECD field office).
    (d) Recapture. Borrowers must agree to provisions for recapture of 
any payment assistance the borrower may receive during the life of the 
loan. See subpart I of part 1951.
    (e) Eligibility. To be eligible for payment assistance, an 
applicant must qualify for a section 502 RH loan, must personally 
occupy the dwelling, and must meet the following additional 
requirements:
    (1) Initial loans including inventory property sales. Payment 
assistance may be granted at loan closing if:
    (i) The applicant's adjusted annual income, at the time of loan 
approval, did not exceed the applicable low-income limit contained in 
exhibit C (available in any RECD field office).
    (ii) The term of the loan will not be less than 25 years.
    (2) Subsequent loans. Payment assistance may be granted on 
subsequent loans which meet the terms of paragraph (e)(1) of this 
section. If payment assistance is presently being granted on the 
initial loan and the applicant's adjusted income does not exceed the 
moderate-income limit, it may also be granted on a subsequent loan, 
providing the term of the subsequent loan is 25 years or more.
    (3) Assumptions. Payment assistance may be granted to an applicant 
assuming an RH loan on new rates and terms, provided the assuming 
parties qualify according to paragraph (e)(1) of this section. Payment 
assistance may only be granted on ``same term'' assumptions if the 
original loan was approved on or after August 1, 1968.
    (f) Processing payment assistance. The adjusted payment for which 
an applicant qualifies after application of payment assistance will be 
stated in the most current payment assistance agreement. Payment 
assistance agreements will be for a 12-month period, with the following 
exceptions:
    (1) Self-employed applicants. For a self-employed applicant, the 
initial payment assistance agreement will run from the effective date 
to 3 months after the end of the applicant's business fiscal year, but 
not more than a 12-month period. This will allow subsequent agreements 
to coincide with the applicant's business fiscal year with a 3-month 
over-lap to provide sufficient time for the applicant to supply 
verification of the previous year's income.
    (2) Unemployed applicants. For an applicant receiving unemployment 
benefits, the agreement will be effective for the period during which 
the applicant will receive unemployment benefits, or, if the period is 
unknown, no longer than 6 months. The expiration date of the agreement 
will be established by RHCDS.
    (3) Annual payment applicants. For an applicant currently paying an 
annual installment, who receives a subsequent loan, the initial payment 
assistance agreement including the subsequent loan will be in effect 
until the next January 1.
    (g) Applicant notice of right to appeal. All applicants who request 
and are denied payment assistance may appeal in accordance with Pub. L. 
103-354 to the National Appeals Division, USDA.
    (h) Exceptions. RHCDS may make exceptions to proposed transactions 
in which the conditions prescribed in the foregoing paragraphs of this 
section cannot be met. This paragraph is primarily intended to be used 
for those cases in which the granting of payment assistance is 
necessary for the applicant to retain or obtain a dwelling for the 
applicant's own use, and there are no other means to do so. RHCDS may 
authorize a further reduction of the equivalent rate of interest in 
high cost areas as determined by HUD when there is evidence to indicate 
that there is no adequate, lower-cost housing available to the 
applicant which would reduce the applicant's need for additional 
subsidy; the housing to be financed is comparable in cost to housing 
financed for very low-income applicants in the area; and the applicant 
will be unable to acquire adequate housing unless additional subsidy is 
authorized. This exception is limited to an additional one percentage 
point reduction in the equivalent rate of interest but in no event may 
the equivalent rate of interest be less than 1 percent except as 
authorized in Sec. 1944.35. A high cost area is an area which has been 
designated as high cost by HUD under the maximum dollar limitation of 
section 203(b) of the National Housing Act (12 U.S.C. 1709) (available 
from any HUD office).


Sec. 1944.35  Deferred mortgage payments.

    (a) General. It is the policy of RHCDS to defer up to 25 percent of 
the installment amount at the 1 percent equivalent interest rate to 
qualified RHCDS applicants, to assist them in obtaining decent, safe, 
and sanitary dwellings and related facilities. Only principal and 
interest can be deferred.
    (b) Approval authority. Officials authorized to approve section 502 
RH loans are also authorized to approve the deferral.
    (c) Eligibility. In order to qualify for deferred mortgage payments 
under this section, the following conditions must exist: 

[[Page 55140]]

    (1) The applicant's adjusted family income, at the time of initial 
loan approval, must not exceed the applicable very low-income limits in 
exhibit C (available in any RECD field office);
    (2) The term of the loan is 38 years, or 30 years for manufactured 
housing units;
    (3) The applicant qualifies for the maximum payment assistance 
(equivalent to an interest rate of no more than 1 percent) allowable 
under Sec. 1944.34;
    (4) The applicant's PITI, calculated at 1 percent equivalent 
interest rate for 38 years, exceeds 29 percent of the adjusted annual 
income; and
    (5) The initial deferral assistance under this section is granted 
in connection with the initial loan closing; or deferral assistance is 
being renewed, without interruption, during the 15-year period from the 
effective date of the initial agreement.
    (d) Amount and terms of deferral.
    (1) The deferral amount is determined as follows:
    (i) The applicant will be at the maximum payment assistance 
allowable under Sec. 1944.34.
    (ii) RHCDS will calculate the applicant's PITI based on the 
equivalent 1 percent interest rate for 38 years (30 years for 
manufactured housing units), and the annual real estate taxes and 
insurance due for the current year (or escrow amounts for real estate 
taxes and insurance premiums due during the current year, where 
applicable).
    (A) If the amount of real estate taxes due for the initial 
agreement is less than a typical year's taxes (such as in new 
construction), then ``eligibility'' for deferral assistance will be 
determined based on the amount of taxes due in a typical year but the 
``amount'' of deferral for which the applicant qualifies will always be 
based upon actual taxes due for the current year. This may result in 
the applicant being eligible for assistance but not having anything 
deferred during the first year. Although there may not be any portion 
of the payment deferred in the first year, the 15-year period for 
assistance will still be calculated from the date of loan closing.
    (B) For renewals of deferral assistance, only the regularly 
scheduled PITI due for the current year calculated at 1 percent 
equivalent interest rate for 38 years, will be considered when 
calculating the deferral amount. Protective advances, additional 
payment agreements, and other payment agreements will not be considered 
in this calculation.
    (iii) If the reduced PITI calculated at 1 percent for 38 years (30 
years for manufactured housing units) still exceeds 29 percent of gross 
annual income, the deferred mortgage payment will be 75 percent of the 
monthly installment amount at the 1 percent equivalent interest rate 
amortized over 38 years.
    (2) Deferred mortgage payments will be effective for a 12-month 
period. The effective date will coincide with the anniversary date of 
the payment assistance agreement. Deferred mortgage assistance may be 
continued, without interruption, for up to 15 years after the date of 
loan closing. A borrower who no longer qualifies for deferred mortgage 
assistance because of an increase in income, will not receive deferred 
mortgage assistance again, even if income decreases at a later date.
    (e) Review process. The borrower's income, taxes, and insurance 
will be reviewed annually to determine eligibility for continued 
deferred mortgage assistance and payment assistance. The review for 
both types of assistance shall be performed simultaneously. It is not 
the responsibility of RHCDS to monitor changes in the borrower's 
income. If a borrower whose payments are being deferred experiences a 
change in income that qualifies under subpart G of part 1951 for a 
change in payment assistance, the borrower should request a review for 
deferred mortgage payment assistance. Adjustments to deferred mortgage 
assistance and payment assistance will be effective as of the date of 
income change.
    (1) Annual review. The annual review will be scheduled to take 
place during the payment assistance review period as defined in subpart 
G of part 1951 (available in any RECD field office).
    (2) Responsibilities of the applicant. Before a deferral will be 
approved, the applicant must:
    (i) Provide RHCDS with income verification, as described in 
Sec. 1944.27;
    (ii) Provide RHCDS with information needed to complete the deferral 
section of the Payment Assistance/Deferred Mortgage Assistance 
Agreement;
    (iii) Review and sign the appropriate RHCDS forms and documents, 
and
    (iv) Participate in an interview to review the deferral 
information.
    (f) Cancellation of deferral. Deferral under this section may be 
canceled for any of the conditions for which payment assistance may be 
canceled in Sec. 1951.313. Once a borrower goes off deferred mortgage 
payments, the borrower is not eligible to receive this assistance 
again. Deferred payments may only be continued for up to 15 years after 
the effective date of the loan closing.
    (g) Recapture. The amount deferred is subject to repayment and 
recapture in accordance with subpart I of part 1951.
    (h) Appeal/review rights. Because the deferred mortgage regulations 
are based on the objective application of formulas, deferred mortgage 
payment calculations are not appealable; however, a review may be 
requested in accordance with subpart B of part 1900. Applicants who 
request and are denied deferred mortgage payments, or whose deferral 
amount has been reduced, canceled, or not renewed based on contested 
income calculations, may appeal that decision in accordance with Pub. 
L. 103-354 to the National Appeals Division, U.S.D.A.


Sec. 1944.36  [Reserved]


Sec. 1944.37  Subsequent section 502 RH loans.

    Subsequent section 502 RH loans may be made to existing borrowers 
for the same purposes and under the same conditions and limitations as 
an initial loan, except as provided in this section. A new credit 
report is required for all applicants for subsequent loans in 
accordance with Sec. 1944.27.
    (a) The subsequent loan will be processed in the same manner as an 
initial loan, except that a new appraisal report will be required in 
accordance with Sec. 1944.24 only when real estate will be taken as 
security and at least one of the following conditions exists:
    (1) The property was not appraised in connection with the initial 
loan;
    (2) The latest appraisal report of the real estate is over 2 years 
old;
    (3) The physical characteristics of the property have changed 
significantly;
    (4) RHCDS is uncertain of the adequacy of the security; or
    (5) The subsequent loan is in connection with a transfer of an 
existing loan subject to subsidy recapture in accordance with subpart I 
of part 1951.
    (b) A subsequent RH loan may be made on a note-only basis, provided 
the amount of the subsequent loan plus the unpaid principal balance of 
any prior note-only RH loans do not exceed $2,500. Applicants for such 
loans must meet the requirements of Sec. 1944.18.
    (c) [Reserved]
    (d) The subsequent loan will bear interest at a rate determined in 
accordance with exhibit B of FmHA Instruction 440.1 (available in any 
RECD field office).
    (e) A subsequent loan may be made to permit the remaining borrower, 
if eligible, to purchase the equity of a departing coborrower.
    (f) When an area designation has been changed from rural to 
nonrural, 

[[Page 55141]]
subsequent RH loans may be made only in accordance with the provisions 
of Sec. 1944.10.
    (g) The loan approval official may authorize reamortization of a 
prior RH loan at the time a subsequent loan is made in those cases in 
which it is determined that the borrower cannot reasonably be expected 
to meet installments due unless the account is reamortized. If the 
account is reamortized, the reamortization must be in accordance with 
subpart G of part 1951.
    (h) Title clearance and appraisal fees for subsequent loans to 
existing RHCDS borrowers for minimal essential repairs to protect the 
Government's security will be handled in accordance with Secs. 1944.18 
and 1944.24.


Sec. 1944.38  Mutual Self-Help Housing loans.

    Applicants may build their homes by participating in a Mutual Self-
Help Housing project sponsored by an RHCDS self help housing grantee. 
See subpart I of part 1944 for the requirements for an organization to 
become a self-help housing grantee.


Sec. 1944.39  RH loans to RHCDS employees and loan closing officials.

    RHCDS employees, and loan closing agents, or members of their 
families may obtain a section 502 RH loan subject to the provisions of 
this subpart:
    (a) Written evidence indicating the applicant's inability to obtain 
the needed credit elsewhere will be included in the application.
    (b) Applications will be processed and loans will be serviced 
according to subpart D of part 1900.
    (c) Loans, inventory property sales, or assumption agreements will 
not be approved under this authority for any of the following purposes:
    (1) Buying RHCDS inventory property;
    (2) Buying RHCDS security property from a borrower; or
    (3) Buying RHCDS security property at foreclosure sale.


Sec. 1944.40  [Reserved]


Sec. 1944.41  Housing demonstration programs.

    RHCDS may authorize limited demonstration programs that may not be 
consistent with some of the provisions of this chapter. Those 
demonstration programs will be clearly identified as such.


Sec. 1944.42  Condominium and community land trust requirements.

    (a) Condominiums. A loan may be made on an existing condominium 
unit when the project has been approved or accepted by Housing and 
Urban Development (HUD), Federal National Mortgage Association (Fannie 
Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) provided 
the applicant and loan meet all other requirements in accordance with 
this subpart. Official documentation from the approving agency must be 
submitted with the sales contract. The condominium documents must 
ensure the following:
    (1) The condominium project has been created and exists in full 
compliance with the requirements of the condominium enabling statute 
and all other applicable laws of the jurisdiction where the condominium 
project is located.
    (2) Any right of first refusal in the condominium documents will 
not impair the rights of Rural Housing and Community Development 
Service (RHCDS) to:
    (i) foreclose or take title to a condominium unit pursuant to the 
remedies in the mortgage;
    (ii) accept a deed or assignment in lieu of foreclosure in the 
event of default by a mortgagor; and
    (iii) sell or lease a unit acquired by RHCDS.
    (3) If RHCDS obtains title to a condominium unit pursuant to the 
remedies in its mortgage or through foreclosure, RHCDS will not be 
liable for more than 3 months of the unit's unpaid regularly budgeted 
dues or charges accrued before acquisition of the title to the unit by 
RHCDS. The homeowners association's lien priority may not include costs 
of collecting unpaid dues.
    (4) In case of condemnation or substantial loss to the units or 
common elements of the condominium project, unless at least two-thirds 
of the first mortgagees or unit owners of the individual condominium 
units have given their consent, the homeowners association may not:
    (i) By act or omission seek to abandon or terminate the condominium 
project;
    (ii) Change the pro rata interest or obligations of any condominium 
unit in order to levy assessments or charges, allocate distribution of 
hazard insurance proceeds or condemnation awards, or determine the pro 
rata share of ownership of each condominium unit in the common 
elements;
    (iii) Partition or subdivide any condominium unit;
    (iv) Seek to abandon, partition, subdivide, encumber, sell, or 
transfer the common elements by act or omission; (the granting of 
easements for public utilities or other public purposes consistent with 
the intended use of the common elements by the condominium project is 
not a transfer within the meaning of this clause); or
    (v) Use hazard insurance proceeds for losses to any condominium 
property (whether units or common elements) for other than the repair, 
replacement, or reconstruction of the condominium property.
    (5) The project, including all common elements and amenities, is 
complete. All amenities are covered by the mortgage at least to the 
same extent as the common elements.
    (6) All taxes, assessments, and charges that may become liens prior 
to the first mortgage under local law relate only to the individual 
condominium units and not to the condominium project as a whole.
    (7) No provision of the condominium documents gives a condominium 
unit owner or any other party priority over any rights of RHCDS as 
first or second mortgagee of the condominium unit pursuant to its 
mortgage in the case of a payment to the unit owner of insurance 
proceeds or condemnation awards for losses to or taking of condominium 
units or common elements.
    (8) If the condominium project is on a leasehold the underlying 
lease provides adequate security of tenure.
    (9) At least 70 percent of the units have been sold. Multiple 
purchases of condominium units by one owner are counted as one sale 
when determining if the sales requirement has been met.
    (10) No more than 15 percent of the unit owners are more than 1 
month delinquent in payment of homeowners association's dues or 
assessments at the time of delivery of the mortgage to RHCDS.
    (b) Community land trusts. Loans may be made to finance the 
purchase of a dwelling located on land owned by a community land trust, 
provided the applicant and the loan meet all other requirements in 
accordance with this subpart.
    (1) Community land trust is defined as a community housing 
development organization which is a private nonprofit organization, 
including State or locally chartered nonprofit organization. In 
addition to the statutory requirements the ownership requirements must 
be consistent with the leasehold provisions in Sec. 1944.15(a)(5) of 
this subpart. The leasehold must be appraised in accordance with 
subpart C of part 1922 (available in any RECD office).
    (2) The ownership requirements must be consistent with the 
leasehold provisions in Sec. 1944.15(a)(5). The leasehold must be 
appraised in 

[[Page 55142]]
accordance with subpart C of part 1922 (available in any RECD field 
office).
    (i) The rights are held only by a governmental body or eligible 
nonprofit organization and exercised by them or someone they have 
identified as an eligible purchaser;
    (ii) Any right is exercised within 45 days after the holder of 
these rights may exercise them (for example, the rights are often 
triggered by a notice of sale from the borrower); and
    (iii) Any option price allows the borrower to recover the 
borrower's investment plus a reasonable share of appreciation. The 
national office may approve option rights to be held and exercised by 
another person or entity on a case-by-case basis.
    (3) All restrictions relating to community land trusts that are 
allowed by RHCDS must automatically and permanently terminate upon 
foreclosure and deed-in-lieu of foreclosure. The relevant legal 
documents must have language that accomplishes this result. Merely 
subordinating the restrictions to the mortgage is not sufficient. The 
restrictions cannot come back in force upon subsequent resale by RHCDS.


Sec. 1944.43  [Reserved]


Sec. 1944.44  Borrower graduation.

    Borrowers will be asked to refinance RH loans when the Agency 
determines that credit likely will be available at rates and terms 
prevailing in the area and on terms which the borrower can reasonably 
be expected to meet. Borrowers will be required to apply for a 
refinancing loan from one or more locally active lenders when asked 
and, if approved by a lender, accept such credit to pay the RHCDS loan 
in full.


Sec. 1944.45  Conditional commitments.

    (a) General. A conditional commitment is assurance from RHCDS to a 
qualified builder, dealer-contractor, or seller that a dwelling to be 
offered for sale will be acceptable for purchase by qualified RH loan 
applicants if accepted by RHCDS and/or built or rehabilitated in 
accordance with RHCDS approved plans, specifications, and regulations, 
and priced at not more than a specified amount. The conditional 
commitment does not reserve funds nor does it assure that an eligible 
loan applicant will be available to buy the dwelling. The conditional 
commitment is not effective if the area does not remain rural.
    (b) Eligibility. To be eligible for conditional commitments, the 
builder, dealer-contractor, or seller must:
    (1) Be the owner as defined in Sec. 1944.15, prior to the beginning 
of any planned construction, of the site on which the dwelling is 
located or to be built, except as set out in subpart G of part 1822 
(FmHA Instruction 444.8).
    (2) Have the experience and ability to complete any proposed work 
in a competent and professional manner.
    (3) Be financially responsible and have the ability to finance or 
obtain financing for any proposed construction or rehabilitation.
    (4) Comply with the requirements of subpart E of part 1901 and all 
applicable laws, regulations, and Executive Orders relating to equal 
opportunity.
    (5) Plan to build or rehabilitate dwellings which will qualify for 
purchase by RH applicants and which will be in compliance with all 
applicable laws, ordinances, and codes.
    (6) Have the legal capacity to enter into the required agreements 
and the actual capacity to carry them out.
    (c) Limitations. 
    (1) Conditional commitments will be issued only in cases where the 
commitment applicant's selling price does not exceed the commitment 
price, which will never be more than the lower of the appraised value 
or the maximum loan amount as contained in Sec. 1944.17.
    (2) Conditional commitments will be issued by RHCDS for new homes 
to be constructed, new manufactured homes, or existing homes (other 
than manufactured).
    (3) Conditional commitments for new or substantially rehabilitated 
dwellings will not be issued after construction has started.
    (4) The total number of conditional commitments issued in any 
locality will not exceed the number of homes for which there is an 
immediate and ready market in that locality. In addition, the total 
number of conditional commitments outstanding in the area served by an 
RECD field office will not exceed the number on which the approval 
official can reasonably expect to be able to approve RH loans within 3 
months after the houses covered by the commitments are completed, 
considering the availability of loan funds, and the number of 
applications in any RECD field office.
    (5) The period of the conditional commitment will be for 12 months 
from the date of issuance. The commitment may be extended for an 
additional 6 months because of unexpected delays in construction caused 
by such factors as bad weather, materials shortages, or marketing 
difficulties.
    (6) When five or more conditional commitments have been issued to 
one recipient during a 12-month period, an affirmative marketing plan 
will be required in accordance with Sec. 1901.203(c).
    (d) Conditional commitments where the dwelling is presold to a 
specific applicant. In cases where the dwelling is presold and is to be 
constructed for sale only to a specific applicant and the information 
on the house and the loan applicant is submitted at the same time, all 
of the following conditions must be met:
    (1) The conditional commitment will not be approved until the RH 
loan has been approved;
    (2) Construction will not begin until loan funds are obligated for 
the RH loan. RHCDS may make an exception to this requirement when it 
appears likely that funding will be forthcoming and it is necessary to 
begin construction because of weather conditions or similar 
circumstances provided the commencement of construction prior to 
closing the RH loan will not jeopardize RHCDS's lien priority.
    (i) The sales agreement must indicate that the loan has been 
approved but not funded and must provide that if the loan is not closed 
within 90 days of the date of approval, the contractor may, in writing, 
terminate the sales agreement and sell the home to another party. If 
the sales agreement is terminated, the conditional commitment will be 
honored for another eligible RHCDS loan applicant for the remaining 
period of the commitment, providing the contractor has met all other 
requirements of this subpart.
    (ii) If the sales agreement is terminated, a Certificate of 
Eligibility will be issued to the loan applicant in accordance with 
Sec. 1944.27.
    (3) The RH loan will be closed only after the dwelling is 
constructed or the required rehabilitation completed and final 
inspection has been made.
    (e) Fees. Each commitment applicant will pay a fee for each 
conditional commitment at the time an application is submitted. Fees 
are established in exhibit G (available in any RECD field office). 
Conditional commitment contractors will be reimbursed at the time the 
section 502 RH loan is closed for an amount equal to the fee the 
section 502 RH applicant is charged for the real estate appraisal.
    (f) Processing applications.
    (1) Application submission. Applications for conditional 
commitments will be submitted on a form provided by the Agency. 
Attachments, as required by the form, will be included for each 
individual dwelling for which a conditional commitment is requested.
    (2) [Reserved] 

[[Page 55143]]

    (3) Evaluation of applications. The commitment applicant must meet 
the requirements of paragraphs (b) and (c) of this section, and the 
dwelling and site must meet the requirements of this subpart and 
subpart A of part 1924 and comply with all local codes and ordinances. 
The property must meet the requirements of subpart C of part 1924 and 
subpart G of part 1940. If the commitment applicant, dwelling, and site 
qualify, an appraisal will be obtained in accordance with subpart C of 
part 1922.
    (4) Failure of applicant or dwelling to qualify. If the application 
is denied for failure to meet the requirements of paragraph (b)(2) or 
(3) of this section, the applicant may appeal in accordance with Pub. 
L. 103-354 to the National Appeals Division, U.S.D.A.
    (i) The application fee will be refunded if for any reason 
preliminary inspection of the property or investigation of the 
commitment applicant indicates that a conditional commitment will not 
be issued.
    (ii) Application fees will not be refunded for any property on 
which the required appraisal has been made.
    (5) Conditional commitment price. The commitment price may not 
exceed the loan approval authority for section 502 RH loans. See 
subpart A of part 1901.
    (g) Inspections. Failure to correct any deficiencies or to complete 
the work in accordance with plans and specifications approved by RHCDS 
will be a basis for canceling the conditional commitment. The applicant 
must allow RHCDS access for the purpose of inspection. See subpart A of 
part 1924.
    (h) Changes in plans, specifications, or commitment price. RHCDS 
may approve changes in plans and specifications that are consistent 
with the applicable development standard and exhibit D of subpart A of 
part 1924. If the changes are requested after an option has been 
executed by an RH applicant, the change will be approved only if the 
applicant and the commitment holder agree to the request in writing. If 
a change will reduce or increase the appraised value of the property, 
RHCDS will revise the commitment price and inform the commitment 
holder. Also, in cases when the holder of a commitment reports to RHCDS 
that costs associated with the construction or repair of a dwelling 
have increased, RHCDS may increase the commitment price provided the 
property has not been optioned by an RH applicant, and RHCDS determines 
that the increase is clearly justified, the circumstances causing the 
price increase were beyond the commitment holder's control, and the 
value of the property is adequate to permit the increased commitment 
price and the price does not exceed the maximum cost established 
pursuant to Sec. 1944.16. A revised appraisal report will be prepared.
    (i) Cancellation of outstanding conditional commitments.
    (1) Conditional commitments may be canceled when construction of 
the dwelling is not begun within 60 days after the commitment is 
issued.
    (2) Conditional commitments will be canceled when construction is 
not in accordance with all RHCDS requirements, approved plans, 
specifications, or the applicable development standards, and the 
builder does not make corrections necessary for compliance.
    (j) [Reserved]
    (k) Builder's warranty. The builder or seller, as appropriate, will 
execute an RHCDS approved ``Builder's Warranty,'' or provide a 10-year 
insured warranty when construction is completed or the loan to buy the 
dwelling is closed.


Sec. 1944.46  Appeals.

    Any applicant who requests and is denied assistance or who has a 
right denied, reduced, or canceled may appeal the action in accordance 
with Pub. L. 103-354 to the National Appeals Division, U.S.D.A.


Secs. 1944.47-1944.48  [Reserved]


Sec. 1944.49  Administrative instructions.

    Detailed administrative instructions for administering this subpart 
are available in any RECD field office.


Sec. 1944.50  OMB control number.

    The reporting and recordkeeping requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0059. Public 
reporting burden for this collection of information is estimated to 
vary from 5 minutes to 1.5 hours per response, with an average of .41 
hours per response, including time for reviewing instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. 
Send comments regarding this burden estimate or any other aspect of 
this collection of information, including suggestions for reducing this 
burden to the Department of Agriculture, Clearance Officer, OIRM, Ag 
Box 7630, Washington, D.C. 20250; and to the Office of Management and 
Budget, Paperwork Reduction Project (OMB #0575-0059), Washington, D.C. 
20503.

Subpart J--Section 504 Rural Housing Loans and Grants


Sec. 1944.452  [Amended]

    18. Section 1944.452 is amended by removing the word ``handicap'' 
and adding the words ``physical or mental disability'' in their place 
and by revising ``FmHA'' to read ``RHCDS''.
    19. Section 1944.453(d) is added to read as follows:


Sec. 1944.453  Definitions.

* * * * *
    (d) Owner-occupant. Adults living in the household who have 
ownership rights in the property at the time a loan or grant is closed.
    20. Section 1944.456 is amended by removing ``County Supervisor'' 
and replacing it with ``loan approval official'' in paragraphs (a)(1) 
and (2); by inserting ``, environmental, tax monitoring,'' after the 
word ``architectural'' in paragraph (i); by removing the wording 
``handicapped or disabled persons'' and inserting ``persons who are 
developmentally disabled'' in paragraph (l); by inserting ``, not to 
exceed $300,'' after the word ``fees'' in paragraph (m) introductory 
text; by removing existing paragraph (m)(2); and by redesignating 
paragraph (m)(3) as paragraph (m)(2); and by adding a new paragraph 
(m)(3) to read as follows:


Sec. 1944.456  Loan and grant purposes.

* * * * *
    (m) *  *  *
    (3) The package is acceptable and the request is funded.
    21. Section 1944.457 is amended by revising the heading; by 
inserting the word ``loan'' after the word ``Maximum'' in paragraph 
(a)(1); by removing the word ``individual'' in paragraphs (a) (1) and 
(2) and inserting the words ``owner-occupant;'' by revising ``$15,000'' 
to read ``$20,000'' at the end of paragraph (a)(1); by revising 
``$5,000'' to read ``$7,500'' at the end of paragraph (a)(2); and by 
revising paragraph (a)(4) to read as follows:


Sec. 1944.457  Loan and grant restrictions and record keeping.

* * * * *
    (a) *  *  *
    (4) Document the amount of grant provided each grantee on a list of 
section 504 recipients and retain it in the office operational file. 
The list will contain the names of all owner-occupants at the time of 
the grant closing. The list must include the following information 
recorded at the time a section 504 grant is made:
    (i) Grantee's names, address, and case number; 

[[Page 55144]]

    (ii) Amount of the grant; and
    (iii) Date grant was closed.
* * * * *
    22. Section 1944.458 is amended by revising ``District Director'' 
to read ``next level approval official'' in paragraph (d)(3), and 
paragraphs (d) (1) and (2) are revised to read as follows:


Sec. 1944.458  Eligibility requirements.

* * * * *
    (d) *  *  *
    (1) Evaluation of personal resources will exclude the dwelling and 
a minimum adequate site, personal automobile, household goods, and 
liquid assets up to $7,500. Liquid assets are cash or other assets that 
can be converted to cash in 90 days or less. Real estate acreage larger 
than a minimum adequate site will not be excluded from the evaluation.
    (2) In cases where the family is experiencing unusually high 
medical expenses, the next level approval official may waive requiring 
the use of liquid assets down to $7,500.
* * * * *
    23. Section 1944.461 is amended by revising the term ``County 
Supervisor'' to read ``loan approval official'' in paragraphs 
(a)(1)(iii)(A) and (d)(2), by revising the term ``County Supervisors'' 
to read ``loan approval officials'' in the introductory text of 
paragraph (a), by removing the words ``loan plus any outstanding'' and 
inserting in their place ``and existing section 504'' in paragraph 
(b)(1), by removing the word ``remaindermen's'' before the word 
``interests'' and inserting the word ``remainder'' in its place in 
paragraph (b)(3) introductory text, and by revising paragraphs (b)(3), 
(i), (iii), and (iv) to read as follows:


Sec. 1944.461  Security and other requirements.

* * * * *
    (b) *  *  *
    (3) *  *  *
    (i) One or more of the holders of remainder interests is not 
legally competent (and there is no guardian or conservator who can 
consent to the mortgage), cannot be located, or the remainder rights 
are divided among such a large number of people that it is not 
practical to obtain the signatures of all the remainder interests;
* * * * *
    (iii) All legally competent persons (or the guardian or conservator 
for any person who is not legally competent) holding remainder 
interests who are using or occupying the dwelling sign the mortgage; 
and,
    (iv) The loan does not exceed the market value of the portion of 
the property represented by the remainder interests of the persons 
signing the mortgage.
* * * * *
    24. Section 1944.463 is amended by inserting the words ``or other 
construction development'' after the words ``safety hazards'' and by 
revising ``FmHA'' to read ``RHCDS'' in the first sentence of paragraph 
(a) introductory text; by inserting the words ``security is taken and 
the total section 504 indebtedness will be'' after the word ``when,'' 
by removing ``(including land sale contracts) is'' and by revising 
``$7,500'' to read ``$15,000'' in the first sentence of paragraph (d) 
introductory text; by removing the words ``Total FmHA indebtedness'' 
from the first sentence of paragraphs (e)(1) and (e)(2) and inserting 
the words ``section 504 assistance'' in their place; by revising the 
term ``County Supervisor'' to read ``loan approval official'' in the 
second sentence of paragraph (e)(1); and by revising paragraph (d)(1) 
to read as follows:


Sec. 1944.463  Technical services.

* * * * *
    (d) * * *
    (1) On a nonfarm tract or small farm, or on a leasehold interest in 
a nonfarm tract or small farm, an estimate of value (limited vs. 
complete appraisal) will be done in accordance with subpart C of part 
1922, based on the direct sales comparison approach only, utilizing the 
most recent comparable sales data available. The Uniform Residential 
Appraisal Report (URAR) will be used for this purpose. These appraisals 
will be done by RHCDS employees having a good understanding of 
appraisal concepts and adequate appraisal training. A small farm, for 
the purpose of this subpart, is a farm as defined in Sec. 1944.2 which 
has value primarily as a residence rather than for the production of 
agricultural commodities, and repayment of the RH loan is not dependent 
on farm income.
* * * * *
    25. Section 1944.467 is amended by removing paragraph (d); by 
removing and reserving paragraph (c) by redesignating paragraphs (e), 
(f), (g) and (h) as paragraphs (d), (e), (f) and (g) respectively; by 
revising the term ``County Supervisor'' to read ``loan approval 
official'' in paragraph (a)(1) and newly redesignated paragraph (e); 
and by revising the introductory text of paragraph (a), and paragraph 
(a)(3) to read as follows:


Sec. 1944.467  Processing applications.

    (a) Application. Application for Section 504 assistance will be 
made on a form provided by the Agency. The application will be 
processed in accordance with Sec. 1944.27 using applicable forms from 
exhibit E, available in any RECD field office.
* * * * *
    (3) Actions taken under this subpart are subject to the 
environmental requirements of subpart G of part 1940.
* * * * *


Sec. 1944.468  [Amended]

    26. Section 1944.468 is amended by removing the words ``must not be 
over 90 days old.'' at the end of paragraph (b) and inserting the words 
``are as prescribed in subpart A of this part.''


Sec. 1944.469  [Amended]

    27. Section 1944.469 is amended by revising the term ``County 
Supervisor'' to read ``loan approval official'' in the introductory 
paragraph; by removing and reserving paragraphs (b) and (c) and by 
adding the words ``or Deed of Trust'' to the name of Form FmHA 1927-1 
after the word ``Mortgage'' in paragraph (d).
    28. Section 1944.472 is amended by adding new language at the end 
of the paragraph to read as follows:


Sec. 1944.472  Subsequent Section 504 loans and/or grants.

    * * * If the area designation has changed from rural to nonrural, 
subsequent loans and grants will be made only for essential repairs.
    29. Section 1944.500 is revised to read as follows:


Sec. 1944.500  OMB control number.

    The reporting requirements contained in this regulation have been 
approved by the Office of Management and Budget (OMB) and have been 
assigned OMB control number 0575-0062. Public reporting burden for this 
collection of information is estimated to average 5 minutes per 
response, including time for reviewing instructions, searching existing 
data sources, gathering and maintaining the data needed, and completing 
and reviewing the collection of information. Send comments regarding 
this burden estimate or any other aspect of this collection of 
information, including suggestions for reducing this burden to the 
Department of Agriculture, Clearance Officer, OIRM, Ag Box 7630, 
Washington, D.C. 20250; and to the Office of Management and Budget, 
Paperwork Reduction Project (OMB #0575-0062), Washington, D.C. 20503.

[[Page 55145]]


PART 1951--GENERAL

Subpart D--Final Payment on Loans


Sec. 1951.155  [Amended]

    30. Section 1951.155(c) introductory text is amended to remove 
``FmHA'' and replace it with ``RHCDS, RBCDS, RUS, and/or CFSA'' in the 
next to the last sentence of the paragraph.

Subpart G--Borrower Supervision, Servicing, and Collection of 
Single Family Housing Loan Accounts


Sec. 1951.301  [Amended]

    31. Section 1951.301 is amended by revising ``Farmers Home 
Administration or its successor agency under Public Law 203-354'' to 
read ``Rural Housing and Community Development Service (RHCDS) or its 
successor agency,'' by revising ``FmHA or its successor agency under 
Public Law 103-354'' to read ``RHCDS,'' and replacing the word 
``handicap'' with ``disability''.
    32. Section 1951.304(d) is added to read as follows:


Sec. 1951.304  Definitions.

* * * * *
    (d) Interest credit. The terms ``interest credit'' and ``interest 
credit assistance,'' as they relate to Single Family Housing (SFH), are 
interchangeable with the term ``payment assistance.'' Payment 
assistance is the generic term for the subsidy provided to eligible SFH 
borrowers to reduce mortgage payments.''


Sec. 1951.312  [Amended]

    33. Section 1951.312, in paragraph (b), the heading is revised to 
read ``Payment Assistance'' and the words ``and Sec. 1951.313 of this 
subpart'' are added at the end of the paragraph.


Secs. 1951.313-1951.319  [Amended]

    34. Sections 1951.313 through 1951.319 are redesignated as 
Secs. 1951.314 through 1951.320, and a new Sec. 1951.313 is added to 
read as follows:


Sec. 1951.313  Payment assistance.

    (a) General. The correction, renewal, and cancellation of payment 
assistance agreements and payment assistance granted as a servicing 
action on existing loans is handled under this section. Payment 
assistance granted under this section will be approved and computed in 
accordance with subpart A of part 1944 of this chapter. Recapture of 
payment assistance will be calculated and repaid in accordance with 
subpart I of this part.
    (b) [Reserved]
    (c) Existing loans. Payment assistance may be granted at any time 
after loan closing if the following conditions are met.
    (1) The loan was approved on or after August 1, 1968.
    (2) The borrower personally occupies the dwelling unless determined 
uninhabitable by RHCDS or is temporarily not occupied for reasons such 
as seasonal or migratory employment, military call-up, or 
hospitalization.
    (3) The borrower's adjusted annual income does not exceed the 
moderate-income limit contained in exhibit C of subpart A of 
Instruction 1944 (available in any RECD field office).
    (i) If there is not a reasonable expectation that current income 
will continue for 12 months, income will be projected for the period 
expected rather than for 12 months. For example, if a borrower is 
receiving unemployment benefits, the payment assistance agreement will 
be effective for the period of the benefits. At the end of the benefit 
period or earlier if circumstances change, the borrower's situation 
will be reviewed and appropriate action taken based on current 
circumstances.
    (ii) [Reserved]
    (iii) If one coborrower has left the dwelling due to domestic 
discord, payment assistance may be based on the remaining borrower's 
income if the following conditions are met:
    (A) The remaining coborrower is occupying the dwelling, owns a 
legal interest in the property, is liable for the debt, and agrees to 
notify RHCDS if the other coborrower returns.
    (B) Legal papers have been filed to commence divorce or legal 
separation, a restraining order has been obtained, or one coborrower 
has not been living in the dwelling for at least 3 months.
    (iv) Payment assistance will not be granted if separation is due to 
work assignment or military orders.
    (4) The term of the loan at closing was at least 25 years. If an 
account has been reamortized and the term of the loan was at least 25 
years initially, payment assistance may be granted even though the term 
of the reamortized loan is less than 25 years. If the term of the loan 
was less than 25 years prior to reamortization, the reamortized term 
must be at least 25 years.
    (5) The amount of payment assistance granted will be based upon the 
borrower's adjusted family income compared to median income for the 
area where the property is located as determined by Sec. 1944.34(c).
    (6) Payment assistance may be granted retroactively for up to 6 
months if the conditions described in paragraphs (c)(1) through (c)(5) 
of this section existed at the time.
    (d) Correction. A corrected payment assistance agreement will be 
prepared under the following circumstances.
    (1) Change in income. RHCDS is not responsible for monitoring 
changes in a borrower's income. If RHCDS becomes aware of income 
changes outside of the renewal period that will change the amount of 
authorized payment assistance as defined in Sec. 1944.34(c), a new 12-
month agreement will be prepared effective the due date following the 
date RHCDS became aware of the change.
    (2) Insufficient payment assistance. If a borrower received less 
payment assistance than the borrower was eligible to receive, a 
corrected agreement will be prepared. The effective date of the 
corrected agreement will be the same date as the agreement being 
replaced.
    (3) Unauthorized assistance. If a borrower received unauthorized 
payment assistance, the account will be serviced in accordance with 
Subpart M of this part. This includes situations where the borrower did 
not advise RHCDS of income increases as required on the Payment 
Assistance/Deferral/Repayment form.
    (e) Renewal. 
    (1) Contractors. State Directors are authorized to enter into 
contracts for the processing of payment assistance renewals. Renewal 
contracts will cover all required actions except approval or 
cancellation of payment assistance.
    (2) Annual renewal period. Monthly, the Finance Office will provide 
each County Office or contractor a list of borrowers whose payment 
assistance agreements expire in approximately 120 days.
    (i) Borrower Interview. The borrower must be available for an 
interview during each renewal period.
    (ii) Determination of eligibility. Adjusted annual income will be 
determined and documented in the file. All borrowers will be required 
to submit a copy of their most recent Federal income tax return. In 
addition, income for wage earning borrowers will be verified by use of 
an RHCDS form (available in any RECD field office), and wage matching, 
if available. Borrowers receiving social security or retirement 
benefits must provide copies of their most recent benefit/award 
letters. Payment assistance will not be renewed if the borrower's 
adjusted family income exceeds the moderate-income limit, (available in 
any RECD field office) or if the borrower does not occupy the dwelling. 


[[Page 55146]]

    (iii) Renewals not completed prior to expiration of existing 
agreement. If not due to RHCDS error, the effective date of the renewal 
will be the next due date after the date of approval. If due to RHCDS 
error, the effective date will be the expiration date of the previous 
agreement.
    (3) Termination of foreclosure action. If a payment assistance 
agreement expired after a problem case report recommending foreclosure 
was submitted and the foreclosure action was terminated prior to sale 
or payment in full, payment assistance will be renewed effective as of 
the expiration date of the previous agreement if RHCDS is to continue 
with the loan.
    (f) Cancellation. Payment assistance will be canceled when any of 
the following conditions occur:
    (1) The borrower has never occupied the dwelling and RHCDS will not 
continue with the loan. Cancellation will be effective as of the date 
of loan closing or amortization effective date, whichever is 
applicable.
    (2) The borrower ceases to occupy the dwelling. Cancellation will 
be effective the payment due date following the date of non-occupancy 
if known; otherwise, the payment due date following the date RHCDS 
became aware of non-occupancy.
    (3) The borrower has received improper payment assistance as 
determined in accordance with subpart M of this part and a corrected 
agreement will not be submitted. Cancellation will be effective the 
payment due date following the date RHCDS became aware of the 
situation.
    (4) The borrower is no longer eligible for payment assistance due 
to an increase in income. Cancellation will be effective the payment 
due date following the date RHCDS became aware of the increase.
    (5) The borrower sells the property or title to the security 
property is otherwise transferred. Cancellation will be effective the 
payment due date subsequent to the date title transferred. When 
security property is acquired by RHCDS, cancellation will be effective 
the payment due date prior to the date of acquisition.
    (g) [Reserved]
    (h) Notice of right for review or appeal. All borrowers who request 
and are denied payment assistance or whose payment assistance is 
reduced, canceled, or not renewed may appeal or request a review in 
accordance with Pub. L. 103-354 to the National Appeals Division, 
U.S.D.A.
    (i) [Reserved]
    (j) Hardship waiver. The approval official may submit to the 
District Director any situation in which the borrower cannot meet the 
conditions of paragraphs (c) and (e) of this section and it is 
determined that without payment assistance the borrower would 
experience extreme hardship or lose the property through foreclosure. A 
waiver may be granted if the above can be determined and the borrower 
has no other means of retaining the dwelling.


Sec. 1951.314  [Amended]

    35. Section 1951.314 is amended by revising the reference 
``Sec. 1944.5(d)(11)'' to lead ``Sec. 1944.5(e)(2)'' in paragraph (e).


Sec. 1951.330  [Amended]

    36. Section 1951.330(b)(4) is amended by revising the reference 
``Sec. 1944.34'' to read ``Sec. 1951.313(d)(1)'' and by removing ``FmHA 
or its successor agency under Public Law 103-35'' and replace it with 
``RHCDS.''
    37. Section 1951.330(c) is amended by revising the reference 
``Secs. 1951.313 and 1951.314'' to read ``Secs. 1951.314 and 
1951.315''.

Subpart I--Recapture of Section 502 Rural Housing Subsidy

    38. Section 1951.401 is revised to read as follows:


Sec. 1951.401  Purpose.

    This subpart outlines the policies and procedures for the recapture 
of interest credits or Homeownership Assistance Program (HOAP) subsidy 
granted on initial and subsequent section 502 Rural Housing (RH) loans, 
transfers, and credit sales approved on or after October 1, 1979. The 
terms ``interest credit'' and ``interest credit assistance,'' as they 
relate to Single Family Housing (SFH), are interchangeable with the 
term ``payment assistance.'' Payment assistance is the generic term for 
the subsidy provided to eligible SFH borrowers to reduce mortgage 
payments.

Subpart J--Management and Collection of Nonprogram (NP) Loans

    39. Section 1951.457(b) is revised as follows:


Sec. 1951.457  Payments.

* * * * *
    (b) Payments not received when due. NP borrowers are expected to 
make scheduled payments when due. The Agency personnel are not required 
to provide program supervision, servicing, management or credit 
counseling in accordance the agency servicing instructions if payments 
are not received when due. To ensure consistency, a series of contacts 
will be made when servicing delinquent accounts. All actions taken, 
agreements reached and recommendations made in the servicing of the 
borrower's account are to be documented. When appropriate, the Agency 
may work out a reasonable agreement with an NP borrower to cure a 
delinquency; however, such an agreement will not usually exceed 1 year. 
Failure to make payments as agreed will result in actions determined by 
the agency to best protect the Government's interest. Collection of a 
delinquency from an Internal Revenue Service (IRS) offset will be used 
to the extent permitted by law.

Subpart M--Servicing Cases Where Unauthorized Loan or Other 
Financial Assistance Was Received--Single Family Housing

    40. Section 1951.602 is amended by redesignating paragraphs (g), 
(h), and (i) as paragraphs (h), (i), and (j), respectively; and adding 
a new paragraph (g) to read as follows:


Sec. 1951.602  Definitions.

* * * * *
    (g) Interest credit. The terms ``interest credit'' and ``interest 
credit assistance,'' as they relate to SFH, are interchangeable with 
the term ``payment assistance.'' Payment assistance is the generic term 
for the subsidy provided to eligible SFH borrowers to reduce mortgage 
payments.''
* * * * *


Sec. 1951.604  [Amended]

    41. Section 1951.604(a)(1)(iv)(E) is amended by revising 
``Sec. 1944.2(h)'' to read ``Sec. 1944.2.''
    42. Section 1951.608 is amended by revising the last sentence of 
paragraph (a)(3)(ii) to read as follows:


Sec. 1951.608  Decision on servicing actions.

    (a) * * *
    (3) * * *
    (ii) * * * A form provided by the Agency must be submitted 
simultaneously with the lump sum payment to cancel payment assistance 
or adjust the amount of payment assistance for each period of time 
unauthorized payment assistance was granted.
* * * * *

PART 1955--PROPERTY MANAGEMENT

Subpart A--Liquidation of Loans Secured by Real Estate and 
Acquisition of Real and Chattel Property

    43. Section 1955.3 is amended by adding the definition of 
``Interest credit'' to read as follows: 

[[Page 55147]]



Sec. 1955.3  Definition.

* * * * *
    Interest credit. The terms ``interest credit'' and ``interest 
credit assistance,'' as they relate to Single Family Housing (SFH) 
loans, are interchangeable with the term ``payment assistance.'' 
Payment assistance is the generic term for the subsidy provided to 
eligible SFH borrowers to reduce mortgage payments.
* * * * *


Sec. 1955.15  [Amended]

    44. Section 1955.15(d)(2)(iv) is amended in the next to last 
sentence by revising the reference ``Sec. 1951.314'' to read 
``Sec. 1951.315.''

Subpart B--Management of Property


Sec. 1955.63  [Amended]

    45. In Sec. 1955.63, paragraph (c) introductory text is amended by 
removing the words ``except the requirements relating to size and/or 
design features will not be considered'', and by revising the phrase 
``the Agency'' to read ``RHCDS''. Paragraph (c)(1) is amended by 
removing the words ``in size, design and/or cost.''

PART 1965--REAL PROPERTY

Subpart A--Servicing of Real Estate Security For Farmer Program 
Loans and Certain Note-Only Cases


Sec. 1965.26  [Amended]

    46. Section 1965.26(c)(2)(iv)(C) is amended by revising the 
reference to paragraph ``(c)(iv)(A)'' in the first sentence to read 
``(c)(2)(iv)(A)'' and to replace ``FmHA or its successor agency under 
Public Law 103-354'' with ``RHCDS'' each time it appears.
    47. Section 1965.26(c)(3) is amended by revising the reference to 
``Sec. 1951.314'' to read ``Sec. 1951.315'' in the last sentence of the 
paragraph.

Subpart C--Security Servicing for Single Family Rural Housing Loans

    48. Section 1965.101 is revised to read as follows:


Sec. 1965.101  Purpose.

    This subpart prescribes policies and procedures for servicing 
actions related to real estate which secures section 502 and section 
504 Rural Housing (RH) loans on nonfarm tracts or on farms when the 
borrower is indebted to Rural Housing and Community Development Service 
(RHCDS) for the RH loan only herein referred to as Single Family 
Housing (SFH) loans. Security servicing for RH loans when the borrower 
is also indebted for Farmer Program loans is under subpart A of part 
1965 of this chapter. Security servicing for nonprogram (NP) loans on a 
single family residence will be according to subpart J of part 1951 of 
this chapter. The terms ``interest credit'' and interest credit 
assistance,'' as they relate to SFH in this subpart, are 
interchangeable with the term ``payment assistance.'' Payment 
assistance is the generic term for the subsidy provided to eligible SFH 
borrowers to reduce mortgage payments.


Sec. 1965.126  [Amended]

    49. Section 1965.126 is amended as follows:
    a. In paragraph (b)(3) by removing the phrase ``FmHA or its 
successor agency under Public Law 103-354'' each time it appears and 
inserting the term ``RHCDS'' in its place and by removing the words 
``serve as a minimum adequate site for another dwelling.'' and 
inserting the words ``be subdivided and sold.'' in their place at the 
end of the first sentence.
    b. In paragraph (b)(4)(i) by removing the term ``FmHA'' in the 
first sentence and inserting the term ``RHCDS'' and by removing the 
second, third, and fourth sentences and the word ``however;'' and the 
comma preceding it in the last sentence.
    c. In paragraph (b)(4)(ii)(A) by removing the word ``clearly,'' and 
by removing the words ``size, design, and/or cost.'' and inserting in 
their place the word ``value.''
    d. In paragraph (b)(8) by removing the phrase ``FmHA or its 
successor agency under Public Law 103-354'' each time it appears and 
replacing it with the term ``RHCDS'' and by adding the words ``except 
as provided in Sec. 1944.17 of subpart A of part 1944 of this 
chapter,'' following the words ``being assumed'' in the first sentence.

    Dated: October 13, 1995.
Jill Long Thompson,
Under Secretary for Rural Economic and Community Development.
    Dated: October 13, 1995.
Dallas Smith,
Deputy Under Secretary for Farm and Foreign Agriculture Services.
[FR Doc. 95-26553 Filed 10-26-95; 8:45 am]
BILLING CODE 3410-07-U