Rural Housing Service, USDA § 3555.10

Pt. 3555 7 CFR Ch. XXXV (1–1–20 Edition)

PART 3555—GUARANTEED RURAL 3555.250 OMB control number. HOUSING PROGRAM Subpart F—Servicing Performing Loans Subpart A—General 3555.251 Servicing responsibility. 3555.252 Required servicing actions. Sec. 3555.253 Late payment charges. 3555.1 Applicability. 3555.254 Final payments. 3555.2 Purpose. 3555.255 Borrower actions requiring lender 3555.3 Civil rights. approval. 3555.4 Mediation and appeals. 3555.256 Transfer and assumptions. 3555.5 Environmental requirements. 3555.257 Unauthorized assistance. 3555.6 State and local law. 3555.258–3555.299 [Reserved] 3555.7 Exception authority. 3555.300 OMB control number 3555.8 Conflict of interest. 3555.9 Enforcement. Subpart G—Servicing Non-Performing 3555.10 Definitions and abbreviations. Loans 3555.11–3555.49 [Reserved] 3555.50 OMB control number. 3555.301 General servicing techniques. 3555.302 Protective advances. Subpart B—Lender Participation 3555.303 Traditional servicing options. 3555.304 Special servicing options. 3555.51 Lender eligibility. 3555.305 Voluntary liquidation. 3555.52 Lender approval. 3555.306 Liquidation. 3555.53 Contracting for loan origination. 3555.307 Assistance in natural disasters. 3555.54 Sale of loans to approved lenders. 3555.308–3555.349 [Reserved] 3555.55–3555.99 [Reserved] 3555.350 OMB control number. 3555.100 OMB control number. Subpart H—Collecting on the Guarantee. Subpart C—Loan Requirements 3555.351 Loan guarantee limits. 3555.101 Loan purposes. 3555.352 Loss covered by the guarantee. 3555.102 Loan restrictions. 3555.353 Net recovery value. 3555.103 Maximum loan amount. 3554.354 Loss claim procedures. 3555.104 Loan terms. 3555.355 Reducing or denying the claim. 3555.105 Combination construction and per- 3555.356 Future recovery. manent loans. 3555.357–3555.399 [Reserved] 3555.106 [Reserved] 3555.400 OMB control number. 3555.107 Application for and issuance of the loan guarantee. AUTHORITY: 5 U.S.C. 301; 42 U.S.C. 1471 et 3555.108 Full faith and credit. seq. 3555.109 Qualified mortgage. SOURCE: 78 FR 73941, December 9, 2013, un- 3555.110–3555.149 [Reserved] less otherwise noted. 3555.150 OMB control number.

Subpart D—Underwriting the Applicant. Subpart A—General 3555.151 Eligibility requirements. § 3555.1 Applicability. 3555.152 Calculation of income and assets. 3555.153–3555.199 [Reserved] This part sets forth policies for the 3555.200 OMB control number. Single Family Housing Guaranteed Loan Program (SFHGLP) administered Subpart E—Underwriting the Property by USDA Rural Development. It addresses the requirements of section 3555.201 Site requirements. 502(h) of the Housing Act of 1949, as 3555.202 Dwelling requirements. 3555.203 Ownership requirements. amended, and includes policies regard- 3555.204 Security requirements. ing originating, servicing, holding and 3555.205 Special requirements for condomin- liquidating SFHGLP loans. Any provi- iums. sion regarding the expenditure of funds 3555.206 Special requirements for commu- under this part is contingent upon the nity land trusts. availability of funds. 3555.207 Special requirements for Planned Unit Developments (PUDs). § 3555.2 Purpose. 3555.208 Special requirements for manufactured homes. (a) General. The purpose of the 3555.209 Rural Energy Plus loans. SFHGLP is to provide low- and mod- 3555.210–3555.249 [Reserved] erate-income persons who will live in

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rural areas with an opportunity to own § 3555.4 Mediation and appeals. decent, safe and sanitary dwellings and Whenever Rural Development makes related facilities. The SFHGLP offers a decision that will adversely affect a applicants without sufficient resources participant, the participant may pro- to provide the necessary housing on ceed with alternative dispute resolu- their own account, and unable to se- tion including mediation and a USDA cure the credit necessary for such National Appeals Division hearing in housing from other sources upon terms accordance with 7 CFR parts 1 and 11. and conditions, which the applicant The participant also may request an can reasonably be expected to fulfill informal review of the adverse decision without the guarantee, an opportunity made by Rural Development. Except to acquire, build, rehabilitate, im- when the adverse decision applies to a prove, or relocate dwellings in rural loss claim, the applicant or borrower areas. and the lender may participate in the (b) Demonstration programs. Rural De- appeal process. Adverse decisions made velopment may authorize limited dem- by the lender cannot be appealed unless onstration programs as allowed by law. concurrence by Rural Development was The objective of these demonstration required by this subpart and obtained programs will be to test new ap- by the lender. proaches to offering housing under the statutory authority granted to the § 3555.5 Environmental requirements. Secretary. Therefore, such demonstra- (a) Policy. Rural Development will tion programs may not be consistent consider environmental quality, eco- with all of the provisions contained in nomic, social, and other relevant fac- this part. However, any statutory tors in program development and deci- SFHGLP requirements will remain in sion-making processes. Rural Develop- effect. ment will take into account potential environmental impacts of proposed § 3555.3 Civil rights. projects by working with applicants, Rural Development, lenders, and other Federal agencies, American In- their agents must administer the pro- dian tribes, State and local govern- gram fairly, and in accordance with ments, and interested citizens and or- both the letter and the spirit of all ganizations in order to formulate ac- equal opportunity, equal credit oppor- tions that advance the program’s goals tunity and fair housing legislation, and in a manner that will protect environ- applicable executive orders. Loan guar- mental quality. antees, services, and benefits provided (b) Regulatory references. Loan proc- under this part shall not be denied to essing or servicing actions taken under any person based on race, color, na- this part must comply with the envi- tional origin, sex, religion, marital sta- ronmental review requirements in ac- tus, familial status, age (provided the cordance with 7 CFR part 1970, and 7 applicant has the capacity to enter CFR part 1924, which addresses lead- into a binding contract), handicap, re- based paint. ceipt of income from public assistance, (c) Agency responsibilities. Rural De- sexual orientation, or because the ap- velopment is responsible for compli- plicant has, in good faith, exercised ance with all applicable environmental any right under the Consumer Credit regulations and statutes. Protection Act (15 U.S.C. 1601 et seq.). (d) Lender and loan applicant respon- All activities under this part shall be sibilities. (1) Lenders must use due dili- accomplished in accordance with the gence in regard to potential environ- Fair Housing Act (42 U.S.C. 3601–3620), mental hazards to ensure the property the Equal Credit Opportunity Act (15 is decent, safe and sanitary and of suf- U.S.C. 1691), and Executive Order 11063 ficient value to adequately secure the as amended by Executive Order 12259, loan. The level of due diligence review as applicable. Rural Development’s to determine potential environmental civil rights compliance requirements hazards must be equivalent to the are provided in 7 CFR part 1901, subpart standards established by Fannie Mae, E. Freddie Mac, FHA, or the VA.

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(2) Mortgage loan transactions will meets the requirements of 42 U.S.C. be subject to the requirements of the 4012a (b)(1)(A). 1994 National Flood Insurance Reform (7) Rural Development will not guar- Act to determine if the dwelling is lo- antee loans for new or proposed homes cated in a Special Flood Hazard Area in an SFHA unless the lender obtains a (SFHA). final Letter of Map Amendment (3) On an as needed basis, lenders and (LOMA) or a final Letter of Map Revi- loan applicants will assist Rural Devel- sion (LOMR) that removes the property opment in obtaining such information from the SFHA, or performs an alter- as Rural Development needs to com- natives analysis in compliance with plete its environmental review and to the Agencies National Environmental cooperate in the resolution of environ- Policy Act regulation and obtains a mental problems. FEMA elevation certificate that shows that the lowest floor (including base- (4) Lenders will become familiar with ment) of the dwelling and all related Agency environmental requirements, building improvements are built at or so they can advise applicants and re- above the 100-year flood plain elevation duce the probability of unacceptable in compliance with the NFIP. applications being submitted to Rural Development. [78 FR 73941, Dec. 9, 2013, as amended at 81 (5) The lender must comply with Fed- FR 6428, Feb. 8, 2016; 81 FR 11048, Mar. 2, 2016] erally mandated flood insurance pur- § 3555.6 State and local law. chase requirements. Existing dwellings in a SFHA are not eligible under the Lenders will comply with applicable SFHGLP unless flood insurance State and local laws and regulations, through the FEMA National Flood In- including the laws of American Indian surance Program (NFIP) is available tribes. Supplemental guidance will be issued in the case of any conflict with for the community and flood insurance, or significant differences from provi- whether NFIP, ‘‘write your own,’’ or sions of this part. private flood insurance, is purchased by the borrower. The lender will re- § 3555.7 Exception authority. quire the borrower to obtain, and The Administrator of the Agency, or maintain for the term of the mortgage, a designee, may make an exception to flood insurance for any property lo- any requirement or provision of this cated in a SFHA, listing the lender as part or to address any omissions in this a loss payee. Purchase of existing part, when the Administrator, or des- structures within the federally regu- ignee, determines that application of lated floodplain will not require con- the requirement or failure to take ac- sideration of alternatives to avoid ad- tion would adversely affect the Govern- verse effects and incompatible development’s interest. Any exception must be ment in floodplains; consistent with the authorizing statute (6) The borrower must obtain, and and other applicable laws. continuously maintain for the life of the mortgage, flood insurance on the § 3555.8 Conflict of interest. security property in an amount suffi- (a) Applicant or borrower responsibility. cient to protect the property securing The applicant or borrower must dis- the guaranteed loan. Flood insurance close to the lender any prohibited rela- policies must be issued under the tionship or association with any Rural NFIP, or by a licensed property and Development employee, and the lender casualty insurance company author- must disclose that information to ized to participate in NFIP’s ‘‘Write Rural Development. Your Own’’ program or private flood (b) Lender responsibility. The lender insurance policy, as approved by the must disclose to Rural Development lender. Lenders are required to accept any prohibited relationship or associa- private flood insurance policies, when tion it, or any of its employees, has purchased by a borrower, that meet the with any Rural Development employee. requirements of 42 U.S.C. 4012a (c) Prohibited relationships and associa- (b)(1)(A). Lenders remain responsible to tions. Prohibited relationships and as- ensure a private flood insurance policy sociations include the following:

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(1) Immediate family members, in- suing 12 months. Adjusted annual including parents and children, whether come is used to determine whether an related by blood or marriage; applicant is income-eligible for a guar- (2) Close relatives, including grand- anteed loan, or interest assistance, if mother, grandfather, aunt, uncle, sis- applicable. Adjusted annual income ter, brother, niece, nephew, grand- provides for deductions to account for daughter, grandson, or first cousin, varying household circumstances and whether related by blood or marriage; expenses. See § 3555.152(c) for a com- (3) Any household residents; plete description of adjusted annual in- (4) Immediate working relationships, come. including coworkers in the same office, Agency. The Rural Housing Service of subordinates, and immediate super- the U.S. Department of Agriculture, visors; and Rural Development. (5) Close business associations, in- Agency employee. Any employee of the cluding business partnerships, joint Rural Housing Service, or any em- ventures, or closely held corporations. ployee of the Rural Development mis- (d) Result of disclosure. Disclosure of sion area who carries out SFHGLP prohibited relationships and associa- functions. tions under this section will not nec- Alien. See ‘‘Qualified alien.’’ essarily result in applicant, borrower Amortization. A gradual reduction of or lender ineligibility. Disclosures may the mortgage debt through equal result in reassignment with regard to monthly principal and interest pay- the loan guarantee in question so that ments sufficient to fully repay the un- no prohibited relationships or associa- paid principal balance over the mort- tions exist between the Rural Develop- gage term. ment employees responsible for loan guarantee transactions and lenders, Amortized payment. Equal monthly borrowers, or applicants. payments under a fully amortized mortgage loan that provides for the § 3555.9 Enforcement. scheduled payment of interest and principal over the term of the loan. Rural Development will take such actions as are appropriate and necessary Annual fee. A periodic amount that is to enforce the provisions of these regu- based on the average annual scheduled lations. Such actions will include, but unpaid principal balance of the loan not be limited to, reduction of the loss and is paid by the servicing lender to claim payment; termination of a lend- Rural Development on an annual basis er’s or servicer’s participation in the for issuance of a Loan Note Guarantee. SFHGLP; suspension and debarment of The fee may be passed on to the bor- participation in this or other Federal rower and included in the monthly programs; and, any other appropriate mortgage payment of a borrower and is administrative, civil, or criminal ac- used when calculating payment ratios. tions as allowed by law. Rural Develop- Annual income. The income of all ment may assess civil monetary pen- household members calculated accord- alties pursuant to Section 543 of the ing to § 3555.152(b). Annual income is Housing Act of 1949, 42 U.S.C. 1409s(b). used to determine adjusted annual income in § 3555.152(c) for program eligi- § 3555.10 Definitions and abbrevia- bility purposes. tions. Applicant. An individual applying to The definitions and abbreviations in a lender for a guaranteed loan. this section apply to this part. Area median income. The median in- Acceleration. Demand for immediate come in a specific locality, typically a repayment of the entire balance of a county or Metropolitan Statistical debt if the covenants in the promissory Area (MSA), as determined by the De- note, assumption agreement, or secu- partment of Housing and Urban Devel- rity instruments are breached. opment. Adjusted annual income. Income from Assumption. A method of selling real all household members who live or pro- estate wherein the property purchaser pose to live in the dwelling as their pri- accepts the liability for payment of an mary residence for all or part of the en- existing mortgage.

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Borrower. An individual obligated to years old or disabled, the surviving repay the loan guaranteed under the household member shall continue to be Guaranteed Rural Housing loan pro- classified as an elderly household for gram. the purpose of determining adjusted in- Combination construction and perma- come, even though the surviving mem- nent loan. A guaranteed loan on which bers may not meet the definition of an the Rural Development guarantee be- elderly family on their own, provided: comes effective at the time construc- (i) They occupied the dwelling with tion of an eligible single family hous- the deceased household member at the ing project begins. time of the death; Community land trust. A private non- (ii) If one of the surviving household profit community housing development members is the spouse of the deceased organization that is established to ac- household member, the surviving quire parcels of land, held in per- household shall be classified as an el- petuity, primarily for conveyance derly family only until the remarriage under long-term ground leases. See sec- or death of the surviving spouse; and tion 502(a)(3)(B) of the Housing Act of (iii) At the time of the death of the 1949, 42 U.S.C. 1472(a)(3)(B), as amended. deceased household member the dwell- Conditional commitment. Rural Devel- ing was financed with a Guaranteed opment’s agreement that a proposed Rural Housing loan. loan will be guaranteed if all condi- Escrow account. A trust account that tions and requirements established by is established by the lender or its serv- Rural Development are met. icing agent to hold funds collected Condominium project. A real estate from the borrower and allocated for the project in which each owner has title payment of real estate taxes, special to a unit in a building, an undivided in- assessments, hazard or flood insurance terest in the common areas of the premiums, and other similar expenses. project and sometimes the exclusive Existing dwelling. A dwelling that use of certain limited common areas. does not meet the definition of ‘‘new See § 526(d) of the Housing Act of 1949, dwelling’’. as amended. Extended-term loan modification. A Debarment. An action taken under 2 loan modification authorized under CFR part 180 or 417 to exclude a person § 3555.304 of this part, in which the lend- or entity from participating in Federal er reduces the interest rate to a level programs. at or below the maximum allowable in- Default. A loan is considered in de- terest rate and then extends the repay- fault when a payment has not been ment term up to a maximum of 40 paid after 30 days from the date it was years from the date of loan modifica- due. tion, but only as long as is necessary to Disability. See ‘‘Person with a dis- achieve the targeted mortgage pay- ability.’’ ment to income ratio. Dwelling. A house, manufactured Fannie Mae. A private, shareholder- home, or condominium unit, and re- owned company with a charter from lated facilities, such as a garage or Congress to support the housing fi- storage shed, used or to be used as the nance system, formerly officially borrower’s principal residence. known as the Federal National Mort- Elderly family. An elderly family con- gage Association. sists of one of the following: FEMA. The United States Depart- (1) A person who is the head, spouse, ment of Homeland Security, Federal or sole member of a household and who Emergency Management Agency. is 62 years of age or older, or who is FHA. The Federal Housing Adminis- disabled, and is an applicant or bor- tration of the United States Depart- rower; ment of Housing and Urban Develop- (2) Two or more persons who are liv- ment. ing together, at least one of whom is FHLB. Federal Home Loan Bank. age 62 or older, or disabled, and who is First-time homebuyer. Individuals who an applicant or borrower; or meet any one of the following three (3) Where the deceased borrower or criteria are considered first-time spouse in a household was at least 62 homebuyers:

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(1) An individual who has had no dence, except for live-in aides, foster ownership interest in a principal resi- children, and foster adults. dence during the three-year period end- Housing Act of 1949. The Act which, in ing on the date of loan closing. part, provides the authority for single (2) An individual who is a displaced family housing programs, codified at 42 homemaker and who, except for owning U.S.C. 1471 et seq. a home with a spouse, has had no own- HUD. The United States Department ership interest in a principal residence of Housing and Urban Development. during the three-year period ending on Interest assistance. Agency assistance the date of loan closing. Displaced available to eligible borrowers that re- homemakers include any individual duces the effective interest rate on the who is: guaranteed loan. Interest assistance (i) An adult; applied to borrowers whose loans were (ii) Unemployed or underemployed; approved as a subsidized guaranteed (iii) Experiencing difficulty in ob- loan between April 17, 1991, and Sep- taining or upgrading employment; and tember 30, 1991, and who entered into (iv) In recent years has worked pri- interest assistance and shared equity marily without remuneration to care for the home and family, but has not agreements at loan closing. worked full-time, full-year in the labor IRS. The Internal Revenue Service of force. the United States Department of the (3) An individual who is a single par- Treasury. ent and who, except for owning a home Leasehold estate. The right to use and with a spouse, has had no ownership in- occupy real estate for a stated term terest in a principal residence during and under conditions which have been the three-year period ending on the conveyed by a lease. date of loan closing. Single parents in- Lender. The entity making, holding, clude any individual who is: or servicing a loan that is guaranteed (i) Unmarried or legally separated; under the provisions of this part. and Live-in aide. A person who: (ii) Has custody or joint custody of (1) Lives with an elderly person or a one or more children, or is pregnant. person with a disability and Forbearance agreement. An agreement (2) Is essential to that person’s care between the lender and the borrower and well-being, and providing for temporary suspension of (3) Is not obligated for the person’s payments or a repayment plan that support, and calls for periodic payments of less than (4) Would not be living in the unit ex- the normal monthly payment, periodic cept to provide the support services. payments at different intervals, etc. to bring the account current. Loan modification. A written agree- Freddie Mac. A private, shareholder ment that permanently changes an owned company with a charter from original note term, such as the interest Congress to support the housing fi- rate, monthly payment, and/or the nance system, formerly officially principal balance due to capitalization known as the Federal Home Loan of interest or advances. Mortgage Corporation. Low-income. An adjusted income Funded buydown account. An escrow limit developed in consultation with account funded by the lender, seller, or HUD under 42 U.S.C. 1437a(b)(2)(D). through a third party gift, from which Manufactured home. A structure that monthly payments are released di- is built on a permanent foundation ac- rectly to the lender to reduce the cording to Federally Manufactured amount of interest on a loan, thereby Home Construction and Safety Stand- improving an applicant’s repayment ards established by HUD and found at ability. 24 CFR part 3280. Ginnie Mae. Government National Market value. The value of the prop- Mortgage Association, a Government- erty as determined by a current ap- owned corporation within HUD. praisal made in accordance with the Household. All persons routinely liv- Uniform Standards of Professional Ap- ing in the dwelling as principal resi- praisal Practices.

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Median income. The area median in- other amounts recovered, and deduct- come, adjusted for family size, as es- ing the costs associated with liquida- tablished by HUD. tion, acquisition and sale of the prop- Moderate income. The greater of: erty. Net recovery value is calculated (1) 115 percent of the U.S. median differently depending on the type of family income, disposition, as contained in § 3555.353. (2) The average of the state-wide and New dwelling. A dwelling that is to be state non-metro median family in- built is under construction, or a dwell- come, ing that is less than one year old and (3) 115/80ths of the area low-income has never been occupied. A manufac- limit adjusted for household size for tured home is considered a new unit if the county or MSA where the property the manufacturer’s date is within 12 is, or will be, located. months of the purchase contract and Modest housing. For purposes of this the unit has never been occupied or in- part, ‘‘modest housing’’ is the housing stalled at any other location as other- that a low- or moderate-income bor- wise provided by Rural Development. rower can afford based on their repay- Participant. For the purpose of ap- ment ability. peals, a participant is any individual or Mortgage. A form of security instru- entity that has applied for, or whose ment or consensual lien on real prop- right to participate in or receive a pay- erty including a real estate mortgage ment, loan guarantee, or other benefit, and a deed of trust. is affected by an Agency decision in ac- Mortgage credit certificate. A certifi- cordance with 7 CFR 11.1. cate issued by an authorized State or Person with a disability. Any person local housing finance agency that doc- who has a physical or mental impair- uments a Federal income tax credit ment that substantially limits one or awarded to a first-time homebuyer and/ more major life activities, including or low- or moderate-income home- functions such as caring for one’s self, buyer. The Federal income tax credit performing manual tasks, walking, see- reduces the applicant’s Federal income ing, hearing, speaking, breathing, tax liability, which improves his or her learning and working, has a record of repayment ability. such an impairment, or is regarded as Mortgage payment to income ratio. As having such an impairment. used in § 3555.304, this ratio is the Planned Unit Development. For the monthly mortgage payment (principal, purpose of this definition, a condo- interest, taxes, and insurance) divided minium is not a Planned Unit Develop- by the borrower’s gross monthly in- ment (PUD). A PUD is a development come. that has all of the following character- Mortgage recovery advance. A mort- istics: gage recovery advance is funds ad- (1) The individual unit owners own a vanced by the lender on behalf of a bor- parcel of land improved with a dwell- rower to satisfy the borrower’s arrear- ing. This ownership is not in common age, pay legal fees and foreclosure with other unit owners; costs related to a cancelled foreclosure (2) The development is administered action, and reduce principal. Upon re- by a homeowners association that owns quest, RHS will reimburse the lender and is obligated to maintain property for eligible mortgage recovery ad- and improvements within the develop- vances under § 3555.304. ment (for example, greenbelts, recre- MSA (Metropolitan Statistical Area). A ation facilities and parking areas) for geographic entity defined by the the common use and benefit of the unit United States Office of Management owners; and and Budget. (3) The unit owners have an auto- Net family assets. The value of assets matic, non-severable interest in the available to a household, as contained homeowners association and pay man- in § 3555.152(d). datory assessments. Net recovery value. The amount avail- Pre-foreclosure sale. A sale of property able to apply to the outstanding unpaid in which the lender and borrower agree loan balance after considering the to accept the proceeds of the sale to value of the security property and satisfy a defaulted mortgage, even

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though this may be less than the Settlement date. The settlement date, amount owed on the mortgage, in order for the purpose of loss calculation, is to avoid foreclosing on the property. the later of the following: Primary residence. See ‘‘Principal resi- (1) Actual foreclosure date; dence.’’ (2) The closing date, if sold to a third Principal residence. The home domi- party at the foreclosure sale; cile physically occupied by the owner (3) The date the borrower sells the for the major portion of the year and property to a third party in order to the address of record for such activities avoid or cure a default situation, with as Federal income tax reporting, voter prior approval of the lender; and registration, occupational licensing, (4) When title is acquired to the secu- etc. rity following the expiration of any Prior lien. A lien against the security state-required redemption or confirma- property that is superior in right to the tion period. lender’s debt instrument. SFHGLP. Single Family Housing Qualified alien. See the definition of Guaranteed Loan Program. The the term under Section 401 of the Per- SFHGLP guarantees loans under sec- sonal Responsibility and Work Oppor- tion 502 of the Housing Act of 1949. tunity Reconciliation Act of 1996 Under the guarantee, the holder of the (PRWORA) (8 U.S.C. 1641). loan note may be reimbursed by Rural Real estate taxes. Taxes and assess- Development for all or part of a loss in- ments estimated to be due and payable curred if a borrower defaults on a loan. on the property. Short sale. A type of voluntary liq- REO (Real Estate Owned). Property uidation (also referred to as a that formerly served as security for a preforeclosure sale or short payoff) guaranteed loan and for which the where a borrower and the lender who lender holds title. holds the mortgage on the property Repayment income. Used to determine agree to sell the property at fair mar- whether an applicant has the ability to ket value, but for less than the current make monthly loan payments. Repay- outstanding debt (including any miss- ment income may include amounts ex- ing payments, late fees, penalties, and cluded for the purpose of determining advances for taxes and the like). adjusted annual income. See Streamlined-assist refinance. A stream- § 3555.152(a) for a complete description lined-assist refinance is an abbreviated of repayment income. method of refinancing which does not Rural area. The definition of ‘‘rural require a credit report, or the calcula- area’’ is found in section 520 of the tion of loan-to-value or debt-to-income Housing Act of 1949, as amended. ratios. Lenders must verify that the Rural Development. A mission area borrower has been current on their ex- within USDA that includes the Rural isting loan for the preceding 12 month Housing Service, the Rural Utilities period. Service, and the Rural Business-Coop- Supplemental loan. A guaranteed loan erative Service. made in conjunction with a transfer Scheduled payment. The monthly in- and assumption to provide funds to stallment on a promissory note, as complete the transaction. modified by an interest assistance Suspension. An action taken under 2 agreement or forbearance agreement, CFR parts 180 or 417 to exclude a person plus escrow payments. or entity from participation in Federal Secured loan. A loan that is programs for a temporary period, pend- collateralized by property so that in ing completion of an investigation of the event of a default on the loan, the wrongdoing. property may be sold to pay down the Total debt to income ratio. Total debt debt. to income ratio is defined as the bor- Security instrument. The mortgage, or rower’s monthly mortgage payment deed of trust, that secures the promis- plus all recurring monthly debt divided sory note or assumption agreement. by the borrower’s gross monthly in- Security property. All the real prop- come. erty that serves as collateral for a Unauthorized assistance. Any guaran- guaranteed loan. teed loan or interest assistance for

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which there was no regulatory or stat- ing lines of credit to finance loan origi- utory authorization, or for which the nation and or construction financing. borrower was not eligible. [78 FR 73941, Dec. 9, 2013, as amended at 81 United States citizen. An individual FR 26464, May 3, 2016; 84 FR 29038, June 21, who resides as a citizen in any of the 50 2019; 84 FR 35006, July 22, 2019] States, the District of Columbia, the EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. Commonwealth of Puerto Rico, the 26, 2019, § 3555.10 was amended in the defini- U.S. Virgin Islands, Guam, American tion of Settlement date by revising the intro- Samoa, the Commonwealth of the ductory text and adding paragraph (5), effec- Northern Marianas, the Federated tive April 24, 2020. For the convenience of the user, the added and revised text is set forth States of Micronesia, the Republic of as follows: Palau, or the Republic of the Marshall Islands. § 3555.10 Definitions and abbreviations. USDA. The United States Depart- ment of Agriculture. * * * * * U.S. non-citizen national. A person Settlement date. The settlement date, for born in American Samoa or Swains Is- the purpose of loss calculation, is: land on or after the date the U.S. acquired American Samoa or Swains Is- * * * * * land, or a person whose parents are (5) The date title is acquired upon recorda- U.S. non-citizen nationals. tion of a deed-in-lieu of foreclosure, with VA. United States Department of prior approval of the lender. Veterans Affairs. Veterans’ preference. A preference in * * * * * loan processing extended to a SFHGLP loan applicant who served on active §§ 3555.11–3555.49 [Reserved] duty and has been discharged or re- § 3555.50 OMB control number. leased from the active forces on condi- The report and recordkeeping re- tions other than dishonorable from the quirements contained in this subpart United States Army, Navy, Air Force, have been approved by the Office of Marine Corps, or Coast Guard. The Management and Budget and have been preference applies to the service per- assigned OMB control number 0575– son, or the family of a deceased serv- 0179. iceperson who died in service before the termination of such war or such pe- Subpart B—Lender Participation riod or era. The applicable timeframes are: § 3555.51 Lender eligibility. (1) During the period of April 6, 1917, A lender must meet the requirements through March 31, 1921; described in this section to be approved (2) During the period of December 7, for participation in the SFHGLP. 1941, through December 31, 1946; (a) Ability to underwrite and service (3) During the period of June 27, 1950, loans. The lender must have a dem- through January 31, 1955; onstrated ability to underwrite and (4) For a period of more than 180 service single-family home loans. A days, any part of which occurred after lender will be considered to have such January 31, 1955, but on or before May a demonstrated ability if it qualifies as 7, 1975; one of the following: (1) A State Housing Agency; (5) During the period beginning Au- (2) A lender approved as a supervised gust 2, 1990, and ending January 2, 1992, or nonsupervised mortgagee by HUD provided, of course, that the veteran is with direct endorsement authority for otherwise eligible; or submission of applications for Federal (6) During any other period as pre- Housing Mortgage Insurance; scribed by Presidential proclamation (3) A supervised or nonsupervised or law. mortgagee with authority to close VA- Warehouse lender. A non-depository guaranteed loans on the automatic lender who utilizes short-term revolv- basis;

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(4) A lender approved by Fannie Mae of which include, but are not limited for single-family loans; to: (5) A lender approved by Freddie Mac (i) Evidence of a written plan when for single-family loans; contracting for escrow services. (6) A Farm Credit System institution (ii) Evidence the lender has serviced that provides documentation of its single-family residential mortgage ability to underwrite and service sin- loans in the year prior to request lend- gle-family loans. Lenders who are a er approval to participate in the Farm Credit System lender with direct SFHGLP. lending authority meet demonstrated (b) SFHGLP participation requirements. ability; Lenders and their agents must comply (7) A lender participating in other with the following requirements: Rural Development or Farm Service (1) Keep up to date, and comply with, Agency guaranteed loan programs that all Agency regulations and handbooks, provide documentation of its ability to including all amendments and revi- underwrite and service single family sions of program requirements and loans. Documentation criteria for policies. Lenders who originate a mini- other Rural Development or Farm mal number loans, as determined by Service Agency guarantee loan pro- the Agency, in a 24 month time frame grams require an active lender agree- may be required to take updated train- ment; or ing to ensure a lender’s continued (8) A Federally supervised lender that knowledge of the program; provides documentation of its ability (2) Regularly check Rural Develop- to originate, underwrite and service ment’s Web site for new issuances re- single-family loans. Acceptable sources lated to the program; of supervision include: (3) Underwrite loans according to (i) Being a member of the Federal Re- Rural Development regulations and serve System; process and approve loans in accord- (ii) The Federal Deposit Insurance ance with program instructions; Corporation (FDIC); (4) Review loan applications for accu- (iii) The National Credit Union Ad- racy and completeness, ministration (NCUA); (5) Ensure that applicant income lim- (iv) The Office of Thrift Supervision its are not exceeded; (OTS); (6) Ensure that borrowers have ade- (v) The Office of the Comptroller of quate loan repayment ability and ac- the Currency (OCC). ceptable credit histories; (vi) The Federal Housing Finance (7) Ensure that loss claims include Board regulating lenders within the only supportable costs; Home Loan Bank FHLB system. (8) Cooperate fully with Agency re- (9) A lender may demonstrate its porting and monitoring requirements; ability to originate and underwrite (9) Comply with limitations on loan loans by submitting appropriate docu- purposes, loan limitations, interest mentation, examples of which include, rates, and loan terms; but are not limited to: (10) Inform Rural Development im- (i) A summary of residential mort- mediately after the sale, transfer, or gage lending activity. change of servicers of any Agency (ii) Written criteria outlining the guaranteed loan; lender’s policy and procedures for orig- (11) Maintain reasonable and prudent inating, underwriting and closing resi- business practices consistent with gen- dential mortgage loans. erally accepted mortgage industry (iii) Evidence of an experienced loan standards, such as maintaining fidelity underwriter on staff. bonding; (iv) Certification the lender will con- (12) Remain responsible for servicing tract with an Agency-approved lender even if servicing has been contracted to meeting the criteria to participate in a third party; the program as a servicer. (13) Use Rural Development, HUD, (10) A lender may demonstrate its Fannie Mae, or Freddie Mac forms, un- ability to service loans by submitting less otherwise approved by Rural De- appropriate documentation, examples velopment;

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(14) Maintain eligibility under para- (b) Conditions of approval. The lender graph (a) of this section; must provide evidence to support their (15) Notify Rural Development if ability to originate, underwrite and/or there are any material changes in orga- service SFHGLP loans as outlined in nization or practices; § 3555.51(a), including evidence of the (16) Be neither debarred nor sus- lender’s internal loan criteria and qual- pended from participation in Federal ity control. New lenders will be subject programs, not debarred, suspended or to mandatory training prior to lender sanctioned under state licensing and approval in accordance with Agency certification laws and regulation; procedures. (17) Notify Rural Development in the (c) Termination of approval. Lender event of its bankruptcy or insolvency; approval may be terminated in any of (18) Remain free from default and de- the following situations: linquency on any debt owed to the Fed- (1) Lapse of any eligibility requirement. eral government; In the event that a lender fails to meet (19) Allow Rural Development or its any of the requirements described in representative access to the lender’s § 3555.51, the lender must notify Rural records, including, but not limited to, Development immediately. Rural De- records necessary for on-site and desk velopment may terminate the lender’s reviews of the lender’s operation and the operations of any of its agents to approval upon written notice and in ac- verify compliance with Agency regula- cordance with the lender’s agreement. tions and guidelines; The Agency may take other appro- (20) Maintain adequate operational priate corrective action due to non- quality control and reporting proce- compliance with any of the require- dures to prevent mortgage fraud; ments in this part and the lender’s (21) Maintain complete loan files agreement. A lender whose approval with all required documentation that has been terminated must sell any is accessible by the Agency upon re- SFHGLP loans it holds to an approved quest for review; and lender immediately, and in no event (22) Execute a lender’s agreement later than 6 months, after termination provided by Rural Development. of approval. (2) Voluntary withdrawal. The lender EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. 26, 2019, § 3555.51 was amended by adding a may choose to end participation in the new second sentence to paragraph (b)(1), ef- SFHGLP at any time. If the with- fective Apr. 24, 2020. For the convenience of drawing lender has originated SFHGLP the user, the added text is set forth as fol- loans and obtained conditional com- lows: mitments but has not closed the loans, § 3555.51 Lender eligibility. or is holding or servicing SFHGLP loans, the lender must make arrange- ments prior to withdrawing for the * * * * * transfer of such loans to lenders ap- (b) * * * proved to participate in the SFHGLP. (1) * * * Lenders must also comply with all other applicable federal, state, and local § 3555.53 Contracting for loan origina- laws, rules, and requirements, including tion. those under the purview of the Consumer Fi- nancial Protection Bureau, such as the Real Lenders may contract with mortgage Estate Settlement Procedures Act and the brokers, non-approved lenders, or other Truth in Lending Act. * * * entities for loan origination services, closing services, or both, provided the * * * * * loan is transferred immediately after closing to an Agency approved lender § 3555.52 Lender approval. to which the guarantee will be issued. (a) Initial approval. The lender must The approved lender is responsible for apply for and receive approval from ensuring that the loan is properly un- Rural Development to participate in derwritten, obtaining the conditional the SFHGLP. Application forms are commitment, ensuring that the loan is available from Rural Development. properly closed, and ensuring that all

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closing costs, financing, and settle- (1) Purchase and installation of es- ment fees meet Agency program re- sential household equipment in the quirements. dwelling such as wall-to-wall carpeting, ovens, ranges, refrigerators, § 3555.54 Sale of loans to approved washing machines, clothes dryers, lenders. heating and cooling equipment, and Lenders may sell SFHGLP loans only other similar items as long as the to other Agency-approved lenders, equipment is conveyed with the dwell- Fannie Mae, Freddie Mac, or the Fed- ing and such items are typically in- eral Home Loan Banks. In such a sale, cluded in the purchase of similar dwell- the purchasing lender acquires all ings in the area. rights of the selling lender under the (2) Purchase and installation of en- Loan Note Guarantee, and assumes all ergy-saving measures. of the selling lender’s obligations con- (3) Site preparation including grad- tained in any note, security instru- ing, foundation, plantings, seeding or ment, or Loan Note Guarantee in con- sodding, trees, walks, fences, and drive- nection with the loan purchased. The ways to the home. purchasing lender may be subject to (4) A supplemental loan to provide any defenses, claims, or offsets that funds for seller equity or essential re- Rural Development would have had pairs when an existing guaranteed loan against the selling lender if the selling is assumed simultaneously. lender had continued to hold the loan. (5) Special design features or equip- The lender must notify Rural Develop- ment when necessary because of a ment immediately upon the sale or physical disability of the applicant or a transfer of servicing of a SFHGLP member of the household. loan. (6) Loan funds may be used to pay for reasonable and customary expenses re- §§ 3555.55–3555.99 [Reserved] lated to obtaining the loan. Allowable loan expenses include: § 3555.100 OMB control number. (i) Legal, architectural, and engi- The report and recordkeeping re- neering fees; quirements contained in this subpart (ii) Title exam, title clearance and have been approved by the Office of title insurance; Management and Budget and have been (iii) Transfer taxes and recordation assigned OMB control number 0575– fees; 0179. (iv) Appraisal, property inspection, surveying, environmental, tax moni- Subpart C—Loan Requirements toring, and technical services; (v) Homeownership education. § 3555.101 Loan purposes. (vi) Reasonable and customary loan discount points to reduce the note in- Loan funds must be used to acquire a terest rate from the rate authorized in new or existing dwelling to be used by § 3555.104(a). the applicant as a principal residence. (vii) Reasonable and customary non- (a) Eligible purposes. Loan funds may recurring closing costs associated with be used for: the mortgage transaction that do not (1) The construction or purchase of a exceed those charged other applicants new dwelling; by the lender for similar transactions (2) The cost of acquisition of an exist- such as FHA-insured or VA-guaranteed ing dwelling; first mortgage loans. If the lender does (3) The cost of repairs associated not participate in such programs, the with the acquisition of an existing loan closing costs may not exceed dwelling; or those charged other applicants by the (4) Acquisition and relocation of an lender for a similar loan program that existing dwelling. requires conventional mortgage insur- (b) Eligible costs. Loan funds also may ance or guarantee. Allowable closing be used to pay for the following items costs include the actual cost of credit associated with the acquisition of a reports, the loan origination fee, set- dwelling: tlement fee, deposit verification fees,

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document preparation fees (if per- (iv) An appropriate dwelling will be formed by a third party not controlled constructed on the site. by the lender), and other reasonable (3) The loan is a present Section 502 and customary costs as determined by Direct or guaranteed loan, authorized Rural Development. Payment of find- under the Housing Act of 1949 subject er’s fees or placement fees for the re- to the following additional require- ferral of an applicant to the lender is ments: prohibited. (i) Three options for refinancing may (viii) Reasonable connection fees, as- be offered: Streamlined, non-stream- sessments, or the pro rata installment lined, and streamlined-assist. Other costs for utilities such as water, sewer, than provided in this paragraph, no electricity and gas for which the bor- cash out is permitted for any refinance. rower is responsible. Documentation costs and underwriting (ix) The prorated portion of real es- requirements of subparts D, E, and F of tate taxes that is due and payable on this part apply to streamlined and non- the property at the time of closing and streamlined refinances. to establish escrow accounts for real (A) Lenders may offer a streamlined estate taxes, hazard and flood insur- refinance for existing Section 502 Guar- ance premiums, and related costs. anteed loans, which does not require a (x) The amount of the loan up-front new appraisal. The lender will pay off guarantee fee required by § 3555.107(g). the balance of the existing Section 502 (xi) The cost of establishing a cush- Guaranteed loan. ion in the mortgage escrow account for (B) Lenders may offer non-stream- payment of the annual fee required by lined refinancing for existing Section § 3555.107(h), not to exceed 2 months. 502 Guaranteed or Direct loans, which (xii) If the seller or other third party requires a new and current market pays any of the costs described in this value appraisal. The amount of the new section, the amount of the costs paid loan must be supported by sufficient by the seller or other third party may equity in the property as determined not be included in the loan amount to by an appraisal. The appraised value be guaranteed. may be exceeded by the amount of up- (c) Combination construction and per- front guarantee fee financed, if any, manent loan. Loan funds may be used when using the non-streamlined op- and Rural Development will guarantee tion. a ‘‘combination construction and per- (C) A streamlined-assist refinance manent loan’’ as defined at § 3555.10, loan is a special refinance option avail- during the term of construction and able to existing Section 502 direct and prior to the borrower occupying the guaranteed loan borrowers. Applicants property, subject to the conditions in must meet the income eligibility re- § 3555.105. quirements of § 3555.151(a), and must (d) Refinancing. Refinancing is per- not have had any defaults during the 12 mitted only in the following situations: month period prior to the refinance (1) The loan may be used for perma- loan application. There are no debt-to- nent financing when temporary financ- income calculation requirements, no ing to construct a new dwelling, or to credit report requirements, no property purchase and improve an existing inspection requirements, and no loan- dwelling, is arranged as a part of the to-value requirements. There is no ap- loan package. praisal requirement except for Section (2) In the case of loans for a site on 502 direct loan borrowers who have re- which a dwelling is not constructed ceived a subsidy. prior to issuance of the Loan Note (ii) The interest rate of the new loan Guarantee, refinancing is permitted if: must be fixed and must not exceed the (i) The site is free and clear of debt; interest rate of the original loan being (ii) The debt to be refinanced was in- refinanced. curred for the sole purpose of pur- (iii) Existing borrowers seeking to re- chasing the site; finance must have demonstrated their (iii) The applicant is unable to ac- ability to meet payment demands by quire adequate housing without refi- maintaining a current account for the nancing; and 180 days prior to application.

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(iv) The loan security must include (viii) The lender pays a guarantee fee the same property as the original loan as established by the Agency. and be owned and occupied by the bor- (ix) The refinance loan may be sub- rowers as their principal residence. ject to an annual fee as established by (v) The maximum loan amount can- the Agency; and not exceed the balance of the loan (x) The Agency may limit the num- being refinanced including accrued in- ber of guaranteed loans made for refi- terest, the guarantee fee, and reason- nancing purposes based on market con- able and customary closing costs. ditions and other appropriate factors. When a direct loan is refinanced, any [78 FR 73941, Dec. 9, 2013, as amended at 81 recapture amount owed may be in- FR 6428, Feb. 8, 2016; 81 FR 26464, May 3, 2016] cluded in the loan amount or deferred as long as the recapture amount takes § 3555.102 Loan restrictions. a subordinate lien position to the new A guarantee will not be issued if loan SFHGLP loan. A discount on the recap- funds are to be used for: ture amount may be offered if the bor- (a) Existing manufactured homes. Pur- rower does not defer recapture or in- chase of an existing manufactured cludes the recapture amount in the home, except as provided in new loan. § 3555.208(b)(3); (vi) Two options for refinancing can (b) Income producing land or buildings. be offered. Lenders may offer a stream- Purchase or improvement of land or lined refinance for existing Section 502 buildings that are typically used prin- Guaranteed loans, which does not re- cipally for income-producing purposes; quire a new appraisal. Streamlined fi- (c) Business or income-producing enter- nancing may not be available for exist- prise. Purchase or the construction of ing Section 502 Direct loans. The lender buildings which are largely or in part will pay off the principal balance of the specifically designed to accommodate a existing Section 502 Guaranteed loan. business or income-producing enter- The new loan amount cannot include prise; any accrued interest, closing costs or (d) Loan discount points. Loan dis- lender fees. The refinance up-front count points, except as provided in guarantee fee as established by the § 3555.101(b)(6)(vi); Agency can be included in the loan to (e) Refinancing. Refinancing, except be refinanced to the extent financing as provided in § 3555.101(d); does not exceed the original loan (f) Buydown. Establishing a buydown amount. Lenders may offer non- account; streamlined refinancing for existing (g) Lease. Payments on a lease; or Section 502 Guaranteed or Direct loans, (h) Seller concessions. Purchasing a which requires a new and current mar- home if the seller, or other interested ket value appraisal. The new loan may third party, contributes more than 6 include the principal and interest of percent, unless otherwise provided by the existing Agency loan, reasonable the Agency, of the property’s sales closing costs and lenders fees to extent price toward the purchaser’s mortgage there is sufficient equity in the prop- financing costs, closing costs, escrow erty as determined by an appraisal. accounts, furniture or other giveaways. The appraised value may be exceeded by the amount of up-front guarantee § 3555.103 Maximum loan amount. fee financed, if any, when using the The amount of the loan must not ex- non-streamlined option. Documenta- ceed the lesser of: tion, costs, and underwriting require- (a) Market value. The market value of ments of subparts D, E, and F of this the property as determined by an ap- part apply to refinances, unless other- praisal that meets Agency require- wise provided by the Agency. ments plus the amount of the up-front (vii) Lenders may require property loan guarantee fee required by inspections and/or repairs as a condi- § 3555.107(g), or tion to loan approval. Expenses related (b) Purchase price and acquisition to property inspections and repairs re- costs. The total of the purchase price quired of the lender may not be fi- and all eligible acquisition costs as nanced into the new loan amount. permitted by § 3555.101.

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(c) Newly constructed dwelling—limited § 3555.105 Combination construction to 90 percent. A newly constructed and permanent loans. dwelling that does not meet the defini- Guarantees of combination construction of an existing dwelling, as defined tion and permanent loans are subject at § 3555.10, and cannot meet the inspec- to the following conditions: tion and warranty requirements of (a) Lender requirements. In addition to § 3555.202(a) of this subpart is limited to other lender requirements of this part, 90 percent of the present market value. lenders seeking guarantees of combina- The dwelling must meet or exceed the tion construction and permanent loans International Energy Conservation must: Code (IECC) in effect at the time of (1) Have two or more years experi- construction. ence making and administering con- [78 FR 73941, Dec. 9, 2013, as amended at 81 struction loans. FR 6428, Feb. 8, 2016] (2) Submit an executed construction contract with each loan application § 3555.104 Loan terms. package. (a) Interest rate. The loan must be (3) Review and approve construction written at an interest rate that: contractors or builders. The lender will conduct due diligence investigations to (1) Is fixed over the term of the loan; determine that the contractor or build- (2) Shall be negotiated between the er meets the minimum requirements in lender and the borrower to allow the paragraph (b) of this section. Evidence borrower to obtain the best available of the contractor or builder’s compli- rate in compliance with all applicable ance must be made available by the laws. lender upon request of the Agency. (3) If the interest rate increases be- (4) Close the loan prior to the start of tween the time of the issuance of the construction with proceeds disbursed conditional commitment and the loan to cover the cost of, or balance owed closing, the lender will submit appro- on, the land and the balance into es- priate documentation and underwriting crow. analysis to confirm that the applicant (5) Pay out monies from escrow to is still eligible. the builder during construction. The (4) The warehouse lender may charge lender must obtain written approval an interest rate for interim construc- from the borrower before each draw tion financing that exceeds the under- payment is provided to the builder. The lying promissory note rate. After con- borrower and lender are jointly respon- struction ends, the interest rate must sible for approving disbursements dur- revert to a rate that is no higher than ing the construction phase. The lender the underlying promissory note rate. must ensure that the appropriate work The Agency reserves the right to estab- has been completed prior to releasing lish a maximum amount for the in- each draw. The Agency may require terim construction financing interest the lender to submit a draw and dis- rate in the handbook, as necessary to bursement ledger for any loan guar- further program goals and protect the antee upon request. best interests of the government. (6) Obtain documentation that con- (b) Repayment period. The term of the firms the construction of the subject loan may not exceed 30 years. Adjust- property is complete. able rate mortgages, balloon term (b) Contractor or builder requirements. mortgages or mortgages requiring pre- Contractors or builders of homes fi- payment penalties are ineligible terms. nanced with guaranteed combination (c) Repayment schedule. Amortized construction and permanent loans payments will be due and payable must at least have: monthly. (1) Two or more years experience (d) Negative amortization. The loan building or constructing all aspects of note must not provide for interest on single family dwellings similar to the interest. type of project being proposed; [78 FR 73941, Dec. 9, 2013, as amended at 81 (2) State-issued construction or con- FR 6428, Feb. 8, 2016; 84 FR 35006, July 22, tractor licenses, as required by State 2019] or local law;

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(3) Insurance for commercial general (2) The fair market value as deter- liability of at least $500,000; mined by a licensed or certified ap- (4) Acceptable credit histories free of praiser in accordance with regulation judgments, collections, or liens related 3555.107(d) will be used to establish the to previous projects the contractor was maximum loan amount. involved with in the past; (3) Annual fees will begin in the (5) No criminal history based on a month immediately following loan criminal background check conducted closing and will not be affected by loan by the lender; reamortization following the comple- (6) Contractors or builders who are tion of construction. Lenders may fund constructing their own residence are a lender imposed escrow account for ineligible. borrower payments of the annual fee in (c) Use of loan funds. (1) The loan is to accordance with § 3555.101(b)(6)(xi), as finance the purchase of real estate and an eligible loan purpose, provided the construction of a single family dwell- market value of the property is not ex- ing or the purchase and required reha- ceeded. bilitation of an existing single family (4) Interest on the construction loan dwelling. Condominiums, including de- is payable monthly either directly tached condominiums and site con- from the borrower or indirectly drawn dominiums, are ineligible for combina- from an established interest reserve. tion construction and permanent loans. Real estate taxes and property insurance due during the construction pe- (2) The loan amount may include: riod may also be paid using the same (i) The price of the lot. draw process. The annual fee will be (ii) Reasonable and customary con- due and payable from the lender on the struction costs related to the construc- 1st of the month following the anniver- tion administration, such as architec- sary date the construction to perma- tural and engineering fees, building nent loan closed. permits and fees, surveys, title up- (5) Initial payment of the regularly dates, contingency reserves, not ex- scheduled (amortized) principal and in- ceeding a percentage specified by the terest payment may be postponed up to Agency of the cost of construction, one year, if necessary, based upon the draw control and inspection fees, build- construction period. Local conditions er’s risk insurance or course of con- and the proposed construction contract struction insurance, and landscaping may dictate the term. costs; (6) The loan will be modified and re- (iii) Reasonable and customary clos- amortized to achieve full repayment ing costs as defined at § 3555.101; and within its remaining term once con- (iv) The costs of an interim construc- struction is complete. Within a reason- tion financing interest rate and PITI able time, as specified by the Agency, reserve under § 3555.104(e) and after the final inspection, the borrower § 3555.105(d)(7), respectively. will begin making regularly scheduled (3) Funds remaining after full dis- (amortized) principal and interest pay- bursement of construction costs will be ments once the loan is re-amortized. applied by the lender as a principal (7) Lenders may fund a reserve ac- payment. Borrowers are not to receive count for up to 12 months of regularly funds after closing except that the bor- scheduled (amortized) principal and in- rower may receive funds remaining terest payments along with taxes and from certain unused prepaid expenses if insurance (PITI). In such cases, a loan the borrower used personal, non-loan modification is not required after con- funds to pay those expenses. struction is complete. Funds remaining (d) Terms. The following terms apply in the PITI reserve after construction to guarantees of combination construc- is complete will be applied by the lend- tion and permanent loans: er as a principal payment. (1) The interest rate for the construc- (e) Mortgage file documentation. tion and permanent loan will be estab- Standard industry credit and lished in accordance with § 3555.104 at verification documents may be utilized the time the rate is locked, which must when processing and closing the loan occur prior to closing. and must be dated within a reasonable

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time, specified by the Agency, of the siders appropriate, such as loan and closing in order to be considered valid. portfolio performance. In addition to documentation noted at § 3555.202(a), lenders must obtain and [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016; 84 FR 35006, July 22, retain evidence: 2019] (1) The actual cost to construct or rehabilitate the subject dwelling. § 3555.106 [Reserved] (2) The acquisition, transfer of ownership, and/or ownership of land; § 3555.107 Application for and issuance (3) Certification of construction com- of the loan guarantee. pletion and that construction costs (a) Processing of applications. Except have been fully drawn; as provided in this section, Rural De- (4) Closing costs; velopment will process loan guarantee (5) Certification that property is free applications in the order that com- and clear of all other liens after con- pleted applications are received. Appli- version to permanent loan; cation forms and instruction proce- (6) Required inspections and warran- dures are available at any Rural Devel- ties; opment office. (7) Loan modification agreement, once construction is complete, con- (1) If analysis of the utilization of firming the existence of a permanent funds during the fiscal year indicates loan and the amortizing interest rate that, at the rate of current utilization, on the loan; and funds may not be sufficient to sustain (8) Evidence that all funds remaining that level of activity for the remainder in the construction escrow or PITI re- of the fiscal year, the Agency may de- serve accounts have been applied as a termine a shortage of funds exists. principal curtailment once construc- (2) When there is a shortage of funds, tion or rehabilitation is complete. the Agency will limit SFHGLP loans to (f) Loan Note Guarantee. The Loan first-time homebuyers or veterans. Note Guarantee will be issued after First-time homebuyers and veterans closing of the construction loan with- will be served in the order their appli- out waiting for complete construction cations are received. of the subject property upon: (b) Automated underwriting. Rural De- (1) Request by the approved lender; velopment will offer approved lenders (2) The lender’s submission of the an automated system, if available; to closing documentation acceptable to process Rural Development guaranteed Rural Development demonstrating that loans under this part. The automated the loan was properly closed; underwriting system is a tool to help (3) Payment of the guarantee fee; and evaluate credit risk, but does not sub- (4) The lender’s compliance with stitute or replace the careful judgment other requirements under § 3555.107. of experienced underwriters, and shall (g) Unplanned changes during con- not be the exclusive basis for a deter- struction. Should an unplanned change mination on whether to extend credit. occur with the borrower or contractor The lender must apply for and receive preventing completion of construction, approval from Rural Development to the lender remains responsible for com- utilize the automated underwriting pletion of improvements satisfactory system. Application forms are avail- to Rural Development. The loan will be able from Rural Development. Lenders serviced in accordance with subparts F using the automated underwriting sys- and G of this part. Funds remaining in tem shall do so in accordance with all PITI reserve and construction es- SFHGLP regulations and guidelines. crow accounts after full disbursement Rural Development reserves the right of construction costs will be applied by to terminate the lender’s use of the the lender as a principal payment. automated underwriting system. (h) Reservation of funding. Rural De- (1) Lenders who utilize the Rural De- velopment reserves the right to limit velopment automated underwriting the number or amount of loans guaran- system remain responsible for ensuring teed under this section based on mar- all data is true and accurately rep- ket conditions and other factors it con- resented.

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(2) Full documentation and (2) Approved lenders are responsible verification, in accordance with Sub- for selecting a qualified appraiser and parts C, D and E of this part, will be re- the integrity, accuracy and thorough- tained in the lender’s permanent loan ness of the appraisals used to support file and must confirm the applicant’s their loan guarantee request. eligibility, creditworthiness, repay- (3) The appraiser must report all ment ability, eligible loan purpose, suf- readily observable property defi- ficient collateral, and all other regu- ciencies, potential environmental haz- latory requirements. ards, as well as any adverse conditions (3) Lenders who utilize the Rural De- discovered performing the research in- velopment automated underwriting volved in completing the appraisal. system will be subject to indemnifica- (4) The Agency will conduct reviews tion requirements in accordance with of the appraisals prior to issuance of § 3555.108. the conditional commitment, and other (4) If a loan receives an ‘‘Accept’’ un- reviews may be conducted to ensure derwriting recommendation, the lender overall quality of appraisals. The lend- is generally permitted to submit mini- er is responsible for correcting any ap- mal documentation including the appraisal deficiencies reported by the praisal, flood hazard determination and Agency. fully executed request for guarantee, (5) The Agency may determine an ap- unless the lender is instructed to pro- praiser ineligible to conduct appraisals vide other documentation. for SFHGLP due to the failure to com- (5) Loan requests that receive a ply with applicable requirements and ‘‘Refer’’ or ‘‘Refer with Caution’’ un- regulations. Appraisals from the ineli- derwriting recommendation require gible appraisers will not be accepted. further review and manual under- (6) Use of an alternative approach to writing by the lender to determine value for appraisals performed in re- whether the applicant meets SFHGLP mote rural areas, on tribal lands, or eligibility requirements. where a lack of market activity exists (6) Lenders who utilize Rural Devel- may be accepted at the Agency’s dis- opment’s automated underwriting sys- cretion. tem will validate findings, based upon (7) The validity period of an appraisal the output report of the underwriting system. will be 120 days, unless otherwise provided by the Agency. (7) The final submission of the last scoring event must be retained in the (e) Environmental requirements. The lender’s permanent loan file. lender and Rural Development will meet all environmental responsibilities (c) Manual underwriting. Lenders may utilize a manual underwriting method. in accordance with § 3555.5. Full documentation and verification, (f) Issuance of a conditional commit- in accordance with Subparts C, D and E ment. The lender must demonstrate of this part will be submitted to Rural that all the general loan, applicant, Development when requesting a guar- and site eligibility requirements of this antee and maintained in the lender’s part are met before Rural Development file. The documentation will confirm will issue a conditional commitment. the applicant’s eligibility, credit- The lender, however, may obtain any worthiness, repayment ability, eligible required property inspection reports, loan purpose, adequate collateral, and such as a well test or construction satisfaction of other regulatory re- phase inspections, if applicable and not quirements. needed for environmental compliance, (d) Appraisals. The lender must sup- after the issuance of the conditional ply a current appraisal report of the commitment, but prior to loan closing. property for which the guarantee is re- (1) The conditional commitment will quested. expire in 90 days from issuance, unless (1) Appraisals must be conducted in new construction is involved. accordance with the Uniform Stand- (2) The expiration of a conditional ards of Professional Appraisal Prac- commitment may coincide with pro- tices. jected completion of new construction.

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(3) An extension may be granted if (3) The lender will maintain evidence the loan cannot be closed due to cir- of hazard insurance and, if applicable, cumstances beyond the lender’s con- flood insurance. trol. (4) Evidence of documentation sup- (4) Lenders may accept or decline the porting the properly closed loan may conditional commitment, or submit re- be submitted to the Agency through quests for changes with adequate sup- regular mail, express mail, facsimile or port and documentation to be reviewed secure email. Rural Development may by the Agency. offer approved lenders an automated (g) Loan guarantee fee. The lender method of submitting properly closed must pay a nonrefundable up-front loans. guarantee fee, the cost of which may be (5) Lenders will submit full docu- passed on to the borrower. The up-front mentation supporting a closed loan or guarantee fee will not exceed 3.5 per- evidence of self-certification status, as cent of the principal obligation. The described in this section. Self-certified current guarantee fee is available at lenders must still submit the settle- any Rural Development office and may ment statement and promissory note. change periodically. Notice of a change Lenders must obtain written author- in fee will be published as authorized in ization from the Agency prior to sub- Exhibit K of subpart A of part 1810 of mitting evidence of self-certification in this chapter (RD Instruction 440.1, lieu of full documentation. Authoriza- available in any Rural Development of- tion for self-certification may be fice) or online at: http:// granted by the Agency if: www.rurdev.usda.gov/ (i) The lender has an active lender rdlinstructions.html. Once the guar- agreement. antee has been issued, the fee will not (ii) The lender is actively engaged in be refunded. originating SFHGLP loans and has (h) Annual fee. The Agency may im- closed a minimum of 10 loans in the pose an annual fee of the lender not to past 12 months. exceed 0.5 percent of the average an- (iii) The lender has successfully sub- nual scheduled unpaid principal bal- mitted 10 consecutive loan closing to ance of the loan for the life of the loan the Agency that were in compliance to allow the Agency to reduce the up- with loan closing requirements and front guarantee in § 3555.107(g). The an- procedures. nual fee will be applicable to purchase (iv) The lender agrees to retain evi- and refinance loan transactions. The dence of confirmed closing conditions annual fee may be passed on to the bor- in accordance with the issued condi- rower by the lender. The Agency may tional commitment in the lender’s per- assess a late charge to the lender if the manent loan file. annual fee is not paid by the due date, (j) Issuance of the guarantee. The loan and the late charge may not be passed guarantee does not take effect until: on to the borrower. Further adminis- (1) The lender transmits the required trative guidance is provided in the up-front guarantee fee, the lender cer- handbook. tification form provided by Rural De- (i) Proper closing and requesting the velopment, and loan closing documents loan note guarantee. The lender must to Rural Development; ensure that any loan to be guaranteed (2) The lender meets all other condi- is properly closed using documents actions set out in the conditional com- ceptable to Rural Development. mitment; (1) Within 30 days of loan closing, the (3) The loan is current at the time lender must request issuance of a loan the lender requests the loan guarantee; guarantee. (4) Any construction or rehabilita- (2) The lender will certify the loan tion, is complete except for develop- was closed in accordance with the con- ment described in §§ 3555.101(c) and ditional commitment and that no 3555.202(c); and major changes have taken place since (5) Rural Development issues the issuance of a commitment, except any loan guarantee document. changes specifically approved by the [78 FR 73941, Dec. 9, 2013, as amended at 81 Agency. FR 6429, Feb. 8, 2016]

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§ 3555.108 Full faith and credit. (1) To indemnify the Agency for the loss, if the default leading to the pay- (a) General. The Loan Note Guarantee ment of loss claim occurred within five constitutes an obligation supported by the full faith and credit of the United (5) years of loan closing, when one or States and is incontestable except for more of the following conditions is sat- fraud or misrepresentation of which isfied: the lender has actual knowledge at the (i) The originating lender utilized un- time it becomes such lender or which supported data or omitted material in- the lender participates in or condones. formation when submitting the request Misrepresentation includes negligent for a conditional commitment to the misrepresentation. Agency; (b) Interest. A note that provides for (ii) The originating lender failed to the payment of interest on interest, properly verify and analyze the appli- however, shall not be guaranteed. If cant’s income and employment history the note to which the Loan Note Guar- in accordance with Agency guidelines; antee is attached or relates provides (iii) The originating lender failed to for the payment of interest on interest, address property deficiencies identified then the Loan Note Guarantee is void. in the appraisal or inspection report Notwithstanding the prohibition of in- that affect the health and safety of the terest on interest, interest may be cap- occupants or the structural integrity italized in connection with re-amorti- of the property; zation under subpart G of this part. (iv) The originating lender used an (c) Violations. The Loan Note Guar- appraiser that was not properly li- antee will be unenforceable by the censed or certified, as appropriate, to lender to the extent any loss is occa- make residential real estate appraisal sioned by violation of usury laws, civil in accordance with § 3555.103(a); or, rights laws, negligent servicing, failure (2) To indemnify the Agency for the to obtain the required security or use loss regardless of how long ago the loan of loan funds for unauthorized pur- closed or the default occurred, if the poses, regardless of the time at which Rural Development acquires knowledge Agency determines that fraud or mis- of the foregoing. Negligent servicing is representation was involved with the defined as servicing that is incon- origination of the loan. sistent with this subpart and includes (3) In addition, the Agency may use the failure to perform those services any other legal remedies it has against which a reasonably prudent Lender the originating lender. would perform in servicing its own loan [78 FR 73941, Dec. 9, 2013, as amended at 81 portfolio of loans that are not guaran- FR 6429, Feb. 8, 2016; 81 FR 26464, May 3, 2016] teed. The term includes not only the concept of a failure to act, but also not § 3555.109 Qualified mortgage. acting in a timely manner or acting contrary to the manner in which a rea- A qualified mortgage is a guaranteed sonably prudent Lender would act up loan meeting the requirements of this to the time of loan maturity or until a part and applicable Agency guidance, final loss is paid. as well as the requirements in 12 CFR (d) Indemnification. The loan note 1026.43(e)(2)(i) through (iii) and 12 CFR guarantee will remain in effect for any 1026.43(e)(3). An extension of credit holder of the loan who acquired it from made pursuant to a program adminis- an originating lender. If the Agency de- tered by a State Housing Finance termines that a lender did not origi- Agency is exempt from this require- nate a loan in accordance with the re- ment as defined in 12 CFR quirements in this part, and the Agen- 1026.43(a)(3)(iv). Lenders will be allowed cy pays a claim under the loan guar- to cure unintentional errors and retain antee, the Agency may revoke the orig- the qualified mortgage status if the inating lender’s eligibility status in ac- conditions set in 12 CFR 1026.31(h) are cordance with subpart B of this part met. and may also require the originating lender: [81 FR 26464, May 3, 2016]

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§§ 3555.110–3555.149 [Reserved] (6) The applicants must be financially qualified to own more than one § 3555.150 OMB control number. home. In order for net rental income The report and recordkeeping re- from the retained dwelling to be con- quirements contained in this subpart sidered for the applicant’s repayment are currently with the Office of Man- ability, the consistency of the rental agement and Budget under review and income must be demonstrated for at awaiting approval. least the previous 24 months, and the current lease must be for a term of at least 12 months after the loan is closed. Subpart D—Underwriting the (f) Legal capacity. Applicants must Applicant have the legal capacity to incur the loan obligation, or have a court-ap- § 3555.151 Eligibility requirements. pointed guardian or conservator who is (a) Income eligibility. At the time of empowered to obligate the applicant in loan approval, the household’s adjusted real estate matters. income must not exceed the applicable (g) Suspension or debarment. Appli- moderate income limit. The lender is cants who are suspended or debarred responsible for documenting the house- from participation in Federal programs hold’s income to determine eligibility under 2 CFR parts 180 and 417 are not for the SFHGLP. eligible for loan guarantees. (b) Citizenship status. Applicants must (h) Repayment ability. Applicants provide evidence acceptable to the must demonstrate adequate repayment Agency of their status as United States ability. Lenders must maintain docu- citizens, U.S. non-citizen nationals, or mentation supporting the repayment qualified aliens, as defined in § 3555.10. ability analysis in the loan file. Refer (c) Principal residence. Applicants to § 3555.152(a) for further information. must agree and have the ability to oc- (1) A repayment ratio will be used to cupy the dwelling as their principal determine an applicant’s ability to residence. The Agency may require evi- repay a loan. The Agency will utilize dence of this ability. Rural Develop- two ratios, principal, interest, taxes ment will not guarantee loans for in- and insurance (PITI) ratio and total vestment properties, or temporary, debt (TD) ratio, to determine adequate short-term housing. repayment for the requested loan. The (d) Adequate dwelling. The dwelling Agency reserves the right to consider must be modest, decent, safe, and sani- calculation of a single ratio in deter- tary. mining repayment for the requested (e) Eligibility of current homeowners. loan. Current homeowners may be eligible (i) An applicant is considered to have for guaranteed home loans under this adequate repayment ability when the part if all the following conditions are monthly amount required for payment met: of PITI, homeowners’ association dues, (1) The applicants are not financially the monthly calculation of an annual responsible for another Agency guaran- fee, as applicable, and other real estate teed or direct home loan by the time assessments does not exceed 29 percent the guaranteed home loan is closed; of the applicant’s repayment income (2) The current home no longer ade- and the monthly amount of PITI plus quately meets the applicants’ needs; recurring monthly debts (total debt) (3) The applicants will occupy the does not exceed 41 percent of the appli- home financed with the SFHGLP loan cant’s repayment income. as their primary residence; (ii) For home purchases under the (4) The applicants are without suffi- Rural Energy Plus provision of cient resources or credit to obtain the § 3555.209, the Agency reserves the right dwelling on their own without the to allow flexibility in the PITI and TD guarantee; ratio. The handbook will define what (5) No more than one single family flexibilities can be extended. housing dwelling other than the one as- (iii) Contributions to personal in- sociated with the current loan request come taxes, retirement accounts (in- may be retained; and cluding the repayment of personal

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loans from those retirement accounts), tem. Flexibilities surrounding loan savings (including repayment of loans ratio exceptions will be further clari- secured by such funds), the cost to fied in the handbook. Lenders with commute, membership fees in unions loans accepted by an Agency approved or like organizations, childcare or automated underwriting system need other voluntary obligations will not be not submit documentation for the need considered in the TD ratio. for a ratio waiver. (iv) Except for obligations specifi- (4) If an applicant does not meet the cally excluded by State law, the debts repayment ability requirements, the of non-purchasing spouse must be in- applicant can increase repayment abil- cluded in the applicant’s repayment ra- ity by having other eligible household tios if the applicant resides in a com- members join the application. munity property state. (5) Mortgage Credit Certificates may (2) The repayment ratio may exceed be considered in determining an appli- the percentage specified in paragraph cant’s repayment ability. (h)(1) of this section if certain compen- (6) Section 8 Homeownership Vouch- sating factors exist. The handbook will ers may be used in determining an ap- define when a debt ratio waiver may be plicant’s repayment ability. The granted. The automated underwriting monthly subsidy may be treated as re- system will take into account any payment income in accordance with compensating factors in determining § 3555.152(a) or offset in the PITI. whether the variance is appropriate. (7) A funded buydown account may be For manually underwritten loans, the used to reduce the borrower’s monthly lender must document compensating mortgage payment during the early factors demonstrating that the house- years of repayment when all of the fol- hold has higher repayment ability lowing requirements are met: based on its capacity, willingness and (i) The loan will be underwritten at ability to pay mortgage payments in a the note rate. timely manner. The presence of com- (ii) The interest rate may be bought pensating factors does not strengthen a down to no more than 2 percentage ratio exception when multiple layers of points below the note rate. risk, such as a marginal credit history, (iii) The interest rate paid by the are present in the application. Accept- borrower may increase no more fre- able compensating factors and sup- quently than annually. porting documentation for a proposed (iv) The interest rate paid by the bor- debt ratio waiver will be further de- rower may increase no more than 1 per- fined and clarified in the handbook. centage point annually. Compensating factors include, but are (v) Funds must be placed in an es- not limited to: crow account with monthly releases (i) A credit score at an acceptable scheduled directly to the lender. level of 680 or higher for any appli- (vi) Funds must be placed with a cants, unless otherwise provided by the Federal- or state-regulated lender. Agency. The Agency reserves the right (vii) The escrow account must be to change the acceptable level of credit fully funded for the buydown period. score. (viii) The borrower is not permitted (ii) A minimal increase in housing to use personal funds or funds borrowed expense, i.e. the current rent payment from another source to establish the is comparable to the proposed mort- escrow account for the buydown. gage loan payment PITI and if applica- (ix) The borrower must not be re- ble, homeowner association dues. quired to borrow or repay the funds. (iii) The demonstrated ability to ac- (i) Credit qualifications. Applicants cumulate savings and cash reserves generally must have a verifiable credit post loan closing. history that indicates a reasonable (iv) Continuous employment with a ability and willingness to meet their current primary employer. debt obligations as evidenced by an ac- (3) Loan ratio exceptions require ceptable credit score, a credit report written approval by Rural Develop- from a recognized credit repository ment, or acceptance by an Agency ap- meeting the requirements of Fannie proved automated underwriting sys- Mae, Freddie Mac, FHA or VA, and

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other credit qualifications satisfactory the problems were caused by factors to Rural Development. temporary in nature, if the cir- (1) Except as provided in paragraph cumstances leading to the derogatory (i)(6) of this section, the applicant’s credit were beyond the control of the credit history must demonstrate a past applicant, and if the loan would signifi- willingness and ability to meet credit cantly reduce the applicant’s housing obligations to enable the lender to expenses. evaluate each applicant and draw a log- (5) In all cases, the applicant cannot ical conclusion about the applicant’s have an outstanding Federal judgment, commitment and ability to handling fi- other than a judgment obtained in the nancial obligations successfully and United States Tax Court, or a delin- ability to make payments on the new quent non-tax Federal debt that has mortgage obligation. not been paid in full or otherwise satis- (2) A loan’s acceptance by an Agency fied. approved automated underwriting sys- (6) For applicants without an estab- tem eliminates the need for the lender lished credit history, alternative meth- to submit documentation of the credit ods may be used to evidence an appli- qualification decision as loan approval cant’s willingness to pay, such as a requirements will be incorporated in non-traditional mortgage credit report the automated system. or multiple independent verifications (3) For manually underwritten loans, of trade references. lenders must submit documentation of (7) A credit report for a non-pur- the credit qualification decision. Lend- chasing spouse must be obtained in ers will use credit scores to manually order to determine the debt-to-income underwrite loan mortgage requests. ratio referenced at § 3555.151(h) if the Lenders are required to validate the applicant resides in a community prop- credit scores utilized in the under- erty state. writing determination. Indicators of (8) Lenders are encouraged to offer or significant derogatory credit will re- provide for home ownership counseling. quire further review and documenta- Lenders may require first-time home- tion of that review. Indicators of sig- buyers to undergo such counseling if it nificant derogatory credit include, but is reasonably available in the local are not limited to: area. When home ownership counseling (i) A foreclosure that has been com- is provided or sponsored by Rural De- pleted in the 36 months prior to appli- velopment or another Federal agency cation by the applicant. in the local area, the Lender must re- (ii) A bankruptcy in which debts were quire the borrower to successfully com- discharged within 36 months prior to plete the course. the date of application by the appli- (j) Obtaining credit. The applicant cant. A lender may give favorable con- must be unable to obtain traditional sideration to applicants who have en- conventional mortgage credit, as de- tered into a bankruptcy debt restruc- fined by the Agency, for the subject turing plan who have completed 12 loan. months of consecutive payments. The payment performance must have been [78 FR 73941, Dec. 9, 2013, as amended at 81 satisfactory with all required pay- FR 6429, Feb. 8, 2016] ments made on time, and the Trustee or the Bankruptcy Judge must approve § 3555.152 Calculation of income and of the new credit. assets. (iii) One rent or mortgage payment The lender must obtain and maintain paid 30 or more days late within the documentation in the loan file sup- last 12 months prior to application by porting the lender’s determination of the applicant. all income and assets described in this (iv) A previous Agency loan that re- section. sulted in a loss to the Government. (a) Repayment income. Repayment in- (4) When evidence of significant de- come is the amount of adequate and rogatory credit is present, lenders may stable income from all sources that consider extenuating circumstances, parties to the promissory note are ex- including but not limited to, whether pected to receive. Repayment income

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is used to determine the applicant’s third-party sources are acceptable. ability to repay a loan. Lenders must project the expected an- (1) The lender must examine the ap- nual income for the next 12 months plicant’s past income record for at from the verified sources. least the past 2 years and any applica- (3) The lender remains responsible for ble training and/or education. The the quality and accuracy of all infor- Agency may require additional information used to establish a household’s mation and documentation from self- eligibility. employed applicants and applicants (4) Household income from all employed by businesses owned by fam- sources including, but not limited to, ily members. income from temporarily absent house- (2) The lender must establish an ap- hold members, allowances for tax-ex- plicant’s anticipated amount of repay- empt income and net family assets as ment income and the likelihood of its defined in paragraph (d) of this section continuance for at least the next 3 are to be considered in the calculation years to determine an applicant’s ca- of annual income. pacity to repay a requested mortgage (5) The following sources of income loan in accordance with § 3555.151(h)(1). will not be considered in the calcula- (3) Income may not be used in calcu- tion of annual income: lating an applicant’s ratios if it is from (i) Earned income of persons under any source that cannot be verified, is the age of 18 unless they are an appli- not stable, or is likely not to continue. cant or a spouse of a member of the (4) The following types of income are household; examples of income not included in re- (ii) Payments received for the care of payment income: foster children or foster adults and in- (i) Any student financial aid received comes received by foster children or by household members for tuition, fees, foster adults who live in the household; books, equipment, materials, and (iii) Amounts granted for, or in reim- transportation; bursement of, the cost of medical ex- (ii) Amounts received that are spe- penses; cifically for, or in reimbursement of (iv) Earnings of each full-time stu- the cost of medical expenses for any dent 18 years of age or older, except the family member; head of household or spouse, that are (iii) Temporary, nonrecurring, or spo- in excess of any amount determined radic income (including gifts); pursuant to HUD definition of annual (iv) Lump sum additions to family income at 24 CFR 5.609(c); assets such as inheritances, capital (v) Temporary, nonrecurring, or spo- gains, insurance payments and per- radic income (including gifts); sonal or property settlements; (vi) Lump sum additions to family (v) Payments for the care of foster assets such as inheritances; capital children or adults; and gains; insurance payments under (vi) Supplemental Nutrition Assist- health, accident, or worker’s com- ance Program payments. pensation policies; settlements for per- (b) Annual income. Annual income is sonal or property losses; and deferred the income of all household members, periodic payments of supplemental so- regardless of whether they will be par- cial security income and Social Secu- ties to the promissory note. rity benefits received in a lump sum; (1) Applicants must provide the in- (vii) Any earned income tax credit; come, expense and household informa- (viii) Adoption assistance in excess of tion necessary to enable the lender to any amount determined pursuant to make income determinations. HUD’s definition of annual income at (2) Lenders must verify employment 24 CFR 5.609(c); and income information provided by (ix) Amounts received by the family the applicant for all household mem- in the form of refunds or rebates under bers. Lenders will verify the income for State or local law for property taxes each adult household member for the paid on the dwelling; previous 2 years. Written or oral (x) Amounts paid by a State agency verifications provided by third-party to a family with a developmentally dis- sources or documents prepared by abled family member living at home to

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offset the cost of services and equip- (ii) Are not reimbursed from insur- ment needed to keep the develop- ance or another source; and mentally disabled family member at (iii) Are in excess of 3 percent of the home; household’s annual income and do not (xi) The full amount of any student exceed the amount of earned income financial aid; included in annual income by the per- (xii) Any other revenue exempted by son who is able to work as a result of a Federal statute, a list of which is the expenses. available from any Rural Development (4) For any elderly family, a deduc- office; tion in the amount determined pursu- (xiii) Income received by live-in ant to HUD definition of adjusted in- aides, regardless of whether the live-in come at 24 CFR 5.611. aide is paid by the family or a social (5) For elderly and disabled families service program; only, a deduction for household med- (ix) Employer-provided fringe benefit ical expenses that are not reimbursed packages unless reported as taxable in- from insurance or another source and come; and which, in combination with any ex- (x) Amounts received through the penses related to the care of household Supplemental Nutrition Assistance members with disabilities described in Program. paragraph (c)(3) of this section, are in (c) Adjusted annual income. Adjusted excess of 3 percent of the household’s annual income is used to determine annual income. program eligibility and is annual in- (d) Net family assets. For the purpose come as defined in paragraph (b) of this of computing annual income, the net section, less any of the following family assets of all household members verified deductions for which the must be included in the calculation of household is eligible. annual income. Lenders must docu- (1) A reduction for each family mem- ment and verify assets of all household ber, except the head of household or members. spouse, who is under 18 years of age, 18 (1) Net family assets include, but are years of age or older with a disability, not limited to, the actual or imputed or a full-time student, the amount of income from: which will be determined pursuant to (i) Equity in real property or other HUD definition of adjusted income at capital investments, other than the 24 CFR 5.611. dwelling or site; (2) A deduction of reasonable ex- (ii) Cash on hand and funds in savings penses for the care of a child 12 years of or checking accounts; age or under that: (iii) Amounts in trust accounts that (i) Enables a family member to work, are available to the household; to actively seek work, or to further a (iv) Stocks, bonds, and other forms of member’s education; capital investments that is accessible (ii) Are not reimbursed or paid by an- to the applicant without retiring or other source; and terminating employment; (iii) In the case of expenses to enable (v) Lump sum receipts such as lot- a family member to work, do not ex- tery winnings, capital gains, and inher- ceed the amount of income, including itances; the value of any health benefits, earned (vi) Personal property held as an in- by the family member enabled to work. vestment; and If the child care provider is a household (vii) Any value, in excess of the con- member, the cost of the children’s care sideration received, for any business or cannot be deducted. household assets disposed of for less (3) A deduction of reasonable ex- than fair market value during the 2 penses related to the care of household years preceding the income determina- members with disabilities that: tion. The value of assets disposed of for (i) Enable a family member or the in- less than fair market value shall not be dividual with disabilities to work, to considered if they were disposed of as a actively seek work, or to further a result of foreclosure, bankruptcy, or a member’s education; divorce or separation settlement.

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(2) Net family assets for the purpose (b) Site standards. Sites must be mod- of calculating annual income do not in- est and developed in accordance with clude: any standards imposed by a State or (i) Interest in American Indian re- local government and must meet all of stricted land; the following requirements. (ii) Cash on hand which will be used (1) The site size must be typical for to reduce the amount of the loan; the area. (iii) The value of necessary items of (2) The site must not include income- personal property; producing land or buildings to be used (iv) Assets that are part of the busi- principally for income-producing pur- ness, trade, or farming operation of poses. Vacant land without eligible res- any member of the household who is idential improvements, or property actively engaged in such operation; used primarily for agriculture, farming (v) Amounts in voluntary retirement or commercial enterprise is ineligible plans such as individual retirement ac- for a loan guarantee. counts (IRAs), 401(k) plans, and Keogh (3) The site must be contiguous to accounts (except at the time interest and have direct access from a street, assistance is initially granted); road, or driveway. Streets and roads (vi) The value of an irrevocable trust must be hard surfaced or all weather fund or any other trust over which no surfaced and legally enforceable ar- member of the household has control; rangements must be in place to ensure (vii) Cash value of life insurance poli- that needed maintenance will be pro- cies; and vided. (viii) Other amounts deemed by the (4) The site must be supported by Agency not to constitute net family as- adequate utilities and water and waste- sets. water disposal systems. Certain water and wastewater systems that are pri- §§ 3555.153–3555.199 [Reserved] vately-owned may be acceptable if the lender determines that the systems are § 3555.200 OMB control number. adequate, safe, compliant with applica- The report and recordkeeping re- ble codes and requirements, and the quirements contained in this subpart cost or feasibility to connect to a pub- are currently with the Office of Man- lic or community system is not reason- agement and Budget under review and able. Certain community-owned water awaiting approval. and wastewater systems may be acceptable if the lender determines that the systems are adequate, safe, and Subpart E—Underwriting the compliance with applicable codes and Property requirements. The Agency may require inspections on individual, central, or § 3555.201 Site requirements. privately-owned and operated water or (a) Rural areas. Rural Development waste systems. will only guarantee loans made in rural areas designated as rural by Rural De- § 3555.202 Dwelling requirements. velopment. However, if a rural area (a) New dwellings. New dwellings designation is changed to nonrural: must be constructed in accordance (1) Existing conditional commit- with certified plans and specifications, ments in the former rural area will be and must meet or exceed the Inter- honored; national Energy Conservation Code (2) A supplemental loan may be made (IECC) in effect at the time of con- in accordance with § 3555.101 in construction. The lender must obtain and junction with a transfer and assump- retain evidence of construction costs, tion of a guaranteed loan; inspection reports, certifications, and (3) Loan requests where the applica- builder warranties acceptable to Rural tion and purchase contract was com- Development. plete prior to the area designation (b) Existing dwellings. Existing dwell- change may be approved; and ings are considered to meet the fol- (4) REO property sales and transfers lowing criteria when inspected and cer- with assumption may be processed. tified as meeting HUD requirements for

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one-to-four unit dwellings in accord- (6) The lender remains responsible to ance with Agency guidelines: ensure a final inspection is performed (1) Be structurally sound; and required repairs are completed. (2) Be functionally adequate; (7) The settlement statement reflects (3) Be in good repair, or to be placed the amounts escrowed. in good repair with loan funds; and § 3555.203 Ownership requirements. (4) Have adequate and safe electrical, heating, plumbing, water, and waste- After the loan is closed, the borrower water disposal systems. must have an acceptable ownership in- (c) Escrow account for exterior or inte- terest in the property as evidenced by rior development. This paragraph does one of the following: not apply if the development is related (a) Fee-simple ownership. Acceptable to a ‘‘combination construction and fee-simple ownership is evidenced by a permanent loan’’ under § 3555.101(c). If a fully marketable title with a deed vest- dwelling is complete with the excep- ing a fee-simple interest in the prop- tion of interior or exterior develop- erty to the borrower. ment work, Rural Development may (b) Secured leasehold interest. Loans issue the Loan Note Guarantee on the may be guaranteed on leasehold prop- loan if the following conditions are erties. If the conditions in this sub- met: section are met: (1) The applicant is unable to obtain (1) The incomplete work does not af- fee simple title to the property; fect the habitability of the dwelling, (2) Such leaseholds are fully market- nor the health or safety of the housing able in the area, except in the case of occupants. properties located on American Indian (2) The cost of any remaining interior restricted land; or exterior work is not greater than 10 (3) The lease has an unexpired term percent of the final loan amount. of at least 45 years from the date of (3) An escrow account is funded in an loan closing, except in the case of prop- amount sufficient to assure the com- erties located on American Indian re- pletion of the remaining work. This stricted land where the lease must figure must be at least 100 percent of have an unexpired term at least equal the cost of completion but may be to the term of the loan. Leases on higher if the lender determines a high- American Indian restricted land for pe- er amount is needed. riod of 25 years which are renewable for (4) The builder or a licensed con- a second 25 year period are permissible tractor has executed a contract pro- as are leases of a longer duration; viding for completion of the planned (4) The mortgage must cover both the development within 180 days of loan property improvements and the lease- closing. If the borrower will be com- hold interest in the land; pleting the planned development on an (5) The leasehold estate must con- existing dwelling without the services stitute real property, be subject to the of a contractor, the requirement for an mortgage lien, be insured by a title executed contract is waived when all of policy, be assignable or transferable the following conditions are met: and cannot be terminated except for (i) The estimated cost to complete nonpayment of lease rents; and the work is less than 10 percent of the (6) The lease must be recorded in the total loan amount; appropriate local real estate records. (ii) The escrow amount is less than or equal to $10,000; and § 3555.204 Security requirements. (iii) The lender has determined the Rural Development will only guar- borrower has the knowledge and skills antee loans that are adequately se- necessary to complete the work. cured. A loan will be considered ade- (5) The lender may release escrowed quately secured only when all of the funds only after obtaining a final in- following requirements are met: spection report acknowledged by the (a) Recorded security document. The borrower and indicating all planned de- lender obtains at closing, a mortgage velopment has been satisfactorily com- on all required ownership and leasehold pleted. interests in the security property and

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ensures that the loan is properly (2) Members, founders, contributors closed. or individuals cannot benefit from any (b) Prior liens. No liens prior to the part of net earnings of the organiza- guaranteed mortgage exist except in tion. conjunction with a supplemental loan (3) The organization must be dedi- for transfer and assumption. The guar- cated to decent affordable housing for anteed loan must have first lien posi- low-and moderate-income people. tion at closing. Junior liens by other (4) Comply with financial account- parties are permitted as long as the ability. junior liens do not adversely affect re- (d) Lender documentation. The lender’s payment ability or the security for the file must contains documentation that guaranteed loan. the community land trust has commu- (c) Adequate security. Existing and nity support, local market acceptance proposed property improvements are and 2 years of prior experience in pro- completely on the site and do not en- viding affordable housing. croach on adjoining property. (e) Appraisals. A property located on (d) Collateral. All collateral secures a site owned by a community land the entire loan. trust must be appraised as leasehold interest and meet the provisions of § 3555.205 Special requirements for condominiums. § 3555.203. Loans may be guaranteed for condo- § 3555.207 Special requirements for minium units in condominium projects Planned Unit Developments (PUDs). that meet all the requirements of this Loans may be guaranteed for PUDs part, as well as the standards for con- that meet all of the requirements of dominium standards established by this part, as well as the criteria for HUD, Fannie Mae, VA, or Freddie Mac, PUDs established by HUD, VA, Fannie including those related to self-certifi- Mae, or Freddie Mac. cation, warranty, underwriting, and ineligible condominium projects. § 3555.208 Special requirements for manufactured homes. § 3555.206 Special requirements for community land trusts. Loans may be guaranteed for manu- A community land trust must meet factured homes if all the requirements the definition in accordance with in this section are met. § 3555.10 and other requirements de- (a) Eligible costs. In addition to the scribed in this subpart. Loans may be loan purposes described in § 3555.101, guaranteed for dwellings on land owned Rural Development may guarantee a by a community land trust only if: loan used for the following purposes re- (a) Rural Development review. Rural lated to manufactured homes when a Development reviews and accepts any real estate mortgage covers both the restrictions imposed by the community unit and the site: land trust on the property or applicant (1) Purchase of a new manufactured before loan closing. The Agency may home, transportation, permanent foun- place conditions on the approval of re- dation, and installation costs of the strictions on resale price and rights of manufactured home, and purchase of first refusal. an eligible site if not already owned by (b) Foreclosure termination. The com- the applicant; and munity land trust automatically and (2) Site development work properly permanently terminates upon fore- completed to HUD, state and local gov- closure or acceptance by the lender of ernment standards, as well as the man- a deed in lieu of foreclosure. ufacturer’s requirements for installa- (c) Organization. The organization tion on a permanent foundation. must meet the definition of a commu- (b) Loan restrictions. The following nity land trust as defined in the Hous- loan restrictions are in addition to the ing Act of 1949 and the following re- loan restrictions contained in § 3555.102: quirements: (1) A loan will not be guaranteed if it (1) Be organized under State or local is used to purchase a site without also laws. financing a new unit.

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(2) A loan will not be guaranteed if it terations, such as garage construction, is used to purchase furniture, including as a new unit must comply with but not limited to: movable articles of FMHCSS. personal property such as drapes, beds, (5) The site development, installation bedding, chairs, sofas, divans, lamps, and set-up must conform to the HUD tables, televisions, radios, and stereo requirements and the manufacturer’s sets. Furniture does not include wall- requirements for a permanent installa- to-wall carpeting, refrigerators, ovens, tion. ranges, washing machines, clothes dry- (6) The unit must meet or exceed the ers, heating or cooling equipment, or IECC in effect at the time of construc- other similar items. tion. (3) A loan will not be guaranteed to (7) The lender must maintain docu- purchase an existing manufactured mentation of construction plans and home and site unless: required certifications. (i) The unit and site are already fi- (d) Warranty requirements. (1) The ap- nanced with an Agency direct single plicant must receive a warranty in ac- family or guaranteed loan; cordance with HUD requirements for (ii) The unit and site are being sold new manufactured homes on perma- by Rural Development as REO prop- nent foundations. erty; (2) The warranty must identify the (iii) The unit and site are being sold unit by serial number. from the lender’s inventory, and the (3) The lender and applicant must ob- loan for which the unit and site served tain certification that the manufac- as security was a loan guaranteed by tured home has sustained no hidden Rural Development; or damage during transportation and, if (iv) The unit was installed on its ini- manufactured in separate sections that tial installation site on a permanent the sections were properly joined and foundation complying with the manu- sealed according to the manufacturer’s facturer’s and HUD installation stand- specifications. ards. (4) A loan will not be guaranteed for (4) The manufactured home must be repairs to an existing unit, unless the affixed with a data plate, placed inside unit meets the requirements of the unit, and a certification label, af- § 3555.208(b)(3). fixed to each transportable section at (5) A loan will not be guaranteed for the tail-light end of each unit which in- the purchase of an existing manufac- dicates that the home was designed and tured home that has been moved from built in accordance with HUD’s con- another site. struction and safety standards in effect (c) Construction and development. (1) on the date the home was manufac- To be an eligible unit, the new unit tured. must have a floor space of not less than (5) The lender must retain a copy of 400 square feet. all manufacturers’ warranties in the (2) The unit must be properly in- lender file. stalled on a permanent foundation ac- (e) HUD requirements. The FMHCSS cording to HUD standards, and the and HUD requirements may be found at manufacturer’s requirements for in- http://www.access.gpo.gov/nara/cfr/ stallation on a permanent foundation. waisidxl04/24cfr3280l04.html. A certification of proper foundation is (f) Title and lien requirements. To be required. eligible for the SFHGLP, the following (3) All wheels, axles, towing hitches conditions must be met and docu- and running gear must be removed mented in the lender’s file: from the manufactured home. (1) A manufactured home loan must (4) Unit construction must conform be secured by a perfected lien on real to the Federal Manufactured Home property consisting of the manufac- Construction and Safety Standards tured home and the land; (FMHCSS) and be constructed in com- (2) The manufactured home must be pliance with the HUD heating and cool- taxed as real estate as applicable under ing requirements for the State in State law, including relevant statutes, which the unit will be located. Any al- regulations, and judicial decisions;

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(3) The security instrument must be form in servicing its own portfolio of recorded in the land records and must non-guaranteed loans. identify the encumbered property as (b) Third party servicer. A lender may including both the home and the land; contract with a third party to service (4) If applicable State law so permits, its loans, but the servicing lender of any certificate of title to the manufac- record remains responsible for the tured home must be surrendered to the quality and completeness of the serv- appropriate State government author- icing. ity. If the certificate of title cannot be (c) Transfer of servicing. Rural Devel- surrendered, the lender must indicate opment may require a lender to trans- its lien on the certificate; fer its loan servicing activities to an (5) The mortgage must be covered by approved lender if Rural Development a standard real property title insur- determines that the lender has failed ance policy and any other endorsement to provide acceptable servicing. required in the applicable jurisdiction (d) Non-compliance. Lenders who fail for manufactured home ensuring the to comply with Agency requirements manufactured home is part of the real or program guidelines may be subject property that secures the loan; and to withdrawal of lender approval, de- (6) The borrower must acknowledge nial and/or reduction in loss claims, the unit is a fixture and part of the withdrawal of the loan guarantee and/ real estate securing the mortgage. or indemnification in accordance with § 3555.108(d). [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016] § 3555.252 Required servicing actions. § 3555.209 Rural Energy Plus loans. Lender servicing responsibility includes, but is not limited to, the fol- Loans guaranteed under Rural En- lowing actions. ergy Plus provisions are for the pur- (a) Collecting regularly scheduled pay- chase of energy-efficient homes. Homes ments. Lender must collect regularly that meet the most current IECC scheduled loan payments and apply standards including existing homes them to the borrower’s account. that are retrofitted to those standards (b) Payment of taxes and insurance. are eligible. Energy-efficient homes re- Lenders must ensure that real estate sult in lower utility bills, conserve en- taxes, assessments, and flood and haz- ergy, and thus, make more income ard insurance premiums for all prop- available for monthly debt obligations. erty that secures a guaranteed loan are For loans guaranteed under this sub- paid on schedule. part, the lender will certify that the (1) Establish escrow account. Lenders home meets the most current IECC with the capacity to escrow funds must standards. The Handbook will define establish escrow accounts for all guar- what further flexibilities can be ex- anteed loans for the payment of taxes tended. and insurance. Escrow accounts must §§ 3555.210–3555.249 [Reserved] be administered in accordance with the Real Estate Settlement and Procedures § 3555.250 OMB control number. Act (RESPA) of 1974, and insured by the FDIC or the NCUA. The report and recordkeeping re- (2) Plan and responsibility of lender to quirements contained in this subpart ensure payment. Lenders that do not are currently with the Office of Man- have the capacity to escrow funds must agement and Budget under review and implement procedures, subject to awaiting approval. Agency approval, to ensure the borrower pays such obligations on a time- Subpart F—Servicing Performing ly basis. In addition, such lenders must Loans accept the responsibility for payment of taxes and insurance that comes due § 3555.251 Servicing responsibility. prior to liquidation. Rural Develop- (a) Servicing action. Lenders must per- ment will not include any taxes or inform those servicing actions that a rea- surance amounts that accrued prior to sonable and prudent lender would per- acceleration in any potential loss

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claim. Rural Development may revoke (d) Credit reporting. The lender must the acceptance of the lender’s plan if notify a credit repository of each new loan performance indicates that delin- guaranteed loan, must identify the quency and loss rates are being af- loan as guaranteed by Rural Develop- fected by the lender’s inability to es- ment, and must report to that reposi- crow for taxes, assessment, and insur- tory whenever any account becomes ance. This alternative is not available more than 30 calendar days past due. to lenders who contract for servicing. (e) Bankruptcy actions. The lender is (c) Insurance. (1) Until the loan is responsible for monitoring and taking paid in full, lenders must ensure that all appropriate and prudent actions borrowers maintain hazard and flood during bankruptcy proceedings to pro- insurance as required, on property se- tect the borrower and Government’s in- curing guaranteed loans. The insurance terest, in accordance with § 3555.306(d). must be issued by companies in § 3555.253 Late payment charges. amounts, and on terms and conditions, acceptable to Rural Development. Late payment charges will not be Flood insurance through the National covered by the guarantee and cannot Flood Insurance Program must be be added to the principal and interest maintained for all property located in due under any guaranteed note. special flood or mudslide areas identi- (a) Maximum amount. Any late pay- fied by FEMA and must be consistent ment charge must be reasonable and customary for the area. with mortgage industry standards, as (b) Loans with interest assistance. The determined by the Agency. lender must not charge a late fee if the (2) Lenders must ensure that bor- only unpaid portion of the borrower’s rowers immediately notify them of any scheduled payment is interest assist- loss or damage to insured property se- ance owed by Rural Development. curing guaranteed loans and collect the amount of the loss from the insurance § 3555.254 Final payments. company. Unless the borrower pays off Lenders may release security instru- the guaranteed loan using the insur- ments only after payment for the satis- ance proceeds, the following require- faction of the full debt, including any ments must be met: recapture, has been received and (i) All repairs and replacements using verified. the insurance proceeds must be planned, performed, and inspected in [81 FR 6429, Feb. 8, 2016] accordance with Agency construction § 3555.255 Borrower actions requiring requirements and procedures. lender approval. (ii) When insurance funds remain (a) Mineral leases. A lender may con- after payments for all repairs, replace- sent to the lease of mineral rights and ments, and other authorized disburse- subordinate its lien to the lessee’s ments have been made, the funds must rights and interests in the mineral ac- be applied in the following order: prior tivity if the security property will re- liens (including past-due property main suitable as a residence, the lend- taxes); past-due amounts; protective er’s security interest will not be ad- advances; and released to the borrower versely affected, and Rural Develop- if the lender’s debt is adequately se- ment’s environmental requirements cured. are met. Concurrence by Rural Devel- (3) If the insurance claim is de mini- opment prior to consenting to the lease mis as determined by the Agency, the of mineral rights is required, unless lender may release the funds directly otherwise provided by the Agency. Sub- to the borrower to advance funds to ordination of guaranteed loans to a contractors, provided that the account mineral lease does not entitle the is current and the borrower has a his- leaseholder to any proceeds from the tory of timely payments; the borrower sale of the security property. occupies the property; and the bor- (1) If the proposed activity is likely rower executes an affidavit agreeing to to decrease the value of the security apply the funds for repairs or recon- property, the lender may consent to struction of the dwelling. the lease only if the borrower assigns

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100 percent of the income from the clearance will be obtained before release to the lender to be applied to release of the existing security. duce the principal balance, and the (6) Proceeds from the sale of a por- total rent to be paid is at least equal to tion of the security property, granting the estimated decrease in the market an easement or right-of-way, damage value of the security property. compensation, and all similar trans- (2) If the proposed activity is not actions requiring the lender’s consent, likely to decrease the value of the se- will be used in the following order: curity property, the lender may con- (i) To pay customary and reasonable sent to the lease if the borrower agrees costs related to the transaction that to use any damage compensation re- must be paid by the borrower. ceived from the lessee to repair damage (ii) To be applied on a prior lien debt, to the site or dwelling, or to assign it if any. to the lender to be applied to reduce (iii) To be applied to the guaranteed the principal balance. (b) Partial release of security property. indebtedness or used for improvements A lender may consent to transactions to the security property consistent affecting a security property, such as with the purposes and limitations ap- selling or exchanging security property plicable for use of guaranteed loan or granting of a right-of-way across the funds. The lender must ensure that the security property, and grant a partial proceeds are used as planned. release, provided that the following (7) The lender will seek Agency con- conditions are met. currence, unless otherwise provided by (1) The borrower will receive ade- the Agency, by submitting documenta- quate compensation, and either make a tion supporting the borrower’s reason reduction to the principal balance or for request, the proposed use of the make improvements to the security land with supporting plans, specifica- property, in order to maintain the cur- tions, cost estimates, surveys, disclo- rent loan-to-value ratio for the guaran- sures of restrictions, legal description teed loan. modification, title clearance related to (i) For sale of security property, the the transaction request, as applicable, borrower must receive cash in an and any other documents necessary for amount equal to or greater than the the Agency to make a determination. value of the security property being sold or interests being conveyed. § 3555.256 Transfer and assumptions. (ii) For exchange of security prop- (a) Transfer without assumption. (1) erty, the borrower must receive an- The lender must notify Rural Develop- other parcel of property with value ment if the borrower transfers the se- equal to or greater than that being dis- curity property and the transferee does posed of. not assume the debt. (iii) For granting an easement or (2) Except as described in paragraph right-of-way, the borrower must re- (d) of this section, if a security prop- ceive benefits that are equal to or erty is transferred with the lender’s greater than the value of the security knowledge without assumption of the property being disposed of or interests being conveyed. debt, Rural Development will void the (2) An appraisal of the security prop- guarantee. erty will be conducted by the lender if (b) Transfer with assumption. (1) The the most current appraisal is more lender must obtain Agency approval than 1 year old or if it does not reflect before consenting to a transfer with an current market value. assumption of the outstanding debt. (3) The security property, after the (2) Rural Development may approve a transaction is completed, will continue transfer with an assumption of the out- to be an adequate, safe, and sanitary standing debt if the following condi- dwelling. tions are met: (4) Repayment of the guaranteed debt (i) The transferee must assume the will not be jeopardized. entire outstanding debt and acquire all (5) When exchange of all or part of property securing the guaranteed loan the security property is involved, title balance; however, the transferor must

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remain personally liable. The trans- (d) Transfer without triggering the due- feror must pay any recapture as a re- on-sale clause. (1) The following types of sult of interest subsidy granted, if ap- transfers do not trigger due-on-sale plicable, owed at the time of the trans- clauses in security instruments: fer and assumption. (i) A transfer from the borrower to a (ii) The transferee must meet the eli- spouse or children not resulting from gibility requirements described in sub- the death of the borrower; part D of this part. (ii) A transfer to a relative, joint ten- (iii) The property must meet the site ant, or tenant by the entirety resulting and dwelling requirements described in from the death of the borrower; subpart E of this part, or be brought to (iii) A transfer to a spouse or ex- those standards prior to the transfer. spouse resulting from a divorce decree, Guaranteed loans secured by properties legal separation agreement, or prop- located in areas that have ceased to be erty settlement agreement; rural may be assumed notwithstanding the fact that the property is located in (iv) A transfer to a person other than a non-rural area. a deceased borrower’s spouse who wish- (iv) The priority of the existing lien es to assume the loan for the benefit of securing the guaranteed loan must be persons who were dependent on the de- maintained or improved. ceased borrower at the time of death, if (v) Any new rates and terms must the dwelling will be occupied by one or not exceed the rates and terms allowed more persons who were dependent on for new loans under this part, and the the borrower at the time of death, and interest rate must not exceed the in- there is a reasonable prospect of repay- terest rate on the initial loan. ment; or (vi) A new guarantee fee, calculated (v) A transfer into an inter vivos based on the remaining principal bal- trust in which the borrower does not ance, must be paid to Rural Develop- transfer rights of occupancy in the ment in accordance with § 3555.107(g). property. (vii) If additional financing is re- (2) When a transferee obtains a prop- quired to complete the transfer and as- erty with a guaranteed loan through a sumption or to make needed repairs, transfer that does not trigger the due- Rural Development may approve a sup- on-sale clause: plemental guaranteed loan provided (i) The lender will notify Rural De- adequate security exists. velopment of the transfer; (viii) The lender must verify and doc- (ii) Rural Development will continue ument their permanent file in accord- with the guarantee, whether or not the ance with subpart C of this part. transferee assumes the guaranteed (ix) A written request supported by loan; the lender demonstrating the appli- (iii) The transferee may assume the cant’s credit worthiness, income eligi- guaranteed loan on the rates and terms bility and underwriting analysis must contained in the promissory note. If be submitted to the Agency for ap- the account is past due at the time an proval of a transfer and assumption. assumption agreement is executed, the (x) The lender may close the loan in loan may be re-amortized to bring the accordance with § 3555.107. account current; (c) Transfer without approval. If a (iv) The transferee may assume the lender becomes aware that a borrower guaranteed loan under new rates and has transferred a property without ap- terms if the transferee applies and is proval, the lender must take one of the eligible. following actions: (1) Notify Rural Development and (3) Any subsequent transfer of title, continue the loan without the guar- except upon the death of the inheritor antee; or or between inheritors to consolidate (2) Obtain Agency approval for the title, will trigger the due-on-sale transfer with assumption; or clause. (3) Liquidate the guaranteed loan and [78 FR 73941, Dec. 9, 2013, as amended at 81 submit a claim for any loss. FR 6429, Feb. 8, 2016]

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§ 3555.257 Unauthorized assistance. (b) Evaluation of borrower. Lenders must evaluate loans and take appro- (a) Unauthorized assistance due to false priate loss mitigation actions in an ef- information. (1) If the borrower receives a guaranteed loan based on false infor- fort to resolve any repayment problems mation provided by the borrower, and provide borrowers with the max- Rural Development may require the imum opportunity to become success- lender to accelerate the guaranteed ful homeowners. loan. After the lender accelerates the (c) Prompt contact. In the event of de- loan upon request, the lender may sub- fault, the lender shall promptly con- mit a claim for any loss. If the lender tact the borrower within a timeframe fails to accelerate the loan upon re- specified by the Agency. quest, Rural Development may reduce (d) Determine ability to cure. The lend- or void the guarantee. er must make a reasonable effort to ob- (2) If the borrower receives a guaran- tain from the borrower information re- teed loan based on false information garding the reason for default, the bor- provided by the lender, Rural Develop- rower’s current financial situation and ment may void the guarantee subject any other necessary information to to the provisions of § 3555.108. evaluate the borrower’s ability to cure (3) If the borrower or lender provides the default and determine a feasible false information, Rural Development plan for collection, and/or alternatives may pursue criminal and civil false to foreclosure. claim actions, suspension and/or debar- (e) Communication. Before an account ment, and take all other appropriate becomes 60 days past due and if there is action. no payment arrangement in place, the (b) Unauthorized assistance due to in- lender must send a certified letter to accurate information. Rural Develop- the borrower requesting an interview ment will honor a guarantee for a loan for the purpose of resolving the past made to an applicant who receives a due account. guaranteed loan based on inaccurate (f) Prior to liquidation. Before an ac- information if the applicant was eligi- count becomes 60 days past due or be- ble to receive the guaranteed loan at fore initiating liquidation, the lender the time it was made, and if the loan must assess the physical condition of funds were used only for eligible loan the property, determine whether it is purposes. occupied, and take necessary steps to protect the property. §§ 3555.258–3555.299 [Reserved] (g) Maintain documentation. The lender must maintain documentation dem- § 3555.300 OMB control number. onstrating that requirements in this The report and recordkeeping re- subpart have been met and what steps quirements contained in this subpart have been taken to save a mortgage are currently with the Office of Man- prior to making a decision to foreclose. agement and Budget under review and (h) Formal servicing plan. The lender awaiting approval. must obtain Agency concurrence of a formal servicing plan when a bor- Subpart G—Servicing Non- rower’s account is 90 days or more de- Performing Loans linquent and a method other than foreclosure is recommended to resolve the § 3555.301 General servicing tech- delinquency. Rural Development may niques. issue a written waiver of the need for In accordance with industry stand- concurrence for some or all servicing ards and as provided by the Agency: actions by a lender, on a case-by-case (a) Prompt action. Lenders shall take basis, if the lender demonstrates that prompt action to collect overdue it no longer needs the oversight. This amounts from borrowers to bring a de- may be demonstrated by the lender’s linquent loan current in as short a portfolio performance including, but time as possible to avoid foreclosure to not limited to, lower than average de- the extent possible and minimize linquency rates, foreclosure rates, or losses. loss claim rates. Rural Development

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may revoke such waiver at any time, Apr. 24, 2020. For the convenience of the user, upon notice and without appeal rights. the revised text is set forth as follows: [78 FR 73941, Dec. 9, 2013, as amended at 81 § 3555.302 Protective advances. FR 6429, Feb. 8, 2016] EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. * * * * * 26, 2019, § 3555.301 was amended by revising (b) * * * The lender must obtain prior paragraph (h), effective Apr. 24, 2020. For the Agency concurrence before issuing protec- convenience of the user, the revised text is tive advances under this paragraph of a sig- set forth as follows: nificant amount as specified by the Agency. § 3555.301 General servicing techniques. § 3555.303 Traditional servicing options. * * * * * (a) Eligibility. To be eligible for tradi- (h) Formal servicing plan. The lender must tional servicing, all the following con- report a formal servicing plan to the Agency ditions must be met: utilizing a web-based automated system (1) The borrower presently occupies when a borrower’s account is delinquent for the property; 90 days or more and a method other than foreclosure is recommended to solve the de- (2) The borrower is in default or fac- linquency. ing imminent default for an involun- tary reason. A borrower is ‘‘facing im- § 3555.302 Protective advances. minent default’’ if that borrower is Lenders may pay the following pre- current or less than 30 days past due on liquidation expenses necessary to pro- the mortgage obligation and is experi- tect the security property and charge encing a significant reduction in in- the cost against the borrower’s ac- come or some other hardship that will count. prevent him or her from making the (a) Advances for taxes and insurance. next required payment on the mort- Without prior Agency concurrence, gage during the month in which it is lenders may advance funds to pay past due. The borrower must be able to doc- due real estate taxes, hazard and flood ument the cause of the imminent de- insurance premiums, and other related fault, which may include, but is not costs. limited to, one or more of the following (b) Advances for costs other than taxes types of hardship: and insurance. Protective advances for (i) A reduction in or loss of income costs other than taxes and insurance, that was supporting the mortgage loan; such as emergency repairs, can be (ii) A change in household financial made only if the borrower cannot, or circumstances; (3) The borrower demonstrates a rea- will not, obtain an additional loan or sonable ability to support repayment reimbursement from an insurer or the of the debt in the future; borrower has abandoned the property. (4) There are no adverse property The lender must determine that any conditions that inhibit the inhabit- repairs funded by protective advances ability or use of the property; and are cost effective. Repairs funded by (5) The borrower has not received as- protective advances must be planned, sistance due to the submission of false performed and inspected in accordance information by the borrower. with § 3555.202 and as further described (b) Servicing options. The lender must by the Agency. The lender must obtain consider traditional servicing options prior Agency concurrence or a waiver in the following order to resolve the of concurrence as provided for in borrower’s default or imminent de- § 3555.301(h) before issuing protective fault: advances under this paragraph only for (1) Repayment agreement. A repay- protective advances of a significant ment agreement is an informal plan amount as specified by the Agency. lasting 3 months or less to cure short- [78 FR 73941, Dec. 9, 2013, as amended at 81 term delinquencies. FR 6430, Feb. 8, 2016] (2) Special forbearance agreement. A EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. special forbearance agreement is a 26, 2019, § 3555.302 was amended by revising longer-term formal plan to cure a de- the last sentence in paragraph (b), effective linquency not to exceed the equivalent

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of 12 months of PITI. The agreement Apr. 24, 2020. For the convenience of the user, may gradually increase monthly pay- the revised text is set forth as follows: ments in an amount sufficient to repay § 3555.303 Traditional servicing options. the arrearage over a reasonable amount of time and/or temporarily reduce or suspend payments for a short * * * * * period. If the borrower is at least 3 (b) * * * months delinquent, the special forbear- (3) * * * ance agreement may resume normal (i) Loan modifications must be a fixed in- payments for several months followed terest rate and cannot exceed the market in- by a loan modification. terest rate at the time of modification. (3) Loan modification plan. A loan (ii) Loan modifications may capitalize all modification is a permanent change in or a portion of the arrearage and/or re- one or more of the terms of a loan that amortization of the balance due including foreclosure fees and costs, tax and insurance results in a payment the borrower can advances, and past due Agency annual fees afford and allows the loan to be imposed by the lender. Late charges and brought current. A loan modification lender fees may not be capitalized. must be a written agreement. (i) Loan modifications must be a * * * * * fixed interest rate and cannot exceed the interest rate of the loan note guar- (v) Lenders may require that borrowers antee issued. complete a trial payment plan prior to mak- (ii) Loan modifications may cap- ing scheduled payments amended by the tra- italize all or a portion of the arrearage ditional loan servicing loan modification. (PITI) and/or reamortization of the balance due. Capitalization may also in- * * * * * clude foreclosure fees and costs, tax and insurance advances, past due an- § 3555.304 Special servicing options. nual fees imposed by the lender, but (a) General. (1) Lenders must exhaust not late charges or lender fees. traditional servicing options outlined (iii) If necessary to demonstrate re- in this part or have determined that payment ability, the loan term after use of traditional servicing options reamortization may be extended for up would not resolve the delinquency, to 30 years from the date of the loan prior to special servicing options. modification. Lenders must exhaust special servicing (iv) The lender’s lien priority cannot options prior to liquidation in accord- be adversely affected by providing a ance with §§ 3555.305 or 3555.306. loan modification. (2) Lenders must obtain Agency con- (v) The borrower is not required to currence or a waiver as provided in complete a trial payment plan prior to § 3555.301(h) before implementing any making the scheduled payments special servicing options. amended by the traditional loan serv- (3) Use of special loan servicing does icing loan modification. not change the terms of the loan note (c) Terms of loan note guarantee. Use guarantee. of traditional servicing options does (4) Special servicing options shall be not change the terms of the loan note used in the order established in this guarantee except when the traditional section to bring the borrower’s mort- servicing option meets the require- gage payment to income ratio as close ments of § 3555.303(b)(3)(iv). The loan as possible to, but not less than, 31 per- guarantee will apply to loan terms ex- cent. tending beyond the 30 year loan term (b) Conditions for special servicing op- from the date of origination when a tions. In addition to the requirements loan modification meets the criteria in § 3555.303(a), the following conditions set forth in § 3555.303(b)(3)(iv). apply to all special loan servicing: [78 FR 73941, Dec. 9, 2013, as amended at 81 (1) The borrower’s total debt to in- FR 6430, Feb. 8, 2016] come ratio following the special loan EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. servicing must not exceed 55 percent. 26, 2019, § 3555.303 was amended by revising Prior to servicing a borrower’s account paragraphs (b)(3)(i), (ii), and (v), effective with special loan servicing, the lender

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must verify the borrower’s income and (0.125%), as of the date the loan modi- total debt. fication is approved. (2) The borrower must successfully (3) The term shall be extended only complete a trial payment plan of suffi- as long as is necessary to achieve the cient duration, as determined by the targeted mortgage payment to income Agency, to demonstrate that the bor- ratio after the interest rate has been rower will be able to make regularly fixed at a level at or below the max- scheduled payments as modified by the imum allowable rate. special loan servicing. (4) If the targeted mortgage payment (3) Expenses related to special loan to income ratio cannot be achieved servicing including, but not limited to, using an extended-term loan modifica- title search and recording fees shall tion alone, the lender may consider a not be charged to the borrower. How- mortgage recovery advance under this ever, if a foreclosure was initiated and section in addition to the extended- canceled prior to special loan serv- term loan modification. icing, legal fees and costs for work per- (d) Mortgage recovery advance. (1) The formed in relation to the foreclosure maximum amount of a mortgage recov- costs before the cancellation date may ery advance is the sum of arrearages be charged to the borrower. not to exceed 12 months of PITI, an- (4) Capitalization of late charges and nual fees, legal fees and foreclosure lender fees is not permitted in the spe- costs related to a cancelled foreclosure cial loan servicing option. action, and principal reduction. (c) Extended-term loan modification. (2) The maximum amount of a mort- The Lender may modify the loan by re- gage recovery advance is 30 percent of ducing the interest rate to a level at or the unpaid principal balance as of the below the maximum allowable interest date of default, minus any arrearages rate and extending the repayment term advanced to cure the default and any up to a maximum of 40 years from the foreclosure costs incurred to that date of loan modification. The loan point. The Agency may change the guarantee will apply to loan terms ex- maximum amount of mortgage recov- tending beyond the 30 year loan term ery advance by publication in the FED- from the date of origination when a ERAL REGISTER. loan modification meets the criteria (3) The principal deferment amount set forth in this section. for a specific case shall be limited to (1) The interest rate must be fixed. the amount that will bring the bor- The interest rate cannot exceed the in- rower’s total monthly mortgage pay- terest rate of the loan note guarantee ment to 31 percent of gross monthly in- issued. When reducing the interest come. rate, the maximum rate is subject to (4) The lender may file a claim pursu- paragraph (c)(2) of this section. ant to Subpart H of this part for reim- (2) The Agency may establish the bursement of reasonable title search maximum allowable interest rate by and/or recording fees in connection publishing a notice of a change in in- with the promissory note and mortgage terest rate. A notice of change in inter- or deed-of-trust, not to exceed a max- est rate will be published as authorized imum amount specified by the Agency. in Exhibit B of subpart A of part 1810 of (5) Prior to making a mortgage re- this chapter (RD Instruction 440.1, covery advance, the lender must per- available in any Rural Development of- form an escrow analysis to ensure that fice) or online at http://www.rd.usda.gov/ the payment made on behalf of the bor- publications/regulations-guidelines/in- rower accurately reflects the escrow structions. If the maximum allowable amount required for taxes and insur- interest rate has not been so estab- ance. lished, it shall be 50 basis points great- (6) The following terms apply to the er than the most recent Freddie Mac repayment of mortgage recovery ad- Weekly Primary Mortgage Market Sur- vances: vey (PMMS) rate for 30-year fixed-rate (i) The mortgage recovery advance mortgages (U.S. average) rounded to note and subordinate mortgage or the nearest one-eighth of one percent deed-of-trust shall be interest-free.

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(ii) Borrowers are not required to graphs (c)(1) and (2) and (d)(1) and (2), effec- make any monthly or periodic pay- tive Apr. 24, 2020. For the convenience of the ments on the mortgage recovery ad- user, the added and revised text is set forth vance note; however, borrowers may as follows: voluntarily submit partial payments § 3555.304 Special servicing options. without incurring any prepayment pen- (a) * * * alty. (4) If the borrower currently has a mort- (iii) The due date for the mortgage gage payment to income ratio of 31 percent recovery advance note shall be the due or less, special servicing options can be uti- date of the guaranteed note held by the lized to cure the delinquency without modi- lender, as modified by the special loan fying the note; otherwise, special servicing options shall be used in the order established servicing. Prior to the due date on the in this section to bring the borrower’s mort- mortgage recovery advance note, pay- gage payment to income ratio as close as ment in full under the note is due at possible to, but not less than, 31 percent. the earlier of the following: (A) When the first lien mortgage and * * * * * the guaranteed note are paid off; or (B) When the borrower transfers title (c) * * * (1) Loan modifications may capitalize all to the property by voluntary or invol- or a portion of the arrearage and/or re- untary means. amortization of the balance due including (iv) Repayment of all or part of the foreclosure fees and costs, tax and insurance mortgage recovery advance must be re- advances, and past due Agency annual fees mitted directly to the Agency by the imposed by the lender. Late charges and borrower. lender fees may not be capitalized. (v) The Agency will collect this Fed- (2) Loan modifications must be a fixed in- eral debt from the borrower by any terest rate and cannot exceed the current market interest rate at the time of modifica- available means if the mortgage recov- tion. When reducing the interest rate, the ery advance is not repaid based on the maximum rate is subject to paragraph (c)(3) terms outlined in the promissory note of this section. and mortgage or deed-of-trust. (7) The lender may request reim- * * * * * bursement from the Agency for a mortgage recovery advance. A fully sup- (d) * * * (1) The maximum amount of a mortgage ported and documented claim for reim- recovery advance is 30 percent of the unpaid bursement must be submitted to the principal balance as of the date of initial de- Agency within 60 days of the advance fault. The Agency may change the maximum being executed by the borrower. The amount of mortgage recovery advance by borrower must execute a promissory publication in the FEDERAL REGISTER. note payable to the Agency and a (2) If the borrower’s total monthly mort- mortgage or deed-of-trust in recordable gage payment is less than 31 percent of gross monthly income prior to an extended term form perfecting a lien naming the loan modification, the mortgage recovery Agency as the secured party for the advance can be used to cure the borrower’s amount of the mortgage recovery ad- delinquency without changing the terms of vance. The lender shall properly record the promissory note. the mortgage or deed-of-trust in the appropriate local real estate records * * * * * and provide the original promissory note to the Agency. § 3555.305 Voluntary liquidation. (8) A loss claim filed by a lender will The lender must have exhausted the be adjusted by any amount of mortgage servicing options outlined in §§ 3555.302 recovery advance reimbursed to the through 3555.304 to cure the delin- lender by the Agency. quency before considering voluntary [78 FR 73941, Dec. 9, 2013, as amended at 81 liquidation. The methods of voluntary FR 6430, Feb. 8, 2016] liquidation of the security property outlined in this section may be used to EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. 26, 2019, § 3555.304 was amended by removing protect the interests of the Govern- paragraph (a)(2); redesignating paragraphs ment. The lender must obtain prior (a)(3) and (4) as paragraphs (a)(2) and (3); add- Agency concurrence or a waiver as pro- ing new paragraph(a)(4); and revising para- vided by § 3555.301(h).

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(a) Eligibility. To be eligible for vol- § 3555.306 Liquidation. untary liquidation, the following con- (a) General. (1) When a lender deter- ditions must be met: mines that a borrower is unable or un- (1) The loan must be at least 30 days willing to meet loan obligations with delinquent; servicing options under this subpart, (2) The default was caused by an in- the lender must accelerate the guaran- voluntary reason; and teed loan and, if necessary, foreclose. (3) The borrower must presently oc- (2) Prior to acceleration the lender cupy the property except in situations must have advised the borrower, in where the borrower does not occupy writing, of available foreclosure avoid- the property due to the same involun- ance options and the borrower must tary reason that led to the default. have failed to request such options. (b) Pre-foreclosure or short sale. The (3) The lender must accelerate the borrower may sell the security prop- guaranteed loan, with a demand letter, erty for a price that represents its fair when the account is three scheduled market value. The sale price, less any payments past due unless there is a reasonable and customary sale or clos- reasonable prospect of resolving the de- ing costs incurred by the borrower, linquency through another method. must be applied to the borrower’s ac- (4) The borrower is responsible for all count. expenses associated with liquidation (c) Deed in lieu of foreclosure. The and acquisition. lender may accept a deed in lieu of (b) Foreclosure. (1) The lender must foreclosure if it will result in a lesser initiate foreclosure within 90 calendar loss claim than if foreclosure occurs. days of the decision to liquidate unless (d) Offer by junior lienholder. If a jun- Federal, State, or local law requires ior lienholder makes an offer in the that foreclosure action be delayed. amount of at least the anticipated net When there is a legal delay (such as recovery value, as calculated in accord- bankruptcy), foreclosure must be initi- ance with § 3555.353, the lender may as- ated within 90 calendar days after it sign the note and mortgage to the jun- becomes possible to do so. Foreclosure ior lienholder. initiation begins with the first public (e) Other methods of voluntary liquida- action required by law such as filing a tion. The lender may propose other complaint or petition, recording a no- methods of voluntary liquidation that tice of default, or publication of a no- are consistent with this section if the tice of sale. lender fully documents how the pro- (2) Lenders must exercise due dili- posal will result in a savings to the gence in completing the liquidation Government. process to ensure the foreclosure is cost effective, expeditious, and com- EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. 26, 2019, § 3555.305 was amended by revising pleted in an efficient manner, as other- the introductory text and paragraph (a)(1), wise provided by the Agency. The lend- effective Apr. 24, 2020. For the convenience of er must choose the foreclosure method the user, the revised text is set forth as fol- representing the best interest of the lows: Federal Government. (3) The lender’s decision to bid at § 3555.305 Voluntary liquidation. foreclosure and any bid amount will be The lender must have exhausted the serv- based upon the property value, whether icing options outlined in §§ 3555.302 through 3555.304 to cure the delinquency before con- the property value is sufficient to sidering voluntary liquidation. The methods cover the existing debt and incurred of voluntary liquidation of the security prop- costs, and any potential to recover a erty outlined in this section may be used to deficiency. The lender will encourage protect the interests of the Government. third party bidding at a foreclosure (a) * * * sale when the total debt, including the (1) The loan is at least 30 days delinquent cost of acquiring, managing and dis- or meets the imminent default definition as posing of the property, if acquired, is outlined in § 3555.303(a)(2); greater than the gross proceeds expected from a foreclosure sale at mar- * * * * * ket value.

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(c) Unless State law imposes other a manner designed to ensure maximum requirements, the lender may reinstate recovery as follows. an accelerated account if the borrower (1) The lender must prepare and pays, or makes acceptable arrange- maintain a disposition plan on all ac- ments to pay, all past-due amounts, quired properties. The lender will sub- any protective advances, and any fore- mit the property disposition plan and closure-related costs incurred by the any subsequent changes for Agency lender. concurrence in a timely manner as (d) Bankruptcy. (1) When a borrower specified by the Agency. The lender files a petition in bankruptcy, the lend- may obtain a waiver of the concurrence er must suspend collection and fore- requirement as provided for in closure actions in accordance with § 3555.301(h). The plan will include the Title 11 of the United States Code. proposed method for sale of the property, the estimated value based on an (2) The lender may accept convey- appraisal, minimum sale price, ance of security property by the trust- itemized estimated costs of the sale, ee in the bankruptcy, or the borrower, and any other information that could if the bankruptcy court has approved impact the amount of loss on the loan. the transaction, and the lender will ac- (2) The lender will make all reason- quire title free of all liens and encum- able efforts to sell the property within brances except the lender’s liens. 9 months from the later of either the (3) Whenever possible after the bor- foreclosure sale or expiration of any re- rower has filed for protection under demption period. The Agency may Chapter 7 of Title 11 of the United grant an extension of the permissible States Code, a reaffirmation agreement marketing period in limited cir- will be signed by the borrower and ap- cumstances including, but not limited proved by the bankruptcy court prior to, when a separate legal action is nec- to discharge, if the lender and the bor- essary to gain possession of the prop- rower decide to continue with the loan. erty following foreclosure or when the (4) The lender must protect the guar- lender has or is in final negotiation for anteed loan debt and all collateral se- a firm purchase agreement. If the prop- curing the loan in bankruptcy pro- erty is on American Indian restricted ceedings. land, an additional 3 month marketing (5) The lender can include principal period is permitted. and interest lost as a result of bank- (3) The lender must notify the Agen- ruptcy proceedings in any claim filed cy when the property has not been sold in accordance with § 3555.354. within 30 days of the expiration of the (e) Maintain condition of security prop- permissible marketing period. If the erty. The lender must make reasonable REO remains unsold at the end of the and prudent efforts to ensure that the permissible marketing period, the lend- condition of the security property is er will order a liquidation value ap- maintained during any liquidation, ac- praisal and the Agency will apply an quisition, and sale of the property. acquisition and management resale These efforts include, but are not lim- factor to estimate holding and disposi- ited to, periodic inspections, per- tion cost. Interest expenses accrued be- forming necessary repairs, winteriza- yond 90 days of the foreclosure sale tion, securing the property, removing date or expiration of any redemption debris, yard maintenance and ensuring period, whichever is later, will be the the continuance of property insurance. responsibility of the lender and not The lender must identify, determine covered by the guarantee. the cause, and document any environ- (g) Debt settlement reporting. The lend- mental hazard affecting the value of er must report to the IRS and all na- the security property. The lender must tional credit reporting repositories any retain a record of all efforts to main- debt settled through liquidation. tain the condition of the security prop- [78 FR 73941, Dec. 9, 2013, as amended at 81 erty. FR 6430, Feb. 8, 2016; 81 FR 31164, May 18, (f) Managing and disposing of REO 2016] property. Lenders will expeditiously EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. gain possession of the REO property in 26, 2019, § 3555.306 was amended by revising

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paragraph (f), effective Apr. 24, 2020. For the case basis to determine if the property convenience of the user, the revised text is can be repaired or rebuilt. The set forth as follows: servicer’s actions must be based on the § 3555.306 Liquidation. status of the mortgage, the amount of insurance proceeds, and the length of * * * * * time required repairing or recon- structing the property, and the market (f) Lender acquisition of title. If at liquida- conditions in the area. If the property tion, the title to the property is conveyed to will not be repaired or rebuilt, the in- the lender, the lender will submit a loss claim package, including a market value ap- surance proceeds must be applied to praisal, within 60 days of the foreclosure sale the unpaid principal loan balance. date or the date the lender acquires title. If [78 FR 73941, Dec. 9, 2013, as amended at 81 eviction action is required in order to obtain FR 6430, Feb. 8, 2016] a market value appraisal, the lender must submit the loss claim package, including the market value appraisal, within 60 days of the §§ 3555.308–3555.349 [Reserved] date the occupants clear the premises. The lender must submit the loss claim request, § 3555.350 OMB control number. including the market value appraisal, in ac- The report and recordkeeping re- cordance with subpart H. quirements contained in this subpart are currently with the Office of Man- * * * * * agement and Budget under review and awaiting approval. § 3555.307 Assistance in natural disasters. Subpart H—Collecting on the (a) Policy. Servicers must utilize gen- Guarantee eral procedures available under this subpart for servicing borrowers af- § 3555.351 Loan guarantee limits. fected by natural disasters, as supple- mented by Rural Development, to min- (a) Original loan amount. For the pur- imize delinquencies and avoid fore- poses of this section, the term ‘‘Origi- closure. nal Loan Amount’’ means the original (b) Evaluating the damage. Servicers promissory note amount minus any are expected to inspect a security prop- loans funds not actually disbursed to erty whenever they have reason to be- the borrower or on behalf of the bor- lieve the property has been damaged. rower at the time the SFHGLP loan (c) Special relief measures. The was made or thereafter. servicer must evaluate on an individual (b) Maximum loss payment. The max- case-by-case basis a mortgage that is imum payment for a loss sustained by (or becomes) seriously delinquent as the lender under the SFHGLP is the the result of the borrower’s incurring lesser of: extraordinary damages or expenses re- (1) 90 percent of the Original Loan lated to the natural disaster. The Amount; or servicer should document its individual (2) 100 percent of any loss equal to or mortgage file regarding all servicing less than 35 percent of the Original actions taken during this time period. Loan Amount plus 85 percent of any re- The lender must consider all special remaining loss up to 65 percent of the lief alternatives for disaster assistance Original Loan Amount. available to the borrower prior to sus- pending collection and foreclosure ac- § 3555.352 Loss covered by the guar- tivities. The suspension of servicing ac- antee. tions will expire 90 days from the dec- Subject to § 3555.351, the loss claim laration date of the natural disaster, payment will be calculated as the dif- unless otherwise extended by the Agen- ference between the Total Indebtedness cy. on the loan and the Net Recovery (d) Insurance claim settlements. Prior Value calculated according to § 3555.353. to release of hazard insurance proceeds The Total Indebtedness on the loan in- because of damage caused by a natural cludes: disaster, servicers must complete a (a) Principal balance. The unpaid prin- cost and benefit analysis on a case-by- cipal balance;

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(b) Accrued interest. Accrued interest (1) The proceeds from the sale plus at the guaranteed loan note rate from any other amounts recovered, minus the last day interest was paid by the (2) The amount of actual liquidation borrower to the settlement date, as de- and disposition costs provided those fined at § 3555.10; costs are reasonable and customary for (c) Additional interest. Additional in- the area. Costs incurred by in-house terest on the unsatisfied principal ac- staff may not be included. crued from the settlement date to the (b) Anticipated net recovery value. For date the claim is paid, but not more a property that has not sold when a than 90 days from the settlement date; loss claim is filed, net recovery value is (d) Protective advances. Principal and calculated as follows: interest for protective advances, as de- (1) The value of the property as described in § 3555.303; and termined by a liquidation value ap- (e) Liquidation costs. Reasonable and praisal. The value should be deter- customary liquidation costs, such as mined as if the property would be sold attorney fees, liquidation value ap- without the market exposure it would praisals, and foreclosure costs. Annual ordinarily receive in a normal trans- fees advanced by the lender to the action, or within 90 days, minus; Agency are ineligible for reimburse- (2) The amount of actual liquidation ment when calculating the loss pay- expenses and estimated disposition ment, as otherwise provided by the costs that are reasonable and cus- Agency. tomary for the area. Costs incurred by in-house staff may not be included. [78 FR 73941, Dec. 9, 2013, as amended at 81 (i) Actual liquidation expenses are FR 31164, May 18, 2016] the amount of attorney fees and costs, EFFECTIVE DATE NOTE: At 84 FR 70886, Dec. etc. incurred to acquire title to the 26, 2019, § 3555.352 was amended by revising property. paragraphs (c) and (e), effective Apr. 24, 2020. (ii) Estimated disposition costs are For the convenience of the user, the revised calculated by Rural Development using text is set forth as follows: reasonable and customary cost factors § 3555.352 Loss covered by the guarantee. appropriate for the area (available in any Rural Development office). * * * * * [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 31165, May 18, 2016] (c) Additional interest. Additional interest on the unsatisfied principal accrued from the EFFECTIVE DATE NOTE: At 84 FR 70887, Dec. settlement date to the date the claim is paid, 26, 2019, § 3555.353 was amended by revising but not more than 60 days from the settle- paragraphs (a) introductory text and (b), ef- ment date; fective Apr. 24, 2020. For the convenience of the user, the revised text is set forth as fol- * * * * * lows: (e) Liquidation costs. Reasonable and cus- § 3555.353 Net recovery value. tomary liquidation costs, such as attorney fees, market value appraisals, and fore- * * * * * closure costs. Annual fees advanced by the lender to the Agency are ineligible for reim- (a) For a property that has been sold. When bursement when calculating the loss claim a loss claim is filed on a property that was payment. sold to a third party at the foreclosure sale or through an approved pre-foreclosure sale, § 3555.353 Net recovery value. net recovery value is calculated as follows: The net recovery value of the property is determined differently for prop- * * * * * erties that have been sold than for (b) For a property that has been acquired. properties that remain in the lender’s When a loss claim is filed on a property ac- inventory at the time the loss claim is quired by the lender through a foreclosure filed. sale or a deed-in-lieu of foreclosure, the net recovery value is based on an estimated sales (a) Actual net recovery value. For a price calculated using a market value ap- property that has been sold when a loss praisal along with holding and disposition claim is filed, net recovery value is cal- costs calculated using the acquisition and culated as follows: management factor (also known as the VA

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Net Value Factor) published by the VA, and paragraphs (b)(1)(i) and (ii) of this sec- other factors as determined by the Agency. tion, may be rejected. The lender must submit a loss claim pack- (2) The lender must submit a loss age, including a market value appraisal, claim that includes the completed liq- within 60 days of the foreclosure sale date or the date the lender acquires title. If eviction uidation value appraisal within 30 cal- action is required in order to obtain a mar- endar days of receiving the appraisal. ket value appraisal, the lender must submit Late claims made beyond this period of the loss claim package, including the market time, or submitted with a liquidation value appraisal, within 60 days of the date value appraisal not completed within the occupants clear the premises and in ac- the timeframes described in paragraphs cordance with other requirements of this (b)(1)(i) and (ii) of this section, may be subpart. with any loss claim request in ac- rejected. cordance with subpart H. (c) Deficiency judgments. The lender § 3555.354 Loss claim procedures. must enforce any judgment for which there are current prospects of collec- Rural Development may offer author- tion before submitting a loss claim, ized lenders a web-based automated and amounts collected must be applied system to calculate, submit or update against the outstanding debt. Rural a loss claim request and/or future re- Development will process the loss covery subject to the requirements of claim if there are no current prospects § 3555.356. Manual paper loss claims for collection. may continue to be submitted by some lenders. Lenders must make a thor- [78 FR 73941, Dec. 9, 2013, as amended at 81 ough review of all receipts and ex- FR 31165, May 18, 2016] penses prior to submitting a loss claim EFFECTIVE DATE NOTE: At 84 FR 70887, Dec. request. Supplemental adjustments to 26, 2019, § 3555.354 was amended by revising the initial claim may be considered, as the introductory text and paragraph (b), ef- provided by the Agency. fective Apr. 24, 2020. For the convenience of (a) Sold property. For property that the user, the revised text is set forth as follows: has been sold, the lender must submit a loss claim within 45 calendar days of § 3555.354 Loss claim procedures. the sale. Late claims made beyond this All lenders must use a web-based auto- period of time may be rejected or re- mated system designated by the Agency to duced by Rural Development. Instruc- submit all loss claim requests. tions and forms may be obtained from Rural Development. * * * * * (b) REO. If the property has not been (b) REO. If at liquidation, the title to the sold, the lender must take the fol- property is conveyed to the lender, the lend- lowing steps: er will submit a loss claim package, includ- (1) The lender must submit a loss ing a market value appraisal, within 60 days claim request that includes a com- of the foreclosure sale date or the date the pleted liquidation value appraisal with- lender acquires title. If eviction action is re- in 30 calendar days of the period end- quired in order to obtain a market value ap- ing: praisal, the lender must submit the loss claim package within 60 days of the date the (i) Nine (9) months after either fore- occupants clear the premises. The lender closure or the end of any applicable re- must order a market value appraisal and in- demption period, whichever is later, if clude the market value appraisal with the the property remains unsold and is not loss claim package. The Agency will use the located on American Indian restricted market value appraisal, along with other land; or Agency required documentation, to deter- (ii) Twelve (12) months after either mine the property value for the basis of the loss claim. The Agency will apply an acquisi- foreclosure or the end of any applicable tion and management resale factor to esti- redemption period, whichever is later, mate holding and disposition costs, based on if the property remains unsold and is the most current VA Management and Ac- located on American Indian restricted quisition Factor found at https:// land. Late claims made beyond this pe- www.benefits.va.gov/HOMELOANS/ riod of time, or submitted with a liq- servicerslvaleri.asp. uidation value appraisal not completed within the timeframes described in * * * * *

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§ 3555.355 Reducing or denying the EFFECTIVE DATE NOTE: At 84 FR 70887, Dec. claim. 26, 2019, § 3555.356 was removed and reserved, effective Apr. 24, 2020. (a) Determination of loss payment. Sub- ject to the requirements of § 3555.108, if §§ 3555.357–3555.399 [Reserved] Rural Development determines that the amount of the loss was increased § 3555.400 OMB control number. due to the lender’s failure to comply The report and recordkeeping re- with the conditions of the Loan Note quirements contained in this subpart Guarantee, the Agency may reduce or are currently with the Office of Man- deny any loss claim by the portion of agement and Budget under review and the loss determined was caused by the awaiting approval. lender’s action or failure to act. The circumstances under which loss claims may be denied or reduced include, but PART 3560—DIRECT MULTI-FAMILY are not limited to, the following lender HOUSING LOANS AND GRANTS actions: (1) Failure to adhere to required serv- Subpart A—General Provisions and icing and liquidation procedures as set Definitions forth in Agency regulations and guid- Sec. ance, including the payment of real es- 3560.1 Applicability and purpose. tate taxes or hazard insurance when 3560.2 Civil rights. due; 3560.3 Environmental review requirements. (2) Failure to report defaulted loans 3560.4 Compliance with other Federal re- to Rural Development within required quirements. timeframes; 3560.5 State, local or tribal laws. (3) Failure to ensure that the secu- 3560.6 Borrower responsibility and require- rity property is adequately maintained ments. during liquidation; 3560.7 Delegation of responsibility. (4) Delay in filing a loss claim; 3560.8 Administrator’s exception authority. 3560.9 Reviews and appeals. (5) Claiming unauthorized expenses; 3560.10 Conflict of interest. (6) Providing unauthorized assist- 3560.11 Definitions. ance; 3560.12–3560.49 [Reserved] (7) Failure to obtain the required se- 3560.50 OMB control number. curity or maintain the security position; Subpart B—Direct Loan and Grant (8) Violating usury laws; Origination (9) Negligence, gross negligence or 3560.51 General. misrepresentation; or 3560.52 Program objectives. (10) Committing fraud, or failing to 3560.53 Eligible use of funds. report knowledge of fraud or false in- 3560.54 Restrictions on the use of funds. formation. 3560.55 Applicant eligibility requirements. (b) Disputes. If the lender disputes the 3560.56 Processing section 515 housing pro- loss claim amount determined by Rural posals. Development, Rural Development will 3560.57 Designated places for section 515 pay the undisputed portion of the loss housing. claim, and the lender may appeal the 3560.58 Site requirements. decision in accordance with § 3555.4. 3560.59 Environmental review requirements. 3560.60 Design requirements. § 3555.356 Future recovery. 3560.61 Loan security. 3560.62 Technical, legal, insurance, and The lender must notify the Agency other services. upon sale of an REO property. If the 3560.63 Loan limits. lender recovers additional funds after 3560.64 Initial operating capital contribu- the loss claim has been paid, the pro- tion. ceeds will be distributed so that the 3560.65 Reserve account. total loss to the Government is equiva- 3560.66 Participation with other funding or financing sources. lent to the loss that would have been 3560.67 Rates and terms for section 515 incurred had the recovered amount loans. been included in the initial loss cal- 3560.68 Permitted return on investment culation. (ROI).

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