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Rule

Reinvention of the Sections 514, 515, 516, and 521 Multi-Family Housing Programs

Document Details

Information about this document as published in the Federal Register.

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AGENCIES:

Rural Housing Service, Rural Business—Cooperative Service, Rural Utilities Service, and Farm Service Agency, USDA.

ACTION:

Interim final rule; request for comments.

SUMMARY:

The Rural Housing Service (RHS), formerly Rural Housing seand Community Development Service (RHCDS), a successor Agency to the Farmers Home Administration (FmHA), is streamlining and reengineering its regulations, as well as utilizing several private sector processes and techniques in the administration of the origination, management, servicing, and preservation of its Multi-Family Housing (MFH) programs. These programs include the section 515 Rural Rental Housing (RRH) loan program, the section 514/516 Farm Labor Housing loan and grant program, and the section 521 Rental Assistance (RA) program. This interim final rule combines the provisions of the Streamlining and Consolidation of the sections 514, 515, 516, and 521 Multi-Family Housing (MFH) Programs Proposed Rule published on June 2, 2003, and the Operating Assistance for Off-Farm Migrant Farmworker Projects Proposed Rule published on November 2, 2000.

EFFECTIVE DATE:

February 24, 2005. Written or e-mail comments on this interim final rule must be received on or before December 27, 2004.

ADDRESSES:

You may submit comments to this rule by any of the following methods:

  • Agency Web site: http://rdinit.usda.gov/​regs/​. Follow the instructions for submitting comments on the Web Site.
  • E-Mail: comments@usda.gov. Include the RIN number (0575-AC13) in the subject line of the message.
  • Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
  • Mail: Submit written comments via Federal Express Mail or another mail courier service requiring a street address to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street, SW., 7th Floor, Suite 701, Washington, DC 20024.

All written comments will be available for public inspection during regular work hours at the 300 7th Street, SW., address listed above.

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FOR FURTHER INFORMATION CONTACT:

Sue Harris-Green, Deputy Director, Multi-Family Housing Direct Loan Division, Rural Housing Service, U.S. Department of Agriculture, Room 1241, South Building, Stop 0781, 1400 Independence Avenue, SW., Washington, DC 20250-0781, telephone (202) 720-1660.

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SUPPLEMENTARY INFORMATION:

Classification

The interim final rule has been determined to be significant, but not economically significant, and was reviewed by the Office of Management and Budget (OMB) under Executive Order 12866.

Authority

The existing statutory authority for the MFH programs was established in title V of the Housing Act of 1949, which gave authority to the RHS (then the Farmers Home Administration) to make housing loans to farmers. As a result of this Act, the Agency established single-family and multi-family housing programs. Over time, the sections of the Housing Act of 1949 addressing MFH have been amended a number of times. Amendments have involved issues such as the provision of interest credit, broadening definitions of eligible areas and populations to be served, participation of limited-profit entities, establishment of a rental assistance program, and imposition of a number of restrictive-use provisions and prepayment restrictions.

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940, subpart G, “Environmental Program.” RHS has determined that this action does not constitute a major Federal action significantly affecting the quality of the environment. In accordance with the National Environmental Policy Act of 1969, Pub. L. 91-190, an Environmental Impact Statement is not required.

Regulatory Flexibility Act

This interim final rule has been reviewed with regard to the requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has determined and certified by signature on this document that this rule will not have a significant economic impact on a substantial number of small entities since this rulemaking action does not involve a new or expanded program nor does it require any more action on the part of a small business than required of a large entity.

Federalism (Executive Order 13132)

The policies contained in this rule do not have any substantial direct effect on States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of Government. This rule does not impose substantial direct compliance costs on State and local Governments; therefore, consultation with the States is not required.

Civil Justice Reform (Executive Order 12988)

This rule has been reviewed under Executive Order 12988. In accordance with this rule: (1) Unless otherwise specifically provided, all State and local laws that are in conflict with this rule will be preempted; (2) no retroactive effect will be given to this rule except as specifically prescribed in the rule; and (3) administrative proceedings of the National Appeals Division of the Department of Agriculture (7 CFR part 11) must be exhausted before bringing suit in court that challenges action taken under this rule.

Unfunded Mandate Reform Act (UMRA)

Title II of the UMRA, Pub. L. 104-4, establishes requirements for Federal Agencies to assess the effects of their regulatory actions on State, local, and tribal Governments and on the private sector. Under section 202 of the UMRA, Federal Agencies generally must prepare a written statement, including cost-benefit analysis, for proposed and Final Rules with “Federal mandates” that may result in expenditures to State, local, or tribal Governments, in the aggregate, or to the private sector, of $100 million or more in any 1 year. When such a statement is needed for a rule, section 205 of the UMRA generally requires a Federal Agency to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective, or least burdensome alternative that achieves the objectives of the rule.

This rule contains no Federal mandates (under the regulatory Start Printed Page 69033provisions of title II of the UMRA) for State, local, and tribal Governments or for the private sector. Therefore, this rule is not subject to the requirements of sections 202 and 205 of the UMRA.

Paperwork Reduction Act of 1995

The information collection requirements contained in this regulation have been approved by the OMB under the provisions of 44 U.S.C. chapter 35 and have been assigned OMB control number 0575-0189, in accordance with the Paperwork Reduction Act (PRA) of 1995.

Collectively, 2,191,777 hours of paperwork burden will be made obsolete from 12 dockets. The new 3560 regulation imposes 907,389 hours of paperwork burden on the public. This is a decrease of 1,284,388 hours. However, only 111,552 hours of that are due to program changes.

Programs Affected

The programs affected by this regulation are listed in the Catalog of Federal Domestic Assistance under number 10.405—Farm Labor Housing Loans and Grants; 10.415—Rural Rental Housing Loans; and 10.427—Rural Rental Assistance Payments.

Intergovernmental Consultation

These loans are subject to the provisions of Executive Order 12372 that require intergovernmental consultation with State and local officials. RHS conducts intergovernmental consultations for each loan in a manner delineated in RD Instruction 1940-J (available in any Rural Development office and on the Internet at http://www.rdinit.usda.gov/​regs/​).

Background Information

An Overview

Most communities in the rural United States have a scarcity of decent rental housing that is affordable to very low-income families. In addition, migrant farmworkers and farm laborers, whose incomes are extremely limited, face some of the worst housing conditions in the nation. Despite improvements in housing quality, especially in the number of rural units with complete plumbing facilities, there are about 2.7 million families who live in substandard housing. In the Agency's experience, rural renters were more than twice as likely to live in substandard housing as people who owned their own homes. With lower median incomes and higher poverty rates than homeowners, many renters are simply unable to find decent housing that is affordable. RHS's rental housing programs are some of the few resources that enable the very low-income renters in the rural United States to access decent, safe, sanitary, and affordable housing. In many rural communities, there are simply no other safe and sanitary alternatives for very low-income people.

Through public and private partnerships, RHS enables limited profit and nonprofit developers to build rental housing for low-income and very low-income tenants across the rural United States. As of February 2004, the nearly $12 billion portfolio of 463,632 units and more than 17,100 projects often provides the only decent, affordable rental housing available in rural areas. The program provides affordable rental housing to very low- and low-income rural families, to disabled people, and to elderly residents. The average tenant has an adjusted income of $9,452.

The Agency operates a multifamily rural rental housing direct loan program under section 515 and section 514 for farm labor housing. The Agency also provides grants under the section 516 farm labor housing program. The direct loan program employs a public—private partnership by providing subsidized loans at an interest rate of 1 percent to developers to construct or renovate affordable rental complexes in rural areas. This 1 percent loan keeps the debt service on the property sufficiently low to support below-market rents affordable to low-income tenants. Many of these projects also utilize low-income housing tax credit (LIHTC) proceeds. This program is typically used in conjunction with the RHS section 521 Rental Assistance (RA) program, which provides project-based rental assistance payments to property owners to subsidize tenants' rents to an affordable level. With rental assistance, tenants pay 30 percent of income toward their rent (including utilities). Some section 515 projects also utilize the U.S. Department of Housing and Urban Development's (HUD's) section 8 project-based assistance, which enables additional very low-income families to be served.

The direct loan and grant programs under sections 514 and 516 provide low interest loans and grants to provide housing for farmworkers. These workers may work either at the borrower's farm (“on-farm”) or at the borrower's or any other farm (“off-farm”) so long as the tenants meet program eligibility requirements. Section 521 rental assistance is available for off-farm labor housing, but not on-farm labor housing. The Agency has decided to not provide RA to on-farm labor housing units because of its limited availability.

Goals of the Regulatory Streamlining Process

This rule results from RHS's pledge to make its programs more customer friendly, streamline the processes, reduce costs to the taxpayer, and increase the Agency's level of customer service. These goals were accomplished through the input and commitment that resulted from numerous stakeholder meetings with recognized leaders in the multi-family industry, including borrowers, management agents identified by industry groups, and tenant representatives. Representatives of State housing finance agencies, accounting firms, and the USDA Office of Inspector General (OIG) also participated. Through these meetings, RHS was able to draw on a vast amount of expertise and knowledge to meet the following objectives of multi-family housing reinvention:

  • Assure affordable safe, decent, and sanitary housing for very low- and low-income residents in rural communities.
  • Consolidate and simplify 14 regulations into one regulation for rural rental housing, farm labor housing, and rental assistance.
  • Develop an efficient loan application process that supports the creation of partnerships and leveraging with local, State, and other Federal entities.
  • Clarify RHS's existing policies and procedures to reflect the best practices within the Agency and within the multi-family field.
  • Improve efficiency and service to RHS's customers, correcting past problems and addressing concerns raised by stakeholders so that particularly complex processes, such as preservation, work better.
  • Make much of the farm labor housing review and approval processes the same as those for rural rental housing processes.
  • Create a series of handbooks available to field staff and to applicants, borrowers, and partners that will give clear guidance on policies, such as developing project budget approvals, determining project feasibility, and servicing actions.

Streamlining and Consolidation

RHS is undertaking a major redevelopment and consolidation of Rural Development (RD) regulations affecting the sections 514, 515, 516, and 521 Multi-Family Housing programs. Current customers of these programs are affected by 14 separate regulations, but as a result of reinvention, the interim final rule revises and consolidates Agency regulations affecting the Start Printed Page 69034sections 514, 515, 516, and 521 Multi-Family Housing programs. This rule consolidates the policies outlined in 14 separate regulations and a number of Administrative Notices into one regulation and moves the procedural guidance to program handbooks. A list of the regulations being consolidated follows:

  • 7 CFR part 1806, subpart A—Real Property Insurance
  • 7 CFR part 1930, subpart C—Management and Supervision of Multi-Family Housing Borrowers and Grant Recipients
  • 7 CFR part 1944, subpart D—Farm Labor Housing Loan and Grant Policies, Procedures, and Authorizations
  • 7 CFR part 1944, subpart E—Rural Rental and Rural Cooperative Housing Loan Policies, Procedures, and Authorizations
  • 7 CFR part 1944, subpart L—Tenant Grievance and Appeals Procedure
  • 7 CFR part 1951, subpart D—Final Payment on Loans
  • 7 CFR part 1951, subpart K—Predetermined Amortization Schedule System (PASS) Account Servicing
  • 7 CFR part 1951, subpart N—Servicing Cases Where Unauthorized Loan or Other Financial Assistance Was Received—Multi-Family Housing
  • 7 CFR part 1955, subpart A—Liquidation of Loans Secured by Real Estate and Acquisition of Real and Chattel Property
  • 7 CFR part 1955, subpart B—Management of Property
  • 7 CFR part 1955, subpart C—Disposal of Inventory Property
  • 7 CFR part 1956, subpart B—Debt Settlement Farm Loan Programs and Multi-Family Housing
  • 7 CFR part 1965, subpart B—Security Servicing for Multiple Housing Loans
  • 7 CFR part 1965, subpart E—Prepayment and Displacement Prevention of Multi-Family Housing Loans

These changes have two clear benefits. First, the consolidated, streamlined regulation makes information easier to access. Answers to policy questions are found in one document that has been shortened from over 1,500 pages to less than 200 pages.

Similarly, answers to process and implementation questions are found in three handbooks. These handbooks provide “how-to” guidance on loan origination, asset management, and loan servicing. Agency staff, property owners, property managers, and residents can look for most answers to day-to-day questions in the handbooks' plain English explanations and examples. If the regulatory basis for a procedure is in question, that information can be easily found in the streamlined regulation. The increased ease of finding information will help improve public understanding of the rules and eliminate inconsistencies in interpretation.

Second, the division of policy and procedure gives the Agency more flexibility to update and revise program procedures. For example, as automation changes the way program reporting occurs, relevant procedures can be updated in the handbooks without going through the complex process of changing the regulation. This will make the Agency more responsive to changes in the business environment, an important initiative as the Federal Government strives to have more of its business conducted online and through electronic submissions.

The paperwork burden reduction to the public resulting from this rule will be approximately 45 percent. This estimate is derived from the Paperwork Burden docket that RHS prepared.

The Handbooks

As stated above, the Agency is finalizing three separate handbooks that present the reader with administrative guidance on loan origination, asset management, and project servicing. The Loan Origination Handbook instructs the reader on application and processing procedures and provides information on matters such as what forms must be filed, where to submit loan requests, and the Agency's internal processing procedures. It also provides Agency staff with the guidance needed to originate loans and grants efficiently and effectively. The Asset Management Handbook provides RHS Multi-Family Housing staff with guidance about the Agency's procedures for overseeing borrowers' performance in meeting their responsibilities under the program. The Project Servicing Handbook provides loan servicers with guidance about the Agency's procedures for servicing actions involving borrowers that receive loans or grants for MFH projects.

The handbooks are not published in the Federal Register but are available to the public at no cost. The public can access the handbooks through their local RHS servicing office.

Exhibits

Many of the exhibits that were part of the expired regulations may be found in the three companion handbooks to 7 CFR part 3560: Loan Origination, Asset Management, and Project Servicing. As an example, exhibit B-1 of 7 CFR part 1930, subpart C, is found in exhibit 3-1 of chapter 3 of the Asset Management Handbook.

Discussion of the Interim Final Rule

This interim final rule combines the provisions of the Streamlining and Consolidation of the sections 514, 515, 516, and 521 Multi-Family Housing (MFH) Programs Proposed Rule published on June 2, 2003, and the Operating Assistance for Off-Farm Migrant Farmworker Projects Proposed Rule published on November 2, 2000.

RHS is issuing this regulation as an interim final rule, with an effective date 30 days after publication in the Federal Register, given that these regulatory changes are very extensive, affect all aspects of the programs, and seek to achieve significant streamlining of the programs' regulatory provisions. Delaying implementation of the rule to allow more time for further consideration would not be in the best interest of the direct MFH program or its recipients. All provisions of this regulation are adopted on an interim final basis, are subject to a 90-day comment period, and will remain in effect until the Agency adopts a final rule.

Changes Presented in the 7 CFR Part 3560 Proposed Rule That Remain Proposed, but Not Implemented in the Interim Final Rule

Reserve Requirements for Project Improvements

Current regulations include standards for physical condition, maintenance, and reserve levels to address the physical condition of the property. These regulations require that borrowers initially contribute 1 percent annually of total development costs toward a reserve for project improvements until a total of 10 percent is reached. While borrowers are permitted to request adjustments to their reserve contributions, there is no systematic provision for reevaluating reserves over the life of the project.

The proposed rule included language requiring a life-cycle cost analysis be used to establish the initial reserve amount needed to meet the capital needs of new projects. For existing projects, the proposed rule would have required that any servicing action that involves additional Agency funds must take into account physical needs of the project, based on a capital needs assessment. The regulatory impact analysis for the proposed rule indicated that these provisions would increase rents and result in additional demand for rental assistance payments. Start Printed Page 69035

Since the proposed rule was published, RHS has undertaken a comprehensive property assessment of the properties in the section 515 portfolio. The preliminary results provided useful information for reconsidering the extent of capital reserves that may be necessary to meet the capital needs of projects and to explore policy options for addressing these needs to be reflected in any necessary budgetary and legislative changes. More time is needed to properly address these matters. Accordingly, RHS has decided to publish an interim final rule that does not include these provisions—specifically § 3560.103(c)(3) and § 3560.306(k)(1) of the proposed rule—until their impacts can be assessed and policy decisions can be made for a long-term strategy.

For the interim final rule, the Agency is continuing the policy from the existing regulation 7 CFR part 1930, subpart C. Because 7 CFR part 1930, subpart C is being replaced by 7 CFR part 3560 in this rulemaking, the relevant language from the previous regulation is being carried forward and included in § 3560.306(j)(1) (Changes to Reserve Requirements), while the language from § 3560.103(c)(3) is removed and the paragraph marked as reserved.

Changes to the Rule With Significant Impact

Investment Earnings on Reserve Account Funds

RHS has found that most project owners are putting their reserve funds in accounts that earn no or minimal income. The average reserve account has been earning only 2 percent interest annually. Project owners indicate that, under current regulations and tax rules, they have few options for investing these funds and face a strong disincentive for investing them in a manner that maximizes their return. The disincentive is due to Internal Revenue Service (IRS) rules that treat income earned on reserve accounts as investment income for the owner and thus is taxable, rather than project, income.

This rule makes two changes to address these limitations. First, it allows a greater number of investment options, including relatively conservative investment vehicles that are used by public agencies and are not expected to pose a significant increased risk to the funds. This change would give owners more flexibility for investing their reserve account funds and is expected to result in greater returns on these funds and thus more income to be put toward better project operations and capital improvements. The increase in interest income would lower the amount needed from tenant rents and rental assistance to meet project needs.

Second, the rule addresses the issue of “phantom income”—the interest income earned on reserve accounts. This income is committed to the project but not accessible to the owner. To ease the burden of paying taxes on this phantom income by for profit and limited profit entities, the rule allows owners, with RHS's approval, to withdraw up to 25 percent of the annual interest income earned on the reserve funds to cover the tax expense. The 25 percent allowance was determined to be a reasonable estimate of the tax rate for the average investor. It was decided to use a single rate for all owners to simplify the administration of this feature. RHS also consulted with the USDA OIG and the American Institute of Certified Public Accountants (AICPA) to arrive at the 25 percent figure.

Transferring Surplus Funds

Prior regulations required that if a property had a surplus in its general operating account at the end of the project's fiscal year in excess of 10 percent, the amount over 10 percent had to be transferred into the property's reserve for replacement account. This policy has been changed so that if a project has surplus cash in excess of 20 percent at the end of the project's fiscal year, the amount over 20 percent must be transferred to the reserve account. Numerous comments to the proposed rule said that the prior policy allows for no contingency should the project have an unplanned, extraordinary expense. The policy also results in project cash flows that are extremely tight. The new policy in the interim final rule should help to mitigate these cash flow problems.

Treatment of Surplus Operating Funds Transferred to the Reserve Account

As stated above, the Agency requires surplus funds in a project's operating account to be transferred into the project's reserve account. However, there was confusion about whether the amount transferred could be deducted from the scheduled contributions to the reserve account. This issue is clarified in the interim final rule, which states that transfers of surplus funds into the reserve account may not be deducted from the scheduled contribution. The surplus funds are to be used for addressing a project's capital needs.

Prepayment Policies and Procedures

The Agency, borrowers, and tenant advocates agreed that the prepayment request process is difficult and confusing. Agency staff in the National Office recognized that they were spending a great deal of time providing technical assistance to Field Offices in responding to prepayment requests. Borrowers commented that the process was unduly burdensome to borrowers who were within their rights to request prepayment. Tenant advocates pointed out that tenants are virtually excluded from the process because the process complexity makes it difficult for tenants to take action. Discussion of these concerns at the stakeholder meetings indicated that RHS needed to clarify many of the policies toward prepayment and, where possible, make policy changes that would help simplify the process. Consequently, this rule includes changes to Agency policy regarding tenant notification and projects on the waiting list for incentives.

Tenant Notifications

Stakeholders suggested changes to the content and timing of tenant notifications to provide tenants with the information they need to participate in the prepayment process. This rule replaces the requirement for one early tenant notification with a series of notifications aimed at keeping the tenants informed of the Agency's and the borrower's decisions throughout the process.

Alternatives to Acceleration When Needed To Preserve Affordable Units

The Agency received numerous comments on the proposed rule on the preservation process. One issue that was raised repeatedly is that the Agency should have alternative means to sanction a borrower for monetary or nonmonetary default without accelerating the borrower's account. Commenters expressed concern that a borrower could force the Agency to accelerate the loan to be able to prepay the loan. The Agency cannot prevent such an occurrence in all cases, but has added language to the interim final rule to acknowledge this problem and to demonstrate its intention to prevent it from occurring. Before accelerating a project loan, the Agency will consider the possibility that the borrower is forcing an acceleration to circumvent the prepayment process. If it is found that this is the borrower's motivation, the Agency will consider alternatives to acceleration, such as suing for specific performance under loan and Start Printed Page 69036management documents. Subpart J of the interim final rule provides several alternatives to acceleration.

Waiting List

One of the most common complaints heard about the prepayment process is its open-ended nature. Borrowers who are approved for incentives and agree to stay in the program in exchange for incentives may have to wait years before the funds for the incentives become available. The interim final rule establishes a maximum time on the waiting list of 15 months and allows borrowers three choices at the end of that time: (1) Stay on the waiting list and continue waiting for the incentives; (2) withdraw from the list and continue operating the property for program purposes; or (3) offer to sell the property to a nonprofit organization. This last option may allow some properties to eventually prepay if they complete the process involved in offering the project for sale and fail to receive a bona fide offer. This option responds to the reality that the Agency may not always have the resources to keep borrowers in the program indefinitely and that costly legal battles are likely if it does not allow other options to the borrowers. Further, it is believed that many borrowers have not applied for prepayment incentives and joined the waiting list because of the extended time period they must currently remain on the list. If the 15-month maximum time period is implemented, a greater number of these borrowers may seek prepayment with the expectation that they will be allowed to exercise one of the three options at the end of the 15-month time period. If borrowers do prepay and convert their apartment complexes to market rate units, RHS will take measures to protect the tenants at these properties by providing them with a letter of priority entitlement (LOPE) that gives them priority in Agency-financed housing elsewhere. However, if alternative vacant RHS-financed rental housing is not available in the market, the impacted tenants face displacement or rent overburden if they remain in place.

Incentives

The interim final rule clarifies the Agency's policy on incentives and adds several requirements to help ensure that the limited amount of funding available for incentives, as discussed in the overview section of this analysis, is used efficiently to benefit the program. For example, this rule outlines the process a borrower must follow when requesting permission to prepay and be eligible to receive incentives.

In addition, the proposed rule clarifies that third-party equity loans are an option for borrowers who are seeking equity loans through the prepayment process. The use of third-party equity funding stretches RHS's incentive funds by providing resources from alternative funding sources. However, it should be noted that debt costs from other sources might be higher than financing received under the section 515 program. For example, section 515 funding is lent at an effective 1 percent interest rate and amortized for 50 years, whereas third-party funds may be lent at rates ranging from interest free to market rate depending upon the source of the funds, with amortization periods ranging from fully deferred to 30 years. All proposed third-party equity loans must be underwritten and reviewed to the same standard as section 515 loans to ensure that no project is made financially unfeasible as a result of a third-party loan.

Initial Operating Capital

Under previous regulations, borrowers were required to pay the equivalent of 2 percent of the cost of developing a project into an account for initial operating costs. They earned no interest on this account, which also received funds from other sources, including rental income. If within 2 years the project was operating successfully and there was sufficient capital in the operating account to maintain the financial soundness of the account, borrowers might take out up to the full amount of their contribution. While on deposit in the operating account, borrowers received no return on investment for the funds. After 2 years, any portion of the contribution that remained in the account must remain in the account to meet ongoing operating capital needs. During the stakeholder meetings, borrowers expressed concern that the previous regulation did not allow them sufficient time to recover their contribution, even when a project is functioning well and no longer needs the additional capital. RHS determined that the 2-year limit was originally set due to difficulties in tracking the funds within the project's overall budget, and that its new management information system, has the capability to provide better tracking and disclosure of these funds. Therefore, RHS is extending the time limit for the recovery of initial operating capital from 2 to 7 years. In selecting 7 years for the new limit, RHS received input from field staff and industry groups indicating that the prospects for recovery after 7 years were minimal, either because financial soundness could not be established or owners were willing to leave their contribution in the account.

This change allows more borrowers to fully recover the payments they make to initial operating capital accounts. It is uncertain how many borrowers would benefit from the change and how many dollars these borrowers would be allowed to recover from these accounts. Because of the limitation on recovery from only financially sound accounts, it is unlikely that there would be immediate, negative impacts on the performance of the MFH programs. However, it should be noted that by allowing borrowers to recover funds from initial operating capital accounts, these funds would not be available for ongoing capital needs. The potential withdrawal of initial operating capital is not considered to have significant impacts on rents and thus on costs to the Government and tenants.

Other Changes to the Rule

Conventional Rents for Comparable Units

RHS has incorporated the concept of “conventional rents for comparable units” (CRCU), which is one of the most important policies established by the interim final rule. The concept is applicable to loan origination, loan servicing, replacement reserve set asides, and preservation. In essence, rents are to be capped at conventional rents for comparable units in the area where the housing is located. Comparable units would be those equivalent to RHS-financed units in terms of quality and amenities. If no such units are located in the same community, units from a similar community could be used for comparison. Comparable units also means that the units the Agency finances would meet a standard of economical development—modest in size, facilities, and design, yet compatible with the community.

RHS will continue to require that rents be based on the project's operating costs. However, the interim final rule requires that RHS not approve project proposals, servicing actions, or prepayment incentives that involve rents above the CRCU, except in limited circumstances, where such rents are determined to be in the best interest of the Government and the tenants of the project. The Agency wants to emphasize that the comparison to CRCUs is not used during annual budget reviews and requests for rent changes.

By placing an upper limit on rents, RHS expects to protect the Government from investing in projects that may be Start Printed Page 69037wasteful or fraudulent, and to ensure that projects are competitive so that vacancy and other market-driven problems can be avoided. In this way, the CRCU should improve the long-term viability of MFH projects, limit the costs of rental assistance, and reduce the risk of defaults.

The interim final rule maintains flexibility for serving areas where MFH projects provide the only decent, safe, and sanitary affordable rental housing in a local housing market, or where a significant amount of the substandard housing rents for less than the cost of operating a MFH project. In such cases, RHS may base the CRCU on rents outside the local community. It may also grant an exemption for exceptional circumstances.

The CRCU will create a definitive underwriting standard. It will apply to leveraging other low-interest loan funds or paying for additional owner contributions (up to 3 percent return on investment over required contribution), improving project design and amenities (within the definition of economical development), and adjusting reserves or other serving actions. In areas where rents are below the CRCU, rental assistance costs and loan levels may increase. However, it will also ensure “marketable units” if the Agency should lose rental assistance units.

Cost Reasonableness Basis for the Evaluation of Project Proposals

The interim final rule also includes changes related to evaluating the cost reasonableness of project proposals. Under current regulations, the Agency has applied a policy of cost containment when evaluating whether the costs of the proposed design for new projects are reasonable. While this policy has effectively held down construction costs for new projects, Agency field staff and borrowers report that lower-cost project design features are not always cost effective over the long term. They report that while certain design features reduce initial construction costs, they actually cost more over the life of the project because the components used require higher levels of maintenance and more frequent replacement.

Projects with these design features experience higher routine maintenance costs, higher expenditures of project reserves, and a greater need for subsequent financing for rehabilitation. The result is an upward pressure on project rents and increased use of rental assistance funding. To the extent a project cannot support the rent increases needed to cover these costs, the project faces an increased risk of financial failure or compliance violations due to physical deficiencies.

Previously, RHS had no process for conducting life-cycle analyses. The requirement for a life-cycle cost analysis is to be used for new projects. The requirement is intended to assure quality construction, as well as the long-term viability of complexes. Under the interim final rule, the Agency will change its policy for evaluating project proposals to consider the life-cycle costs of proposed project designs. Under this policy, the Agency may approve a proposed project design that is not the lowest cost if the life-cycle cost analysis that is prepared by the project architect reveals that the design achieves the lowest overall cost over the life of the project. Industry standards will be used for the analysis. To assure that new projects are affordable and appropriate to the local housing market, this rule restricts the Agency from approving project designs that would cause rents to exceed the market standard (except in exceptional circumstances where such costs are determined to be in the best interest of the Government and the tenants). Examples of two design features that may cost more initially but decrease operating expenses over the life of the project are brick exteriors and increased thermal standards. In the past, many projects were built using a popular exterior plywood siding. These buildings require replacement of the original siding. Similar buildings that utilized brick as an exterior finish or partial finish are not having similar expenses, thereby decreasing demands on the reserve accounts. Thermal standards in RHS-financed projects often exceed local codes. By building RHS projects with more energy efficiency, tenant and owner utility expenses are kept lower, thereby decreasing the need for rent increases or tenant utility allowance increases. By avoiding the additional rent and utility allowance increases, tenant rent overburden is avoided, as is the additional drain on scarce rental assistance resources.

Because this change will allow for more costly designs, the Agency expects the size of initial loans and initial rents to grow slightly. However, higher upfront costs would be offset by lower long-term costs. The Agency expects that new projects receiving funding under this policy will have lower maintenance and rehabilitation needs, thereby lowering project rents and use of Agency rental assistance over the life of the project. Lower maintenance expenses, resulting in rents essentially the same as projects built under cost containment guidelines, would offset the increased debt service due to higher construction costs. This change will also lower demand for subsequent loans from the Agency in a time when additional loan funds are increasingly scarce.

Management Certification

Under previous regulations, RHS needed to approve the management agreement between the borrower and the management entity for a project. This requirement for Agency approval was designed to ensure that the management agent was also accountable for meeting program requirements. However, the Agency has found that this policy resulted in a time-consuming approval process because these agreements varied considerably from borrower to borrower, and lacked the consistency necessary to implement a national program. Further, the USDA OIG has found that many management agreements and plans lack the specificity to accurately describe how project and management costs are prorated between expenses paid by the project fee and those paid by the management fee.

The interim final rule eliminates Agency approval of management agreements and instead requires borrowers to submit a management certification in an Agency-approved format. In submitting this document, borrowers certify that their agreement with the project management entity obligates that entity to comply with program requirements; establishes sanctions for failure to comply with these requirements, including termination of the agent; and specifies penalties for false certifications. This change eliminates the administrative burden on RHS for approving management agreements, while strengthening the Agency's ability to hold borrowers and their agents accountable for their management responsibilities. In addition, revisions to the management fee policy, discussed below, allow for a more definitive method to differentiate between project and management agent expenses.

Management Plan

Under previous regulations, borrowers were also required to obtain RHS's approval of the management plans for their projects. The purpose of this policy was to assure the Agency that the borrower and management entities would have adequate systems in place to comply with program requirements. The requirement to obtain Agency approval for updates only added to the burden for both the Agency staff and the borrowers. This policy also left Start Printed Page 69038the Agency in an awkward position when borrowers with sound projects changed their operations but did not update their management plan. The USDA OIG has reported audit findings where borrowers and management agents have not been operating the properties in conformity with the executed management plan. While this is true, RHS has found that the agent and owner have not engaged in an improper practice; instead, the practice is just not documented correctly in the management plan. The OIG has agreed that if the practice had been correctly disclosed in the management plan, the practice would not have been listed as an audit finding. The OIG has worked with RHS during the stakeholder process to identify changes in policy and procedures and has addressed this particular area of confusion. The result of the change will establish clearer borrower and management agent accountability combined with procedures that discourage RHS micromanagement of borrower and management agent business practices. Additionally, fewer OIG findings will result, requiring less OIG and RHS staff time to resolve.

The interim final rule eliminates Agency approval of project management plans and instead requires that borrowers submit a management plan that addresses a specified list of operational areas. RHS staff will review the plan to see if the required areas have been covered in the plan but will not approve the plan. The plan will be used to monitor project performance, but discrepancies between project operations and the plan will not constitute a violation of program requirements, unless the discrepancies affect program performance. This change reduces the administrative burden on RHS staff and borrowers. It also provides borrowers with greater flexibility to make sound changes in project operations without creating a performance concern.

Management Fees

Previously, program regulations required that management fees for projects be reasonable and competitive. However, the USDA OIG staff found that the management fees approved for projects varied significantly, ranging from as low as $25 per unit per month to $55 per unit per month across States. This led the OIG to question whether the higher fees found in some instances were reasonable. As with management plans, the OIG expressed concern that the current regulations were neither clear nor consistent concerning what services were to be included in the management fee. In some States many of the maintenance services provided by management company staff were included in the management fees, and in other States the charges were not. In some States insurance and tax costs for project employees were included in management fees, while in other States the costs were billed directly to the project. Comments by Agency staff at stakeholder meetings revealed that the variations were often due to differences in Field Office interpretations about the services to be covered by the management fee. They noted that services not covered by the fee were paid for as a line item on the budget. When management fees plus other fees for services were accounted for, management compensation was consistent. Together with representatives of the property management industry and the OIG, RHS developed the bundle of management services that is a part of this regulatory change. By moving to a standardized grouping of services that is to be included in the management fee, RHS and the OIG believe that the change will greatly improve consistency among different areas of the country and RHS offices. As stated in the previous paragraph, as these services were all being provided previously but charged to the project on different lines of the operating budget. The grouping of these expenses in a different manner would neither increase nor decrease the overall cost to the project or the rents being charged.

The interim final rule and accompanying handbooks address the inconsistencies in fees by establishing a standard bundle of services covered by the management fee and a framework for setting standard adjustments for project characteristics that warrant slightly higher fees, such as for a new management agent taking over a troubled property. However, this rule should improve RHS's ability to document that the management fees for projects are reasonable. It should also ensure consistency among RHS Field Offices in interpreting the services included in fees. Additionally, the number of OIG findings should be reduced, requiring less OIG and RHS staff time to resolve.

Standards for Physical Conditions at Projects

Previous regulations established borrowers' responsibility to maintain their projects in decent, safe, and sanitary condition. However, the USDA OIG raised concerns about a lack of consistency in how this standard has been implemented.

The interim final rule establishes specific standards for physical conditions that clarify the conditions that constitute decent, safe, and sanitary housing. These standards do not represent a change in Agency policy. Rather, they make Agency expectations explicit and thus improve the Agency's ability to enforce physical standards, thereby improving the quality of living conditions for tenants and better preserving the security of Agency loans.

Recertifications of Tenant Eligibility

Recertifications are used to document tenants' income for the purpose of determining eligibility to live in a multi-family housing unit and qualify for rental assistance payments. Previous regulations required both an annual recertification and an interim recertification whenever tenants' income changes. Stakeholders indicated that the recertification process was time consuming for tenants, borrowers, and the Agency.

The interim final rule simplifies the process by eliminating the requirements for an interim recertification for tenants' monthly income changes of less than $100. RHS arrived at the $100 threshold by comparing the cost of recertifying tenants with the benefit either the Government or the tenants would receive as a result of increased or decreased rent. Based on consultation with industry groups and the OIG, RHS determined that the cost to recertify a tenant was about $150. Assuming that any change would apply for only 6 months of the year, the $150 figure was converted to a monthly figure of $25, which became the threshold. However, after receiving numerous comments that this threshold amount was too low, that the amount of increase in tenants' contribution toward rent would be minimal, and in consideration of the tenant income profile of RHS properties, the Agency decided to increase the threshold to $100 per month of income change rather than tenant contribution. The regulation also allows tenants to request an interim recertification any time between annual recertifications if their income changes by $50 or more per month. This provision was included to avoid adverse impacts on tenants with the lowest income for whom the $50 per month figure may constitute a significant share of their income.

While a detailed analysis of how the impact of the $100 and $50 thresholds might be distributed between the Government and tenants was not completed, recent OIG audits have indicated that the current recertification process produces approximately the same amount of rent increases as rent Start Printed Page 69039decreases, thus resulting in little or no overall change in rental assistance payments.

Lease Protection

The interim final rule would require that leases for rental units that receive rental assistance include a clause that specifies that tenants' contribution to rent will not increase if rental assistance is terminated due to actions by the borrower/owner. RHS estimates that there have been two to four incidents per year in which borrowers/owners have attempted to make up for the loss of rental assistance payments due to a default on their part by raising tenants' rents. Such action usually occurs in a contentious situation, with the borrowers/owners already in default and uncooperative. Consequently, requiring leases to include a clause specifically prohibiting such action may not resolve all cases. However, it would provide tenants with a regulatory and lease citation that could be used in bringing court proceedings against abusive borrowers/owners. Further, it would provide RHS with an additional instance of noncompliance with regulations that could be used against owners in a liquidation action or in a criminal or civil court case. However, it is uncertain whether cases could be resolved more quickly at less cost to the Government.

While the interim final rule offers some additional protection to tenants and imposes some additional responsibility on borrower/owners, it is difficult to place a monetary value on these impacts. Each case is likely to be different, and the resolutions are uncertain. The low incidence, however, suggests that the impacts would not be significant in value.

Limited English Proficiency (LEP)

The Agency has issued guidance to clarify the responsibilities of recipients and subrecipients of Federal funds from the Agency to assist them in fulfilling their responsibilities to LEP persons under title VI of the Civil Rights Act, as amended, and implementing regulations. The Agency has incorporated language in subparts A and D of the interim final rule stating that borrowers and grantees must take steps to ensure the meaningful participation in Agency programs and activities by LEP persons free of charge.

Application Process for Rental Subsidies

Rental subsidies provide critical funds for housing very low-income tenants. Projects that receive RHS's rental assistance, including interest subsidy and rental assistance payments, depend on the continued availability of these subsidies to maintain in-place tenants in their units. Under previous regulations, borrowers were required to complete full rental assistance requests to renew expiring subsidies. Stakeholders noted that the Agency gathers sufficient information through the budget approval process to assess project needs for rental assistance.

The interim final rule states that expiring subsidies will be renewed at the existing number of units and to the extent that sufficient funds are available. To indicate that rental assistance units are needed, borrowers must fill in a single check box on the project budget form (which must be filed annually) instead of completing a separate form as currently required. These changes relieve borrowers of the burden of applying, and the Agency of the burden of reviewing the requests. Instead, the review can be accomplished as part of the budget approval process. The change has no effect on project or program budgets. It does not change the Agency's determination about rental subsidies; it simply streamlines the process.

Transferring Rental Assistance

The Agency has revised the interim final rule to state that the Agency will transfer rental assistance from one property to another after it has been unused for 6 months. Prior to transferring the RA, the Agency must conduct an analysis to determine whether any of the current tenants or applicants at the top of the waiting list need RA, so that the subsidy is not transferred prematurely. This provision should help to ensure that rental assistance stays in or is transferred to properties where it is needed the most.

Budget Approval

RHS requires its borrowers to submit an annual budget, which is used in setting rents. Approximately 92 percent of these budgets arrive for approval at the same time because most owners operate on a calendar-year basis and their schedules for developing budgets is about the same. Budget approval is a time-consuming process that taxes RHS staff resources in times of high volume and forces borrowers to operate for extended periods of time with unapproved budgets while the review process is underway. Previous regulations required that all budgets be reviewed in the same way, regardless of whether they represented no real change from the previous year or contained significant and potentially controversial changes.

The interim final rule establishes an expedited review for those budgets that are within a certain threshold requiring little or no increase in rents. The threshold is based on data to be obtained from the MFIS III ADP system on area-wide norms for projects within RHS's MFH portfolio, as well as commercially available multifamily income and expense surveys. Details on how the threshold will be computed will be contained in the program handbooks rather than in the interim final rule, which will facilitate making any necessary adjustments in the threshold to meet changing conditions.

The new process could improve program performance by allowing RHS to focus its review on those budgets that contain significant changes, while expediting approval of those budgets with little or no change. However, it is unlikely that the new process would have measurable budget impacts, such as reduced rental assistance costs or fewer defaults, because the decisions RHS makes on whether to approve a budget will most likely be the same under the new process as under the existing system. Those decisions will, however, be reached in a more efficient manner.

Summary of Tenant Comments

There was a requirement in the proposed rule stating that when a borrower requests a rent increase for a particular Agency-financed MFH project, the borrower must provide a summary of all written comments from the tenants to the Agency. The Agency determined that this was a cumbersome and unnecessary requirement as most tenants provide their comments on rent increase proposals directly to the Agency anyway. The Agency removed this requirement, resulting in a decrease in the borrower's burden.

Project Operating Accounts

The interim final rule states that rather than maintaining separate bank accounts for every property, a borrower or manager of Agency-financed MFH projects may have one operating account for all properties in their portfolio, as long as the borrower, manager, and bank track each property's funds separately. With today's enhanced reporting technology, banks can divide accounts into subaccounts, to ensure accurate reporting of all transactions for each property. In addition, this policy is economical, because it helps the borrower and/or manager save on bank fees and charges for separate accounts. Start Printed Page 69040

Priorities for Budgeted Expenses

The priorities for budgeting a property's operating expenses have been revised in the interim final rule. In the proposed rule, the first priority for budgeted expenditures was critical maintenance and operating expenses. Due to comments received by the Agency, the interim final rule now lists amounts owed to a prior lienholder as the first priority for budgeted expenditures. This new policy reflects the current reality that the Agency is not always the primary lienholder on Agency-financed projects. The policy also acknowledges the Agency's focus on participating with other funding sources.

Annual Financial Reporting

Under previous regulations, the Agency required that for all projects of 25 units or more the owners contracted with a Certified Public Accountant (CPA) to perform an audit in accordance with Government Auditing Standards (GAS). Because a large percentage of the Agency's portfolio consists of projects with between 16 and 24 units, annual financial statements have not been prepared for a substantial number of projects financed by the Agency. Moreover, certain components of GAS-audited financial statements did not address the Agency's need for certain information related to specific aspects of project performance, and these financial statements are prohibitively expensive for a substantial portion of the Agency's portfolio. Finally, the previous audit guide did not require the auditor to provide information that remains of specific importance to the Agency, such as information on identity-of-interest (IOI) transactions.

Under the interim final rule, owners of MFH projects with 16 or more units must base their annual financial reports on an engagement report completed according to “agreed upon procedures” established by the Agency, which will be included in detail in the new Multi-Family Housing Engagement Guidelines to be delivered by the Agency. Borrowers must include the engagement report with their annual financial reports submitted to the Agency. These borrowers will not be required to submit a GAS audit prepared by an independent CPA. The new Multi-Family Housing Engagement Guidelines will provide specific instructions on how the individual preparing the annual financial statements should handle compliance issues. The annual financial statements must be completed using agreed upon procedures that help meet certain performance standards. The engagement must be initiated by borrowers using an engagement letter, which will either:

  • Reference the Multi-Family Housing Engagement Guidelines, which will specify the program compliance issues that the Agency wants the preparer to address and the guidelines for testing compliance; or
  • State the list of compliance issues that the Agency wants the preparer to address.

Owners of small projects, which are defined as projects with fewer than 16 units, must submit annual financial statements that are prepared in a manner consistent with the Agency's Engagement Guide using a limited scope engagement based on Agency-approved procedures and must certify that the housing meets the performance standards established in the interim final rule. The annual financial statements may be prepared by a CPA or other individual with the training and experience to prepare the report. The information presented in the annual financial statements must be prepared in a manner consistent with the requirements of the Engagement Guide.

In response to USDA OIG concerns, the Agency is implementing these changes to the annual financial reporting system to ensure that a higher percentage of projects submit annual financial statements to the Agency, and that the preparers of these statements are made aware of the Agency's specific concerns so that project funds are spent appropriately.

Loans From Third Parties

In its continuing efforts to streamline and facilitate transfers, the Agency has included a new provision in the interim final rule that specifically allows for loans from a third-party source in conjunction with an ownership transfer or sale of a housing project. The loan may be in the form of a first mortgage or deed of trust, junior or parity lien, or soft second mortgage. This provision should make it easier for purchasers to put together more than one source of financing and allow for greater leveraging of Agency funds.

Transfers at New Rates and Terms

Previously, Agency regulations implied that project transfers typically occur at the same rates and terms as the original loan. In acknowledging the need to streamline and facilitate the transfer process, the Agency will allow transfers to occur at new rates and terms if the transfer would result in lower rents to the tenants than at the original rates and terms. Again, this will help preserve the Agency's affordable housing resources without increasing the drain on the Agency's budget, and without resulting in higher rents.

Equity Loan at the Time of Transfer

Previously, the regulation prohibited debt to be added to pay for equity to the seller. In an effort to facilitate transfers and provide incentives to sellers to assure the project remains as affordable rental housing, the new regulations will allow for equity loans from the Agency or from third parties at the time of transfer.

Special Servicing, Enforcement, Liquidation, and Other Actions

In response to stakeholder, USDA OIG, and Agency staff comments, the Agency made a number of changes to strengthen Agency servicing. None of the changes to the regulations on servicing constitute changes in policy; rather, they address a lack of clarity in existing rules and incorporate policies that previously existed only in Administrative Notices. As such, the changes are not anticipated to have either a negative or a positive budget impact.

For example, the interim final rule clarifies the definition of “default” by spelling out specific actions that owners may take or fail to take that would cause the Agency to determine that the loan is at risk. The rule also simplifies the submission requirements for transfers of project ownership. Other changes serve to simplify servicing actions in an effort to enhance the Agency's flexibility in addressing servicing issues. These changes allow for swifter and more consistent action to address troubled projects—for example, focusing action for the Agency and borrowers. This would help to avert more serious problems in the long term and allow Agency staff to concentrate their efforts on other portfolio management issues.

Additional Enforcement Tools

As a result of the Debt Collection Improvement Act and other statutes, the Agency has added some important enforcement provisions to the interim final rule. These include provisions allowing the Agency to have the U.S. Attorney bring an action in U.S. court to recover project assets or income, seek civil monetary penalties and other sanctions against borrowers for “equity skimming,” and seek legal remedies for money laundering and obstruction of Federal audits. These are important provisions that shift some of the burden of recovering lost resources from the Agency to the rest of the Federal Government and also give the Agency Start Printed Page 69041more effective tools in enforcing its requirements.

Management and Disposition of Real Estate Owned Properties

The interim final rule consolidates current regulations regarding real estate owned (REO) property and clarifies the specific requirements that apply to MFH properties. Previous regulations addressed many different types of REO properties acquired by USDA, including MFH properties. Often, the guidance provided was generic or related to non-MFH properties. The interim final rule provides specific guidance to MFH properties, taking into consideration the physical condition of the property, occupancy status of the property by eligible program tenants, and determinations of whether the property is still needed under the program. This rule also adds flexibility to the Agency's requirements for selling the property; the change allows the sale to be conducted while taking into account local market conditions. It also provides Field Offices with several options in selling REO properties, giving them authority that previously rested with the National Office. With more options and flexibility, processing and sales times will be reduced.

Farm Labor Housing

The interim final rule consolidates separate program regulations for the Farm Labor Housing loan and grant program along with separate regulations for other MFH programs. It does, however, maintain separate subparts for off-farm labor housing and on-farm labor housing. This was necessary to preserve the distinction between off-farm labor housing, which consists of multi-unit housing operated by nonprofit corporations or public bodies that receive either loans or loans and grants under the sections 514 and 516 programs, and on-farm labor housing, which consists of single or small multi-family housing operated by farmers who receive only loans. Several statutory changes to the Farm Labor Housing loan and grant program have been made over the past 5 years. Previous regulations have been modified to incorporate these changes prior to drafting this proposed rule. Since the changes are currently in place, they are not addressed again in this analysis. No further program changes other than regulation consolidation are included.

Technical Assistance Grants to Developers of Off-Farm Labor Housing

The Agency received numerous comments on the proposed rule with regard to technical assistance grants to developers of off-farm labor housing. The Farm Labor Housing Technical Assistance Final Rule published on October 31, 2002, in the Federal Register (67 FR 66308), gives the Agency the authority to award technical assistance grants to eligible private and public nonprofit agencies. These grant recipients will, in turn, assist other organizations to obtain loans and grants for the construction of off-farm labor housing. This information was inadvertently not incorporated into the proposed rule. However, the requirements for technical assistance grants have been incorporated into the interim final rule.

Operating Assistance for Off-Farm Labor Housing

The Agency published a proposed rule entitled “Operating Assistance for Off-Farm Migrant Farmworker Projects” on November 2, 2000, in the Federal Register (65 FR 65790). The requirements for operating assistance were not included in the 7 CFR part 3560 proposed rule, but have been added to the interim final rule. Operating assistance may be used in lieu of tenant-specific rental assistance in off-farm labor housing projects financed under section 514 or section 516 that serve migrant farmworkers. Owners of eligible projects may choose tenant-specific rental assistance as described in § 3560.573 or operating assistance, or a combination of both; however, any tenant or unit assisted under this section may not receive rental assistance under § 3560.572. The objective of this program is to provide assistance toward the cost of operating the project so that rents may be set at rates that are affordable to very low- and low-income migrant farmworkers.

Priorities for Admitting Applicants to Off-Farm Labor Housing

The previous regulations contained an elaborate and complicated priority system for admitting applicants into off-farm labor housing projects. The Agency received numerous comments on the proposed rule stating that the priority system was cumbersome and confusing. The previous regulations had four priorities, two of which had two subpriorities. These priorities have been streamlined into three simple categories in the interim final rule. This change will result in waiting lists that are simpler to create and maintain and should promote greater adherence to the Agency's admission criteria.

Income Limits for Off-Farm Labor Housing

Off-farm labor housing applicants and tenants must demonstrate that they earn a certain portion of their annual household income from farm labor. The prior regulation, 7 CFR part 1944, subpart D, exhibit J, provided income thresholds for applicants of off-farm labor housing projects. Borrowers applied these percentages to the income threshold for their particular region of the country. The income thresholds established de facto income floors for farm labor housing projects. Exhibit J, however, had not been updated since 1986 and reflected average income figures for farmworkers from 1983. Therefore, the Agency conducted research on average farmworker earnings based on the 2000 U.S. Census and will include an updated version of exhibit J in the Asset Management Handbook. The interim final rule has been revised to state: “Actual dollars earned from farm labor by domestic farm laborers other than migrant farmworkers must equal at least 65 percent of the annual income limits indicated for the standard Federal regions as published by the Agency for their particular region of the country. For migrant farmworkers living in seasonal housing, the actual dollars earned from farm labor by a domestic farm laborer must equal at least 50 percent of annual income limits indicated for the standard Federal regions, as published by the Agency.” While imposing these new income limits may result in an increased number of applicants to be ineligible for occupancy in off-farm labor housing, the Agency anticipates that this increase will be extremely small, given the concomitant increase in average farmworker wages during the past 20 years.

Office of Rental Housing Preservation

Changes to the Housing Act of 1949 required the establishment of an Office of Rental Housing Preservation within RHS for handling matters related the preservation of affordable rental housing in the Agency's MFH portfolio. RHS established this office within its Multi-Family Housing Portfolio Management Division.

The Office of Rental Housing Preservation has already taken steps to enhance the Agency's consistency in reviewing prepayment requests and offering incentives by making a single entity responsible for coordinating all preservation actions. The interim final rule recognizes the establishment of this office and defines its responsibility to Start Printed Page 69042coordinate, direct, and monitor the RHS's MFH preservation activities. This addition to the rule complies with the statute and clarifies the role of the National Office in the preservation process.

Unauthorized Assistance

When tenants receive unauthorized assistance through their own error, the Agency has a duty to try to recapture the assistance. Under previous regulations, much of this responsibility was put on project owners. The process was both time consuming and burdensome. Furthermore, project owners, as well as RHS, have only limited ability to collect unauthorized assistance, and in many cases the cost of pursuing unauthorized assistance outweighed the funds collected.

Recognizing these circumstances, the interim final rule relieves project owners of the responsibility of recovering unauthorized assistance due to tenant error once tenants have moved. It also provides for RHS to determine whether unauthorized assistance should be pursued. These changes give the Agency greater flexibility to apply resources cost effectively toward cases that most deserve to be pursued, and to relieve project owners of the burden of pursuing tenants who no longer live in their projects. This rule also brings RHS into compliance with the Debt Collection Improvement Act by allowing the use of collection agencies and offsets to collect unauthorized assistance from project owners and tenants.

Market Value, Subject to Restricted Rents

In the past, the process for determining the security value of Agency-financed MFH projects has been overly complicated and a source of confusion because of the various methods of valuation that the Agency used, some of which were not those typically used and understood by the appraisal industry. Therefore, the interim final rule now clarifies that appraisals must include the “market value” of the property, or the “market value, subject to restricted rents.” The term “market value” is defined in § 3560.752. “Market value, subject to restricted rents” means that the appraisal will take into consideration any rent limits, rent subsidies, expense abatements, or restrictive-use conditions that will affect the property as a result of an agreement with the Agency or any other funding source. “Market value, subject to restricted rents” refers only to the value of the subject real property, as restricted, and excludes the value of any favorable financing. When this value type is part of an appraisal assignment, all favorable financing in place at the time of the appraisal must also be valued, but separately from the real property. The specification and definition of value types will help to ensure that applicants, borrowers, and the Agency receive appraisals that are more accurate and complete.

Conformance With the Appraisal Industry

Subpart P of the interim final rule has been revised substantially so that the Agency's requirements for multi-family housing appraisals conform to appraisal industry standards. In addition to the specification and definition of value types described above, subpart P establishes new guidelines for appraisal scope, procurement, review, and release. These new requirements should facilitate the appraisal process, as certified general appraisers will be familiar with the terminology and procedures of the revised subpart.

Changes in Definitions

Disability

Agency regulations currently have separate definitions for the terms “individual with disability” and “individual with handicap.” The definition of the term “individual with disability” is, in large part, taken from section 501(b) of the Housing Act of 1949. The definition of the term “individual with handicap” is taken from the Fair Housing Act. Other civil rights laws, such as the Americans with Disabilities Act (ADA) and section 504 of the Rehabilitation Act of 1973, use the term “disability” rather than “handicap''; however, they define it in the same manner as the Fair Housing Act defines handicap.

Rather than having two separate terms, the Agency will only use the term “disability” and it will be considered equivalent to the term “handicap.” If people meet either the Housing Act of 1949's definition of handicap or the Fair Housing Act's definition of handicap, they will be considered disabled.

Nonprofit Organization

The Agency has streamlined its definition of “nonprofit” and has made it less prescriptive so that more nonprofit organizations are eligible for participation in the Agency's multi-family direct loan programs. Most notably, the aspects of the definition that describe local and regional nonprofit organizations have been broadened. This will result in increased participation by a wider pool of nonprofit organizations in the construction, transfer, and preservation of Agency-financed multi-family projects. There are additional requirements for what constitutes a nonprofit organization for purposes of farm labor housing and preservation, and these are described in subparts A, L, M, and N.

Additional Definitions

As a result of comments received on the proposed rule from the public, the Agency has added several definitions to the interim final rule. The addition of these definitions should help to clarify the Agency's policies on a variety of issues. The new definitions and their significance are as follows:

  • Applicant: Clarifies the distinction between the applicant and the borrower.
  • Appraisal: Provides the industry definition that the Agency uses.
  • Capital needs assessment: Explains how the Agency uses this term.
  • Disabled domestic farm laborer: Explains this category of tenant, so that the farm labor housing priorities for admission are more easily understood.
  • Farm: Clarifies what the Agency considers an eligible farm, which is particularly helpful in the discussion of farm labor housing.
  • Manufactured housing: Clarifies what constitutes this type of housing for purposes of interpreting the regulation and handbooks.
  • Market rent: Provides the industry definition of the term that the Agency uses.
  • Off-farm labor housing: Distinguishes this type of farm labor housing from on-farm labor housing.
  • On-farm labor housing: Distinguishes this type of farm labor housing from off-farm labor housing.

Participation With Other Funding or Financing Sources

The provisions of 7 CFR 3560.66 were revised to encourage participation from public and private sources. The Agency made a number of changes in the proposed rule to provide greater flexibility in the program to allow program financing to be more readily combined with other sources. However, the existing section 515 policy of restricting rental assistance to basic rents that do not exceed what they would have been had the Agency provided full financing is retained. The Agency recognizes that because it is delivering financing at 1 percent, this provision will be difficult for an applicant to meet under the most aggressive leveraging or other low-interest loan funds financing package. Start Printed Page 69043However, the Agency is also responsible for ensuring the efficient, prudent use of rental assistance funding. Without this standard, RHS would face even greater growth in the demand for rental assistance funding over and above the already significant funding levels. For this reason, RHS made the decision to continue this policy.

30-Year Term and 50-Year Amortization Period

Though not a new issue or policy, this rule requires that new loans have a 30-year term with a 50-year amortization schedule. This rule will clarify that, at the end of 30 years, borrowers have the option to pay off the residual balloon with no restrictive-use on the property, and the Agency has the option to refinance (or not) for the facility's remaining economic life. In effect, loans will have a 30-year use restriction, versus the previous 50-year use restriction, with additional use restrictions only should the Agency refinance.

Conforming Household Income Calculation to Industry Standards

By changing the calculation of tenant household income and assets to be consistent with other funding sources in the MFH industry, RHS has made a significant contribution to reducing paperwork burden to the public. No longer will a separate calculation have to be made for a MFH loan when a separate calculation was already executed for LIHTCs or another affordable housing program. Tenants' income and assets will be calculated in accordance with 24 CFR 813.106 and 102, which are regulations published by HUD.

Discussion of Comments—Streamlining and Consolidation of the Sections 514, 515, 516, and 521 Multi-Family Housing (MFH) Programs—Proposed Rule

This proposed rule was published in the Federal Register on June 2, 2003 (68 FR 32872), with a 60-day comment period that ended August 1, 2003. Comments were received from 146 commenters yielding nearly 3,000 individual comments about the language in the proposed rule. Commenters included Rural Development personnel, housing advocacy groups, developers, builders, property managers, attorneys, housing organizations, and others with an interest in these housing programs.

Many of the comments focused on areas currently published in the CFR, which were not a part of the proposed rule. As discussed, part of the intent behind the reengineering and reinvention of these regulations was to remove much of the administrative guidance from the CFR and incorporate this guidance into the program handbooks, which would not be published in the CFR. As discussed above, the handbooks provide the Agency with flexibility in the Agency's administration of program procedures in response to changing circumstances without entering into a rule-making process.

The responses to many comments have indicated that the guidance requested by a commenter is administrative and contained in the applicable handbooks. RHS sincerely appreciates the time and effort of all commenters. Comments, by subpart, from the proposed rule are discussed below.

Subpart A—General Provisions and Definitions

Topic: Regarding civil rights (e.g., limited English proficiency, fair housing compliance, reasonable accommodations, domestic violence), several commenters stated that the Agency did not fully address the requirements of section 504 of the Rehabilitation Act of 1973.

Response: The Agency appreciates these comments and has specific references to section 504 requirements in § 3560.2 and § 3560.11 of the interim final rule.

Topic: Other commenters were concerned with the sufficiency of the Agency's proposed language with respect to the civil rights responsibilities of borrowers and the protections the language in the proposed rule would offer the applicants to and residents of RHS housing.

Response: The Agency has ensured that the civil rights requirements of borrowers are clearly described in the interim rule and internal Agency procedures.

Topic: Several commenters addressed the protected classes included in the proposed rule. One commenter believed that age and marital status classes are added under the proposed language and disagreed with this amendment to the regulation. Another commenter believed that sexual orientation should be added. Yet another commenter thought that age and disability are important to take into account.

Response: The Agency appreciates these comments and has removed marital status from § 3560.2 because it is not a status specifically protected by civil rights statutes. Age was retained because it is protected by statute. However, the Agency wants to clarify that when age is established by statute as a program eligibility factor, then it needs to be considered when determining eligibility for occupancy, but only for that determination. Sexual orientation is not a status specifically protected by civil rights statutes, and therefore was not added.

Topic: Several commenters identified an occurrence of “accommodation” in the civil rights section, which is not preceded by “reasonable.” The commenters urged the Agency to revise this error.

Response: The Agency thanks the commenters and has revised the interim final rule at § 3560.2(a)(1).

Topic: One commenter suggested that a single point of contact at USDA be established to receive complaints.

Response: The Agency acknowledges the comment and has revised § 3560.2(c) in response to this suggestion.

Topic: One commenter urged the Agency to remove requirements that owners and agents collect ethnicity and racial information from applicants.

Response: The Agency thanks the commenter for highlighting this important issue. The Agency has modified § 3560.2 to include a disclosure statement about the use of race and ethnicity information that must appear on all applications for housing under sections 514, 515, and 516.

Topic: One commenter suggested revising proposed § 3560.2(a)(1) to read: “To refuse to make reasonable accommodations * * *.”

Response: The Agency appreciates the commenters' suggestion and has revised the interim final rule accordingly.

Topic: Commenters also addressed CRCU. Several commenters expressed confusion about the implementation of CRCU.

Response: The Agency has added additional information on the circumstances under which CRCU applies. Specific references to the CRCU applicability can be found at §§ 3560.60(c), 3560.69(g), 3560.406(d), 3560.409(b)(3), and 3560.656(e)(1) in the final interim rule.

Topic: Several commenters were concerned that capping rents at CRCU will keep rents artificially low in some cases and not address cases in which the costs of operating assisted housing are higher than those for conventional housing.

Response: The Agency has addressed this concern by allowing exceptions to the CRCU cap to allow for certain market conditions—extraordinary circumstances when it is in the best interest of the Government as a means to preserve affordable housing Start Printed Page 69044resources. See the references noted above for discussions concerning CRCU.

Topic: The Agency received many comments regarding the definition of CRCU. Several commenters believed that the definition in proposed § 3560.11 should refer to the market area, not to the geographic area.

Response: The Agency thanks the commenters for this suggestion, but has made no change to the interim final rule. There are regions in the country where the market is small and where Agency-financed multi-family properties comprise the market. By expanding the definition to include the geographic area, this increases the likelihood that there will be compatible rents by which to measure these Agency-financed properties.

Topic: One commenter suggested that CRCU should not be used in any county where the median income is lower than the statewide median income.

Response: The Agency thanks the commenter for this suggestion but has made no change to the interim final rule. CRCU is designed to work within “market areas” which may cross county lines and is not designed to work within the strictures of a county basis.

Topic: One commenter believed that the Annual Financial Report requirement places an additional burden on small projects that is further exacerbated by the CRCU restrictions.

Response: The Agency thanks the commenter for this suggestion but has made no change to the interim final rule. Based on the findings of the OIG, the Agency is adding this requirement for smaller projects to address the potential misuse of funds.

Topic: Concern was expressed with respect to authority measures, specifically the delegation of authority, as well as exception authority.

Response: The Agency understands that commenters are concerned that its requirements be implemented consistently and that the chain of command remain clear when authority is delegated. The interim final rule was designed to maximize consistency in implementing Agency requirements nationwide.

Topic: Commenters were concerned that the interim final rule imposes too many restrictions on granting exceptions. Several commenters stated that the proposed rule allows exceptions only when the action is in the best financial interest of the Government.

Response: The Agency appreciates these comments and has revised § 3560.8 to read “The RHS Administrator may make an exception to any provision of this part or address any omissions provided that the exception (1) is consistent with the applicable statute, (2) does not adversely affect the interest of the Federal Government, and (3) does not adversely affect the accomplishment of the purposes of the Multi-Family Housing programs, or application of the requirement would result in undue hardship on the tenants.”

Topic: One commenter recommended that the USDA hire a national firm to evaluate preservation projects to ensure they are economically beneficial to the Government and, therefore, to tenants.

Response: The Agency acknowledges this suggestion but has made no change to the interim final rule. The Agency has an established process and internal procedures and staffing to evaluate the economic benefits of preservation transactions.

Topic: One commenter believed that Rural Development employees find it easier to disallow exceptions than to perform the necessary steps to execute an exception.

Response: The Agency respectfully disagrees with the commenter's interpretation. Exceptions are evaluated thoroughly on a case-by-case basis and only granted rarely.

Topic: One commenter believed that Agency regulations should acknowledge that other financing programs (e.g., tax-exempt bonds, State financing programs, HOME Investment Partnership Funds) may dictate rent levels in addition to the rents dictated by LIHTCs.

Response: The Agency appreciates the comment. The Agency has acknowledged these other programs in its descriptions of financial leveraging, third-party financing, and subordination of Agency debt. Numerous commenters raised concerns about some of the definitions provided in § 3560.11, which are described below: Administrative appeals

Topic: Several commenters stated that the rule does not contain enough information on when appeals are allowable, to whom appeals should be made, and what are the tenant grievance procedures.

Response: The Agency wishes to clarify that the requirements for appeals for all actions, unless otherwise noted in the interim final rule, are found at 7 CFR part 11. The tenant grievance process is described in detail in subpart D and in internal Agency procedures.

Topic: One commenter objected to the use of handbooks, notices, or other issuances being a program requirement. The commenter believed that practice subverts the public comment and appeals period otherwise required for regulatory changes.

Response: The Agency appreciates the commenter's interest in ensuring a free and open public discussion of public policy but disagrees with the assertion. The regulatory and burden issues are discussed in the interim final rule. Handbooks are useful for providing guidance and establishing internal Agency procedure.

Topic: One commenter addressed the issue of environmental reviews. First, with respect to “practicable alternatives,” the commenter suggested that the location of a site in relation to flooding, along with the additional cost for insurance and potential development costs, must be addressed in the appraisal. Second, the commenter addressed § 3560.4(e) and noted that lead-based paint requirements are no longer located in 7 CFR part 1924, subpart A; the correct reference is 24 CFR part 35, subparts A-D, J, and R, which are regulations published by HUD.

Response: The Agency thanks the commenter for the updated regulatory citations and has updated these references in the interim final rule. However, the Agency has made no change to § 3560.3 of the interim final rule. The suggestion was not adopted because of the existing environmental regulations at 7 CFR part 1940, subpart G.

Numerous commenters raised concerns about some of the definitions provided in § 3560.11, which are described below:

Applicant

Topic: One commenter suggested that proposed § 3560.55(b) refers to the “applicant,” but that “applicant” is not defined.

Response: The Agency thanks the commenter for the suggestion and has added a definition for “applicant” to the interim final rule.

Asset Management Fee

Topic: A commenter believed that the Agency should add a definition for “asset management fee,” asking it be defined as a fee allowed to nonprofit organizations or public bodies for the effective ownership of RHS-assisted multi-family housing properties.

Response: The Agency appreciates the comment but has made no change to the interim final rule. This issue is covered under § 3560.303(b)(1)(ii) and includes a list of expenses that would commonly be charged as an asset management fee.

Basic Rent

Topic: Several commenters agreed with the change in definition of “basic rent” but were concerned that CRCU Start Printed Page 69045would impose a restriction on the amount of basic rent that borrowers can charge that could adversely affect some properties. Several commenters recommended additional components to be included in the calculation of basic rent.

Response: As stated previously, CRCU only applies in certain instances, and the Agency may make CRCU exceptions on a case-by-case basis. CRCU is a concept that the Agency uses to evaluate rent levels. It is not considered the established “rent” or basic rent.

Topic: A commenter suggested that in the definition of “basic rent,” the Agency should change the last word “agreement” to “subsidy.”

Response: The Agency appreciates this suggestion; however, the interest credit agreement is the instrument by which any reduction is made.

Caretaker

Topic: One commenter believed that the definition of “caretaker” should be expanded to state that caretakers may also serve as a site manager, with either an onsite or offsite work location.

Response: The Agency appreciates the comment but has made no change to the interim final rule. Borrowers may use caretakers or site manager as they see fit, as long as staffing duties and responsibilities are clearly spelled out in the Management Plan.

Congregate Housing

Topic: One commenter thought that the definition for “congregate housing” should state that such a facility could not be a licensed healthcare facility.

Response: The Agency appreciates the comment and has adopted that change in the interim final rule.

Current Appraisal

Topic: A commenter believed that the definition for “current appraisal” be revised because an appraisal report could be 14 months old and still be a current appraisal report.

Response: The Agency thanks the commenter for the suggestion and has revised the interim final rule to state that the appraisal report date should be no more than 1 year old.

Default

Topic: Several commenters thought that the definition of “default” raised a concern that the Agency could consider a borrower to be in default for minor, insignificant items.

Response: The Agency appreciates these comments and has revised the definition to state that default is the failure “by a borrower to meet significant monetary or non-monetary obligations.”

Disability

Topic: One commenter believed that the definition of “disability” is a helpful change, while another commenter believed that the definition is inappropriate.

Response: The Agency thanks the commenter for their concurrence on this issue and has clarified the definition in the interim final rule by providing the specific regulatory citations.

Topic: One commenter recommended changes to the definition of “disability.” The commenter believed that the Agency should either delete the list of examples of a disability, or at least make it clearer that the lists of examples are in no way intended to be exclusive.

Response: The Agency appreciates the comment but made no change to the interim final rule because the definition is statutory.

Topic: One commenter suggested that the term “handicapped” be replaced by “disabled” or “accessible” whenever appropriate. In limited instances, the use of “handicapped” is acceptable, but the term should be limited.

Response: The Agency thanks the commenter for the suggestion and has revised the text as appropriate in the interim final rule.

Domestic Farm Laborer

Topic: Five comments were received concerning the definition of domestic farm laborer and the proposed rule's elimination of the requirement that aliens be admitted for permanent residence. The majority were in support of the change. One of the commenters contended that Congress has expressed its intent for broader eligibility standards.

Response: The requirement that aliens be admitted for permanent residence has been reinserted in the definition. This is required by the authorizing statute, 42 U.S.C. 1484(f)(3)(A). The language concerning the eligibility of a family member was also rewritten to be more consistent with statutory language in 42 U.S.C. 1484(f)(3).

Elderly Person

Topic: Numerous commenters were concerned that the definition of an “elderly person” includes persons with a disability, and that these persons could be any age. They thought that allowing non-elderly persons to reside in properties designed for the elderly causes social and project management problems.

Response: The Agency appreciates these comments but has made no change to the definition because it is statutory.

Engagement

Topic: One commenter suggested that because the costs of CPA audits are based on the scope of work, the requirements for such engagements must be provided to owners in enough time for the owner to obtain cost estimates from the CPAs and to include the costs in proposed budgets.

Response: The Agency appreciates the comment but has made no change to the interim final rule. The Agency will provide guidance for borrowers in the MFH Engagement Guidelines to be issued separately.

Familial Status

Topic: Regarding the definition of “familial status,” the commenter recommended that RHS adopt the same definition used in the Fair Housing Act.

Response: The Agency thanks the commenter for raising this issue. The Agency is adopting the same definition of “familial status” as used under the Fair Housing Act.

Family Farm Corporation or Partnership

Topic: One commenter questioned the definition for “family farm corporation or partnership.” The commenter asked whether this definition is consistent with other rural development definitions of family farm, particularly the Rural Business-Cooperative Service Business and Industry Cooperative Stock Purchase Program.

Response: The Agency thanks the commenter for the suggestion but has made no change to the interim final rule because the definitions are consistent within Rural Development.

Farm Labor

Topic: The Agency received several comments concerning the definition of “farm labor.” Each commenter raised questions about the term “unprocessed stage.”

Response: The Agency has used this term in the proposed rule instead of the term “manufactured state” in the previous regulation to make the term more consistent with statutory language.

Topic: One commenter asked the Agency to include the statutory phase “without respect to the source of employment” in the definition and to provide examples of what is considered to be farm labor in the handbooks.

Response: The Agency has added the statutory phase to the definition, and the Agency intends to include examples of farm labor in the program handbooks.

Farmer and Farm Owner

Topic: For the definitions of “farmer” and “farm owner,” one commenter found the added reference to 7 CFR Start Printed Page 690461941.4, which brings in the concept that a farmer must be a “family-size farm,” to be a very limiting and improper restriction. This commenter believed that farm laborers should be able to occupy farm labor housing regardless of whether the farm they work for is “family size.”

Response: The Agency thanks the commenter and has deleted the reference to 7 CFR 1941.4 from the interim final rule.

General Overhead

Topic: Two commenters asked whether RHS imposes maximum limits for general overhead.

Response: There is a maximum limit on general overhead. This maximum limit is 4 percent of the construction cost. RHS establishes a maximum limit that is similar to the standards used by other government lenders. This upper limit can vary with the types of financing used for a project or due to changes in market conditions. The ceiling only serves as an upper limit to help ensure cost reasonableness and can vary across circumstances and over time.

Topic: The Agency received a comment stating that the proposed rule should require documentation to ensure that the resident assistant is truly needed for the well-being and care of the tenant.

Response: The Agency appreciates the comment but has made no change to its interim final rule. Section 3560.104(c)(4) of the interim final rule provides guidance for borrowers to permit resident assistants. This is a reasonable accommodation issue and should be treated like other reasonable accommodation issues.

Topic: One commenter asked why Plainview, Texas, and Altus, Oklahoma, are singled out for consideration in terms of 2000 U.S. Census data.

Response: These communities are authorized by statutory language in section 520 of the Housing Act.

General Requirements

Topic: The commenter thought that performance and payment bonds, cost certifications, and building permits are not considered “general requirements” by the industry and need to be left out of the definition.

Response: The professional architect on the Agency's staff disagrees with the commenter and feels the items mentioned are part of “general requirements” by the industry and no change is needed in the definition.

Household Furnishings

Topic: A commenter questioned the definition of “household furnishings,” believing household furnishings should not include tables, chairs, dressers, and beds.

Response: The Agency appreciates the comment but has made no change to the interim final rule. The commenter needs to consider that these items are necessary for tenants of Farm Labor Housing occupied primarily by migrant farmworkers.

Household Member

Topic: The commenter thought that the proposed rule and the handbooks should be reconciled and should clarify their definitions of “household member.”

Response: The Agency appreciates the comment and will revise Agency guidance about program procedures to be consistent with the regulation. No change to the interim final rule was needed.

Identity-of-Interest

Topic: Numerous commenters stated that the definition of “identity-of-interest” is too broad.

Response: The definition of IOI has been moved from the existing regulations to 3560 without change and it is consistent with the one used by other Government lenders.

Topic: Some commenters stated that the trigger for an identity-of-interest to occur of 10 percent or more interest in the supplying entity was a reasonable threshold. Other commenters thought that the threshold was either too high or too low.

Response: The Agency appreciates these comments. However, the Agency has decided to retain the definition as presented in the proposed rule. The concept of identity-of-interest, as it relates to specific issues, is discussed in more detail in subpart C. Therefore, the Agency has determined that retaining a general description in § 3560.11 is appropriate.

Legal or Qualified Alien

Topic: One commenter requested that the Agency use the Single-Family Housing definition for “legal or qualified alien,” which the commenter finds clearer.

Response: The Agency appreciates the comment but has made no change to the interim final rule. The definition used in the proposed rule was the same as the definition that is used by the Single-Family Housing Program (see 7 CFR 3550.10) and is consistent with the Housing Act of 1949, section 501(h). The Agency has exercised its authority under sections 501(h) and 510(k) of the Housing Act of 1949 [42 U.S.C. 1471(h) and 1480 (k)] to restrict eligibility for occupancy in all section 515 projects to citizens and qualified aliens. In addition, eligibility for the migrant farm workers programs under sections 514 and 516 is specifically restricted to such individuals by section 514(f)(3)(A) of the Housing Act of 1949 [42 U.S.C. 1484(f)(3)(A)].

Life-Cycle Cost Analysis

Topic: Several commenters expressed approval of the Agency's decision to require life-cycle cost analyses under certain circumstances. Others, however, expressed concern about the definition's lack of specificity.

Response: The Agency appreciates these comments and has clarified the life cycle cost analysis in§ 3560.11.

Topic: One commenter addressed the wording in the definition for “life-cycle cost analysis.” The commenter believed that the Agency should say Licensed Engineer or Architect rather than Design Professional.

Response: The Agency thanks the commenter for this suggestion but has made no change to the interim final rule. The Agency does not want to limit the borrower's option regarding preparation of the analysis.

Limited Partnership

Topic: Two commenters suggested that “capitol” be revised to “capital” in the definition for “limited partnership.”

Response: The Agency thanks the commenters for the suggestion and has revised the interim final rule.

Management Fee

Topic: Regarding the definition of “management fees,” one commenter asserted that the proposed rule will use occupied units as the basis for all fees—an approach that is not in keeping with normal industry practices * * * and fails to recognize that vacant units are typically the ones that require the greatest amount of management attention and effort.

Response: The Agency acknowledges the commenters' concerns. However, the Agency believes the rule as written takes into account partial occupancy at § 3560.102(i)(2). If additional staff time is needed to perform leasing activities to address vacancies, these costs are payable directly from the project. For this reason, the Agency believes that a fee system based on occupied units will not adversely affect projects experiencing vacancies or higher turnover. Further, if a property is located in a difficult market, the Agency can authorize add-on fees as a means to Start Printed Page 69047address issues associated with individual markets in an area. The Agency has made no changes to the rule, but will continue to consider options and refinements during the interim final rule.

Maximum Debt Limit

Topic: The commenter supported the inclusion of the reduction of funding available to the borrower from sources other than the Agency in the definition of the “maximum debt limit.”

Response: The Agency appreciates the commenter's support.

Migrants or Migrant Agricultural Laborers

Topic: Several commenters stated that the definition for “migrants” and “migrant agricultural laborers” should be clarified to provide a definition of “temporary residence.” Others stated that the definition should exclude the requirement that to be migrant, the farmworker would have to travel out of state, and that in large states such as California, this requirement is not practicable.

Response: The Agency acknowledges these comments but notes that the definition states that farmworkers may still be considered “migrant” if they are “day-haul agricultural workers whose travels are limited to work areas within one day of their residence.” In addition, the term “temporary residence” is discussed more fully in § 3560.553 of the interim final rule.

Moderate-Income Households

Topic: Several commenters stated that the Agency's definition of “moderate income” is not used by any other affordable housing program and that the Agency should adopt HUD's definition.

Response: The Agency appreciates the commenters' concerns but has chosen to use the definition from the Single-Family Housing program for consistency within Agency programs.

Mortgages

Topic: One commenter suggested that a definition for “deed of trust” should be added. The term “mortgage” is defined, but because many of our multi-family housing loans are secured by a deed of trust rather than a mortgage, deed of trust should also be defined.

Response: The Agency appreciates the comment and has clarified its definition of “mortgage” to include deed of trust in the interim final rule.

Topic: One commenter recommended that the definition of “mortgage” be modified by adding the phrase “that requires judicial foreclosure for enforcement” to the end of the definition.

Response: The Agency appreciates the comment but has made no change to the definition because not all states require judicial foreclosure for enforcement.

Native American

Topic: Several comments addressed the definition of “Native American.” The commenters believed that the reference to the Indian Self-Determination & Education Assistance Act as the trigger for eligible status is confusing and results in a burdensome search to find this information.

Response: The Agency thanks the commenters for the suggestion. The Agency has revised the interim final rule to define the term “Indian tribe” and provides appropriate reference to the Indian Self-Determination & Education Assistance Act. In addition the definition of “Native American” is statutory under section 501(b)(6) of title V of the Housing Act of 1949 (42 U.S.C. 1471(b)(6)).

Net Recovery Value

Topic: A commenter wrote in support of the definition for “net recovery value.”

Response: The Agency appreciates the commenter's concurrence.

Nonprofit Organization

Topic: Numerous commenters expressed concern that the definition of “nonprofit organization” is too prescriptive and will cause too many organizations to be considered ineligible for the priority purchaser category in preservation transfers. For instance, in large states such as California, nonprofit organizations that have the capacity to develop and operate affordable MFH properties are often not local in nature. Commenters were concerned that such restrictions would limit the participation of capable nonprofit organizations in the development and operation of sections 514, 515, and 516 properties.

Response: The Agency appreciates these comments and has simplified the definition of nonprofit organization to be less prescriptive and to allow for more widespread participation by nonprofit groups, but the definition remains consistent with the applicable statute. Similarly, the interim final rule provides a separate definition for “nonprofit organization for section 515 program for prepayment or purchase” that is substantially simplified to allow for greater participation in these activities.

Note Rent

Topic: Several commenters expressed concern that the definition of “note,” for note rent, should acknowledge that it stands for the term “note rate rent.”

Response: The Agency has included the definition for “note rent” in § 3560.11 of the interim final rule, and the correct term for this rent is “note rent.”

Permanent

Topic: A commenter questioned why the term “permanent” was eliminated. The commenter wondered whether the intent is that tenants who are here with temporary legal status papers be housed.

Response: The Agency thanks the commenter for the suggestion and notes that there was an error in the proposed rule. The text has been revised as appropriate in the interim final rule.

Plan I

Topic: One commenter stated that the definition for “Plan I” can be more specific by saying interest credit became effective in 1968.

Response: The Agency appreciates the comment but has made no change to the interim final rule because the Agency does not believe the additional specificity provides any more clarity to the definition.

Prepayment

Topic: One commenter recommended providing further clarification for the definition for “prepayment” by adding “as authorized by the Agency in response to an offer from the borrower.”

Response: The Agency appreciates the comment but has not incorporated the suggested language in the interim final rule. The Agency does not believe that the suggested revision adds anything to the definition because full payment of the debt may occur in situations other than the Agency's response to an offer from the borrower.

Renovation

Topic: One commenter stated that “renovation” is a new term for the program that is barely used in the proposed regulation, so this definition should be deleted.

Response: The Agency thanks the commenter for the suggestion and has deleted the definition from the interim final rule.

Rent

Topic: Several commenters were pleased that the Agency acknowledges that there are many different rent levels in affordable housing finance. One commenter asked the Agency to address the issue of multi-tiered rents. Start Printed Page 69048

Response: The Agency thanks these commenters for their comments on this issue. The Agency did not address multi-tiered rents in the Definitions because such rents are not permitted in the interim final rule.

Topic: One commenter found the definition of “rent” to be redundant with the definition of “basic rent.” The commenter suggested that the definition of “rent” include vacancy and contingent factors, reserve transfers, and owner's return as defined expenses.

Response: The Agency appreciates the comment and has clarified the definition of each type of rent in the interim final rule in § 3560.11 by removing the language in § 3560. 202(c). The Agency did this because it believes the language from the Housing Project Budget Form provided clearer wording for a definition of this term.

Rental Assistance

Topic: One commenter suggested that the definition for “rental assistance” be revised to read: “The portion of approved shelter cost paid by the Agency to compensate a borrower for the difference between the approved shelter cost (basic rent) and the tenant contribution when such contribution is less than the basic rent.”

Response: The Agency has accepted the comment and has revised the definition for “rental assistance” in § 3560.11 of the interim final rule.

Topic: One commenter suggested revisions to “rental assistance units,” specifically, expanding the definition of servicing units to include RA units provided to an operational project for any reason.

Response: The Agency thanks the commenter for the suggestion and has revised the interim final rule at § 3560.11.

Topic: The Agency received one comment that asks for explanatory guidance as to what a season is. For example, in Oregon seasonal farm labor housing is occupied typically up to 10 months. In other states or regions it may be only as long as 6 or 7 months.

Response: The Agency appreciates the comment but has decided not to add this term to the interim final rule. As stated by the commenter, seasons vary by region and therefore, the Agency is allowing the borrower to have the flexibility to deal with this issue. Section 3560.568 of the interim final rule requires the borrower, in their management plan, to establish specific opening and closing dates for off-farm labor housing operating on a seasonal basis.

Resident or Site Manager

Topic: Regarding the definition for “resident or site manager,” the commenter recommended replacing the portion of the definition that currently reads: “who lives at or near the project site.” The commenter believed that maintaining a local presence is a critical element in providing an acceptable level of customer service.

Response: The Agency appreciates the comment but has made no change to the interim final rule because a site manager is a manager who works at the property but is not required to live at or near the property. The Agency does not believe there is a connection between local presence and good customer service.

Rural Area

Topic: A few commenters expressed concern that basing the definition of “rural area” on decennial census population data is inappropriate because the data are now several years old. Another commenter suggested that the definition was too complicated.

Response: The Agency appreciates these comments but has made no change to the definition of rural area because it is statutory, from section 520 of title V of the Housing Act of 1949.

Topic: One commenter asked the Agency to add a provision that allows for the automatic revision of the definition of “rural area” as statutes change. This commenter was also concerned with the definitions of sections 515, 514, and 516 programs.

Response: The Agency appreciates the comment but has made no change to the interim final rule. The definition is statutory and will be changed when the statute is amended.

Tenant Contribution

Topic: One commenter suggests that in the definition for “tenant contribution,” the word “rent” be replaced with the words “shelter cost.”

Response: The Agency thanks the commenter for the suggestion and has revised the interim final rule.

Topic: The commenter believed that the definition of “tenant contribution” implies that all tenants pay something for occupancy at a rental unit; however, some tenants do not pay anything.

Response: The Agency appreciates the comment and has reworded the definition of “tenant contribution” to use the same definition that was used previously. Under the statutory definition (42 U.S.C. 1471(a)(5)(A)) of income, some items are excluded from the calculation of income; therefore, the commenter is correct that some tenants do not pay any rent.

Tenants' Rights

Topic: One commenter suggested that the regulation should include an explicit statement that state or local laws that give tenants greater rights than this regulation are not preempted by the regulation or handbooks, as long as those laws do not interfere with the fundamental purposes of the RHS programs.

Response: The Agency appreciates the comment but has made no change to the interim final rule. Throughout subpart D of the interim final rule, the Agency states that borrower policies regarding occupancy and tenant rights must be consistent with state and local laws.

Topic: One commenter acknowledged that no per-unit square footages was proscribed. The commenter stated that this will help in dealing with multifunding sources; however, developing modest housing should still be a priority with the Agency.

Response: The Agency thanks the commenter for the support.

Topic: Regarding design requirements, one commenter agreed with the change in philosophy from cost containment to economical construction.

Response: The Agency thanks the commenter for the support.

Topic: The Agency received a comment regarding owner responsibility and requirements. The commenter believed that this provision is confusing and may be interpreted too broadly. Implicitly this rule provides that parties cannot delegate responsibility, which is not accurate.

Response: The Agency appreciates the comment but has made no change to the interim final rule. The borrower is contractually bound to meet the Agency's requirements by the promissory note, loan agreement/resolution, and mortgage. The borrower is permitted to hire a management company to perform day-to-day oversight of the property, but the borrower is ultimately responsible for the property.

Topic: One commenter addressed § 3560.60(d)(2) and the definition of “to the extent possible” as it relates to accessibility upgrades when a single damaged unit is being extensively repaired. The commenter suggested that if accessibility requirements would add more than 5 percent to the repair costs, the accessibility requirement should not be required. Further, the Agency should note that borrowers could use reserve funds for additional accessibility requirements.

Response: The Agency appreciates the comment but has made no change to the Start Printed Page 69049interim final rule. See the reference at § 3560.2(a)(2) that the Uniform Federal Accessibility Standards are required (49 CFR part 1190).

Total Development Costs

Topic: Numerous commenters were concerned that the components of total development costs do not include developer fees. One commenter suggested that household furnishings be removed from the total development cost.

Response: For Agency-financed projects with LIHTC financing, the developer will continue to earn developer fees. Developers of projects without LIHTC financing will not be permitted developer fees. The Agency believes that the borrower's permitted return as currently calculated should provide sufficient remuneration on a well-managed property. Furnishings, as noted in the Definition, are only part of the total development cost for section 514 and 516 (Farm Labor) Housing.

Subpart B—Direct Loan and Grant Origination

Topic: Numerous commenters expressed concern that the definition of and restrictions on nonprofit organizations are too restrictive. Several commenters said that the requirement for a nonprofit to have 25 members from the community to show community support for the project is excessive because finding 25 people in any community to actively serve is difficult. Some commenters stated that the requirements were unclear. For instance, several commenters asked for a definition of public sector, when used to describe restrictions on the number of board members from the public sector.

Response: As stated in the description of the comments received for subpart A, General Provisions and Definitions, the Agency has revised the definition of “nonprofit organization” to be simpler, less prescriptive, and less restrictive to maximize participation of nonprofit organizations in the sections 514, 515, and 516 programs.

Topic: Similar to the comments received on the definition of “total development costs,” numerous commenters stated that developer fees should be an allowable expenditure of loan funds. Several commenters noted their belief that developer fees should be capped.

Response: Again, the Agency's position is that for Agency-financed projects with LIHTC financing, developers will continue to receive developer fees. Developers of projects without LIHTC financing will not be permitted developer fees. (This is described in § 3560.63(d)(2) of the interim final rule.) The Agency believes that a borrower's permitted return as currently calculated should provide sufficient remuneration on a well-managed property.

Topic: The Agency received multiple comments on the requirements for initial operating capital and the initial equity contribution required of borrowers, as well as the time period during which the initial operating capital may be repaid to the owner. One commenter asked the Agency to revise the proposed language in § 3560.64(b) to state that any additional initial operating expenses paid by owners above this amount would be repaid, as a priority, from available cash flow. A second commenter asked the Agency to clarify in § 3560.64(c) why it would require the initial contribution of operating to be made prior to the start of construction. The commenter asked the Agency to revise these requirements so that the initial operating contribution could be provided at the end of the construction period, or at least after construction is 50 percent completed.

Response: As outlined in § 3560.304, the purpose of initial operating capital (IOC) is to provide a source of capital for start-up costs. IOC may only be used to pay for approved budget expenses. The applicant's ability to fund the IOC, if required, is part of the applicant eligibility requirements and therefore, cannot be contributed after loan approval, e.g., at the end of construction or at 50 percent completion. The 2 percent IOC requirement is a minimum. If excess funds are contributed to the IOC, they may be withdrawn by borrower in accordance with § 3560.304(c).

Topic: Several commenters said that the amount of the initial operating capital—2 percent of total development costs—is unrealistically high.

Response: The Agency has determined that 2 percent of total development costs is reasonable in light of the amount required to operate an Agency-assisted property, especially during the initial rent-up period, during which the amount is used to help cover startup costs.

Topic: Some commenters said that the 2- to 7-year time period during which the initial operating capital may be repaid to the owner is too long, while others said it was too short.

Response: The Agency appreciates these comments but has decided that the 2- to 7-year repayment period is acceptable because it allows adequate flexibility to borrowers. Therefore, the Agency has made no change to the regulation.

Topic: Regarding the requirements for general partners in a limited partnership with LIHTCs, 12 commenters stated that the requirement for general partners to have a 5 percent financial interest in a limited partnership, as stated in § 3560.55(d)(2), is unworkable. They stated that in the majority of LIHTC deals, the general partners only have a financial interest of 1 percent or less.

Response: The Agency believes that the commenters are confusing the expression “financial interest in the residuals or refinancing proceeds” with “financial ownership interest.” The two expressions are distinct, whereby having a 5 percent interest in the former does not preclude having a 1 percent interest in the latter. Therefore, the Agency has made no change to this section.

Topic: Numerous commenters stated that the pre-application and initial application submission requirements were too onerous and asked the Agency to clarify its position since they could not clearly understand the proposal. For example, one commenter recommended two annual Notices of Funding Availability (NOFAs) rather than one to promote accelerated use of USDA funds and to allow for more units to be produced on a 6-month versus 12-month cycle. Some commenters were concerned that the Agency considered additional technical assistance as an ineligible use of funds.

Response: In developing the NOFA process with the three application stages, the Agency has endeavored to streamline the process by minimizing the application requirements during the pre-application phase when project approval is unknown to reduce the applicants' burden. Likewise, the Agency is requiring the minimum amount of information to be submitted during the initial application phase to reduce the applicants' burden. However, the Agency has a responsibility to collect enough information about proposed projects at each stage to allow for reasonable decisionmaking and effective underwriting. Therefore, the Agency has made no further changes to this section.

Topic: Some commenters said that requiring the Agency to conduct an environmental review during the pre-application phase, when it is still uncertain whether the project will receive funds, is unrealistic.

Response: The Agency believes that the commenters misunderstood § 3560.56. This paragraph states that environmental reviews are required during the initial phase of loan processing to aid in determining project eligibility and feasibility. Start Printed Page 69050

Topic: Several commenters asked the Agency to define “State Consolidated Plan.”

Response: The Agency agrees with the commenters and has added this definition to § 3560.11 of the interim final rule.

Topic: Some commenters said that the Affirmative Fair Housing Marketing Plan should not be required for submission during the initial application stage but should be part of the final application submission.

Response: The Agency believes the commenters misunderstood the procedures in the handbook. The form used for this plan is given to the applicant during the initial application stage, but the applicant does not need to submit the plan until the final application stage. The Agency has clarified this point in § 3560.56(h) of the interim final rule.

Topic: Several commenters stated that the Agency should allow flexibility in requiring applicants to be in full compliance with any existing loan and grant programs, particularly in the case of property transfers and preservation, wherein the new owner entity should not be punished for taking on a property with physical, financial, or managerial issues, or under a preexisting workout plan of less than 6 months.

Response: The Agency realizes that achieving and maintaining compliance are challenges under these circumstances. The Agency recognizes these challenges, and program procedures allow RHS to accept a revised workout plan from the new owner that it deems acceptable under the standards in § 3560.453 of the interim final rule and in the Project Servicing Handbook. Also, an exception may be requested by the State Director and considered by the Agency on a case-by-case basis.

Topic: The Agency received several comments regarding its position on purchasing excess land, such as when a seller owns 5 acres and will only sell all of the acres, regardless of how much the applicant wants to develop. Commenters stated that there should be flexibility in the Agency's policy so that excess land can be purchased if the applicant cannot find a smaller parcel to purchase and develop.

Response: The Agency recognizes the need for flexibility on this issue and is willing to work with applicants in determining the suitability of sites for development. Funds may be used to purchase and improve the site on which multi-family housing will be located, provided that the amount of loan funds used to purchase the site does not exceed the appraised market value of the site immediately prior to purchase. The regulations at § 3560.54(a)(11) allow borrowers to purchase land for a site in excess of what is needed, except when the applicant cannot acquire an alternate site or cannot acquire the needed land as a separate parcel. The applicant agrees to sell the excess land as soon as practical and to apply the proceeds to the loan. Program site density requirements must be met in accordance with the site requirements established under § 3560.58.

Topic: Several commenters expressed concern about the difficulty in locating appropriate sites for development and the need for flexibility in the Agency's criteria. One commenter asked the Agency to clarify its language by changing “will” to “should” in § 3560.58(a)(4). Commenters also said that clarification is needed regarding what constitutes an established rural community/eligible site. Many acceptable sites are located outside city limits but have water, sewer systems, and fire protection. Several commenters said that the regulation requires sites to have reasonable access to water and sewage removal, but this statement appears to negate the use of onsite septic systems as outlined in the Loan Origination Handbook, which describes when alternatives to “community” systems may be used.

Response: The Agency appreciates these comments; however, RHS has not made the suggested change from “will” to “should” in § 3560.58(a)(4). The Agency wants to emphasize that it will not approve sites that are not an integral part of a residential community and do not have reasonable access, either by location or terrain, to essential services such as water, sewage removal, schools, shopping, employment opportunities, and medical facilities. Environmental studies and civil rights assessments must be conducted before a site is approved. The Agency wants to emphasize that it remains flexible pending the outcome of such site assessments and the review of final development costs and plans.

Topic: Several commenters felt that more consideration should be afforded for development within 100-year flood plains, provided adequate flood insurance is maintained, and for development near or adjacent to industrial sites and processing plants, provided there are no threats of health hazards.

Response: The Agency appreciates these comments. However, the Agency will not approve sites subject to 100-year floods when non-floodplain sites exist. Where there are no non-floodplain sites available, sites located within a 100-year floodplain are not eligible for Federal financial assistance unless flood insurance is available through the National Flood Insurance Program. Once all necessary information is collected, analyses are performed, and the appropriate reviews completed for these sites, the Agency will make its decision based on whether the proposed project furthers the program's objectives and the government's interests are adequately protected.

Topic: Numerous commenters expressed concern that the Agency does not consider standards imposed by other financing sources, such as tenant income restrictions and tiered rents. Some commenters appeared to be confused about tax credits as a funding source.

Response: The Agency appreciates these comments and is committed to working to reduce interprogram differences to the extent practicable, thereby making it easier to satisfy the requirements of other funding sources. Moreover, as noted in § 3560.66(a)(3) of the interim final rule, the Agency will allow the strictest interpretation of the policy to prevail in most instances when requirements conflict.

Topic: Several comments focused on the Agency's preference for loan applications with leveraging. Commenters stated that the Agency should not award points, or should award fewer points, to applicants with “token” financing that makes up a very small percentage of total development costs.

Response: The Agency understands the commenters' position and notes that how points are awarded is discussed in the Agency's annual NOFA. It is not changing how it scores and ranks applications at this time. Moreover, it already awards fewer points to applications wherein there is a lower percentage of leveraging in comparison to the total development costs.

Topic: The Agency received numerous comments on equity requirements for subsequent loans. One commenter stated that the Agency should change its language in proposed § 3560.55(d)(1) to read “borrower,” not “equity.” Several other commenters stated that requiring a borrower to make an equity contribution for a subsequent loan is a disincentive for applying for the loan. Others said that the equity contribution should come from the property's resources.

Response: The Agency appreciates these comments and has changed its language in § 3560.55(d)(1) of the interim final rule to read “borrower,” but it will not change its position. RHS does not consider it an onerous Start Printed Page 69051requirement for applicants for subsequent loans to make an equity contribution of 3 or 5 percent, depending on whether the project is being financed with LIHTCs.

Topic: A substantial number of commenters focused on the required funding level of a property's reserve account and felt that the minimum deposit requirement was too high. These commenters were concerned that this requirement would be unduly costly and result in budget-based rents exceeding conventional rents for comparable units.

Response: The Agency appreciates these concerns. Since the proposed rule was published, RHS has undertaken a comprehensive property assessment of the properties in the section 515 portfolio. The preliminary results provided useful information for reconsidering the extent of capital reserves that may be necessary to meet the capital needs of projects and to explore policy options for addressing these needs to be reflected in any necessary budgetary and legislative changes. More time is needed to properly address these matters. Accordingly, RHS has decided to publish an interim final rule that does not include these provisions—specifically § 3560.103(c)(3) and § 3560.306(k)(1) of the proposed rule—until their impacts can be assessed and policy decisions can be made for a long-term strategy.

Topic: Several commenters believed that there were loopholes in the proposed rule that would have enabled a borrower to commit deliberate actions to force the Agency to accelerate the borrower's loan to circumvent the preservation/prepayment requirements.

Response: The Agency notes that similar comments were addressed in subpart N and recommends referring to this part of the interim final rule for more information. However, it does note that in the interim final rule, the Agency modified § 3560.456(a) to read as follows: “Before accelerating a project loan, the Agency will consider the possibility that the borrower is forcing an acceleration to circumvent the prepayment process. If it is found that this is the borrower's motivation, the Agency will consider alternatives to acceleration, such as suing for specific performance under loan and management documents.”

Topic: The Agency received numerous comments on the restrictive-use provisions described in this subpart. Several of these comments focused on how the proposed rule was unclear about whether use restrictions remain in effect or terminate on properties whose borrowers make their balloon payment and pay off their Agency debt when the 30-year term expires. Some commenters expressed concern that if the use restrictions do not remain in effect for the entire 50-year loan amortization period, the supply of affordable housing will decrease. Other commenters said that the restrictive-use provisions should expire when the borrower pays off the Agency debt.

Response: As explained in the preamble to the proposed rule, use restrictions are tied to the 30-year term of the mortgage. This requirement was established in 7 CFR part 1944, subpart E and the proposed rule simply continued this policy. However, the Agency notes that its interim final rule would allow properties to remain in the program if the borrower sought and obtained additional financing from the Agency upon expiration of the term.

Topic: Several commenters expressed dissatisfaction with the Agency's policy for calculating returns on investment. Some commenters recommend that the full 8 percent return should be allowed on all equity funds up to 10 percent of the amount of the initial investment instead of just on the 3 or 5 percent initial contribution. These commenters also felt that consideration should be given for older projects.

Other commenters noted that the Agency should allow a return based on the current value of the original investment adjusted for inflation, if owners are expected to maintain a business commitment to MFH projects.

Response: The Agency has considered the commenters' reasons for suggesting higher returns but has retained the policy described in the proposed rule, which is consistent with the Agency's existing policy in 7 CFR part 1944, subpart E on this topic.

Topic: Additional commenters noted that the Agency does not account for inflation when estimating return on investment in § 3560.68. (One noted that the reference to § 3560.67 was wrong and should be § 3560.68.) They also felt that there needed to be provisions for the payment of general partner fees for MFH projects with LIHTCs consistent with the LIHTC industry standard.

Response: The Agency has corrected the cross reference in the interim final rule. As is the case with the payment of developer's fees on combined MFH/LIHTC-financed projects, general partner fees, while not an eligible use of Agency loan funds, may be included in the total development costs when such fee is paid from other financing sources, in accordance with § 3560.63(d)(2).

Topic: Several commenters noted that the definition of security value of the property is critical to the calculation of return on investment. If security value equals “value-in-use,” the return on investment will be greater than if the security value of the property equals the market value.

Response: The Agency acknowledges these comments and has made revisions to the language in § 3560.68 to address this concern. The Agency also has noted that clarifications were made in § 3560.752 of the interim final rule to reduce confusion about the types of value determinations.

Topic: The Agency received comments regarding its cost certification requirements, which state: “Whenever the State Director determines it appropriate, and in all situations where there is an IOI as defined in 7 CFR 1924.4(i), the borrower, contractor and any subcontractor, material supplier, or equipment lessor having an identity of interest must each provide certification as to the actual cost of the work performed in connection with the construction contract.” Several commenters stated that these requirements were not strict enough and suggested requiring further cost certifications. Another commenter recommended that the regulation should specify an audit by a CPA, who is independent from the borrower. Another commenter asked for clarification about some of the related procedures, and who pays for the audit.

Response: The Agency appreciates these comments and has included a clarification in § 3560.72(b) of the interim final rule that cost certifications must be prepared in accordance with 7 CFR part 1924, subpart A. The Agency believes this clarification provides the necessary protection. Further, the Agency, rather than the borrower, has the authority to contract with a CPA to perform the audit. RHS believes that the language in the rule is clear—the expenses related to the cost certification and the accompanying audit are paid by the borrower out of loan proceeds. If the Agency contracts for the audit, it pays for the cost, and the loan funds for this cost are returned. This process is described in Agency guidance about program procedures.

Topic: Several commenters supported the elimination of the designated places requirement. The commenters said that the designated places list frequently excludes areas where the need for affordable housing is the greatest. Commenters said that if a market study indicates a need for affordable housing in a given area, the Agency should consider the project for funding, even if the location is not on the designated places list. Start Printed Page 69052

Response: The Agency is committed to using its funds to benefit households with the greatest need for housing in areas where the supply of affordable housing is limited. Further, it believes this commitment is reflected in the designated places list, where designated places is a requirement in accordance with § 532(c) of title V of the Housing Act of 1949, as well as other Agency or Administration priorities.

Topic: The Agency received several comments on the regulation's references to accessibility standards. Several commenters suggested that the reference to the ADA be removed because the ADA is not applicable to residential properties. Some commenters expressed confusion about accessibility requirements.

Response: The Agency has noted these comments and has removed the references to the ADA, except where it is applicable. The interim final rule continues to reference 7 CFR part 1924, subpart A, which addresses accessibility requirements. Further, Agency staff can help provide clarification about accessibility requirements during the project planning stage.

Topic: Other commenters said that the accessibility requirements for on-farm labor housing should be less stringent.

Response: The Agency appreciates these comments. However, the Agency has made no change to § 3560.60(d), as its policy on accessible units needs to comply with the applicable civil rights statutes and regulations.

Topic: The Agency received several comments on § 3560.56(e), which states that the Agency will process the next initial loan application, in rank order, when an application is delayed for a period of time that will not permit funding of the project during the current funding cycle. The commenters stated that it is very difficult to complete projects within a particular funding cycle given all the development challenges and the need to obtain funds from other sources.

Response: The Agency believes that the commenters misunderstood this paragraph. The Agency must be able to obligate the funds for a particular project, not complete the construction process, during the current funding cycle. The Agency recognizes the challenges in preparing an application involving multiple funding sources but has retained the language as written because it must obligate the available program funds within the established period.

Topic: Several commenters focused on § 3560.60 (Design requirements), with comments ranging from the specific to the relatively general. For example, commenters stated that the Agency's requirements for (1) economical construction, operation, and maintenance and (2) life-cycle cost analyses are contradictory, as life-cycle cost analyses can lead to greater maintenance costs. By comparison, a commenter asked the Agency to work with other Agencies to ensure that current threshold requirements are improved to prevent air and water infiltration.

Response: While the Agency appreciates these comments, it has made no change to this section because it feels that conducting life-cycle cost analyses will help ensure a balance between economical construction and a property's long-term viability.

Topic: Several commenters also focused the on the life-cycle cost analysis requirement in § 3560.60 (Design requirements). Some commenters were concerned that requiring a life-cycle cost analysis would not be cost-effective for properties with minor capital needs. Others said that the term “life-cycle cost analysis” should be clarified so that borrowers are fully aware of their responsibilities for obtaining and implementing the results of the analysis.

Response: The Agency appreciates these comments, but the life-cycle cost analysis requirements in § 3560.60(c)(3)(iii) of the interim final rule are used in an effort to balance upfront construction costs and long-term operating costs. The Agency has made no change. The Agency provides further information on obtaining and using a life-cycle cost analysis in its guidance about program procedures.

Topic: A number of commenters stated that a property's rents should be based on its operating and development costs, which might be higher than conventional rents for comparable units. Several of these commenters stated that it is difficult to find comparable rents in certain communities. Other commenters said that it was difficult to comment on the implementation of conventional rents for comparable units without knowing what the impact will be.

Response: The Agency appreciates these comments, but RHS views conventional rents for comparable units as an important underwriting consideration in assessing project viability. As stated previously, the Agency may make an exception to the requirement that rents do not exceed conventional rents for comparable units if doing so is in the Government's best interest.

Topic: With regard to the Agency's requirement that its loans be at least 25 percent of a project's total development costs, some commenters thought that this 25 percent threshold is reasonable, but others said that the threshold should be increased because of the difficulty in servicing small loans.

Response: The Agency has considered the commenters' suggestions but has decided to retain the 25 percent threshold. The Agency believes this threshold is reasonable and has not been a problem for the majority of applicants.

Topic: Several commenters asked what security value should be used to determine maximum loan limits.

Response: The Agency has clarified these terms in the interim final rule so that the terms “current value” and “value-in-use” were replaced by “market value” in § 3560.63(e). Also, a description of market value is provided in § 3560.752 of the interim final rule.

Topic: The Agency received several comments regarding the cap of 2 percent of total development costs for section 515 projects and 4 percent for off-farm labor housing projects to cover development/loan packaging. Several commenters said that the 2 percent for section 515 projects and 4 percent for off-farm labor housing projects are not adequate to cover costs, especially in those cases where the developer does not serve as the general contractor. Other commenters contended that development costs for section 515 and off-farm labor projects are roughly equivalent.

Response: The Agency acknowledges the commenters' concerns but has determined that there is no compelling reason to increase the cap. Furthermore, in the Agency's experience, development of Farm Labor Housing projects is more difficult than development of section 515 properties. Therefore, the Agency has made no change in the cap for section 515 properties.

Topic: Regarding the eligible uses of loan and grant funds as described in § 3560.53, several commenters supported the Agency's more detailed description of allowable costs. Others said that the percentages for allowable builder's profit, general overhead, and general requirements are improved over prior allowances, while others thought that the percentages should be increased to compensate for increased costs. Several commenters said that the section should be more inclusive, while others thought some costs should be prohibited.

Response: The Agency appreciates these comments but has made no change to its position in the interim final rule. The comments were very general, and RHS believes the language in the proposed rule is reasonable. Start Printed Page 69053Moreover, the allowable cost percentages were derived as a result of an Agency review of Agency, State, and industry cost information and best management practices. The provisions in the Agency's interim final rule are consistent with the results of this review.

Topic: Regarding the language in § 3560.53 on the use of funds to develop and install necessary systems, some commenters felt that certain elements of this requirement were too prescriptive and bureaucratic, ultimately leading to increased development costs. Other commenters said that the installation of necessary systems offsite should require permanent easements.

Response: The Agency has considered the commenters' concerns and revised § 3560.53(e)(1) in the interim final rule to read: “The loan applicant will hold title to the facility or have a legal right to use the facility in the form of an easement or other instrument acceptable to the Agency for a period of at least 50 percent longer than the term of the loan or grant and the title or right is transferable to any subsequent owner of the housing.”

Topic: Other comments regarding § 3560.53 included praise for the clearer, improved statement of authorized purposes. Another commenter stated that the language in § 3560.53(b)(2) was too restrictive and could result in properties without the amenities to effectively compete with other affordable properties in their market area.

Response: The Agency thanks the commenters for positively recognizing the improved language. RHS acknowledges the concern about ensuring that properties are competitive. The Agency believes that other provisions throughout subpart B provide sufficient flexibility to enable applicants to develop properties with competitive features and amenities for the area, while at the same time ensuring affordability and reasonable development costs.

Subpart C—Borrower Management and Operations Responsibilities

Topic: The Agency received numerous comments on the property maintenance requirements. These comments covered three broad topics, as discussed below.

Topic: A number of commenters expressed approval of the Agency's effort to codify property standards. They indicated that the increased clarity will help ensure a consistently higher level of compliance with the standards and provide safer, healthier environments for tenants, especially children. However, other commenters argued that such specificity should not be included in the regulation, as it can create a lack of flexibility for property owners who must follow the rules over their own judgment about cost-effective maintenance. Some suggested putting the detailed property standards in the program handbooks. One person suggested referencing an industry code.

Response: The Agency appreciates these comments and understands the commenters' concerns. The Agency has considered the advantages and tradeoffs of including specific standards in the rule and has decided to keep the specific standards in the rule. By establishing the standards in the regulation, the Agency has a stronger regulatory basis for enforcing property maintenance standards.

Topic: Similarly, commenters were concerned that for many properties it would not be practical to achieve and maintain compliance with all items in the list of requirements. They indicated that any single deficiency should not be interpreted as an indication of a poorly maintained project and questioned whether a single or limited number of deficiencies would put them out of compliance. One commenter asked for a specific statement of what would constitute compliance. Commenters also added that ongoing compliance with a long list of requirements would be even more difficult given the limits on operating budgets and stressed the need for adequate resources to meet these property maintenance standards. They suggested that they be allowed to consider the severity of a problem to prioritize their maintenance needs and not be required to address all deficiencies at once.

Response: The Agency appreciates all these comments and has modified § 3560.103(a) to indicate that it will not penalize the borrower for not meeting all standards if there is clear evidence that the borrower is working toward meeting 100 percent of the standards. Further, properties in the process of addressing deficiencies will not be deemed out of compliance unless the number of deficiencies constitutes substantial noncompliance and calls into question the viability of the property and the effectiveness of the borrower's maintenance program. The Agency has added language to the interim final rule at § 3560.103(a)(4) indicating that upon discovery of conditions that do not meet the standards, it expects that the borrower will remedy the conditions in a reasonable period of time. The Agency has listed in the interim final rule at § 3560.103 (a)(3)(i) through (xvii) the standards by which compliance will be measured.

Topic: Commenters also had a number of suggestions, proposed language changes, and questions on how to interpret these standards. They had questions on issues ranging from rain diverters and gutters to van parking spots to the caulking of water closet floors and accessible laundry facilities. They suggested edits to the language on water leaks, cracks, moisture and mold, and common area accessibility. They also raised the issue of work order systems and the difficulty of implementing them in small properties.

Response: The Agency acknowledges these comments and has made appropriate edits for clarity in the interim final rule at § 3560.103(a)(3)(i) through (xvii). The work order system required is not intended to be any more elaborate than necessary for the size of the property.

Topic: Regarding the new approach to management plans, management agreements, and management certifications, many commenters applauded these changes for reducing the administrative burden on both the borrower and the Agency, though a number of commenters were also concerned that the changes might hinder the effectiveness of Agency oversight. Other commenters suggested further streamlining these requirements, and a number of comments asked to see the management certification form. Finally, several commenters noted that subpart C of the proposed rule contradicts itself by stating that management plans are not subject to Agency approval and then stating conversely that Agency approval is required (see § 3560.102(c)).

Response: The Agency acknowledges these comments. The Agency has remedied the conflict identified at § 3560.102(c) to clarify that Agency approval of management plans is no longer required. The Agency believes that the concerns about the changes hindering Agency oversight reflect commenters' confusion about the some of the specifics of the new policy. While the Agency is no longer approving either the management plan or the management agreement, the management certification is signed by both the management agent and the borrower, and is approved by RHS . The certification commits the management agent and the borrower to operate the property in compliance with program requirements and provides specific financial and other penalties for failure to comply, including termination of the management agreement. This certification is similar to the document Start Printed Page 69054used successfully in HUD multi-family programs. The Agency believes that this document eliminates unnecessary Agency reviews, while still retaining clear authority for compliance oversight and enforcement.

Topic: Commenters made a number of suggestions on how and when to submit management plans and certifications. They asked if current management plans would need to be reviewed and updated for approval, and also, what types of changes in approved plans would require reapproval of the documents; they strongly suggested that only significant changes require reapproval within the 3-year timeframe. One commenter suggested that a borrower with multiple properties should be able to submit a “master file” with a plan for all the borrower's properties. Another asked if the management certification could be done as part of the budget document. Commenters also asked about using a management agreement acceptable to both the Agency and the State finance Agency to help eliminate paperwork.

Response: The Agency agrees with the commenters that only significant changes will require resubmission of documents. As noted in § 3560.102(c) of the interim final rule, the Agency will no longer approve management plans. Borrowers will need to prepare and submit updated management plans initially after publication of this rule. Subsequent updates are required when project operations substantially change with regard to the mandatory items in the plan, or if the borrower needs to submit a workout plan and the management plan needs to be updated to be consistent with the workout plan (see subpart J).

Topic: Numerous commenters questioned the requirement in § 3560.102(d) that the management plan be updated if the project is found to be out of compliance. The commenters questioned the need to update the management plan in cases where the problem is not due to items covered in the plan and noted that this poses an unnecessary burden.

Response: The Agency agrees with the commenters' concern but notes that the paragraph allows borrowers to submit a statement that the management plan is adequate to assure compliance if changes to the plan are not needed to address the violation. Further, the Agency believes that requiring the management plan to be updated to describe how compliance violations are to be addressed is reasonable when such changes would support compliance. Therefore, the Agency has made no changes to the management plan requirements.

Topic: Management fees and the policy for determining allowable fees to be paid out of project income received numerous comments. A number of commenters supported the new method. Some commenters suggested that a base fee using a National average, with add-ons for geographic factors, would help with consistency. However, others expressed strong opinions that the determination of reasonable fee standards could only be done effectively at the State level. Numerous commenters were disappointed that the Agency chose to institute a “per unit, per month” management fee rather than a fee based on a percentage of revenue or gross collections. They were also concerned that much of the clarity gained through the development of Administrative Notices on this topic did not appear in the rule. Many commenters were concerned that any method used to determine a range of base fees for a given area would be seriously flawed. Their concerns included the following:

  • Management fees should be determined at the State level because only the state has specific market knowledge to set fees correctly.
  • Management fees should be published periodically at specified times. Some commenters worried that the process of publication will delay the release of the fees. They asked that State lists be made available immediately.
  • RHS should consider Consumer Price Index when establishing management fees.
  • The management fee system should ensure that the appropriate fee ranges are allowed. Some suggested looking at successful State models for per-unit fees.

Commenters also had a number of questions and clarifications regarding the eligibility for fees of Public Housing Authorities, the fees for sections 514 and 516 projects, the bundle of services, and add-on fees and the relationship of these fees to fees in market rate properties.

Response: The Agency acknowledges the commenters' concerns and has revised § 3560.102(i) to address clarification issues raised by the commenters. Management fees will be paid based on a “per occupied unit” basis. The Agency feels that this is the fairest methodology at this time. The base fee will be valued on a specific “bundle of services” that has been added to this section. The “bundle of services” has previously been issued in Administrative Notices. Periodically, the Agency through the State Offices will publish the base fee. The States will determine the base fee using housing industry data for their state. The frequency for updating the fee ranges will be established in Agency program procedures.

Topic: The Agency received numerous comments with respect to management agents being allowed to earn a management fee for any unit occupied for at least one day during the month. Several commenters said that allowing for a management fee for a partial month is a welcomed improvement; however, there was disagreement about whether the Agency's information management capabilities would allow it to effectively track monthly occupancy rates, including units that are vacant on the first of the month but occupied later in the month. Some commenters suggested that management agents should only be eligible to receive a fee for a unit that was occupied on the first of a month; in contrast, other commenters argued that occupancy should not even be a factor in calculating management fees. They stressed this method is not the industry standard because vacant units often require more attention than occupied units. In addition, the tracking of occupied units places an additional burden on the management agent. One compromise approach offered was to allow management fees on the total units as long as the property stays 90 percent occupied, and per-unit fees if the property falls below the 90 percent threshold.

Response: The Agency acknowledges the commenters' concerns. However, the Agency believes the rule as written takes into account partial occupancy at § 3560.102(i)(2). If additional staff time is needed to perform leasing activities to address vacancies, these costs are payable directly from the project. For this reason, the Agency believes that a fee system based on occupied units will not adversely affect projects experiencing vacancies or higher turnover. Further, if a property is located in a difficult market, the Agency can authorize add-on fees as a means to address issues associated with individual markets in an area. The Agency has made no changes to the rule but will continue to consider options and refinements during the comment period of the interim final rule.

Topic: The bundle of services concept established in § 3560.102(i) received many comments and questions. Several commenters asked for more detail on the included list of services. Some expressed concern that this arrangement will add new costs and complexity to the compensation of management Start Printed Page 69055agents, while others strongly endorsed the concept stating that it will help bring clarity and consistency to the process. Commenters stressed that, given the diversity of business practices among agents, the defined bundle of services must be complete, necessary, and consistent among projects, counties, and states. Some commenters asked that a list of charges for each state (for the bundle of services) should be made available for comment before the interim final rule is published.

Response: The Agency appreciates these comments and has endeavored to establish a clear, appropriate, and practical delineation of project-related costs and services to be covered out of the management fee, and those costs and services to be paid directly from project income. RHS has developed this definition of the bundle of services for the management fee based on extensive input from stakeholders prior to the rulemaking. The bundle of services can be found at § 3560.102(i)(3) of the interim final rule.

Topic: Commenters raised several points about the benefits and potential costs of the prohibition on IOI relationships in the program. Several commenters recommended that IOI relationships between any parties connected to a particular Agency-financed project be prohibited, while other commenters stated that such a prohibition would increase the cost of goods and services for many projects. In addition, several commenters suggested that § 3560.102(g)(2) be revised to state that failure to disclose IOI relationships will subject the borrower, management agent, and any other firms or employees found to have an IOI relationship to suspension and debarment. Still others asked for more guidance on what constitutes an IOI relationship and how to document it.

Response: While the Agency acknowledges the commenters' concerns, requirements regarding the disclosure of IOI relationships and documentation that the use of such providers and suppliers is in the best interest of the project are essential program controls to ensure program integrity and reduce the risk of abuse. Further, the Agency's ability to suspend or debar borrowers who fail to disclose IOI relationships is important to enforcing this requirement; however, the Agency reserves the right to use this provision within its discretion. For these reasons, the Agency has made no change to § 3560.102(g) in the interim final rule.

Topic: The prohibition of IOI insurance carriers drew many comments. Commenters explained that with rising insurance premiums, they have fewer and fewer choices for insurance providers. They noted that it is especially difficult to find insurance in rural and tribal areas; many have found that their only cost-effective option has been with carriers that would be considered to have an IOI relationship with the borrower. Commenters emphasized that member-owned risk pools have been a successful strategy for holding down insurance costs, but these, too, are adversely affected by the prohibition on IOIs. Commenters urged the Agency to remove the IOI prohibition with respect to insurance.

Response: The Agency has considered these comments and has deleted the requirement under § 3560.105(e) that prohibited borrowers from using IOI insurance carriers. The Agency expects that this change will improve borrowers' ability to obtain Agency-required coverage at a lower cost.

Topic: Regarding the Agency's general insurance requirements, several commenters stated that the Agency should not have to deem insurance carriers as “reputable and financially sound.” Other commenters recommended that the minimum property insurance coverage should be the replacement value, not the depreciated replacement value. They offered that the alternative of existing debt is acceptable. Commenters also proposed adding language to the regulation on tenant responsibility for “contents” insurance, the use of project revenue for nonprofit organizations' director's liability insurance, and the deposit of checks. Commenters also requested certain changes to language in the rule for clarity regarding insurance minimums and limited insurance. Finally, one commenter expressed satisfaction with the addition of the guidance on policies for several buildings.

Response: The Agency appreciates the comments and suggestions, and has made several of the suggested editorial changes to the rule for clarity at § 3560.105(b),(c), and (d). The Agency acknowledges the concerns raised, and while the Agency has decided not to make substantive modifications to its insurance requirements in the interim final rule, the Agency will continue to accept comments and consider them in subsequent policy discussions prior to publishing the final rule.

Topic: Commenters also asked RHS to allow greater flexibility with respect to insurance requirements to allow the Agency and borrowers to appropriately respond to changing market conditions. Several commenters expressed strong concern about rising insurance premiums and identified possible cost-effective alternatives to current insurance policies. They stressed the need for exception authority and suggested that one approach—at the state level grant exceptions to the deductible requirement, while allowing borrowers to put aside funds to self-insure for the difference.

Response: The Agency recognizes the cost issues associated with insurance and changes in the insurance industry. Since September 11, 2001, the Agency has been processing deductible exceptions and meeting with industry groups in order to develop a response to higher costs. Therefore, the Agency has increased the maximum allowable deductible to $10,000 (for property insurance). The Agency has retained the flexibility for increased deductible amounts.

Topic: Regarding requirements for insurance deductibles, several commenters stated that the required deductibles were too low and could result in dramatic premium increases. Other commenters said that the deductible limits (of 0.5 percent or $5,000) were set many years ago and should be adjusted to reflect current industry standards. Finally, several commenters asked for clarification with regard to the language in § 3560.105(f) about how insurance deductible “amounts must be accounted for in the reserve account.”

Response: The Agency recognizes the commenters' concerns. It has adjusted the deductible amounts to reflect current industry practice and they appear at § 3560.105(f)(8) in the interim final rule.

Topic: The Agency received several comments on the requirements for hazard insurance coverage. These commenters asked the Agency to clarify its definition of hazard insurance. For instance, some commenters were uncertain if terrorism or earthquake coverage is required. Several commenters stated that earthquake insurance should not be required as it is prohibitively expensive.

Response: The Agency appreciates these comments and has revised the interim final rule to clarify the insurance types required at § 3560.105(f)(1) and (2).

Topic: Regarding requirements for liability and fidelity coverage, some commenters said that while the proposed rule provides for minimum liability coverage of $1,000,000 per occurrence, no deductible is provided in the proposed rule. Similarly, commenters expressed concern that the proposed rule did not provide minimum Start Printed Page 69056coverage amounts and deductibles for fidelity coverage. Commenters also asked that language regarding the breadth of liability coverage be changed to specify the coverage of buildings; grounds; and common, commercial, and other public space. They suggested that language on options for liability coverage, such as errors and omissions and environmental damage, be moved to the Asset Management Handbook. For fidelity coverage, commenters indicated that the provision for reflecting the portion covering the employee in the management plan was not practical.

Response: The Agency acknowledges the commenters' concerns. The deductible amounts for fidelity coverage have been included in the interim final rule at § 3560.105(h)(2)(i). The Agency has retained the language from the proposed rule regarding coverage of areas beyond the buildings in the interim final rule and has replaced the language regarding the fidelity premium to state that the premium could be prorated among the housing projects covered. The Agency has not removed the language on suggested coverage as it reflects current industry standards and, as a minimum amount, is not likely to require regular updating.

Topic: Several commenters objected to the Agency's requirement that the Agency must be named as co-payee on all loss drafts. These commenters felt that this is a viable requirement only when the Agency is in first lien position. Several commenters said that if the Agency is in the junior lien position, the Agency can be named as an additional insured.

Response: The Agency has considered these comments and made appropriate revisions at § 3560.105(b)(4) of the interim final rule.

Topic: Regarding the affirmative marketing and accessibility requirements discussed in § 3560.104, one commenter expressed appreciation for the level of specificity provided in the rule, while another stated that further guidance was still needed. Several commenters proposed edits to the language to strengthen and clarify requirements regarding community contacts, the frequency of advertising and the publication of advertisements, the costs associated with fair housing training for staff, and requirements regarding limited English proficiency. Another commenter asked for additional detail regarding accessibility and reasonable accommodations. Finally, several commenters asked for clarification regarding the requirements for updates to the Affirmative Fair Housing Marketing Plan, suggesting that updates be made only for significant changes.

Response: The Agency appreciates the comments and has made the change to clarify organizations for the disabled at § 3560.104(b)(4)(ii)(B) of the interim final rule. The Agency has not made changes to the language on reasonable accommodations and financial burden because it is based on fair housing and accessibility statutes and their implementing regulations. Additional clarification about procedures and determinations regarding reasonable accommodations and Affirmative Fair Housing Marketing Plans are included in internal Agency procedures. Limited English proficiency requirements are addressed in subpart A.

Topic: The Agency received a number of additional comments regarding the fair housing and accessibility requirements in subpart C. Commenters noted the importance of these requirements. Several commenters stated that reasonable accommodations should be made at the project's expense, not at the borrower's expense as stated in the proposed rule. Other commenters asked for clarification as to who makes the decision about whether a request for an accommodation causes undue financial or administrative burden, and one asked for a definition of undue burden. Multiple commenters requested a change in the language about persons with disabilities and companion animals to help clarify which tenants can request this accommodation. Other commenters said that the discussion of accessible laundry facilities does not allow for alternate arrangements, as allowed by section 504. Other commenters stated that in the interim final rule, any discussion of common area accessibility must refer to the Uniform Federal Accessibility Standards (UFAS). Still other commenters said that the proposed rule's language defining responsibility for paying for reasonable accommodations is unclear.

Response: The Agency appreciates the comments and has changed the language at § 3560.104(c)(4) of the interim final rule to place the financial burden on the property, instead of on the borrower, and further clarifies this responsibility.

Topic: The discussion of required signage drew many comments. Some suggested language changes to clarify the requirements. Others questioned the need for such extensive guidance on these topics. Still others questioned about the applicability of the requirement and whether existing signs had to be changed to meet the requirements or local requirements.

Response: The Agency acknowledges that the ten requirements listed under § 3560.104(d) are very specific but does not consider these requirements to be onerous. Further, the Agency believes that this detail is appropriate to help ensure compliance with applicable Federal fair housing and accessibility requirements. Therefore, the Agency has retained these requirements in the interim final rule.

Topic: Several commenters disagreed with the language in certain paragraphs in subpart C that referred to the ADA. The commenters correctly noted that these paragraphs should refer to section 504 of the Rehabilitation Act of 1973 because most areas in residential properties are not regulated under the ADA.

Response: The Agency thanks the commenters for highlighting this issue and has removed the identified references to the ADA from the interim final rule.

Topic: Regarding policies related to payment of property taxes, some commenters stated that the Agency should not require the borrower to certify that the property's taxes were paid because some states have services that notify USDA of property tax delinquencies. Several other commenters suggested that instead of requiring the Agency to pay property taxes when the borrower fails to do so, the Agency should determine whether it is in the best interest of the Government to pay the delinquent taxes.

Response: The Agency appreciates these comments and removed the requirement at § 3560.105(i) for borrowers to certify the payment of property taxes from the interim final rule. However, this certification will remain as a requirement for the annual financial statements. The Agency has considered the suggestion regarding property taxes but believes that it is not prudent as a general policy to relax the requirement for keeping the property tax payment current. More guidance on the annual financial statements will be provided by the MFH Engagement Guidelines to be issued separately.

Topic: The Agency received a number of comments on the qualifications for acceptable management agents. Some commenters approved of the requirements, while others suggested that it may be difficult to find management entities with the required 2 years of experience in many rural areas. Other commenters questioned whether this requirement is unnecessary for small properties. One commenter suggested broadening the requirement to allow experience managing LIHTC properties to satisfy the experience Start Printed Page 69057requirement. One commenter suggested requiring the prospective management agent to disclose all past RRH properties managed as evidence of past performance.

Response: The Agency understands the commenters' concerns but has retained the experience requirement. RHS believes that successful experience with some type of federally assisted affordable housing is important for effective project management because the program rules require specialized knowledge beyond conventional property management. The Agency notes that experience managing LIHTC projects would be acceptable experience.

Topic: There were also comments on the 45-day approval timeframe for management agents. Some commenters agreed with it or suggested lengthening it to 90 days to allow the Agency more time for review. Others stated that the approval timeframe, with 30-day interim authorizations, for new agents is too long for a project without a management agent and suggested that the Agency should simply accept the agent and provide approval after the change has taken effect.

Response: The Agency understands the commenters' concerns about getting new management agents in place quickly but also needs to allow adequate time for Agency review of a prospective agent's experience and acceptability. In balancing these two considerations, the Agency has decided to retain the proposed timeframes in the interim final rule.

Topic: The Agency received several comments on the requirement for resident participation in property management. The commenters were concerned that the wording implies that residents have a role in decisions regarding property operation beyond input and suggestions. They stated that while resident input is helpful, borrowers' financial responsibilities also give them full responsibility for operations.

Response: The Agency emphasizes that the borrower has ultimate responsibility and, therefore, decisionmaking authority in the property. The intent of the tenant participation requirement is only to provide an opportunity for tenant input into the management process, not a role in making decisions.

Topic: One commenter suggested adding a requirement to the rule requiring language in the management agreement that clearly establishes a management agent's responsibility and liability for any equity skimming it causes or allows to happen.

Response: The Agency does not have a direct relationship with the borrower's management agent and cannot hold such agents directly responsible for these activities. The Agency relationship is with the borrower and, as such holds the borrower responsible for all activities at Agency-financed properties.

Subpart D—Multi-Family Housing Occupancy

Topic: The Agency received a substantial number of comments on lease and occupancy terminations. Several commenters said that the regulation should acknowledge that some tenants are displaced through no fault of their own and describe the tenants' rights in these situations.

Response: The Agency thanks the commenters for this suggestion and has modified the interim final rule. Specifically, the Agency has modified § 3560.159(c) to state that tenants whose leases are terminated through no fault of their own are entitled to benefits under the Uniform Relocation Act.

Topic: Several commenters said that once a termination notice is given to the tenant to vacate, the tenant's recourse should be through the court system. To allow a tenant to provide a corrective action plan will only increase the termination time of problem tenants. Other commenters said that the proposed regulation still excludes evictions from the grievance process but also eliminates the written warning requirement and the right to meet with the borrower to discuss the alleged lease violation and possibly the termination notice itself.

Response: The Agency has modified § 3560.159(a) to state that the borrower must give the tenant written notice of the violation and give the tenant the opportunity to correct the violation prior to terminating a lease.

Topic: The Agency received several comments that recommend revised language regarding the termination of occupancy in § 3560.159(a)(1). One commenter suggests that § 3560.159(a)(1)(i) be revised to read: “Violations of lease provisions or occupancy rules which are substantial and/or repeated.” The commenter also suggested revisions to § 3560.159(a)(1)(ii), specifically, removing “beyond the grace period.”

Response: The Agency thanks the commenter for the suggestions and has changed the above referenced sentences as recommended at § 3560.159(a)(1)(i) and (ii) in the interim final rule.

Topic: Several commenters wanted the current regulation to better specify residents' rights and borrowers' obligations. Specifically, the commenters identified the following:

  • The proposed regulation eliminates the requirement that the borrower notify the tenant of the right to review the borrower's file and copy information from it.
  • RHS streamlining efforts have gone too far in the eviction or termination section of the proposed rule. RHS should revise the termination section by adding back the language about tenants' rights and obligations from the current regulation and stating these rights in a precise and clear manner that residents can understand.
  • RHS should make it clear to its borrowers that the rejection or eviction of otherwise eligible applicants or tenants may cause borrowers to violate the Fair Housing Act, title VI of the Civil Rights Act of 1964, and other civil rights laws.

Response: The Agency acknowledges the commenters' concerns. The issue regarding the tenant's right to review the borrower's file is described in the interim final rule at § 3560.160(g)(4). The Agency has amended 7 CFR 3560.159 to include additional tenant protections with respect to termination. The civil rights laws to which borrowers, tenants, and the Agency are bound are described in 7 CFR 3560.2.

Topic: Multiple commenters praised the Agency for drafting the proposed rule to give new latitude to USDA to issue Letters of Priority Entitlement when required repair or rehabilitation causes displacement. The commenters believed that this added authority is helpful.

Response: The Agency appreciates the commenters' support.

Topic: One commenter advised the Agency to include “major loss or destruction by fire” as another example of conditions that could lead to termination, even if temporary until the housing can be restored for occupancy.

Response: The Agency acknowledges the commenter's concern. The situation described is referenced in 7 CFR 3560.159(c), which states that a tenant's occupancy may be terminated in the event of a building rehabilitation or a natural disaster. This paragraph further explains the tenant's rights under these circumstances.

Topic: Commenters stated that material lease violations should not be attributed to innocent members of the household, particularly in cases of domestic violence.

Response: The Agency notes the commenters' concerns. However, termination of tenancy terminates the lease of the unit and not specific household members. Start Printed Page 69058

Topic: Comments were received regarding the Agency's prohibitions against noncitizens. Several commenters contended that if enacted, the regulation would have a negative impact on many existing tenants who are not eligible noncitizens. This, in turn, will have a negative impact on the projects themselves. One commenter asked whether noncitizens could live in section 515 properties.

Response: While the Agency acknowledges the commenters' concerns, restricting occupancy in sections 514, 515, and 516 properties to U.S. citizens and legal immigrants is a statutory requirement.

Topic: The Agency received one comment recommending that RHS expand its proposed definition of legal or qualified alien to include three classes of immigrants that Congress recently determined should be eligible for public benefits, including “public and assisted housing” under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.

Response: While the Agency appreciates the commenter's suggestion, it has made no change because the definition of a legal alien is statutory per 42 U.S.C. 1436(a). The Agency has exercised its authority under sections 501(h) and 510(k) of the Housing Act of 1949 [42 U.S.C. 1471(h) and 1480(k)] to restrict eligibility for occupancy in all section 515 projects to citizens and qualified aliens. In addition, eligibility for the migrant farm worker programs under sections 514 and 516 is specifically restricted to such individuals by section 514(f)(3)(A) of the Housing Act of 1949 [42 U.S.C. 1484(f)(3)(A)].

Topic: Several comments were received regarding the proposed rule's citizen requirement for the head of household. First, the commenter indicated that RHS's proposal to require the head of household be a citizen or a permanent resident violates section 501(h) of the Housing Act of 1949. In addition, the commenter asserted that HUD has not conditioned eligibility to reside in its housing upon an adult member being a citizen or a person legally admitted for permanent residency. Finally, the commenter urged RHS to clarify language in § 3560.152 to indicate that only one member of a household need be a citizen or legal or qualified alien.

Response: The Agency acknowledges the commenters' concerns, but it has made no change because the requirement for occupants of sections 514, 515, and 516 housing to be citizens or legal immigrants is statutory.

Topic: With regard to § 3560.152(a)(1) and § 3560.154(a)(7), a comment was received suggesting that USDA incorporate appendix 2 to the HUD Handbook 4350.3. Further, the commenter urged USDA to coordinate with the Department of Homeland Security in much the same manner as HUD.

Response: The Agency thanks the commenter for this suggestion. Appendix 2 to the HUD Handbook 4350.3 is incorporated into internal Agency procedures.

Topic: Several comments were received regarding the acceptance of income-ineligible tenants into section 515 properties. Several commenters noted that if enacted, the Agency would require the borrower to publish local notices when waivers are granted to allow a project to rent to ineligible tenants. They thought that § 3560.152(d) was an unnecessary, excessive, and costly requirement to impose on what are presumably vacancy-troubled projects.

Response: The Agency notes the commenters' concerns and has removed this requirement from the interim final rule. In the proposed rule, it was located at § 3560.152(d)(3).

Topic: Regarding § 3560.152(d)(4), commenters believed that borrowers should not be required to submit monthly reports to the Agency regarding marketing efforts to locate eligible tenants. Instead, records should be kept onsite for review during Agency inspections.

Response: The Agency thanks the commenters for raising this issue and has modified the interim final rule so that the monthly report submission is not required. In the proposed rule, this was located at § 3560.152(d)(4).

Topic: Regarding § 3560.152(e), commenters generally argued that the move-in date should be the effective date for tenant certification, which is the first of the month.

Response: The Agency provides rental assistance, if available, to eligible tenants as of the first day of the tenant's first full month of occupancy. Therefore, the recertification date is the first day of the month for which the tenant is eligible to receive the subsidy. The Agency has made no change to the interim final rule.

Topic: One commenter asked what “prevailing market rent rate” means as referenced in § 3560.152(d)(8).

Response: The Agency appreciates the commenter's question. The Agency has removed this reference from § 3560.152(d) of the interim final rule.

Topic: Several commenters addressed ineligible tenant waivers with regard to the lease term, as well as the Farm Labor Housing rent. First, with regard to lease terms, commenters acknowledged that the proposed rule calls for one-year leases to ineligible tenants followed by a month-to-month lease thereafter. The commenters recommended that the lease to ineligible tenants should simply be month-to-month. In terms of Farm Labor Housing rent, the commenters believed that income-ineligible tenants should be expected to pay the greater of the one percent note rent or prevailing market rent, not the lease rate of one percent in the proposed rule. The Agency received one comment suggesting that over income residents should be required to move after the expiration of the current calendar year or 90 days, whichever is later.

Response: The Agency acknowledges the commenters' concerns. The Agency allows a 1 year lease for ineligible tenants because not allowing an ineligible tenant to remain in the unit for at least 1 year could result in an undue financial burden to that tenant, and in many localities, contravenes State or local law. The Agency believes, however, that once the year elapses, it is fair to require the ineligible tenant to move within 30 days if this is stated in the lease and does not contravene State or local law. The Agency has removed the reference to prevailing market rate rent.

Topic: Regarding § 3560.152(d)(7), one commenter suggested that this paragraph be deleted. Other commenters indicated that requiring a 25 percent surcharge for a Plan I projects, which operate at market rents, would require the borrower to charge rents higher than the market and consequently hurt project occupancy.

Response: The Agency appreciates the commenters' concerns but has made no change to § 3560.152(d)(7) because the requirement is not a change from existing policy, which merely requires that ineligible tenants pay a higher rent than eligible tenants.

Topic: One commenter addressed § 3560.152(e)(1)(iv) and asked for clarification regarding the ineligibility consequences faced by tenants who fail to comply with tenant certification.

Response: The Agency appreciates the commenter's concern. The interim final rule states that tenants who fail to recertify are no longer eligible for occupancy and subject to termination of tenancy in Agency MFH programs covered by the interim final rule. The interim final rule (at § 3560.152(d)) also explains how ineligible tenants may Start Printed Page 69059continue to be housed and the regulations concerning their occupancy.

Topic: Multiple comments were received asking that any change in tenant eligibility should grandfather in existing tenants.

Response: The Agency notes the commenter's concern; however, any changes in tenant eligibility requirements will not grandfather in existing tenants. Existing tenants should not be affected by changes in eligibility requirements, until their upcoming recertifications. Further, the Agency's internal procedures provide guidance for existing tenants.

Topic: One commenter said that allowing borrowers to “temporarily rent apartments to all persons without regard to age or income restrictions” appears to violate the exemption from the prohibitions against discrimination because of familial status that was granted to RHS.

Response: The Agency does not agree with this commenter's assessment. Ineligible tenants are permitted for temporary periods to protect the financial interest of the Government. No change was made to the interim final rule.

Topic: Several comments were received on tenant grievance procedures. These commenters said that the Notice of Adverse Action is specifically listed as a category of action a tenant or prospective tenant may grieve. The commenters went on to say that new language defines a Notice of Adverse Action as a proposed action that may have adverse consequence for tenants or prospective tenants, whereas in the prior regulation it was not clearly defined, and that notice delivery requirements were excluded from the proposed rule.

Response: The Agency appreciates the commenters' recommendations and has included delivery requirements at § 3560.160(e) of the interim final rule.

Topic: Several commenters asked the Agency to include a provision that when the tenant and the borrower disagree as to whether something is grievable, the dispute should be viewed as a threshold question to be decided before the Hearings Officer or panel.

Response: The Agency has made no change to the interim final rule. The actions that are grievable are identified at § 3560.160(d) of the interim final rule.

Topic: One commenter suggested that the proposed regulation indicate that the tenant has a right to grieve the borrower's action or inaction when it involves the borrower's failure to comply with lease terms or rules.

Response: The Agency acknowledges the commenter's concern. Section 3560.160(b)(2) lists the circumstances under which a borrower's action or inaction is not grievable. Borrower's failure to comply with lease provisions or rules would fall under § 3560.160(b)(1) of the interim final rule.

Topic: The Agency received a few comments regarding compliance with § 3560.103 and a tenant's right to grieve. One commenter believes the standards contained in the proposed rule are too broad. For example, the commenter cited § 3560.103, which indicates that failure to maintain the premises in such a manner that provides decent, safe, sanitary, and affordable housing is grounds for a grievance. The commenter interpreted this to mean that residents would have a right to a grievance hearing if they thought the landscaping was not attractive. Another commenter believed that these standards should be posted or handed out to tenants at the time a lease agreement is executed.

Response: The Agency acknowledges the commenters' concerns. The Agency cannot prevent nuisance or frivolous grievance filings but has attempted to outline realistic standards of property maintenance that are expected of borrowers. Additionally, the Agency does not believe it is necessary to require borrowers to provide these standards to tenants as part of the lease. The standards are contained in § 3560.103 of the interim final rule.

Topic: One commenter addressed the issue of grievances based on discrimination against protected classes (§ 3560.160(a)(2)). According to the commenter, this paragraph includes marital status and sexual preference as protected classes, which is unlike any other Federal law. The commenter believes there is no apparent need to have greater fair housing provisions than in other Government programs.

Response: The Agency thanks the commenter for raising this issue. The Agency has revised the language in this section to include only the protected classes as specified under Federal law. Marital status and sexual preference have been removed from § 3560.160(a)(2) in the interim final rule.

Topic: Several comments addressed grievances that may involve discrimination. One commenter suggested that language should be added to § 3560.160(a)(2) to clarify that discrimination complaints should be filed with the Regional Fair Housing and Equal Opportunity Office of HUD. Another commenter suggested that discrimination grievances could be handled under § 3560.160, if the grievant so desires.

Response: The Agency thanks the commenters' for these suggestions and has modified the language in § 3560.160(a)(2) to state that any tenants or potential tenants who feel that they are being discriminated against may present a complaint to the U.S. Department of Agriculture's Office of Civil Rights.

Topic: One commenter suggested that the process outlined in § 3560.160 may be abused and used merely for delay. The commenter recommended allowing an exception where the owner determines that a resident poses a risk to health and safety to other residents and property staff.

Response: While the Agency recognizes the commenter's concerns, the Agency has a responsibility to ensure that all tenants have equal protection under civil rights and fair housing laws. Tenants have the right to participate in a grievance process when they feel that they have been treated unfairly by a borrower or agent of the borrower in an Agency-assisted MFH property. Section 3560.160(b)(2) makes it clear that tenants who engage in unlawful behavior that threatens the health and safety of other tenants may not take advantage of the grievance process once the termination action has been initiated. The Agency has made no change to the interim final rule.

Topic: One comment addressing § 3560.160(h)(2)(iii) recommended that the right of a tenant to confront and cross-examine witnesses during the hearing be specifically included in § 3560.160(h)(2)(iii) because both the current and the proposed regulations include such a right for the borrower.

Response: The Agency thanks the commenter for this suggestion and has made the change to § 3560.160(h)(2)(iii).

Topic: The Agency received a comment regarding § 3560.160(g)(4) expressing concern that this section limits a tenant's inspection of the documents, records, and policies a borrower intends to use at a hearing to a “reasonable time before the hearing.” The commenter believed that the regulation must include a timeframe in which the borrower is required to disclose their evidence before the hearing so that the tenant has adequate time to prepare for the hearing.

Response: The Agency acknowledges the commenter's concern, but believes that, “reasonable time before the hearing” is clear. In this instance, a reasonable time is that which allows the tenant adequate time to use the information to the benefit of his or her case against the borrower. The Agency has made no change to § 3560.160(g)(4) of the interim final rule.

Topic: Several comments were received regarding fair and impartial Start Printed Page 69060hearing procedures. Specifically, the commenters recommended that the regulation:

  • Require Hearing Officers to be “impartial and disinterested.”
  • Include the prohibition against the Agency's appointing a Hearing Officer who was earlier considered by either party to ensure the integrity of the process.
  • Include the language of the current regulation, which prohibits a Hearing Officer from being paid, unless done so by the Agency.

Response: The Agency acknowledges the commenters' concerns and has incorporated the suggestions into § 3560.160(g)(2) of the interim final rule.

Topic: The Agency received several comments urging time limits for certain actions. Specifically, the commenters recommended that the new regulation:

  • Impose a time limit on a borrower to submit the summary of the informal meeting to the tenant. This would be similar to the proposed regulation, which imposes a 10-day time limit on the tenant to request a hearing after receipt of the summary (§ 3560.160(g)(1)).
  • Include a specific timeframe in which the borrower is required to submit a summary of the meeting to both the tenant and the Agency.
  • Impose a requirement on the borrower to prove receipt of the Response to a Notice of Adverse Action.
  • Change the 10-day Response time for grievances regarding lease modifications.

Response: The Agency acknowledges the commenters' concerns. Section 3560.160(f) of the interim final rule has been revised to provide for a 10-calendar day time frame for the borrower to provide a summary of the informal meeting. The Agency has also imposed a requirement on the borrower to prove receipt of the Response to a Notice of Adverse Action. The Agency did not change the 10-day Response time for lease modifications. No justification was provided by the commenter for the change.

Topic: One comment addressed § 3560.160(f)(3) and noted that language contained in the current regulation required the borrower to include certain information in the summary submitted to the tenant, but this language was left out of the proposed rule. The commenter recommended that this language be retained in the new regulation.

Response: The Agency acknowledges the commenter's concerns and has incorporated this requirement at § 3560.160(f)(3) of the interim final rule.

Topic: The Agency received multiple comments on how borrower/tenant communications, such as Notices of Adverse Action, waiting list decisions, and eligibility decisions should occur. One commenter urged that communications be sent via certified mail. Another commenter suggested that communications be sent by regular mail to the last known address. Other commenters urged that phone contact be made.

Response: The Agency acknowledges the commenters' concerns. Section 3560.160 of the interim final rule provides direction for borrower/tenant communications in those areas where tenant rights are concerned. The Agency would prefer that borrowers establish the most efficient communication system for their property.

Topic: Several commenters urged that any notice from the resident to the owner or management must be in writing.

Response: The Agency appreciates the commenters' concerns. The Agency has added language in § 3560.160(f) of the interim final rule that tenants or prospective tenants must file grievances in writing.

Topic: One comment recommended that the rule state that any tenant or prospective tenant seeking occupancy in a housing project may complain to the Secretary of Agriculture.

Response: The Agency thanks the commenter for this suggestion and has modified the interim final rule's language in § 3560.160(a) to state that any tenants or potential tenants may present a complaint to the U.S. Department of Agriculture's Office of Civil Rights, which Agency is the receiver of all complaints.

Topic: One commenter suggested that § 3560.160 should be deleted. According to the commenter, residents already have leases and lease rights, landlord/resident law, the legal right to form associations, and access to the regulatory Agency, so the additional processes outlined in § 3560.160 are duplicative and burdensome.

Response: While the Agency recognizes the commenter's concerns, it has a responsibility to ensure that all tenants have equal protection under civil rights and fair housing laws. Tenants have the right to participate in a grievance process when they feel that they have been treated unfairly by a borrower or agent of the borrower in an Agency-assisted multi-family housing property.

Topic: The Agency received a comment regarding § 3560.160(f)(2) stating that the 5-calendar-day timeframe for the meeting requirement by the borrower is rather short. The commenter believed that this time limit should be extended to 10 days.

Response: The Agency thanks the commenter for this suggestion and has incorporated it into § 3560.160(f)(2) of the interim final rule.

Topic: One commenter cited § 3560.160(i)(2), which indicates that the notice must state that the decision is not effective for 10 days to allow time for an Agency review as specified in paragraph (i)(3) of this section. The commenter recommended that this section clarify that the 10 days are calendar days. Second, the commenter believed that the reference to (i)(3) appears to be wrong and should be (i)(4).

Response: The Agency thanks the commenter for this suggestion and has changed the interim final rule to clarify that the 10 days are 10 calendar days. The Agency has made the other editorial changes as well.

Topic: The Agency received a comment regarding § 3560.160(g)(5) recommending that 15 calendar days are used, rather than 15 days. Also, in terms of escrow deposits, the commenter suggested a new section be added that requires that the grievant notify the borrower of his intention to escrow funds and the name of where the funds are being held.

Response: The Agency acknowledges the commenters' concern and has added “calendar” to clarify the time period. The Agency believes § 3560.160(g)(6)(iv) of the interim final rule provides the guidance for the tenant providing proof of escrow deposit information.

Topic: A commenter addressed the failure of either party to appear at a scheduled hearing (§ 3560.160(h)(5)). The commenter believed that postponement of the hearing should not be an option when either party has failed to appear at a scheduled hearing.

Response: The Agency appreciates the commenter's concern but has made no change to this provision so that both the borrower and the tenant have ample opportunity to defend their respective positions.

Topic: The Agency received multiple comments regarding the importance of resolving disputes without litigation. The commenters believed that the regulation leaves tenants without adequate protection and leaves borrowers without a clear process to resolve lease compliance issues without litigation. One commenter suggested that without a dispute resolution process, borrowers and tenants will be forced into litigation and resident evictions will increase. Start Printed Page 69061

Response: The Agency acknowledges the commenters' concerns. However, the Agency believes that adequate protections are afforded to the tenant in the interim final rule, including a grievance process, and that borrowers have appeal rights in certain situations. The Agency believes that its policy and accompanying procedural guidance provide ample protection for borrowers and tenants.

Topic: One commenter recommended involving tenants and advocates in the rulemaking process.

Response: The Agency recognizes that the position of tenants and advocates is very important to the proper implementation of the regulation. Tenants' representatives were included in stakeholder meetings prior to the development of the rule and their input was considered by the Agency as it developed the proposed rule.

Topic: Several commenters stated that the proposed requirement that adverse decisions be issued in English as well as other languages when the area contains a concentration of non-English speakers is overly burdensome.

Response: The Agency acknowledges the commenters' concerns but has made no change to the language in the interim final rule because requirements concerning limited English proficiency of applicants and tenants are civil rights issues and are covered under § 3560.2(b).

Topic: Several commenters stated that applicants with incomplete applications should not be entered on the waiting list.

Response: The Agency appreciates these comments and has modified § 3560.154(f)(4) of the interim final rule to state that tenant selection will be made from the applicants on the waiting list with completed applications.

Topic: Several commenters addressed requirements about specifying both a time and a location when applications can be taken, as well as office hours in key documents. Specifically, multiple commenters believed that the requirement to list the office times on the management plan and Affirmative Fair Housing Marketing Plan should be removed because it is burdensome to the borrower and managing agent to update these documents often as office hours change. Other commenters expressed concern about having to maintain regular office hours in small projects to take applications, especially since many are submitted by mail; maintaining office hours in small projects can be costly.

Response: The Agency acknowledges the commenters' concerns and has revised § 3560.154(c) of the interim final rule to eliminate the requirement to maintain a place for accepting applications to provide more flexibility to smaller projects. However, borrowers still need to announce when and where applications will be taken (in rental advertisements) and document this information in the management plan and the Affirmative Fair Housing Marketing Plan because this information needs to be formally documented to establish compliance with key fair housing requirements. This is required in § 3560.154(c) of the interim final rule.

Topic: One commenter addressed § 3560.154(g)(2)(ii), believing that the definition of “displaced” is not clear. The commenter suggested creating a definition of displaced in § 3560.11.

Response: The Agency acknowledges the commenter's concern but has not added a definition of “displaced” because the definition is contained in the Uniform Relocation Act, which is applicable to all Agency MFH properties.

Topic: The Agency received several comments regarding the automation of forms and waiting lists. The commenters believed that the continuation of this practice should be permitted. Another commenter advocated a waiting list cap.

Response: The Agency appreciates the commenters' concerns and has undertaken substantial automation initiatives recently. The commenter did not provide a justification for establishing a waiting list cap, therefore no change was made to the regulation.

Topic: One commenter suggested revising § 3560.152(e)(1)(iii) to read: “Tenants must report to borrowers all changes in their household status that may affect the tenant's eligibility.”

Response: The Agency thanks the commenter for this suggestion and has made the suggested change to § 3560.152(e)(1)(iii) of the interim final rule.

Topic: One commenter recommended that in § 3560.152(e)(2) the Agency should require borrowers to use wage-matching techniques to confirm tenants' income. The commenter believed that this practice should be done at initial certification and at each annual recertification.

Response: The Agency notes the commenter's suggestion. Wage matching is an internal Agency procedure and not available to borrowers.

Topic: One commenter addressing the 10-day standard in § 3560.152(e)(2)(iii) recommended that in certain circumstances this standard should be waived.

Response: The Agency acknowledges the commenter's suggestion, but no change has been made because § 3560.8 of the interim final rule describes the requirements for administrator exceptions.

Topic: Several comments were received on the Agency's policy of collecting race and ethnicity data on applications for occupancy. Several commenters said that the proposed rule requires applicants to provide this information on the application form and if they elect not to do so, the owner is required to note applicants' race/ethnicity and sex on basis of visual observation or surname. In addition, several commenters noted that applicants' race and/or ethnicity should not appear on the waiting list. Further, some commenters urged that if race and/or ethnicity appear on the waiting list, then gender should be included as well. One commenter said that listing the race categories in alphabetical order is problematic. This text is based on 7 CFR part 1900, subpart A, and the Federal Register Notice entitled “Revisions to the Standards for the Classification of Federal Data on Race and Ethnicity” published October 30, 1997.

Response: The Agency thanks the commenters for highlighting this important issue and has modified § 3560.154(a)(9) of the interim final rule to include a disclosure statement about the use of race and ethnicity information that must appear on all applications for housing under sections 514, 515, and 516. Applicants are not required to provide this information. The Agency requires the waiting list to include race and ethnicity information for statistical purposes only.

Topic: One commenter addressed § 3560.154(f) and recommended that computer-generated waiting lists should only be allowed if the program does not allow names to be deleted or inserted. The commenter believes that otherwise computer-generated waiting lists are open to manipulation and civil rights data are not accumulated.

Response: The Agency appreciates the commenter's concern but it notes that in § 3560.154(i) of the interim final rule and irrespective of the form (i.e., electronic or nonelectronic), the Agency requires borrowers to document their purging procedures in the project's management plan. To further address the commenter's concern, the Agency added language to this same paragraph establishing minimum standards regarding these procedures that will allow Agency review of borrower management of the waiting list to check for such concerns.

Topic: One commenter disagreed with the requirement that applicants must Start Printed Page 69062certify that the unit will be their permanent residence as stated in § 3560.154(a)(7). The commenter argues that this rule will not work for migrant families and urges the Agency to revise the language.

Response: The Agency wishes to clarify its position. Section 3560.154(a)(7) states that the applicant must certify that the unit will be the household's primary residence, not its permanent residence.

Topic: One commenter suggested a revision to § 3560.154(a)(2) regarding “the number of household members and their ages.” The commenter suggested that this be changed to “number of household members and their dates of birth.”

Response: The Agency appreciates the commenter's suggestion and has incorporated this change into § 3560.154(a)(2).

Topic: One commenter addressed § 3560.154(a)(10) and did not believe that individuals have a “taxpayer identification number.”

Response: The Agency appreciates the comment and has changed this item to refer to the individual's social security number.

Topic: Several commenters voiced their approval of § 3560.152(a)(3), which makes a household eligible if it qualifies for and is receiving housing benefits through another program, such as section 8 or the Low-Income Housing Tax Credit (LIHTC) program.

Response: The Agency thanks the commenters for their support of this provision.

Topic: Regarding § 3560.154(g), commenters expressed concern that there is no mention of the right of borrowers to give priority to LIHTC-eligible tenants if the project is operated under the LIHTC program, or any mention of the right to leave a unit vacant if no LIHTC-eligible applicant is available.

Response: The Agency recognizes the commenters' concerns and has included language regarding selection of applicants in LIHTC projects at § 3560.154(d) of the interim final rule.

Topic: Comments were received that addressed the Agency's requirements to establish occupancy policies related to unit sizes. Numerous commenters stated that the proposed rule was not clear about the borrower's responsibilities toward residents who are over-or underhoused. Some commenters asked whether these families would be required to move from the project. Others suggested that basing eligibility on unit size could potentially be construed as a violation of applicable civil rights laws. Another commenter recommended that any decision on unit size should be given in writing and should contain specific references to the grievance process.

Response: The Agency appreciates these comments and has deleted the requirement for borrowers to establish a minimum threshold of one person per bedroom for each rental unit from § 3560.155 (e). Families who are over-or underhoused will be required to move into the first appropriate size unit available at the property, not to vacate the property altogether.

Topic: One commenter questioned the proposed regulation regarding occupancy policies in § 3560.155 because it deletes references to “fair housing concepts” such as reasonable accommodation. The commenter recommended that these concepts remain in the regulation.

Response: The Agency thanks the commenter for raising this issue and has added references to reasonable accommodation to § 3560.155(e)(3) of the interim final rule.

Topic: The Agency received multiple comments on § 3560.156(c)(1)(iii) and § 3560.156(c)(15)(xiii) expressing concern about increasing the extended tenant absences from two weeks to four weeks. One commenter recommended that the definition of extended tenant absences remain at two weeks and not be increased to four weeks.

Response: The Agency thanks the commenters for highlighting this issue. The reference to the time period for extended absences has been deleted from the interim final rule. The Agency believes this is an occupancy rule that is best determined by each property. It is not a regulatory definition. The borrower has the right to decide what constitutes an extended absence as long as the definition is consistently applied to all tenants.

Topic: Several comments specifically focused on § 3560.156(c)(15)(xx) of the proposed rule. One commenter suggested that the Agency delete examples of good cause and note that good cause varies based on local practices. In addition, two commenters addressed the lease requirements contained in § 3560.156(c)(15)(xx). The commenters recommended that the Agency specify a distance that represents a good cause move to another location, such as 100 miles.

Response: The Agency acknowledges the commenters' concerns and has deleted the examples of good cause from the interim final rule.

Topic: The Agency received several comments regarding § 3560.156(c)(15)(iii) of the proposed rule, which requires the owner to accept a tenant's net contribution. One commenter urged greater flexibility in how borrowers are allowed to apply these funds to amounts owed by the tenant. Other commenters recommended that this section be revised so that the owner must first apply funds to back rent and any damages, then current rent. A commenter believed that this would limit property abuse.

Response: The Agency acknowledges the commenters' concerns and has revised the interim final regulation at § 3560.152(c)(8) to clarify that the tenant contribution should first be used for rental charges.

Topic: One commenter addressing § 3560.156(c)(15)(iii) of the proposed rule argued that the proposed regulation and handbook sections pertaining to leases and occupancy rules do not adequately cover security deposits. The commenter thought that the new regulation should place limits on security deposits, allow residents to contribute to the deposit over a period of time, require the owner to place the deposits in segregated escrow accounts, and require that leases contain information consistent with provisions of State law regarding the use, collection, and disposition of security deposits.

Response: The Agency appreciates the commenter's concern, but this information is contained in § 3560.204 of the interim final rule.

Topic: Multiple comments were received regarding displaced tenants in cases where a unit is uninhabitable in § 3560.156(c)(15)(xviii) of the proposed rule. One commenter urged that RHS modify the regulation to make clear that tenants who are displaced from units when they become uninhabitable have a first right to return to the unit after it is rehabilitated unless the owner has terminated the residency for good cause. The second commenter acknowledged that both the current and proposed regulations require that the lease contain a provision about disposition of a lease when a unit becomes uninhabitable. Further, commenters suggested that the proposed regulation clarify that termination of the tenancy and the subsidy are two different issues, and that both require written notice and a hearing.

Response: The Agency appreciates the commenters' concerns. While the Agency has made no change to this section in the interim final rule, it has modified § 3560.159(c) to state that any tenant displaced due to a unit being uninhabitable is eligible for benefits under the Uniform Relocation Act. Section 3560.159 refers to termination Start Printed Page 69063of tenancy only; termination of subsidy is discussed at § 3560.259(c) of the interim final rule.

Topic: The Agency received one comment about § 3560.156(c)(15)(ix) of the proposed rule suggesting that the Agency clarify the proposed rule to indicate that the tenant may not be evicted for failure to pay charges other than rent or utilities. Instead, the commenter suggested that the borrower should be limited to other legal action to collect those charges.

Response: The Agency acknowledges the commenter's concern. However, the Agency believes it is appropriate for termination of occupancy based on material noncompliance with lease requirements and has retained this language at § 3560.159(a)(1)(ii) of the interim final rule.

Topic: Several comments addressing the 30-day move out requirement in § 3560.156 (c)(1)(i) of the proposed rule recommended that this paragraph allow tenants to move out either within 30 days or at the end of the term of the lease, whichever is greater, which would agree with language in § 3560.158(b).

Response: The Agency acknowledges the issue raised by the commenters and has revised the interim final rule so that the requirement is consistent with the language in § 3560.158(b).

Topic: The Agency received a comment about § 3560.156(c)(1)(iv) of the proposed rule, acknowledging the requirement that tenants make restitution when unauthorized assistance is received but expressing concern that the proposed rule does not differentiate between the unauthorized assistance being the fault of the tenant or the borrower.

Response: The Agency appreciates the commenter's concern. The Agency has moved references to unauthorized assistance due from the borrower or from the tenant to subpart O of the interim final rule.

Topic: One commenter addressing § 3560.156(c)(15) of the proposed rule recommended that the lease include a statement that tenants agree that they will be held financially responsible if they receive any excessive Government subsidies because of their failure to report their accurate income, income changes, true members of the household and their incomes, or any other improper actions.

Response: The Agency acknowledges the commenter's concern. The certification form that tenants are required to sign includes the penalties for fraudulent reporting of income. This issue is further addressed in subpart O of the interim final rule.

Topic: One commenter suggested month-to-month leases rather than year-long leases.

Response: The Agency has made no change to this provision because it has always required a minimum one-year initial lease term for all its MFH projects, as is the case with other Federal housing programs.

Topic: Several comments addressed Agency concurrence with lease agreements. One commenter suggested the use of standard lease agreements by State to reduce the attorney certification process that is required under the proposed regulation. Other commenters questioned the process of approval of lease modifications. One commenter believed that the Agency's role should be expanded from just a “concurrence” role. One commenter urged that the Office of General Counsel or other qualified Agency staff be involved in lease reviews.

Response: The Agency has amended § 3560.156(a) of the interim final rule to state that the Agency must approve all leases. The borrower's attorney is responsible for ensuring that the lease complies with all applicable State and local laws. This should not be unduly burdensome, as most standard leases are in compliance with these laws.

Topic: One commenter expressed opposition to the provision in the proposed regulation that allows borrowers with projects receiving section 8 project-based assistance to use the HUD model lease, because tenant rights and regulations are significantly different between the two programs.

Response: The Agency appreciates this comment and has revised the language in § 3560.156(e) to clarify that the HUD lease provisions will prevail unless they conflict with the requirements of § 3560.156. The revision also specifies that in the event of an overlap or conflict between the requirements, the provisions most favorable to the tenant will apply.

Topic: One commenter expressed concerned about the way that the requirements in § 3560.156(d)(5) have been revised. The commenter believed that the new wording could lead to borrowers having to notify a tenant of their intent to bring suit as opposed to notifying them that a suit has been filed.

Response: The Agency thanks the commenter for raising this issue. The Agency has revised this section to specify lease clauses stating that the borrower may institute a lawsuit without providing advance notification to the tenant are prohibited.

Topic: Commenters stated that the Agency's requirement to provide leases, Notices of Adverse Action, and other important documents in English as well as other languages when the area contains a concentration of non-English speakers is burdensome from both an administrative and financial standpoint.

Response: The Agency acknowledges the commenters' concerns, but has made no changes to the applicable sections of subpart D. The requirements concerning limited English proficiency of applicants and tenants are civil rights issues and are covered under § 3560.2(b) of the interim final rule.

Topic: One commenter acknowledged that the proposed regulation includes language not found in the current rule that “borrowers must execute their Agency approved lease with each tenant household * * *” The commenter believed that borrowers should be required to offer the same lease to all households in a project or a locality.

Response: The Agency acknowledges the comment. Each household is required in § 3560.156 of the interim final rule to have an executed lease on file and borrowers are required to offer an Agency approved lease to tenants.

Topic: Multiple comments addressed that the proposed regulation adds the requirement that leases contain the street address of the management agent to which tenants may direct complaints. Commenters thought that this meant a management agent with authority to address the complaint.

Response: The Agency acknowledges the above comment but considers the sentence as written to be sufficiently clear. Therefore, the Agency has made no change to this language.

Topic: One commenter did not understand § 3560.156(c)(4) of the proposed rule. The commenter supported the new requirement that leases for rental units that receive rental assistance include a clause that specifies that the tenant's contribution to rent will not increase if rental assistance is terminated due to actions by the borrower. The commenter did not understand the use of the term “other than Federal assistance.”

Response: The Agency appreciates the commenter's support for the addition of this clause. The term “other than Federal assistance” has been deleted from 3560.156(c)(3) of the interim final rule. (The reference to § 3560.156(c)(4) of the proposed rule was changed and is now § 3560.156(c)(3) of the interim final rule.)

Topic: One commenter asserted that leases must state that the housing project is subject to title VI of the Civil Rights Act of 1964, section 504 of the Rehabilitation Act of 1973, the Age Discrimination Act of 1975, and the ADA. While the current regulation (7 Start Printed Page 69064CFR part 1930, subpart C), in addition to identifying the Federal antidiscrimination laws that apply to the housing project, describes the appropriate complaint procedure under those laws, the commenter believed that the complaint information is omitted from the proposed regulation and should be included.

Response: The Agency appreciates the commenter's suggestion. The information on applicable civil rights related laws is included in § 3560.156(c)(6). The complaint procedure is described in § 3560.160.

Topic: One commenter believed that both the proposed regulation and handbooks should explicitly prohibit lease clauses that would limit occupancy by persons with disabilities.

Response: The Agency acknowledges the commenter's concern; however, it is against all applicable Federal civil rights laws to prohibit occupancy by persons with disabilities. The Agency feels that this information does not need to be restated in § 3560.156(d).

Topic: One commenter suggested that the Agency provide something similar to the Form RD 1910-11, Applicant Certification Federal Collection Policies for Consumer or Commercial Debts, to tenants at the time that they apply for assistance, because such a form describes actions that may occur to protect the interests of the government.

Response: The Agency has not imposed this additional requirement, as the certifications on the forms that tenants complete when they apply for assistance provide the government with authority to collect unauthorized rental assistance.

Topic: Several comments were received regarding the Agency's policies on calculating applicant/tenant income and assets. The majority of commenters on this subpart supported the Agency and stated that by using the HUD definitions of annual income, adjusted income, and net assets found in 24 CFR part 5, the Agency will reduce burden on owners and managers who might otherwise be required to use different criteria for calculating income and assets for various Federal programs. Other commenters asked for a comparison between the current practice and the proposed practice to illustrate how the change would affect individuals.

Response: The Agency appreciates the commenters' support. The Agency will consider providing some comparison examples for internal Agency procedures.

Topic: A commenter suggested that chapter 5 of the HUD Handbook 4350.3, sections 1 and 2, provide considerable guidance on determining annual income, adjusted income, and net assets. The commenter thought that RHS should include similar provisions in its handbooks or, at the very least, refer borrowers and tenants to this HUD Handbook when questions arise concerning these matters.

Response: The Agency appreciates the commenter's suggestion. Because the information from this HUD Handbook is procedural, the Agency will be using similar information on determining annual income, adjusted income, and net assets in Agency internal guidance about program procedures.

Topic: Comments were also received on the Agency's policy toward criminal activity and drug use. Several commenters asked that § 3560.154(j) reference 24 CFR part 5.

Response: The Agency has modified this section to include this reference.

Topic: Other commenters stated that the Agency's policy to not allow the lessee or other adult members occupying the unit who commit a drug violation to enter the premises unless the individual agrees not to commit a drug violation in the future, participates in a counseling or recovery program, or has completed such a program is too lax. These commenters recommended that the Agency employ HUD's one-strike policy.

Response: The Agency thanks the commenters for their recommendations; however, the Agency disagrees with the commenter's view that the above-stated policy established in § 3560.156(c) of the interim final rule is too lax. It provides the borrower with the authority to take specific actions to limit the access of such persons and ultimately terminate tenancy if further drug-related violations are committed.

Topic: One commenter suggested that § 3560.159(a)(1) should include evidence of minor infractions such as drug paraphernalia.

Response: The Agency appreciates the commenter's suggestion. The Agency believes the borrower can include this in occupancy rules or lease provisions without Agency direction.

Topic: With regard to § 3560.159(a)(1) and (a)(2), one commenter believed that the regulation should include an innocent tenant defense for material noncompliance cases.

Response: The Agency appreciates the commenter's concern. However, the lease termination is based on the terms of the lease, and any member of the household who signs the lease becomes subject to the terms of the lease.

Topic: Several commenters stated that the Agency's requirements for occupancy rules described in § 3560.157 should include guidance on how to determine who will remain in the unit and/or receive the rental assistance in the event of a family breakup, particularly in the event of domestic abuse.

Response: The Agency appreciates this comment. Households that add or lose any member are required to recertify their income in order to establish eligibility and/or rental assistance levels. This can be found in the interim final regulation at § 3560.158(d).

Topic: With regard to § 3560.154(d) and (h), a commenter indicated that the proposed regulation requires the borrower to base decisions related to the approval or rejection of the application on selection criteria contained in the Agency-approved management plan. The commenter believed, however, that the regulation gives insufficient guidance on the development of those selection criteria. The commenter recommended that language be included in this section providing that the borrower give “due consideration to mitigating factors” that might have led to a history of poor credit, and/or employment or housing problems.

Response: The Agency appreciates the commenter's concerns. The interim final rule at § 3560.102 (b) requires that the borrower describe his applicant eligibility and selection criteria in the property's management plan, which is reviewed by the Agency.

Topic: Several comments focused on the threshold for interim recertifications. These commenters stated that the proposed rule requires a tenant income recertification “whenever a change in household status results in a net tenant contribution change that is greater than $25 per month.” These commenters felt that tenants cannot be expected to understand how a change in their household income will result in a $25 change in their rent.

Response: The Agency reviewed this threshold and has modified § 3560.152(e) to state that an interim recertification is required when a household's monthly income changes by $100 or more per month. In an effort to achieve a more realistic threshold, the Agency evaluated HUD's requirement for recertification and took into further consideration the generally lower incomes of tenants in Agency-financed properties. The overwhelming majority of tenants have annual incomes under $10,000 (or about $800 a month) and turnover at Agency-financed properties does not result in a substantive change in the tenant income profile. The Agency determined that a $100 per month change (half of HUD's $200 Start Printed Page 69065amount) is substantial enough to trigger a recertification but not common enough to create an undue burden on either the tenant or borrower in terms of documentation and follow-up. The Agency further established that a tenant may request a recertification when household income changes by at least $50 per month.

Topic: One commenter recommended that recertification take place every 2 years rather than every year.

Response: The Agency has made no change because the requirement to recertify tenant incomes annually is statutory (see 42 U.S.C. 1490a section 521(a)( 2)(B)).

Topic: Several commenters addressed § 3560.156(c)(1)(ii) of the proposed rule. One commenter recommended that the proposed rule require residents to obtain advance approval of any increase in household members. Another commenter suggests that, in general, the Agency should consider eliminating recertification when the only change in a household is the addition of a minor child (without any increase in income).

Response: The Agency acknowledges the commenters' concerns but has made no change. The Agency does not have the authority to require tenants to obtain preapproval of increases in household members, only to require reporting of these changes. The Agency does not mandate that an interim recertification be completed when a minor child is added to the household unless the household's income will increase as a result.

Topic: With regard to tenant certification and verification, a commenter cited that the proposed regulation, unlike the rule that it replaces, fails to set forth any timeframe or deadline for a borrower to process an updated or interim tenant certification.

Response: The Agency appreciates the commenter's concern. The timeframe requirement can be found at § 3560.152(e)(2)(iii) of the interim final rule.

Topic: Several comments were received regarding policies on the occupancy of accessible units. Several commenters said that § 3560.158(d)(3)(ii) should be modified to say that if an applicant with a need for a unit with accessibility features applies for housing at a project and the unit is occupied by an ineligible family, the family should only be required to move when another suitable unit is available in the project. Some commenters said that the 30-day notification to move needs to be clarified, specifically, those moving can only be given the notification when another nonaccessible unit becomes available, since it is not the intent to displace a tenant totally. The commenter believed that it would be difficult to rent such units if tenants could be forced to move from the complex on 30 days notice at any time.

Response: The Agency thanks the commenters for these recommendations and has modified this section to address the commenters' concerns. Tenants in units with accessibility features will not be required to vacate these units until another appropriate size unit without accessibility features becomes available in the project. The Agency does not intend to displace in-place tenants, but to move them to accommodate the needs of persons with disabilities.

Topic: One commenter asked whether a tenant would be considered overhoused if they were disabled and needed an extra room for apparatus related to their disability.

Response: A tenant who is disabled will not be considered overhoused if the tenant needs an additional room for an apparatus related to the tenant's disability or a live-in aide.

Topic: The Agency heard from several commenters on its policies for allowing surviving family members to remain in units for which they are ineligible after the eligible household member dies. Several commenters recommended that § 3560.158(d) allow a surviving member in this instance to remain in the unit, even if an eligible applicant or tenant is available to occupy that unit, unless another suitable unit becomes available in the project.

Response: The Agency has modified § 3560.158(d) of the interim final rule, which deals with surviving family members and establishes timeframes in which surviving members must move to a suitably sized unit when one becomes available.

Topic: Several commenters stated that mixed housing projects should not be allowed because designating certain units for occupancy by families and others for occupancy by elderly households constitutes segregation and is in violation of title VIII of the Civil Rights Act of 1968.

Response: The Agency thanks the commenters for their recommendation. The interim final rule at § 3560.151 has been revised to clarify that mixed projects are no longer eligible for Agency financing under the multi-family housing program.

Topic: The Agency received several comments regarding pets and service animals. The most frequent comment was that the definition of reasonable pet rules must be clarified. One commenter noted that the proposed regulation should contain a further discussion of factors to consider in the development of pet rules and a list of prohibited clauses, and that borrowers of operational projects consult with tenants when revising pet rules and document how that consultation process was conducted.

Response: The Agency appreciates the commenters' concerns. Internal Agency procedures will provide further guidance on the development of pet rules.

Topic: Several comments addressed the issue of guests. One commenter suggested that the trespass provision of § 3560.156(c)(12) of the proposed rule may violate State laws and Constitutional rights to association. Other commenters suggested that the proposed rule should specify exactly when a guest will be considered a member of the household so that these criteria are applied equally, fairly, and consistently at all RRH projects.

Response: The Agency acknowledges the commenters' concerns, but has made no change because the lease requirements established in § 3560.156(c)(12) of the proposed rule are statutory. Further, § 3560.157(b)(10) establishes the borrower's responsibility to establish the terms under which a person staying in the unit is no longer considered a guest and becomes a member of the household as part of the property's occupancy rules. The Agency has not provided further detail because the appropriate definition will vary depending on local circumstances and in some cases local law. The Agency believes that this policy is most appropriately set by the borrower and then applied consistently within a property. The interim final rule provides guidance on situations in which there is a conflict between Federal and State or local laws. Specifically, if any lease provision is in violation of State or local law, the lease may be modified to the extent needed to comply with the law.

Topic: Multiple commenters addressed § 3560.156(c)(6) and the requirement that leases will state that the housing will be subject to the ADA. However, the commenters pointed out that if there is no public space, this law would not be applicable.

Response: The Agency thanks the commenters for raising this issue and has removed the reference to the ADA from § 3560.156(c)(6) of the interim final rule.

Topic: One commenter expressed concern about the requirement in § 3560.156(c)(4) of the proposed rule that leases must specify that no change in the resident contribution will occur due to loan prepayment. The Start Printed Page 69066commenter believed this has the effect of extending use restrictions for undefined periods, which is inappropriate and inconsistent where the Agency has determined that prepayment is acceptable or where it has been judged the owner's contract right.

Response: Tenant contributions as a result of prepayment are covered under subpart N—Housing Preservation in the interim final rule. Reference to subpart N is made at § 3560.154(c) of the interim final rule.

Topic: Several comments were received on including office hours in the occupancy rules and leases. Commenters believe the office hours should be removed from the occupancy rules; including this in the occupancy rules would require unnecessary changes.

Response: The Agency has made no change because § 3560.157(b)(7) states that the office hours must be posted at the property and included in the project's occupancy policies. While the occupancy policies are to be attached to each tenant's lease, the Agency believes that it is not too cumbersome to provide a blanket amendment to each tenant's lease in which the new office hours are listed.

Topic: One commenter addressed § 3560.157(c), which requires that 30 days notice be given to residents upon a change in the occupancy rules, despite the fact that the preceding paragraph requires the ongoing and permanent posting of the current occupancy rules. The commenter believed that this paragraph serves no useful purpose since the occupancy provisions that exist at the time of signing the lease are the only rules that apply to any given tenant.

Response: The Agency wishes to clarify this matter. The occupancy rules are an attachment to the lease, not the lease itself. The borrower may not change the lease, but may change the occupancy rules, upon written notification to all tenants.

Topic: One commenter noted that the current regulation provides examples of unreasonable restrictions on the use of community rooms by tenants and tenant organizations, but the proposed regulations omit these examples. The commenter thought that they should be included.

Response: In § 3560.157(b)(6), the interim final rule states that the occupancy rules must address housing services and facilities available to tenants and members. The Agency will incorporate this information into its internal Agency procedures. Some examples of unreasonable restrictions may include occupancy rules requiring management representatives to be present in order to use community rooms, barring tenant or cooperative organizational meetings from using the rooms, or requiring management representatives to be present at any resident organizational meeting held in community rooms.

Topic: One commenter suggested that the Agency remove the words “beyond agreed to grace period” from § 3560.159(a)(1)(ii).

Response: The Agency has made this change to § 3560.159(a)(1)(ii) of the interim final rule.

Subpart E—Rents

Topic: The Agency received numerous comments addressed to this subpart about the CRCU limitation. While these comments are discussed here, the Agency notes that CRCU is covered in a number of subparts throughout the rule, including subparts A, B, G, I, and N. Some supported the concept, while many expressed significant reservations. Those that did not support the concept argued either that market forces already achieve the objective sought by the Agency, or that the concept places the properties in jeopardy by limiting the resources available to them. In particular, they noted the potential danger to troubled housing, new construction, and Farm Labor Housing. They asked that the concept be piloted before being used broadly. Others asked that the Agency specifically cite its exception authority.

Commenters cited the critical importance of clearly defining terms such as “conventional,” “comparable,” and “reasonable costs.” Many commenters noted the difficulty of establishing comparable rents in rural areas. They noted that comparable units must be similar in terms of size and age, within the same market (not geographic) area. Several commenters stressed that the cost of developing new units may not be reflected in local market rate units. Commenters also noted that section 515 projects have operational costs that make them difficult to compare to conventional units such as tenant grievance procedures and reserve requirements. Commenters also fear that the CRCU may serve as a disincentive for new owners to take on troubled properties and may make it difficult to work with other funding sources. They asked that there be sufficient flexibility in the definition to facilitate transfers, rehabilitation, and new units and to work with other leveraging sources. Finally, one commenter stated that the CRCU limitation should not apply to public housing authorities.

Response: The Agency recognizes and acknowledges the commenters' concerns. CRCU applies to loan applications, servicing actions, and preservation actions, not to annual budget reviews and requests for rent changes. As noted in the preamble to the proposed rule, the Agency has incorporated this policy into the multi-family regulations to improve the long-term viability of the multi-family properties in the program, limit future costs of rental assistance, and reduce the risk of defaults. The Agency emphasizes that the interim final rule provides RHS with explicit authority to grant exceptions that allow rents that exceed CRCU under certain circumstances, such as when allowing these rents would preserve a valuable affordable housing resource. This flexibility addresses a number of the commenters' concerns. Section 3560.205(f)(4) was deleted in the interim final rule in order to address any confusion.

Topic: Numerous comments were received on the Agency's policies on rent payment grace periods and late fees. Commenters stated that rent should be due by the fifth day of the month and that late fees should be increased. They stated that the grace periods and fees in the proposed rule are not industry standard and do not provide sufficient incentive to tenants to pay on time. They also noted that they are not consistent with HUD rules and asked for guidance about what to do in projects with HUD funding.

Response: While the Agency understands that conventional properties have a stricter definition of late rent payments and charge higher late fees, it has made no change to § 3560.209. Many tenants of sections 514, 515, and 516 properties receive their income from Government agencies by mail. Allowing a 10-day grace period helps to ensure that tenants are not penalized when their checks are not received on time and mirrors the borrower's grace period for submitting mortgage payments to the Agency. Likewise, increasing late fees would be prohibitive to many tenants living in Agency-financed properties. For properties with multiple sources of financing, the strictest rules always apply.

Topic: Some commenters addressed the use and refunding of security deposits. Several of these commenters remarked that the proposed rule allows for payment plans for security deposits but offers no parameters for these plans. Other commenters said that “routine turnover expenses” and other items that may not be covered by a tenant's security deposit should be more clearly Start Printed Page 69067defined or that the Agency defer to State laws on this issue. They also asked for language to clarify the policy on pets versus companion animals.

Response: The Agency acknowledges these concerns and notes that the parameters for security deposit payment plans are described in internal Agency procedures. The Agency has revised § 3560.204(d)(1) in the interim final rule to substitute “routine turnover expenses” with “expenses due for addressing normal wear and tear.” “Normal wear and tear” is a term that is commonly used and understood by the property management industry. The Agency has also revised the interim final rule to distinguish between pets and companion animals.

Topic: Several comments were received on the budget-based rent approach described in the proposed regulation. Several commenters said that there should be standard rent increase allowances, such as occupancy cost adjustment factor (OCAF) or cost-of-living increases that are reviewed every three years but are automatic during the interim years. They also noted that project rents must work with rent standards established by other funding sources (typically the 30 percent of Area Median Income (AMI)). Several other commenters were concerned that the budget-based rent approach would be undermined by CRCU, which would impose an arbitrary cap. Still others asked for clarification on the four definitions provided in § 3650.202(c), specifically the mention of LIHTC rents. Finally, commenters asked how rents would be tested once established.

Response: Regarding the budget-based rent approach, see the Agency's response in the description of comments received on subpart G (Financial Management). The Agency has clarified in the preamble to the interim final rule that the comparison to CRCU will not be applied during reviews of project budgets, only to new projects, projects requesting servicing actions, and preservation activities. The Agency has listed CRCU as a standard in the rule in the circumstances when the Agency will use it as a standard. The Agency wants to clarify that CRCU is not listed as a standard in § 3650.303 of the interim final rule because it will not be used during Agency reviews of annual project budgets. With regard to the comments on the four definitions provided in § 3650.202(c), the rents listed in § 3650.202(c) are now defined in subpart A of the interim final rule. The Agency also deleted § 3560.205(f)(4) in the interim final rule.

Topic: Several commenters said that the annual review of utility allowances is too time-consuming and should not be required.

Response: Because utility costs can change notably from year to year, the Agency, and its interim final rule, requires annual review of utility allowances as a necessary part of the budgeting process. Just like the annual tenant income recertification, this annual review helps to ensure that the amount that tenants pay for shelter cost is not greater than specified by the program, and helps ensure that rental assistance usage reflects the utility costs that tenants actually face.

Topic: Several commenters requested that rather than having all rent changes for all projects go into effect at the beginning of the project's fiscal year, these should be permitted at any other time. They noted that by allowing new rents to take effect over several months, borrowers could submit rent changes and tenant certifications simultaneously, saving time for the Agency, the borrower, and the tenant.

Response: The Agency appreciates these comments, but no change has been made because the rent changes are requested as part of the annual budget that must be submitted for the fiscal year. However, it should be noted that § 3560.205(c) of the interim final rule states that the Agency will accept borrower requests for rent changes anytime during the year if the property is financially distressed due to circumstances beyond the borrower's control.

Topic: Several commenters asked that the Agency allow projects to keep section 8 overage as project revenue to address necessary project repairs. They noted that the Agency is willing to offer interest credit of 1 percent rents regardless of tenant subsidy and therefore should be willing to consider letting the project keep the section 8 overage. Commenters also asked that overage paid by the tenant be kept by the project.

Response: In such instances of overage, the borrower's interest credit will be reduced. Further, if a borrower is collecting significant overage from tenants, project rents should be reevaluated.

Topic: One commenter asked that the proposed rule be revised to address the circumstance of a security officer occupying a unit for the good of the property.

Response: The Agency's interim final rule does not address this issue as it is currently dealt with on a case-by-case basis.

Topic: One commenter asked that the paragraph on funds contributed to reduce rents clarify that this does not mean borrower contributions or rehabilitation loans.

Response: The Agency appreciates the comment and notes that the language in the proposed rule was not intended to mean borrower contributions or rehabilitation loans. The Agency added a sentence to § 3560.202(e) of the interim final rule to clarify that funds from borrower contributions or rehabilitation loans will not be counted towards reducing rents.

Topic: One commenter welcomed the move toward conversion to Plan II, as this will reduce the cost of operating section 515 projects.

Response: The Agency appreciates the commenter for this support.

Topic: Several commenters remarked that the Agency's approach to reviewing HUD section 8 subsidized budgets is only appropriate when HUD is providing less than 100 percent of the tenant subsidy. They suggested that when HUD is providing 100 percent of the tenant subsidy, the Agency should allow the project to charge the rents HUD is willing to subsidize.

Response: The Agency acknowledges the comment but no change has been made to the interim final rule because the Agency seeks to ensure that properties in the program do not receive excessive subsidy. HUD has issued guidance regarding reviewing HUD section 8/515 subsidized budgets. The information is included in chapter 14, “RHS section 515/8,” of HUD document, “Section 8 Renewal Policy—Guidance for the Renewal of Project-Based Section 8 Contracts.” This document is available on the HUD Web site at: http://www.hud.gov/​offices/​hsg/​mfh/​exp/​guide/​s8renew.pdf.

Topic: Commenters had issues with the provisions for rent payment during eviction proceedings. They noted that rent cannot be accepted when eviction proceedings are underway. Further, they questioned why rental assistance and interest credits are suspended, as this can be detrimental to the property. One commenter added that while tenants under eviction proceedings are charged the note rent, they do not always pay it and that borrowers should only be responsible for the note rent if they actually receive it. Finally, one commenter stressed the need to protect tenants by ensuring that a failure to recertify was truly a willful act on the part of the tenant and that the tenant received adequate notice about recertification.

Response: The Agency acknowledges these comments and has revised its Start Printed Page 69068language in § 3560.208(a) of the interim final rule to require borrowers to put any rent received during eviction proceedings into escrow and has removed language suspending rental assistance and interest credits. The Agency believes that the current language adequately protects tenants as it requires sufficient notice.

Topic: Comments varied regarding the extension of time to submit the recertification. One commenter said the extension would be helpful because obtaining signatures from agricultural workers and immigrants on extended family trips can be difficult. Another commenter agreed that the additional 10 days for certifications and recertifications would be helpful. However, one commenter disagreed with the extension.

Response: The Agency appreciates these comments. The majority of the comments agreed with the proposed rule, therefore, no changes were made for the interim final rule.

Topic: One commenter suggested that utility allowances be calculated only once every three years, with adjustments to the rate only once a year.

Response: The Agency appreciates the comment but did not make this change. In § 3560.202(d) of the interim final rule, the Agency notes that borrowers must review utility allowances annually, adjust for accuracy, and submit any utility allowance changes to the Agency for approval. Even if there are no changes, the borrower must notify the Agency that no changes were made. This annual review is necessary because utility allowances are integral to a project's budget and budgets must be submitted annually in accordance with statute 42 U.S.C. 1490(a)(2)(B).

Subpart F—Rental Subsidies

Topic: Several commenters addressed the Agency's requirement to submit information to the Agency electronically. Some commenters expressed concern about submitting certification and recertification information, stating that this requirement is unfair to “mom and pop” ownership entities that will resist submitting the information electronically. Others stated that older properties in the portfolio should be exempt from this requirement. Conversely, several commenters urged that the Agency encourage or require the use of Industry Interface, for example, when borrowers submit their monthly requests for rental assistance payments, as under § 3560.256, and for the purpose of assigning rental assistance, as under § 3560.257.

Response: The Agency is requiring electronic submission in order to expedite the gathering of requisite data. Section 3560.102(i) establishes the submission requirements for properties with eight or more units. The Agency has been upgrading their automation processes to provide better flexibility for borrowers to submit data electronically to the Agency. The upgraded system, Management Interactive Network Connection (MINC), allows for borrowers to use software purchased from vendors or input data directly into the MINC Web site. For more information, access the MINC Web site at https://usdaminc.sc.egov.usda.gov.

Topic: One commenter asked if a tenant that receives a subsidy under a HUD program is prevented from giving up the subsidy to qualify for rental assistance under RHS.

Response: The Agency notes that a tenant receiving a HUD subsidy is only required to give up the subsidy when a rental assistance unit is available.

Topic: Several comments were received in which the commenter stated that the priorities for assigning rental assistance shown in § 3560.253(b) should be changed or removed.

Response: The Agency acknowledges that these priorities were confusing and has deleted this paragraph in its interim final rule.

Topic: Several commenters addressed eligibility issues under § 3560.254. One commenter addressed the requirements for eligible units, stating that the current requirements to meet § 3560.103 were impossible to achieve and that alternative language could include “Borrowers may not request rental assistance for rental units that are not habitable.” Another commenter suggested that the Agency add language to this section that would terminate rental assistance for borrowers found in noncompliance with Agency requirements, “as a means for expediting repairs and corrective actions.”

Response: The Agency has addressed this topic in the revisions to subpart C. The Agency has modified the requirements in § 3560.103 to recognize borrower progress in correcting physical deficiencies. If a borrower is correcting physical deficiencies within a reasonable period of time, the borrower will not be found out of compliance.

Topic: One commenter wrote that “the change to require interim tenant recertifications only when the change in rent would be $25 or more is an improvement.”

Response: The Agency appreciates the commenter's support for the change and has made a change in this policy in the interim final rule to follow the structure used by HUD for recertifications. In the interim final rule, interim recertifications are required only when a household's monthly income increases by $100 or more per month.

Topic: Other comments addressing § 3560.254 discussed household eligibility. One commenter suggested that compliance with occupancy rules be clarified so that households that are under-or overhoused due to a lack of appropriately sized units do not lose their eligibility; they should retain their rental assistance but be required to move when an appropriately-sized unit becomes available. Another commenter suggested that the requirement for having a signed, unexpired tenant certification form on file be clarified so that households retain their eligibility if the lack of such a form is not the household's fault.

Response: The Agency notes that subpart D clarifies that under- and over-housed tenants will retain their rental assistance and be required to move when a unit becomes available. For situations in which a tenant does not have a signed, unexpired certification form on file, the Agency has not modified this rule, but recognizes that individual circumstances should be considered and that no tenant should be unfairly penalized.

Topic: Several commenters expressed dismay at the Agency's citizenship requirements. Commenters said that the Agency should not be in the business of immigration status. More specifically, one commenter questioned whether RHS had an adequate basis to consider an entire household to be eligible based on the citizenship or immigration status of its head of household, and therefore be eligible for assistance only if the head of household is eligible. The commenters believed that one solution would be to follow HUD's approach of prorating assistance to the household based on the eligibility of each individual. If the Agency retains this requirement, another commenter stated that many otherwise eligible farmworker families would no longer be eligible for occupancy in Agency-assisted housing.

Response: The Agency acknowledges the commenters' concerns, but no change has been made because the requirement for occupants of sections 514, 515, and 516 housing to be citizens or qualified aliens is statutory.

Topic: Another commenter was confused by the head of household citizenship requirement because it implied that non-rental assistance units could be rented to noncitizens/illegal aliens. This person stated that the implication would contradict the Start Printed Page 69069requirement “in § 3560.152 that all household [sic], regardless of rental assistance status, qualify under the citizen/alien definition in § 3560.11.”

Response: The Agency notes that the head of household citizenship requirement does not imply that non-rental assistance units could be rented to noncitizens/illegal aliens. The requirement that all households, regardless of rental assistance status, must qualify under the citizen/alien definition is statutory.

Topic: One commenter suggested that the Agency coordinate with the Department of Homeland Security (DHS) as HUD has, incorporating appendix 2 to the HUD Handbook 4350.3, which is a copy of the User Manual created by U.S Citizenship and Immigration Service (USCIS) in 2000 for the Systematic Alien Verification Entitlements (SAVE) Program. References to USCIS should also be replaced with references to DHS.

Response: The Agency recognizes that the correct reference is DHS. However, the Agency does not feel this comment lends itself to being incorporated in this rule. Nevertheless, the commenter's suggestion is incorporated into the Agency's guidance about program procedures.

Topic: Several commenters expressed their approval of the new requirement that allows borrowers to request rental assistance by checking a box on the budget form.

Response: The Agency thanks the commenters for their support.

Topic: One commenter questioned the Agency's automatic renewal of rental assistance agreements at the existing unit number because the policy does not account for changes in the number of units or the amount of rental assistance being received.

Response: The Agency recognizes that changes occur. When borrowers need rental assistance for more units, they can apply for additional units. When borrowers require rental assistance for fewer units, the Agency will transfer the rental assistance to properties with greater need. Consequently, the Agency does not feel a change to this rule is necessary.

Topic: Two commenters disagreed with the Agency's requirement that the borrower notify tenants of a subsidy loss when the Agency does not have funding available to renew the borrower's rental assistance contract.

Response: The Agency has decided to retain the requirement that the borrower notify the tenant because the borrower is in a landlord-tenant relationship with the tenant, and the loss of rental assistance may affect the terms of the lease.

Topic: Several commenters said that the borrower should have the option of paying utility allowances to the utility companies in individually metered projects. Another suggested that the Agency allow the issuance of a joint check made payable to the tenant and the utility company to prevent fraud and abuse and to allow the payment to be applied directly to the tenant's utility bill.

Response: While the Agency acknowledges the commenters' concerns, it does not have the capacity at present to pay some utility allowances directly to the utility companies. Implementing this suggestion would cause an undue administrative burden to the Agency. Currently, management companies may issue a joint check payable to the tenant and the utility company.

Topic: One commenter suggested that the Agency clarify § 3560.256 to prevent borrowers from holding households financially responsible when the Agency adjusts rental assistance payments.

Response: The Agency notes that this issue is clarified in the public comments and Agency responses addressing subpart O.

Topic: The Agency received several comments urging RHS to prorate rental assistance based on the tenant's move-in date.

Response: The Agency acknowledges that for units where a tenant moves in during the middle of the month and the tenant is eligible for rental assistance, either the property or the tenant covers the difference. However, the Agency has made no change to the interim final rule because it does not currently have the information system capability to allow rental assistance to be prorated.

Topic: Other commenters questioned the idea that residents must be in good standing to receive rental assistance. The commenters' believed that tenants should be able to be somewhat delinquent and able to pay back rent through a payment plan; if tenants could afford to pay their rents without hardship, they would not be eligible for rental assistance in the first place.

Response: The Agency appreciates the comment; however, no changes have been made to this subpart. The Agency allows borrowers to establish policies on rent charges under § 3560.157(b)(2) and encourages borrowers to structure these policies to permit workout or payment plans for tenants who encounter payment difficulties due to circumstances beyond their control. Tenants who are following a payment plan that is consistent with such a policy and acceptable to the borrower would be in adequate standing to receive rental assistance. However, the Agency wants to emphasize that such policies do not relieve tenants of their responsibility for timely rental payments.

Topic: Several commenters addressed the requirements for assigning rental assistance in § 3560.257. Commenters indicated that requirements generally needed to be more flexible and that, in particular, documenting the percentages occupied by low-income households was burdensome.

Response: The Agency appreciates the commenters' desire to have more flexibility, but its first responsibility is to the tenants. By assigning priorities and targets, the Agency has tried to use its available rental assistance to best serve the tenants with the greatest need. Information about the percentage of low-income households is necessary to help the Agency manage its rental assistance resources most effectively. Consequently, neither of these suggestions are being adopted in this rule.

Topic: Two commenters agreed that identifying the term of rental assistance agreements or having no term was problematic. One person nevertheless suggested that the term could be “when the funds obligated for the units are expended or 5 years, whichever comes first.”

Response: The Agency appreciates the comment; however, the term of the agreements have traditionally been established in the appropriation language each fiscal year, and can change. Therefore, the Agency has not specified the term of the agreements in the interim final rule.

Topic: One commenter stated his support of the “change to allow a lease clause stating that a tenant's rent will not increase when rental assistance is terminated by actions of the borrower/owner.”

Response: The Agency thanks the commenter for supporting this provision; this lease clause is addressed in subpart D.

Topic: Several commenters addressed § 3560.259 on the transfer of rental assistance, with most concerns addressing the effect of the transfer on the property. For example, two commenters recommended that unused rental assistance remains equal to 5 percent of the total units to avoid financial problems that occur if the property ends up with less than 95 percent occupancy the following year. Other commenters addressed the conditions under which rental Start Printed Page 69070assistance might be lost and thought clarification in the regulation is needed for conditions such as transfer of rental assistance due to unit damage during a disaster, the inability to get an ineligible tenant evicted, turnover in separate units over 4 months, or units for which tenant-based section 8 has been accepted and no rental assistance would be used.

Response: The Agency appreciates the comments addressing the various conditions that could effect and be affected by the transfer of rental assistance. The Agency believes that most issues should be resolved by the 6-month timeframe that occurs before the Agency assesses whether to transfer rental assistance. For all situations, particularly those brought about by disasters or by eviction, the Agency has exception authority under § 3560.8 of the interim final rule. For clarification, the timeframe for transferring rental assistance refers to one unit, not to multiple units several months in a row.

Topic: Other comments on the transfer of rental assistance focused on the borrower's role in transferring rental assistance. Regarding the borrower, commenters urged that the regulation expressly allows borrowers to transfer rental assistance from one project to another or to accommodate the transfer of rental assistance among projects under a common general partner.

Response: The Agency acknowledges the commenters' suggestion; however, RHS must consider the needs of the larger portfolio and tenant population in making decisions about the allocation or transfer of rental assistance. For this reason, the Agency has made no change, and it remains the Agency's decision regarding where to transfer rental assistance.

Topic: Other comments on the transfer of rental assistance focused on the effect on the household. One commenter recommended that households in a project who did not receive rental assistance be notified of the transfer of the rental assistance prior to its approval. Another commenter pointed out that households that were over-income are allowed to pay the “overage,” and suggested “leases be allowed to “non-renew” at the annual recertification date for any “overage tenant” whose continued occupancy prevents reassignment of rental assistance.”

Response: The Agency notes that the regulation already protects the interests of non-rental assistance tenants in the property and has made no changes to the interim final rule. Prior to transferring rental assistance, the Agency conducts a review to determine if the property has other eligible households that qualify for rental assistance. Also, borrowers who lose rental assistance through transfers can apply for new rental assistance units when their property reflects a need. The Agency considered the comment regarding “overage.” Tenants paying overage are eligible to reside in Agency financed housing properties and should not be forced out of their units when they are still income eligible. The Agency's housing is available to very low-, low- and moderate-income tenants in rural areas.

Topic: The Agency received numerous comments on § 3560.259 regarding the Agency's timeframe for transferring rental assistance. Several commenters contended that requiring the transfer of unused rental assistance after 4 months is not sufficient for several reasons, including the seasonal nature of farm work and the recreational industry and the time it takes to repair units after disasters. Several commenters stated that the Agency should continue to transfer unused rental assistance after 12 months. However, one commenter agreed that rental assistance should be transferred if it is unused for 4 months or more to ensure that the assistance goes to those with the greatest need.

Response: The Agency appreciates these comments and acknowledges that four months does not give the Agency sufficient time to analyze assistance needs of current tenants. Therefore, the Agency has increased the time period to six months in the interim final rule.

Topic: Several comments were received in connection with the Agency's requirement that non-RHS subsidy contracts cannot be for less than five years. Some commenters said that non-Agency rental assistance should be allowed for any period of time because “some rental assistance is better than none,” as one commenter noted. Other commenters said that this requirement is inconsistent with those of other funding sources.

Response: The Agency acknowledges the commenters' concerns and has revised § 3560.260(d)(2) in the interim final rule to allow for subsidy agreements with non-Agency sources “similar to existing or current Agency rental assistance funding levels.” This should make it easier for projects with Agency financing to obtain rental assistance from other sources.

Topic: Two commenters provided the following comment: “Projects with HUD certificates (project based) have often received a minimal or no mortgage rate interest credit reduction from the Agency, which often realizes a basic rent equal to HUD established rent. This regulation should allow for use of the HUD established rental rate.”

Response: The Agency notes that § 3560.207 of the interim final rule addresses this issue.

Topic: Two commenters addressed the topic of minimum rents. One commenter expressed disappointment that the regulation did not address zero'income tenants and require a minimum rent level. One commenter wrote that zero rents should be prevented (especially in labor housing) and suggested that there be a minimal payment of $50 or $100, with exception granted by the Agency.

Response: The Agency has considered the suggestion but has decided to retain the language from the proposed rule at this time until it has time to further evaluate this issue.

Topic: One commenter suggested that the regulation allow rental assistance to go to higher rent units in LIHTC and tax-exempt bond projects.

Response: The Agency has decided not to adopt the comment; because rental assistance is not assigned to a particular unit or rental rate, it is prioritized by the tenant's need. The Agency details its priorities in § 3560.257(a) of the interim final rule.

Topic: Two commenters suggested that the Agency allow borrowers flexibility in how they make use of rental assistance to maximize its benefits, particularly when the tenant household income rises and its relative use of rental assistance declines to a nominal amount. In this situation, one commenter stated: “The rental assistance unit is tied up and cannot be reassigned to a more needy very low-income tenant/applicant. This predicament could be alleviated by creating latitude for borrowers to intervene and assume responsibility of the cost of rental assistance to tenants or for the project to offer marketing incentives to near-moderate income tenant (e.g., those using rental assistance at a rate of <$10 per month).”

Response: The Agency believes this comment is permitted under this rule. However, the Agency will need to draft implementing procedures.

Topic: One commenter asked for clarification regarding § 3560.257 because that commenter did not understand the issue.

Response: In § 3560.257 of the interim final rule, the Agency gives priority to the tenants who most need rental assistance. The issue is further discussed in the Agency's internal guidance about program implementation. Start Printed Page 69071

Topic: One commenter stated that the changes in the calculation for electronic submission of certifications/recertifications were unclear.

Response: The Agency believes that the commenter misunderstood the changes; the timeline was changed, but the calculation was not changed. The timeline changes are addressed earlier in this subpart.

Subpart G—Financial Management

Topic: Numerous comments were received on § 3560.308 regarding the requirements for submitting annual financial statements. Several commenters stated that lowering the threshold for requiring a Government Auditing Standards (GAS) audit for projects from 25 units to 16 units would be cost-prohibitive, particularly by raising the costs for projects least prepared to absorb the additional costs. Several commenters attempted to estimate the increase in cost, including the cost to tenants or to taxpayers of subsidizing this increased expense. Additionally, because the number of projects requiring an audit will go up, a commenter stated that this requirement will create an additional burden on Area Offices to review these audits. Other commenters disagreed, stating that the submission requirements for small properties currently do not contain sufficient information to adequately analyze the financial status of the project, and that the additional requirements in the proposed rule are appropriate. Several commenters suggested an agreed upon procedures report for smaller properties that is consistent with generally accepted accounting principles (GAAP) under 42 U.S.C. 1485(z)(1) be required as an alternative to a standard audit. Another commenter suggested using a “verification of review” to achieve the same goals as the audit at lower costs. Another suggested requiring audits every second or third year or forgoing audits on projects that have a good track record of financial integrity as a way of reducing the burden. Another commenter said that audits are only as good as the accountant providing them; since the owner is the one providing the information and paying for the audit, it is doubtful that requiring audits on smaller complexes will bring to light additional fraudulent activities. The commenter went on to say that MFH specialists do not have accounting degrees and are not equipped to quickly recognize fraudulent activities, and that an audit of the project should provide all pertinent information that RHS is interested in that affects Agency-financed projects.

Response: As discussed in the preamble to the proposed rule, the Agency implemented the change to address concerns raised by the USDA OIG. The Agency has modified § 3560.308 of the interim final rule in response to the commenters' concerns, while staying consistent with the actions agreed upon with OIG. OIG requires that annual financial reports are prepared in a way that allows the Agency to get a realistic picture of the property's financial status and operations. By requiring an Agency approved engagement, the Agency should be able to address OIG concerns and obtain the information necessary to get an accurate picture of the property's health. In addition, the Agency has substantially modified § 3560.308 in the interim final rule to allow properties with 16 or more units to obtain an Agency approved engagement report. This section also states that properties with fewer than 16 units may obtain a limited-scope engagement. These engagements may be conducted by a CPA or other accounting professional and will cost considerably less than GAS audits, thereby minimizing the financial impact on the properties. The Agency has not adopted the suggestion for procedures reports or verification of reviews because the Agency needs the information that would be provided in an acceptable engagement letter so that it can meet OIG needs. The Agency's new policy shifts away from standard GAS audits to year-end reports that provide a more detailed picture of each property being managed. To address the issue of additional burden on Area Offices, RHS intends to automate most of the review process, enabling Area Office staff to concentrate on problem cases. One of the major considerations of the Agency in developing this new policy was the financial impact on properties. The limited scope engagement required in § 3560.308 provides the Agency with adequate financial information while not imposing a full audit requirement on smaller properties. The Agency has the option to obtain full audits on randomly-selected properties every two or three years. The Agency notes the concerns about the accountants being selected by the borrowers, but feels that the current rule strikes the best balance between risk, cost, and reliability.

Topic: Two commenters suggested raising the number of units triggering the audit threshold from 25 to 33 or 36, rather than lowering it to16. Another commenter suggested that the cost to projects that had not been subject to the auditing process would be high, especially to prepare the first audit, as this auditor would want to review data from the beginning of the project, which will increase operating expenses for the most difficult properties to manage. These properties will have to impose rent increases to accommodate the additional expense. Another commenter said that one reason stated for this new requirement is to further monitor IOI transactions, and that the new proposed management certification should provide the Agency with a certain amount of comfort that it is putting borrowers on notice that IOI relationships will be closely monitored. Another commenter said that the list of borrower accounting responsibilities should include a requirement to maintain documentation of the financial benefits where IOI work is used. The dollar amount of fraud at smaller properties would be less than the added expense of trying to catch it. Another commenter said that the proposed rule basically allows projects with less than 16 units to self-certify that their financial reports are accurate; the proposed rule is unclear in that it says the borrower must certify that the “* * * housing meets the performance standards * * *” The commenter went on to say that the rule should be more specific, saying that the borrower must certify that the financial statement report is accurate and that project funds have only been used for authorized purposes and for expenses that are actual, necessary, and reasonable. A commenter said that Agency personnel are currently awaiting the publication of an Agency guide about preparing annual financial statements being developed with the assistance of OIG.

Response: The Agency acknowledges the commenters' concerns. The policy set forth in the proposed rule and the interim final rule—the 16-unit threshold—responds to OIG's concern that the Agency is not receiving a complete and accurate picture of the financial and operational status of the properties in the Agency's portfolio. While the Agency's goal is to receive more targeted information, it recognizes that GAS audits performed by independent CPAs are costly, which is why the Agency has opted to allow annual reports that are tailored to Agency specifications for larger projects and limited scope engagements for smaller projects. The Agency has researched the costs of obtaining these types of financial reports, which are substantially lower than the cost of a GAS audit. The Agency does not think that the cost of such audits will pose an undue financial burden, such as Start Printed Page 69072increased rents, on the properties in its portfolio. With respect to identity-of-interest relationships and their impact on the financial activity at properties, the new management certification will reveal such relationships but the new financial statement requirements outlined in § 3560.308 will provide more financial information regarding these relationships. The new regulation also outlines the performance standards each engagement and limited engagement is required to cover. Agency review of this information will verify the owner's certification. The Agency did not adopt the suggestion regarding maintaining documentation because that documentation must already be retained for audits provided under this rule.

Topic: Two commenters said that the Agency should not require an Agency engagement letter, as this would create additional burden on Agency staff and could cause delays in completing the audit if the Agency does not approve the engagement letter in a timely manner. The commenters went on to say that it would be beneficial for the Agency to provide suggested wording in accordance with AICPA. Another commenter said that if the Agency's intention is to distribute the exact verbiage entailed in an engagement letter, it may be beneficial for the Agency to ensure the wording is in accordance with GAS and AICPA standards. The commenter noted that if the prescribed letter was not written in accordance with the above mentioned standards, accounting firms would still need to issue a separate engagement letter to discuss their procedures to be performed in accordance with GAS and AICPA standards. The commenter went on to say that such firms are required to issue an engagement letter detailing the procedures to remain licensed in their profession by peer review standards.

Response: The Agency thanks the commenters for raising this issue; however, the commenters seem to have misinterpreted § 3560.308(b). The Agency does not feel that audits in accordance with GAS are sufficient because they would not sufficiently cover IOI compliance issues and do not provide a sufficient sampling for this program. This section states that the borrower must use an Agency approved engagement letter, not that the Agency must approve the engagement. The engagement letter must be approved by the Agency. The Agency will consult with the OIG which regularly consults with AICPA on engagement and audit compliance standards. Therefore the engagement letter should be in alignment with AICPA requirements.

Topic: One commenter suggested that § 3560.308(a)(1) should be limited to requiring that engagement letters be compliant with GAS. Another stated that the regulation should specifically state that the audit should be in accordance with GAS. Another commenter said that for projects with less than 16 units where a compilation is required, the MFH Balance Sheet should be submitted. For project with 16 or more units, in lieu of the MFH Balance Sheet, a balance sheet in accordance with GAS should be accepted. Another commenter pointed to chapter 1, section 1.01 of the GAO Government Auditing Standards 2003 Revision issued by the Comptroller General of the United States which states that audits and engagements compiled according to GAS are considered reliable. This commenter also highlighted chapter 1, section 1.02, regarding auditors who use GAS can support Government accountability. Another commenter stated that the idea of not getting audits on all projects creates more opportunity for problems; while this might save a project some money, most owners must have audits prepared for their partners anyway.

Response: The Agency acknowledges the commenters' concerns. The Agency does not feel that audits in accordance with GAS are sufficient because they would not sufficiently cover IOI compliance issues and do not provide a sufficient sampling for this program. The Agency has established the engagement standards. A balance sheet is not sufficient to meet OIG requirements. The regulation does not prevent borrowers from obtaining GAS audits, but rather seeks to ensure that the Agency receives detailed financial information tailored to its needs to assist in the Agency's portfolio analysis.

Topic: One commenter said that in the past, it has been difficult to reconcile an accrual-based audit to a cash-based Form RD 1930-7, “Multiple Family Housing Project Budget,” and that while the proposed rule indicates that an engagement letter will control the annual report process for projects with 16 or more units, one of the proposed program handbooks indicates that this is still an audit. The commenter noted that as such, the same situation may result—the Form RD 1930-7 is prepared on a cash basis, while the annual reports are prepared on an accrual basis. The commenter recommended that the bookkeeping system and reporting be consistent.

Response: The Agency thanks the commenter for introducing these issues and has modified § 3560.302(b)(1) of the interim final rule to say that the borrow must conduct accounting, bookkeeping, and budget preparation in a manner consistent with the engagement.

Topic: One commenter said that § 3560.302 could be confusing to the independent accounting community because it states “borrowers must maintain records in a manner suitable for an audit or an engagement.” The commenter said that an engagement can be several things: An audit, an audit performed to agreed upon procedures, a review, or a compilation, all of which are typically performed by CPAs. The commenter continued, saying that review and compilation engagements do not include procedures/tests to verify the accuracy of the amounts disclosed in financial statements, whereas audits are designed to do just that.

Response: The Agency thanks the commenter for this observation and has made changes to § 3560.302(a) to refer to maintaining “records in a manner suitable for an engagement,” rather than to an audit or engagement.

Topic: One commenter contacted the AICPA and spoke with the Director of Professional Standards and Services, Ian A. MacKay, on July 11, 2003, more than halfway through the comment period on the proposed rule. The commenter found that the Director was not even aware of any changes being proposed by the Agency that would affect the accounting profession and auditing and urged that any planned changes to audit guidance must include and involve CPAs. The commenter believed that the Agency needs to engage and work with industry partners who are the experts in accounting before issuing the final rule. Another commenter echoed the idea that CPAs should be involved in writing the Agency policy and guidance on this topic.

Response: The Agency would like to reassure the commenters that CPAs and the HUD were consulted during the development of these policies.

Topic: Another commenter questioned whether the intent of § 3560.308(b) was for projects owned by the same owner and managed by the same manager to not be required to have separate audits for each property. The commenter stated a preference for having annual financial statements on all properties. One commenter suggested that in § 3560.308(b), the term “managing” general partner be defined as the partner responsible for operation under the partnership agreement. One commenter recommended removing § 3560.308(c) because if only a sample of housing projects were audited in a specific time period, audits conducted in later years would lack the necessary data inputs. Start Printed Page 69073

Response: The Agency appreciates the commenters' suggestions and has deleted in the interim final rule what was § 3560.308(b) in the proposed rule. All properties will be required to prepare annual financial statements, not just a sample number of properties.

Topic: One commenter stated that § 3560.308(d)(7) was too subjective.

Response: The Agency appreciates the commenter's concern. However, the Agency believes the standards are sufficiently objective to meet the needs of the Agency and borrowers.

Topic: Several commenters questioned the 2-year limit in § 3560.308(f), indicating that (1) most audit requests for proposals are for more than two years, and (2) required audit costs should always be an authorized project expense. Another commenter requested clarification on the procedures required by § 3560.308 after the initial 2-year period. Another commenter said that the proposed rule states that the Agency will approve a “full audit expense” for two years after the effective date of this regulation and questioned whether this is an attempt to get borrowers going with these audits and not worrying about the additional costs that they would incur doing these “full audits.”

Response: The Agency thanks the commenters for highlighting this issue and has deleted § 3560.308(f) from the interim final rule. Annual financial statements are an allowable financial expense through the term of the property's Agency loan.

Topic: Regarding the proposed language for § 3560.305, several commenters stated that borrowers should be able to take their returns without prior authorization from the Agency. Other commenters said that § 3560.305 appears to allow an owner be paid a return that was earned several years prior but still not paid, provided sufficient funds are available to pay it. Some commenters thought that it was prudent to allow the borrower to accrue unpaid returns on investments, while others thought that the period for capturing the return should be limited. One commenter said that the proposed rule should limit how many years the borrower can go back and be paid earned but unpaid return on investment, which would possibly prevent large withdrawals on project accounts where borrowers have not collected their return on investment because of negative cash flow or their own discretion. One commenter said that if the audit confirms sufficient cash flow, which would allow for a return on investment, then the return on investment should be taken the next year. The commenter went on to say that the Agency should allow for this return to not be taken “immediately after,” but rather any time during the next year.

Response: The Agency notes these concerns and has modified § 3560.305(b) of the interim final rule to state that a borrower may only take a return that is accrued but unpaid for the previous year only. The interim final rule does not require the borrower to receive Agency approval before taking a return unless the project had a negative cash flow. The Agency believes that the period of time to recapture earned returns should be limited and believes this policy is in the best interest of the property. The borrower is permitted in § 3560.305 to take his return after the fiscal year. The Agency has removed the word “immediately” from the section discussed by the commenter.

Topic: Other commenters said that an owner's return should be treated like any other property operating expense and that the Agency should encourage owners to stay in the program instead of discouraging their involvement by establishing regulations and administrative processes that result in denying payment of an owner's return. Another commenter said that the timing for payment of accrued but unpaid return on investment is unclear and that owners should be allowed to accrue such returns indefinitely or until sale or other disposition of the owner's interest, since returns are paid from surplus cash, and do not affect the underlying real estate. One commenter said that rent increases should be allowed for a return on investment, which is part of the budget, and that the Agency's denying such a request constitutes a clear violation of the loan agreements. The commenter felt that if RHS cannot guarantee a return, it at least must permit the owner to seek that return.

Response: The Agency acknowledges the commenters' concerns; however, the return to owner is to be paid only when the project has surplus cash while being properly operated and maintained. If the property has adequate occupancy and is operating properly, then the net operating cash available at the end of the year would enable the borrower's return to be paid. The Agency does not believe the policies concerning returns on investment discourage participation in the program. However, a policy that permits unlimited accrual of such return could financially harm the property and the Agency's security. The return on investment is a budgeted line item and, combined with other operating costs, could be the basis for a rent increase. However, a rent increase based solely on guaranteeing the return on investment is not permitted. Therefore the Agency has not adopted these suggestions.

Topic: One commenter said that consideration should be given to returns on investment for older projects and allow a return based on the current value of the original investment, which would help preserve existing projects because the return allowed is insignificant when compared to the property's current value.

Response: The Agency acknowledges the commenter's concern but has not modified the regulation at this time. However, the Agency will consider methods to implement such a change.

Topic: One commenter said that it appears from the language in the proposed rule that an owner may be paid for a return on investment that was earned several years prior but still not yet paid, provided sufficient funds are now available to pay it. The commenter asked if a project experiences a negative cash flow for the year and lacks sufficient surplus cash to pay the return, is it assumed that a return was not earned for that year and therefore could not be paid in subsequent years. If not, the commenter wanted to know if there is ever a situation where the return on investment is not earned.

Response: The Agency thanks the commenter for these suggestions. The borrower may carry accrued, unpaid distributions on the project balance sheet but only will be eligible to receive a distribution from the prior year. This can be found at § 3560.305(b) of the interim final rule.

Topic: Several commenters said that if the Agency approves a negative cash flow budget, then the return on investment should be paid because it is outside the borrower's control. They thought that payment of return should depend on whether there are sufficient funds to address the project's capital or operational needs. If reserves are funded as required, the commenter felt that the return on investment should be allowed and paid.

Response: The Agency acknowledges the commenters' concern. The Agency will only approve a negative cash flow budget at the beginning of the project's fiscal year if the property has sufficient cash on hand from the previous fiscal year. Under these circumstances, the borrower could be eligible to receive a return, but only with the Agency's prior approval. This can be found at § 3560.305(a)(2) of the interim final rule. The Agency does not believe the return is outside of the borrower's control because the borrower controls the budget. Further, the Agency has not adopted the suggestion to pay a return Start Printed Page 69074if there are sufficient funds to address the project's capital or operational needs because the Agency needs to evaluate the performance of the property.

Topic: One commenter asked under what conditions, or with what justification, would the Agency authorize borrowers to be paid their return on investment, while at the same time their project is experiencing a negative cash flow. The commenter asked if these criteria are published to ensure their consistent use. Several commenters suggested that the borrower be prohibited from taking a return on investment from the project's reserve account.

Response: The Agency wishes to clarify this issue. The Agency may authorize that a return be paid to an owner when the property has a negative cash flow under very limited circumstances, as described in § 3560.305(a)(2) of the interim final rule—when surplus cash exists in the reserve account and the property has sufficient funds to address its capital needs. The Agency policy remains the same and the borrower is permitted, with Agency approval, to withdraw ROI from surplus cash in the reserve account. The Agency did not adopt the suggestion that the borrower be prohibited from taking a return on investment from the reserve account because taking this return has no adverse effect on the project.

Topic: One commenter said that the reference in § 3560.305(a)(2)(i) to § 3560.306(d)(2) should read § 3560.306(d)(1).

Response: The Agency thanks the commenter and has revised the reference in the interim final rule.

Topic: Regarding budget reviews and approvals, a substantial number of commenters decried the Agency's decision to have the budget submission date for borrowers requesting rent increases be 105 days before the end of the project's fiscal year. Commenters explained that this timeframe would require borrowers to prepare budget information so early in the project's fiscal year that they would have inadequate data—such as projected property taxes—to estimate the upcoming year's cost. Another commenter expressed approval of the proposed timeline. Another commenter said that the Agency should allow for rent increases on days other than the first day of the fiscal year because many management companies recertify all residents on a specific annual day. If that day is February 1, having a rent increase January 1 will require managing agents to implement a rent increase January 1 and then revise the rent on February 1, doubling the workload. In addition, the commenter said that this will require Agency staff to update their records twice, increasing their workload. The commenter believed that allowing rent increases on days other than the first day of the fiscal year will decrease workloads and allow rent increase reviews to occur over a period of months. However, several Agency commenters said that the timeframe proposed for reviewing budgets with and without rent increases was a welcome addition.

Response: The Agency appreciates these comments and has revised § 3560.303(d) of the interim final rule to reflect the previous deadline for budget submissions of 90 days before the end of the project's fiscal year for a project for which a rent increase is being requested and of 60 days before the end of the project's fiscal year for a project for which a rent increase is not being requested. The Agency's streamlined budget processing also makes it possible for budgets to be reviewed on a more timely basis. The Agency wishes to note that there is nothing in the regulation that prohibits a borrower from submitting a rent increase request that will go into effect on a date other than on the first of the year. Further, § 3560.205 of the interim final rule allows requests for rent or utility allowance changes any time during the year if necessary to preserve the financial integrity of the housing complex and the circumstances are due to factors beyond the borrower's control.

Topic: Another commenter said that the Agency's new expedited review will free up Agency resources, which are stressed when all budgets come in at the same time, and will eliminate owners' having to operate their projects without approved budgets because of long waits for Agency approval. However, another commenter stated that the Agency has too many budgets to review at one time.

Response: The Agency thanks the commenter for this concurrence. The Agency is working to improve its management information systems to help expedite budget reviews, thereby enabling it to complete this task on time.

Topic: One commenter said that the proposed rule does not specify any thresholds and refers to budgets with “no rent increase.”

Response: The Agency wishes to clarify this issue. “No rent increase” means that the borrower did not request a rent increase with the submitted budget package. Thresholds are addressed in § 3560.303(d) of the interim final rule, which describes budgets and rent increases for which Agency approval is required.

Topic: One commenter said that the proposal to use thresholds when reviewing annual budgets seems good; however, there needs to be a way for the public to comment on the thresholds used.

Response: The Agency appreciates the comment; however, the thresholds are an internal program standard used to determine the level of Agency review. The thresholds are not part of the criteria used to determine whether the budget can be approved. Because the thresholds are part of internal program procedures, there is no obligation to allow public comment. The Agency does want to note that the public can easily find out the thresholds being used by obtaining the relevant Agency guidance about program procedures, which is readily available via the Internet or Agency Offices. Further, the Agency wants to emphasize that the criteria that borrowers must meet are provided in § 3560.303(a) of the interim final rule.

Topic: Several commenters said that the proposed rule should include the information contained in the current 7 CFR part 1930, subpart C, exhibit C whereby a budget is considered approved if the Agency approval official does not act on the request within 30 days. The commenters believed that this should include any budget, regardless if a rent change is requested.

Response: The Agency acknowledges the commenters' concern. Language was added to § 3560.303(d)(3)(ii) of the interim final rule to address budgets and automatic rent change procedures.

Topic: The Agency also received comments on the disposition of interest earned on the project's reserve account. Several commenters stated that letting the borrower retain 25 percent of the interest earned on reserve accounts helps offset taxes paid on phantom income. A few commenters felt that borrowers were not entitled to this benefit. Another commenter said that the criteria for Agency approval under § 3560.306(i) should be (1) A statement from a CPA in an audit or compilation regarding the amount of interest on reserves, and (2) a request to release 25 percent of that interest amount. The commenter said that this should not be calculated as return to owner; instead, this will mostly compensate owners for the tax burden from interest income as a return to owner. Someone commented that borrowers or management companies do not put the reserve account on higher yielding interest rate accounts because they do not get to keep the interest; there is no business Start Printed Page 69075incentive. Further, to obtain higher interest yields, this commenter said that long-term commitments are required, and borrowers and agents may be afraid to have funds locked at a time when they may need the money for an emergency. Another commenter said that the proposed rule needs to limit the withdrawal of 25 percent of interest earned on reserve accounts to borrowers that deposit project funds in high interest-bearing accounts; at best, this is a break-even deal for the borrower, which is not a good incentive. Another commenter said that the annual return should equal 35 percent of the interest earned on reserve accounts, because 25 percent is not sufficient to compensate borrowers. Still, another said that the borrower should receive 100 percent of the interest earned on this account. One of the commenters concurs with the basic principle of the rule change to allow borrower's to keep up to 25 percent of the interest earned on reserve accounts, provided that the use of reserve fund interest to pay borrowers a return on investment (§ 3560.306(i)(2)(ii)) is conditioned on the deposits to the maintenance reserve account being on schedule. However, the commenter is opposed to any concession to limited profit owners that might result in underfunding the maintenance reserve.

Response: The Agency appreciates the commenters' concerns. The Agency will not consider the 25 percent of interest income as part of the return to owner. The Agency believes the 25 percent figure, as opposed to 35 percent or 100 percent, is a reasonable amount. The Agency will monitor this new policy and determine if any change is necessary. The Agency has attempted to provide borrowers with investment options so they are less limited by the size of the reserve account that may be invested. This policy allows borrowers to receive an amount to offset the effect of phantom income taxes. Borrowers are entitled to this amount if interest is earned on the reserve account. It is not dependent upon compliance with the reserve account funding schedule. Borrowers are encouraged to maximize their interest return as long as they remain in alignment with this rule.

Topic: One commenter said that § 3560.306(d)(2) of the proposed rule states that the borrower may need to deposit surplus general operating account funds into the reserve account “if the reserve account is not fully funded,” but could not find a definition for “fully funded.” Another commenter stated that borrowers should make required deposits until the reserve is fully funded.

Response: The Agency appreciates the commenters' questions and has revised § 3560.306(d)(2) of the interim final rule to state that the borrower will be required to deposit surplus general operating funds into the reserve account. This does not change the borrower's required contribution to the reserve account. This is because scheduled contributions are required until the account is fully funded as stated in the loan agreement.

Topic: With respect to § 3560.306(h)(3), one commenter said that the paragraph should read that borrowers may make an annual withdrawal from the reserve account equal to no more than 25 percent of the interest earned on a reserve account during the prior year, rather than on amounts earned. The commenter believed that this paragraph should state that interest income earned does not include any increased equity in the value of any reserve securities. Another commenter praised the new rule because it requires borrowers to record the price actually paid for securities when reserves are involved. The commenter said that this will help the Agency determine whether accounts have lost money and will also help determine that 25 percent of earnings to be released to the owner for taxes.

Response: The Agency acknowledges the first commenter's concern and has revised § 3560.306(h)(3) to read that borrowers may withdraw 25 percent of the interest earned on a reserve account during the prior year. The Agency believes this clarifies its position sufficiently. The Agency appreciates the second commenter's support of its position.

Topic: One commenter said that borrowers should not be able to take 25 percent of the earned interest out of the reserve account because interest earned is not phantom income; the interest is income earned on an asset, thus increasing the asset. The commenter continued that the value of the asset is higher because the interest is left with the property, and that there is already a problem with the reserve accounts not being adequate to cover needed capital improvements. Another commenter said that 25 percent of the interest earned only be given to the owner if the actual annual deposit to the account exceeds this amount.

Response: The Agency appreciates the commenters' position but does not agree that the disposition of the interest earned on the reserve account should be limited per the commenters' suggestions. The Agency understands that paying taxes on phantom income is a disincentive for staying in the program and that allowing borrowers to receive a portion of the interest income earned on the reserve accounts helps to mitigate this disincentive. The Agency expects that 100 percent of the interest earned on the account will be deposited to the account. Twenty-five percent of that amount is available for withdrawal. The Agency will monitor this new policy and determine if any change is necessary.

Topic: Regarding allowable project expenses, several commenters stated that costs incurred in connection with alleged civil rights abuses by the borrower should be allowable project expenses if the borrower is not guilty. Other commenters said that the language in § 3560.303(b)(2)(v) is overly restrictive because if a judge overturned a management agent's eviction action, it would be for a violation of some portion of landlord—tenant law. The commenter said that regardless of how minor or insignificant the violation is, this would prevent the owner from billing the legitimate legal fees to the project; if owners end up paying for such legal fees, they will be less likely to pursue such actions, which might have a detrimental effect on other tenants.

Response: While the Agency takes civil rights abuses very seriously, it acknowledges that the borrower should not be required to pay for costs associated with frivolous lawsuits. Section 3560.303(b)(2)(v) has been revised to remove the term evictions and now states only that borrowers must pay for fines, penalties, and legal fees when they are found guilty of civil rights or other violations.

Topic: One commenter said that the proposed rule states that authorized purposes for project funds are described in the rule, but felt that § 3560.303(b) is not specific enough.

Response: The Agency acknowledges the commenter's concern. Allowable and unallowable project expenses are discussed in greater detail at § 3560.303(b) of the interim final rule.

Topic: Several comments were received on project payment for tenant services. One commenter said that the proposed rule should spell out the limits on how much project funds can be budgeted for tenant services. Another commenter suggested adding a section to the rule that allows a project controlled by a nonprofit corporation or public body to utilize operating revenues to pay for tenant services that enhance the tenant's quality of life. An additional commenter said that the value of tenant services in creating a healthy community is recognized by the MFH industry and that the Agency Start Printed Page 69076encourages these services but does not allow them to be paid for from operating costs. A commenter said that HUD's project reengineering program allows tenant services to be paid for by project operating funds and that nonprofit organizations should be allowed to expense tenant services that enhance the tenant's quality of life (e.g., computer rooms, afterschool programs, etc.).

Response: The Agency has considered the comments but has decided to retain the language from the proposed rule at this time until it has time to further evaluate this issue.

Topic: One commenter noted that § 3560.302(c)(5)(iii) should state that uses of funds for nonprogram purposes does constitute a non-monetary default, not that it “may” constitute a non-monetary default.

Response: The Agency thanks the commenter for highlighting this issue and has made this change in the interim final rule.

Topic: The Agency received several comments on asset management fees. One commenter said that the proposed rule does not provide a definition for asset management fee. The commenter suggested that to facilitate the acquisition of Rural Development housing by nonprofit organizations, a reasonable and customary asset management fee be established; additionally, payment of asset management fees is inconsistent throughout the country. Another commenter asked the Agency to clarify that nonprofit organizations can obtain asset management fees consistent with current practice. However, one commenter strongly disagreed with allowing an asset management fee for nonprofit organizations. Another commenter said that the Agency should allow asset management fees as an allowable project expense as required by third-party entities, in conjunction with grants, loans, or equity.

Response: The Agency acknowledges the commenters' concerns. The Agency is not adopting a definition of “asset management fees” nor setting a “reasonable and customary management fee” because it feels this concept is sufficiently delineated in the provisions of this rule. The Agency allows nonprofit organizations to use housing project funds as asset management expenses directly attributable to ownership responsibilities. Section 3560.303(b)(1)(ii) of the interim final rule delineates the purposes of the asset management fee, which are reasonable and customary costs incurred by nonprofit organizations. While the Agency acknowledges commenter's disagreement, it also recognizes that small nonprofit organizations often cannot afford to cover the time to perform property oversight functions or errors and omission insurance, and this oversight and coverage is important to ensuring the viability of the property.

Topic: Several commenters stated that supervised bank accounts are too cumbersome. Some of these commenters also stated that certain banks would no longer accept responsibility for dual signature accounts. Several individuals thought that the Agency micromanages reserve accounts because the borrower must submit a request for withdrawal of reserves to the local USDA office for review and approval with supporting documentation for eligible replacement items or residual receipts. Another commenter said that HUD and other affordable housing funders allow borrowers to operate their reserve accounts as legitimate needs dictate. Another commenter recommended that borrowers should be given more control over management of the reserve accounts, with USDA reviewing and verifying the accounts on a semiannual or annual basis.

Response: The Agency acknowledges the commenters' concerns. The Agency has determined that these requirements are necessary to enable RHS to meet its fiduciary responsibility to ensure that these funds are used for the purposes for which they were intended. The Agency does recognize, however, that technological and other changes may require different techniques to ensure the Agency's security. The Agency will review possible acceptable alternatives for the dual signature requirement. The Agency does not believe that (1) it micromanages reserve or operating accounts, (2) the requirements it imposes are unreasonable or cumbersome, and (3) that it can give borrowers more control over the management of the reserve accounts * * *

Topic: One commenter noted that the postapproval requirement contained in § 3560.306(h)(5) should be discretionary with the Agency, but “extraordinary circumstances” should be revised to accommodate emergencies where prior approval is not practical and where there are delays in Servicing Office approvals.

Response: The Agency has revised the regulation at § 3560.306(g) to respond to emergency situations and will include further direction in internal Agency procedures. The Agency wants to emphasize that it has a fiduciary responsibility to ensure that these funds are used for the purpose for which they were intended.

Topic: Several comments were received on pre- and postapprovals of project reserve funds. One commenter said that to require preapproval of all expenditures from reserve accounts in unnecessarily burdensome; current practices at both HUD and many State housing agencies allow for postreporting in many instances—for instance, below a certain threshold dollar amount. The commenter recommended that the Agency modify this requirement to allow for postreporting of expenditures when the dollar amount is budgeted or when the amount is less than $10,000. Conversely, another commenter said that a bad precedent will be set if the Agency begins to post-approve withdrawals from the reserve account based on the funds' being used for authorized purposes and having been approved by the Agency anyway, even if the proposed rule says that these will be approved only under “extraordinary circumstances.”

Response: The Agency has revised § 3560.306(g) of the interim final rule to state that borrowers must inform the Agency of planned withdrawals when the project's budget is prepared. The Agency has not adopted a threshold requirement because the Agency feels it needs to evaluate program use and categorization of reserve accounts and due to the extensive problems the Agency has had with reserve accounts. In addition, the Agency has deleted from the interim final rule the statement in § 3560.306(g)(5) that it may postapprove the use of reserve funds only under extraordinary circumstances.

Topic: Numerous comments were received on § 3560.306 regarding the required deposits to the project's reserve accounts. The comments were similar to those described in the comments to subpart B.

Response: For the Agency's response, please refer to the discussion in the comments to subpart B.

Topic: Several commenters said that the proposed rule states that the required deposit amount will be an amount needed to maintain the property. They said that the methods of determining the amount need to be described in the program handbooks, or everyone will deposit the current 10 percent of the loan amount. The Office of Rural and Farmworker Housing agrees that maintenance reserve requirements should be revised (§§ 3560.65 and 3560.306). They said that history seems to indicate that the current one percent per year required contribution is insufficient; for the Agency to continue using one percent as a base would seem to invite the problems of the past, as some say this Start Printed Page 69077amount is too high and some say it is too low. One commenter believed that the correct approach would be flexible and tied to the new requirement for including life-cycle cost analysis in the design and specifications of the proposed project (§ 3560.60(c)) and suggested that there should be two bases for funding the reserve accounts:

  • One percent per year for 15 years for projects using materials with longer lives, such as brick siding and long-life heating equipment. During year 15, future maintenance needs would be calculated and the reserve conditions changed up or down as appropriate. In some cases, excess reserves should be returned to the owner as appropriate.
  • One-and-a-half percent per year for 10 years for projects using average designs and specifications, with reevaluation performed during or after year 10.

Response: RHS has decided to publish an interim final rule that does not include § 3560.103(c)(3) and § 3560.306(k)(1) of the proposed rule, until their impacts can be assessed and policy decisions can be made for a long-term strategy. For the interim final rule, the Agency incorporated the relevant language from the existing regulation (7 CFR part 1930, subpart C).

Topic: Several commenters said that while increasing maintenance reserves will increase rents and therefore rental assistance costs in the short term, these increases should be balanced by smaller increases in the long run. They thought that the potential for deferred maintenance is more critical than the need for additional rental assistance with respect to the program's long-term success and its ability to serve the lowest-income rural residents.

Response: The Agency is in the process of evaluating the capital needs of the properties in the portfolio. However, over half of the residents in Agency-financed properties receive rental assistance; more than 93 percent of our residents are very low income and earn less than $10,000 a year. Rental assistance will continue to be a very important component in the long-term success of the RHS MFH programs.

Topic: One commenter said that the proposed rule reads as if future reserve requirements would be imposed on existing projects, which may require an agreed upon change to the loan agreement by the owners. Regardless, this commenter thought that this is only possible if the Agency increased rental assistance and allows liberal rent increases. While the commenter wanted to see well-capitalized properties, additional reserves simply cannot be expected without more income being provided to the projects.

Response: The Agency refers the commenter to the response for the two preceding topics.

Topic: One commenter asked the Agency to allow borrowers the flexibility to deposit funds irregularly over the course of the year, as long as they achieve the required annual deposit.

Response: The Agency agrees with the commenter's suggestion and has revised § 3560.306(c) of the interim final rule to address this comment and it is based on the language in the loan agreement as to the timing of deposits into the reserve account.

Topic: The Agency received a number of comments on the requirements for disposition of surplus operating funds and excess reserve account funds. Several commenters stated that excess reserve funds should be transferred to the property's operating account. Other commenters contended that borrowers should be allowed maximum flexibility in using surplus funds for the benefit of the project and that the borrower should be able to use excess reserves to make repairs and capital improvements and cover unexpected costs or unanticipated cost increases—in other words, for any project purpose when needed or to pay the return on investment. They thought that this language makes use of the excess reserves more restrictive than the use of reserves. Several commenters said that when a determination of surplus funds is made, it should take into account the upcoming year's budget of the project. One commenter said with regard to § 3560.306(d)(2) that rather than saying that if the housing project's general operating account has surplus funds at the end of the project's fiscal year, the Agency may require the borrower to use the funds to address the project's capital needs, with the word “may” being replaced with the word “will.”

Response: The Agency appreciates these comments and has made several modifications to § 3560.306(d) in the interim final rule. These modifications should add flexibility to the requirements for transferring excess operating funds to the reserve account and determining whether the borrower is entitled to take a return on investment. The Agency has also revised § 3560.306(d)(2) in the interim final rule to read that the Agency will require the use of surplus operating funds to address the project's capital needs. Excess funds should be deposited to the reserve account because so doing: (1) Maintains Agency control and oversight; and (2) ensures these funds are readily available for capital expenses and emergency needs. Use of surplus reserves is outlined in § 3560.306(k), all for the benefit of the project. Internal Agency procedures require evaluation of the upcoming project budget with reviewing surplus reserves.

Topic: A commenter asked if the priorities for using excess reserve funds shown in § 3560.306(l) are in order of importance.

Response: The Agency wishes to clarify this issue and has modified § 3560.306(k) of the interim final rule to read: “Amounts in the reserve account which exceed the total required by the loan or grant agreement must be used, at the direction of the Agency, for any of the following.”

Topic: Several commenters stated that under § 3560.306(d)(1), the Agency seeks to keep excess funds to a maximum of 10 percent of the budget, which causes many properties to operate more thinly than is recommended and puts a property at financial risk to the normal vagaries of operations. They thought that prudent industry servicing should permit several months of funds to accumulate.

Response: The Agency thanks the commenters for their suggestions and has revised the interim final rule to state that the general operating account will be considered to contain surplus funds when the balance at the end of the project's fiscal year exceeds 20 percent of the budget. This can be found at § 3560.306(d)(1) of the interim final rule.

Topic: With regard to the requirements of initial operating capital, the Agency received a substantial number of comments. Comments received were similar to those described in the comments to subpart B. Several commenters said that the rule allows the developer to take the initial operating capital in more than one withdrawal within the 2- to 13-year period after a property is built, which decreases the developer's incentive to have a successful project as soon as possible. To these commenters, it appeared that there may be conflicting information as the summary indicates 2 to 7 years, while § 3560.304(c)(2) allows the developer 2 to 13 years to take the initial operating capital. Some commenters approved of this timeframe; some thought it was too short, and some thought it was too long.

Response: There was an error in the proposed rule and it should have stated that the developer may take the initial operating capital in more than one withdrawal in years 2 through 7, with Start Printed Page 69078Agency approval. This can be found at § 3560.304 of the interim final rule.

Topic: Some commenters expressed skepticism regarding the benefits of this proposed rule change. One commenter questioned if there is an element of the borrower's desire to max out profit. The commenter went on to say that in today's market, owners are receiving an eight percent rate of return on their investment in their property, while the best any bank will do is a two or three percent.

Response: The Agency acknowledges the commenters' concerns but believes that the proposed rule change is more equitable to borrowers. Therefore, the Agency has not revised its regulatory language in the interim final rule.

Topic: Several comments were received on the Agency's requirements for project bank accounts. Most of these comments contended that the regulation should be permissive enough to allow for establishing accounts required by other funding sources, over and above the four that RHS requires. Another commenter said that § 3560.302(c)(5)(v) should be reworded to clarify whether commingling of accounts is acceptable between projects owned by the same borrower, or project owned by different borrowers but operated by the same entity. Another commenter said that the proposed rule states in § 3560.302(d)(1) and (d)(2) that the borrower may combine two or more housing project accounts, and in (d)(3) it says that they cannot if they are managed by the same management company. One commenter asked whether nonprofit organizations could have all program funds through one account as long as they are tracked separately for each program; if this is the case, the commenter wanted to see separate operating and maintenance accounts for the housing program, along with separate reserve accounts for each project.

Response: The Agency acknowledges the commenters' concerns. Section 3560.302(c)(3) in the interim final rule identifies permitted accounts, including account required by third-party lenders. The Agency has also revised § 3560.302(c)(5)(v) in the interim final rule to state that borrowers, including nonprofits, may operate one account for multiple projects as long the funds for each project are accounted for separately. Management companies may not commingle funds for multiple properties. This can be found at § 3560.302(d)(3).

Topic: Several commenters believed that the collateral requirements for project accounts are too restrictive. One commenter said that the Agency's proposal to use the cash in reserve accounts as security for the Agency's loan does not address the issue of multiple lenders on projects. The individual thought that this requirement should be amended to address the mechanism to be used when multiple lenders, including the Agency, require this type of security. Some additional commenters expressed concern that the proposed rule does not address circumstances when borrowers have not adequately collateralized accounts that exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit of $100,000. Other commenters noted that the proposed rule continues and expands 7 CFR 1902.4(a)(5) to require collateral pledges for not just reserve accounts, but for all project accounts. They stated that this is a cumbersome, time-consuming, and an unnecessary requirement. They favored simply continuing 7 CFR 1902.4(a)(5), which allows more flexibility because a collateral pledge only applies to reserve accounts, and even then a collateral pledge is not required if the financial institution has its accounts insured against theft and dishonesty. The commenter believed that the requirement for collateral pledges should be removed.

Response: The Agency notes the commenters' concerns. The Agency feels that security issues involving multiple lenders should be handled on a case by case basis. Regarding the comment concerning inadequate collateralization, the Agency makes an independent assessment of collateralization. If the Agency were to determine that the accounts were inadequately collateralized, then it would treat this as a non-monetary default. The Agency does not believe the collateral requirements are too restrictive. An alternative to collateral pledges are multiple accounts under $100,000. Regarding the comment that collateral pledges now apply to all project accounts: that has always been the case. No change was made in this rule and the Agency continues to believe it is necessary to have these accounts pledged to support the loan. The identified collateral requirements establish a minimum threshold for protecting the Government's financial interest.

Topic: The Agency received several comments on this subpart related to life-cycle cost analyses. Comments received were similar to those described in the comments to subpart B.

Response: For the Agency's response, please refer to this discussion in the comments for subpart B.

Topic: One commenter expressed concern that little is stated in the proposed rule concerning vacancies when preparing project budgets. Another commenter said, however, that the vacancy rate should be capped at 10 percent for properties with 15 or fewer units. Vacancies for properties with more than 15 units should have a maximum vacancy rate of 15 percent. Another commenter said that vacancies should be realistic given the project's history, but history is not defined.

Response: The Agency thanks the commenters for their observations. The methods for budgeting vacancy rates vary depending on each project's occupancy history and cannot be capped or based on number of units in the property. The Agency will provide additional details in its program procedures.

Topic: One commenter said that, as an alternative to management fees, the regulation should allow an administrative fee, possibly as a state's option. For example, in Mississippi, the management company is paid an all encompassing administrative fee that is intended to cover salary, paperwork, postage, etc., with the exception of training and auditing. The commenter noted that other states also use this system, and in all cases the reduction in micromanagement results in a much smoother cooperation between management companies and Agency personnel.

Response: The Agency thanks the commenter for this observation. The Agency understands the utility of having the property pay for a specific bundle of services for management and/or administrative services. The Agency describes this bundle of services in § 3560.102 (i)(3) of the interim final rule. However, the Agency cannot adopt this comment because it wants a nationwide, consistent fee structure through the management fee process rather than individual “state options” of administrative fees.

Topic: One commenter said that there must be ways for management companies to do a better job at being more frugal with their project budgets. Another commenter said that audits are reviewed on a first-come, first-served basis; there are so many to review in a short period of time in addition to other work demands. The commenter felt that there are opportunities for management companies to improve on their financial management during the year to avoid issues and questions during auditing times, as well as for auditors to provide clearer explanations on sources of expenditures or findings.

Response: The Agency thanks the commenters for sharing these concerns. The Agency designed the interim final Start Printed Page 69079rule to provide guidelines to ensure that borrowers manage their properties as effectively and efficiently as possible.

Topic: One commenter said that if a borrower chooses to advance funds to properties to meet short-term needs, then the Agency should accommodate repayment. The commenter believed that the limited return limits the ability to repay advances even if funds are later available, and that RHS should allow owners a priority repayment to encourage advances to protect operations.

Response: The Agency appreciates the comment. The Agency has modified the regulation and allows repayment of such advances to projects to meet short-term needs, but prior Agency approval is required. This can be found at § 3560.307 of the interim final rule.

Topic: With regard to the borrower's financial management of Agency-financed multi-family housing, one commenter said that adequate documentation must be defined so it is objective, not subjective. This individual believed that adequate documentation should mean supporting documentation such as invoices, general ledger receipts, or other readily available information to support the books and records.

Response: The Agency thanks the commenter for this observation. Section 3560.302 of the interim final rule sets forth the Agency's basic requirements for project accounting, bookkeeping, budgeting, and financial management systems. “Adequate” or “supporting” documentation is any documentation required to substantiate the books, records and accounting systems.

Topic: One commenter noted that the requirement to notify tenants of rent increases should be compatible with State and local laws, and that there is no need for longer notification periods. Another commenter mirrored this concern and said that a 105-day notification period is too long, especially as rent increases would not be approved unless they were necessary and justified. The commenter believed that the current requirement for 60 days should be continued subject to State law.

Response: The Agency appreciates the commenters' concerns. As stated previously, the Agency has revised the budget submission timeline so that the process in the interim final rule is similar to that of the existing budget submission/tenant notification timeline. By revising some target dates, the Agency gives the tenant 90-day notification of the impending rent increase. Generally, State laws require a shorter timeframe for notification to tenants, so the 90-day period should provide adequate notice.

Topic: Several commenters said that, in principle, they agree with the Agency's requirement to tie reserve for replacement deposit amounts to capital needs assessments, but that this policy could be used by borrowers to inflate project rents.

Response: RHS has decided to publish an interim final rule that does not include § 3560.103(c)(3) and § 3560.306(k)(1) of the proposed rule, until their impacts can be assessed and policy decisions can be made for a long-term strategy. For the interim final rule, the Agency incorporated the relevant language from the existing regulation (7 CFR part 1930, subpart C).

Topic: Several commenters noted that the Agency is not always in the senior debt position and that any senior debt needs to be reflected as a priority over Agency debt; since the Agency is allowing conventional loans to be in the senior debt position, this needs to be reflected throughout the regulations as necessary. Another commenter said that this is critical if the Agency wishes to continue leveraging other sources of debt, which is necessary given low program funding levels.

Response: The Agency appreciates the commenters' concerns and has revised in the interim final rule § 3560.303. This paragraph states that the first priority of planned and actual budget expenditures is the senior position lienholder, if any.

Topic: One commenter said that the proposed rule should explain the appeal rights available to the borrower if the borrower's proposed budget is rejected.

Response: While the Agency acknowledges the commenter's concern, the borrower's appeal rights are covered in § 3560.9 of the interim final rule and in greater detail in 7 CFR part 11.

Topic: Several commenters noted that some of the regulatory citations were incorrect:

  • In § 3560.306(f), the section references should be § 3560.65 and § 3560.302(c)(5). Section 3560.305(f) should be changed to § 3560.306(f).
  • Section 3560.306(m) references §§ 3560.102(c), (d), and (i). The correct references appear to refer to §§ 3560.102(g), (j), and (k).
  • Section 3560.306(f) regarding funds invested in securities should refer to § 3560.306(g) instead of § 3560.305(f).

Response: The Agency thanks the commenters for their suggestions and has made these changes to the interim final rule.

Topic: One commenter said that § 3560.306 of the proposed rule needed “grammatic cleanup” and has “many long, run-together thoughts.”

Response: The Agency acknowledges the commenter's concern and has substantially revised § 3560.306 in the interim final rule to be much clearer and more concise.

Topic: There were several comments about the Agency's proposed guidelines for investing reserve for replacement funds. Two commenters said that the proposed rule establishes very narrow guidelines for investing reserve funds—State- and Federal-backed securities and AAA-rated tax-exempt bonds. They thought that this latitude should be expanded to include investment funds commonly used by State and local Governmental organizations. For instance in California, housing authorities and public bodies routinely place funds in the Local Agency Investment Fund (LAIF). The commenters felt that such prudent State-sponsored investment funds should be allowable investments. In West Virginia, the monitoring and maintenance of investments necessitate significant staff time; significant losses have occurred in West Virginia when CDs have been pledged as security for nonproject loans.

Response: The Agency appreciates the commenters' concerns and has revised § 3560.306(f) in the interim final rule to allow for more flexibility in the investment of reserve funds but still requires reserves to be held at a Federally insured domestic institution. This policy ensures that the Agency maintains its fiduciary responsibilities.

Subpart H—Agency Monitoring

Topic: One commenter asked that the Agency revise the regulatory language in § 3560.352(c)(3) and in § 3560.352(b)(4) to remove “the Fair Housing Amendments Act of 1988” because this language is redundant with language earlier in the paragraph.

Response: The Agency appreciates the comment and has revised the regulatory language in both § 3560.352(c)(3) and § 3560.352(b)(4) to incorporate this suggestion.

Topic: Several comments were received regarding the Agency's monitoring techniques and borrower responsibilities. Commenters suggested including information related to inspections, supervisory visits, triannual supervisory visits, and compliance reviews in the final rule. One commenter expressed concern that the proposed rule did not describe how often onsite monitoring reviews would be performed nor the specific review procedures. However, another commenter expressed appreciation that the Agency did specify the frequency of monitoring activities in the proposed Start Printed Page 69080rule because it gives the Agency the flexibility to “focus on the most important tasks and problem cases.”

Response: The Agency purposefully did not include the specific procedures in the interim final rule's regulatory language, as was suggested by the commenters, in order to retain regulatory flexibility. However, the Agency describes its monitoring activities (e.g., timing of monitoring activities, items examined during monitoring activities) in its internal Agency procedures, which have been updated in conjunction with the issuance of the interim final rule.

Topic: Several commenters were concerned about the policy of scheduling onsite monitoring reviews without giving the borrower prior notice and whether the Agency has the right to enter private property without providing notice to property owners. The commenters requested some assurance for borrowers that tenant-landlord law will be followed. One commenter noted that onsite visits without notice could subject owners to greater insurance liability claims, and requested that borrowers “receive protection, financial and otherwise, from the Agency for any claims from tenants regarding a violation of their privacy rights based on the actions of Agency staff.” Another commenter suggested that staff seeking access for an Agency review should have some standard of notice as any unit inspection must comply with local tenant-landlord law to not disrupt either property operations or residents' homes.

Response: The Agency recognizes the commenters' concerns. The proposed rule specifies: “Generally, the Agency will provide the borrower prior notice of an onsite monitoring review * * *.” In the interim final rule, the Agency has retained the authority to conduct onsite reviews without prior notice because RHS needs the flexibility to conduct these reviews in cases where it is not feasible to reach the borrower or give the borrower prior notice. The Agency has no interest in causing the borrower or the tenants any discomfort about the inspection process. We respect the tenant's rights to privacy and the landlord's responsibility to manage the property without interference from the Agency. However, there may be isolated instances in which the Agency needs to inspect the property or a unit as part of an emergency to protect the health and safety of the resident population and therefore the Agency reserves this right.

Subpart I—Servicing

Topic: One commenter indicated that the proposed rule gives almost no attention to the problems associated with a significantly reduced Agency budget. The commenter also stated that the proposed rule does not adequately take into account the extent of leveraging of funds that currently occurs in the program and that has increased substantially in recent years. The commenter believed that the Agency's policies tend to reflect the same perspective as when the Agency provided 100 percent of the funding. The commenter recommended that the regulation's servicing requirements be relaxed or waived when other funding sources are participating in a project.

Response: The Agency acknowledges the commenter's concern. However, the Agency wants to emphasize that it has made a number of changes in both its requirements and procedures for flexibility when multiple funding sources are involved in a project. There has been language added to § 3560.406 of the interim final rule that acknowledges the use of third-party loans and the ability to subordinate Agency loans. A change in internal Agency procedures is allowing the Agency to use appraisal reports and capital need assessments (CNA) from other funding sources provided the appraisal and “CNA” meet the guidelines as established by the Agency. The combination of these actions will reduce the duplication of work needed to finance these deals and expedite the current time frames.

Topic: Several comments were received on § 3560.405 and its requirement for borrowers to certify annually that there has been no change to the ownership entity. Commenters said that reporting organizational changes to the Agency would be unduly burdensome. Others were opposed to having proposed organizational changes approved by the Agency.

Response: The Agency does not require annual reporting but does require annual certification by the borrower. Only changes in the organizational structure need to be reported. Further, Agency approval is only required prior to a change in the controlling interest of the ownership entity. This responsibility is already a requirement under existing regulations, and these requirements provide the Agency with information that is fundamental to RHS in maintaining borrower accountability and ensuring compliance. For this reason, the Agency has made no change to this requirement in the interim final rule.

Topic: Regarding § 3560.405(a)(2), the commenters requested clarification to the definition of “substantial influence.” To illustrate potential points of confusion, a commenter asked whether a limited partner with limited control rights that buys a 99 percent ownership interest or an instance of upper-tier syndicated ownership, such as the general partner of the 99 percent limited partner of the ownership entity, would be seen to exercise substantial influence. In both instances, the commenter believed that such entities may not exert substantial influence and asked that the Agency clarify this term. Another commenter asked whether the paragraph indicated that a management company had a controlling interest.

Response: The Agency has removed this paragraph. The guidance of the phrase “controlling interest” in § 3560.405(a) should be sufficient to describe a general partner in a limited partnership entity, rather than non-controlling limited partners or management agents.

Topic: One commenter addressed the Agency's limited recourse when a borrower makes a change in ownership or transfer of ownership interest without Agency consent as outlined in § 3560.406(b). The commenter advised that when a borrower makes a change in organizational structure or transfers a title without Agency consent, the Agency should have the power to subject the project to restrictive-use provisions; moreover, if the new ownership entity or transferee will not execute a restrictive-use agreement, then the Agency should take steps to judicially impose such restrictions on the project.

Response: Failure to obtain Agency approval for a change in ownership or transfer of ownership interest is considered a default and handled in accordance with subpart J of the regulation. Subpart J of the regulation covers Special Servicing, Enforcement, Liquidation and Other Actions. A noncompliance issue of this nature could constitute the initiation of the liquidation process, or lesser penalties such as subjecting the borrower to civil money penalties provided in the new regulations. The imposition of a restrictive-use agreement does not deter someone from conducting this type of activity without prior approval. An action of this nature must be handled in accordance with the section of the interim final rule that imposes actions against owners who undertake actions without prior Agency approval.

Topic: The Agency received a comment recommending a change to the proposed rule allowing an exception to the processing limitations contained in § 3560.406(b)(2) for partners that were not present during a default or recent Start Printed Page 69081substitution of partners approved by Rural Development.

Response: The Agency acknowledges the commenter's concern but the reference citation provided refers to “Ownership transfers or sales with an assumption of debt at an amount less than the borrower's debt amount will only be approved by the Agency when all persons in the borrower entity who are transferring their ownership interest or are involved in the selling of the property are not part of the transferee organization”. The citation does not reference the presence of members during a default or recent substitution of partners.

Topic: Numerous comments were received asking the Agency to streamline its property transfer process. These comments included suggestions that there should be expedited processing of those transfers where purchasers seek to preserve affordable housing or rescue troubled properties. Several commenters said that to expedite the transfer process, environmental reviews should not be required when existing security property is being transferred.

Response: The Agency agrees with the intent behind many of the comments. The Agency is implementing procedural steps to streamline the transfer process. While the Agency acknowledges the commenters' concern about requiring an environmental review for all properties being sold, it has made no change because such a review is an established requirement of 7 CFR part 1940, subpart G.

Topic: Comments received by the Agency advocate for a firm time limit for processing transfers. One comment suggested a minimum of 60 days for processing. Others suggested that within 90 days of the submission of a transfer application, the appropriate State Office must process and approve or reject the application, and if the office rejects the application, then it must provide specific reasons and suggestions for approval. The commenter felt that if such action is not taken, then the Agency should allow applicants to pursue their application with the National Office.

Response: The Agency appreciates these comments but has not incorporated arbitrary processing timeframes in this interim final rule. While the Agency is committed to processing transfers as expeditiously as possible, the coordination of resources and action of all participants in the transactions makes the imposition of deadlines in all cases difficult and unreasonable.

Topic: With respect to the transfer of “at risk” properties, several commenters stated that the policy for the transfer and assumption of at risk MFH projects should be clearly defined in the proposed rule.

Response: The Agency appreciates these comments and notes that § 3560.406(b)(1) states: “Priority consideration will be given to ownership transfers or sales needed to remove a hardship to the borrower that was caused by circumstances beyond the borrower's control.” Currently, this is the extent to which the Agency will go toward establishing a definition for at risk properties.

Topic: The Agency received comments that suggest at the closing of escrow accounts, the balance in each of the operating, tax and insurance, and reserve accounts should be released to the transferor, provided the transferee fully replaces the funds in each account.

Response: The Agency notes this concern and has revised the regulatory language to allow for the release of the reserve to the transferor. The release of these funds is contingent on the new owner funding the reserve account in an amount sufficient to cover the project's immediate needs.

Topic: Comments were received on the Agency's requirement for restrictive-use provisions for transferred properties. Several commenters said that purchasers should not be bound by these restrictions because doing so penalizes buyers and sellers seeking to stay in the program without further accommodation, by increasing the use restrictions. One commenter said that the Agency should track the format of HUD Notice 00-8 (available from HUD) for preserving section 236 properties. Another commenter noted that the proposed rule does not institute any new requirements with regard to restrictive-use provisions. The commenter went on to state that subordination is a serious servicing action and should carry with it a requirement for a new, extended restrictive-use agreement.

Response: While the Agency acknowledges the commenters' concerns, the Agency has made changes in the process throughout § 3560.406 to allow for equity at the time of transfer based on the period of time the borrower is willing to agree to restrictive-use provisions. Also at the time of transfer, it is the Agency's goal to have a Capital Needs Assessment completed and all necessary work completed through rehabilitation. It is the aim of the Agency to extend the useful life of the property through rehabilitation at least through the restrictive-use period. The transfer process is being utilized to preserve the existing portfolio for years to come and provide the needed housing for those who otherwise could not afford it. The Agency has made no changes to § 3560.406(g) of the interim final rule. The Agency will continue to monitor this requirement to assess whether it serves to discourage transfers, which help preserve the supply of affordable housing.

Topic: Summarizing the views of several commenters, one commenter suggested that § 3560.406 “should provide a form use restriction agreement that can be amended for form for local legal and recording requirements.” Commenters also suggested that when purchasers agree to both use such a form and extend existing use restrictions, then the purchaser should be able to obtain other Federal, state or local financing to pay for purchase and rehabilitation. They thought that RHS should agree to subordinate and, if requested, reamortize its existing section 515 loan. The commenters suggested that the Agency refer to HUD Notice 00-8 (available from HUD) for more information on such a transfer structure.

Response: In § 3560.406 of the interim final rule, the Agency encourages the use of third-party financers in order to preserve affordable housing. This includes clarifying process requirements such as determining capital needs and simplifying servicing actions such as subordination or reamortization requests. The Agency streamlined the transfer process utilizing a new processing checklist to be used by Agency personnel for transfers which should expedite these type transactions.

Topic: The Agency received a comment suggesting that changes in or transfers of MFH ownership should only be approved by the Agency in cases where further availability of housing would be in the best interest of the resident and the Federal Government.

Response: The Agency appreciates this comment and has outlined a process to determine if the transfer would be in the best interest of the government in § 3560.406. This process takes into account current market conditions, need for the existing housing, existing condition of the property, and cost to rehabilitate the property in order to preserve the property for years to come. The Agency believes that the requirements regarding ownership transfer and sales adequately protect the Government's interest and the availability of affordable housing.

Topic: The Agency received comments on appraisals and security Start Printed Page 69082issues. Several commenters questioned the use of the “as-improved value” for security property to be transferred. Several comments recommended using “as-is market value.” One commenter stated: “There should not be a $100,000 limit as long as the approval official documents that security is adequate,” a concern echoed by several other commenters. One commenter urged that the word “market” be deleted from § 3560.406(d)(3)(i) because it creates confusion. According to the commenter, the value of the housing project should be a “prospective value-in-use,” not a “market value.” Other comments concerned the rights of purchasers to obtain an appraisal.

Response: The Agency acknowledges these concerns regarding the use of appraisal terminology and throughout § 3560.406, it has made revisions as necessary and appropriate. The requirements for determining the value of security property have been clarified and may be found in subpart P of this part. To determine what is in the best interest of the Government, the Agency determined that the appraisal process is necessary when the value of the property exceeds $100,000.

Topic: Reflecting several commenters' concerns, one commenter said: “The subordination of interest or a junior lien will not cause the debt from all sources to exceed the value of the security property; however, total debt should be allowed to exceed the value of the property on a temporary basis during rehabilitation, provided the transferee can demonstrate that permanent financing will not exceed the value of the property.”

Response: The Agency acknowledges this concern but has made no change because it believes that permitting total debt to exceed the value of the property fails to adequately protect the government's interest. This issue is addressed adequately in § 3560.409.

Topic: A commenter stated that CRCU should apply to initial loans, as well as to transfers.

Response: The Agency has made no change because initial loans are subject to CRCU as described in subpart B of this part.

Topic: The Agency received a comment regarding the proposed rule's remedy against an unauthorized junior lien, for which the Agency must declare a default and pursue liquidation of the borrower's loan. The commenter expressed concern with this approach, citing the Agency's obligation to preserve its housing stock. The commenter asked the Agency to explore other options outside of the acceleration and foreclosure process (e.g., enforce the contract, impose fines on the borrower, seek a receivership, and impose continued use restrictions) and amend the regulation accordingly.

Response: The Agency is not required to pursue liquidation. The regulation provides for a cure period and opportunities for the borrower to resolve the issue. The Agency does not believe the regulation needs further amendment.

Topic: The Agency received comments expressing concern that the proposed rule does not allow project accounts to be encumbered by others. The commenters stated that this restriction is unrealistic and unnecessary, especially given the need to leverage other lenders' funds. According to one commenter: “Other lenders will want to encumber project accounts, and this should be allowed provided the Government's position is not unduly impaired,” a statement that reflects other commenters' concerns.

Response: The Agency appreciates these comments but has decided to retain the language in the interim final rule. The Agency has decided not to change the rule because it already allows for liens under conditions that are advantageous to the project and to the Government and has determined that it is not appropriate to reduce its standards.

Topic: One commenter expressed that § 3560.406(e)(2) “should be modified to allow a non-Agency prior lien to also be transferred to the transferee if previously accepted by the Agency for the transferor.”

Response: The Agency disagrees with the commenter. A non-Agency prior lien would reduce the equity and therefore, should be paid off before any equity is paid to the borrower.

Topic: One commenter indicated that § 3560.409 entitled “Subordination or junior liens against security property—other liens” appears to be unnecessary and duplicative of what is already in § 3560.408.

Response: The Agency appreciates this comment but disagrees that § 3560. 409 is duplicative of § 3560.408. Section 3560.408 deals with the lease of security property and does not explain the procedures of § 3560.409, which deals with the subordination and junior liens against security property. In light of this, it is necessary to keep both sections as stated in the interim final rule.

Topic: Several commenters addressed the issue of final balloon payments that are routinely set up under section 515 loans. Under the current regulation, as loans approach the 30-year balloon payment, they may be reamortized as a servicing action, without the need to extend any new funds. The commenters are concerned that the proposed rule discontinues this practice.

Response: The Agency wants to clarify that this practice is allowable and is addressed in § 3560.74. No change was needed.

Topic: One commenter requested that RHS or a third party provide training and assistance to existing owners and local groups to explain the responsibilities that come along with property ownership.

Response: The Agency agrees with the comment but training is outside of the scope of the regulation. The Agency is issuing administrative guidance on processing transfers more effectively. A training request should be forwarded to the Agency. This type of training can be provided on all levels. If such a request is received, the Agency will make every effort to accommodate the needs of its customers. It must also be noted though that with the Agency's current budget constraints, it would be advisable to also seek alternative solutions for obtaining this type training, such as housing organizations, non-profit training centers, etc.

Topic: A commenter asked whether all transfers would be for new rates.

Response: The Agency believes that § 3560.406(i) clearly states how the interest rate is determined in conjunction with an ownership transfer or sale. In most cases transfers will be based on new rates and terms in order to accommodate the preservation activity taking place with the transfer. In other instances loans will be transferred on new rates and terms if it is advantageous to the government. There may be some instances where transfers take place utilizing same rates and terms but only on rare occasion.

Topic: One commenter addressed the language used in § 3560.406. The commenter suggested changing all occurrences of “the transfer should be in the financial interest of the government” to “the transfer should not result in a negative impact to either the government or the tenants.”

Response: The Agency appreciates the intent of this comment. However, the Agency has made no change to the language in the interim final rule to ensure that a transfer affirmatively achieves the goals of the program. This provision is based on the statute section 515(h) of title V of the Housing Act of 1949.

Topic: A commenter stated that local and State Rural Development offices do not have an adequate list of local nonprofit organizations. The commenter believed that Rural Development offices must be given assistance in developing Start Printed Page 69083and maintaining up-to-date lists of active local nonprofit organizations and public bodies.

Response: The Agency appreciates this comment. The Agency works with local and State offices to ensure that they have the necessary materials and information they need. The implementation of the Prepayment Information Exchange (PIX) as mentioned in this document's discussion of subpart N will greatly improve the Agency's ability to maintain a complete listing of non-profit organizations interested in Agency rental programs.

Topic: One comment raised as an issue the practice that banks do not accept stocks as a form of collateral.

Response: The Agency notes that this comment is outside the scope of this regulation. The Agency has no control over what financial institutions accept as collateral and therefore has no authority to change and regulate the daily procedures of these institutions.

Topic: The Agency received a comment urging that a borrower and RHS give notice to residents that the borrower has applied to RHS to transfer the development to another entity. Further, the commenter believed that residents should be given an opportunity to comment on the transfer. The commenter thought that residents should be asked to report to the Agency any needed repairs and/or improvements in operations; if residents make legitimate suggestions, the Agency should include corrections of those issues as conditions for completing the transfer.

Response: The Agency appreciates the comment. However, the Agency does not believe the tenants need to be involved in a borrower's business transaction (transfer) that otherwise does not affect the availability or affordability of the rental housing. The Agency believes that the regulation as written requires identification of repairs and improvements needed prior to transfer approval.

Topic: One commenter identified an issue with the authority to transfer or sell developments under special rates, terms, and conditions as discussed in § 3560.406(l). According to the commenter, the authority fails to consider the Agency's statutory prepayment obligations. The commenter thought that the proposed rule would effectively authorize a borrower to sell a development outside the program restrictions whenever it is considered in the Government's best interest, that the section must be revised to also condition the sale upon the prepayment restrictions set out in subpart N.

Response: The Agency appreciates this comment but has determined that no change is required to the proposed regulation because § 3560.406(l) does not establish any criteria that would exempt new owners from being required to accept restrictions. Any project that would leave the program would be required to pay off the loan and leave the program in accordance with subpart N.

Topic: A commenter suggested that the Agency should allow for a reduction of the interest rate for the note at either the transfer of general partners' interest or the sale. According to the comment, many properties have interest rates approaching 18 percent. If the note could be reduced to a lower rate, then note rent could be lower, which could increase the possibility of attracting moderate-income applicants.

Response: In § 3560.406(i), the interim final rule allows for loan restructuring during such transactions to set the interest rate at the current level or at closing level, whichever is lower. This should address the commenter's concerns.

Topic: One commenter stated that current regulation and the proposed rule make it almost impossible for national nonprofit organizations to acquire properties. As such, the commenter thought that the definition of “nonprofit organization” in § 3560.11 must be revised and simplified to require only that entities be not-for-profit under section 501(c) of the Internal Revenue Code.

Response: The Agency acknowledges the commenter's concerns and has revised and simplified the definition of “nonprofit organization” in § 3560.11.

Topic: One commenter urged RHS to recognize the lack of market value in some properties that nonetheless serve an important resident and market need. The commenter asserted that RHS should revise its regulation to allow for recasting a portion of the existing loan as a soft note payable from cash flow. According to the commenter, this would most likely be needed where a portion of the section 515 loan could not be supported by existing income or where a portion of the existing section 515 loan, through subordination or otherwise, would be undersecured.

Response: The Agency acknowledges the commenter's position. The Agency is currently reviewing its ability to recast a portion of the loan as a note not requiring fixed installment payments (soft note).

Topic: A commenter expressed confusion regarding the type of third-party financing that is permitted given the language in § 3560.406(f). Specifically, the commenter believed that the proposed rule limits the borrower's financing options.

Response: The Agency has rewritten § 3560.406(f) to more clearly state the borrower's options. These options state that equity funding to the borrower may be provided in cash or through a loan either by the Agency or through a 3rd party lender. This will enable the borrower to receive their equity from a 3rd party lender in the event the Agency is unable to provide the funding.

Topic: The Agency received a comment regarding the use of project funds for the purchase of computer equipment relating to industry interface and tenant certifications. The commenter believed that states are not modifying their security agreements to include this equipment. Further, the commenter indicated that costs have skyrocketed based on requests to use project funds for these purchases. The commenter believed that the proposed rule should address this issue.

Response: The Agency appreciates this comment, which requires a change in the security agreement to include the equipment at the property site. The Agency has modified the security agreement.

Topic: Two comments were received that encourage the Agency to revise the proposed rule to allow for the donation or below-market sale of portions of a MFH security property. They argued that the requirement of § 3560.407(b)(3)(i) that “the value of the security will not be reduced” is not adequately permissive to allow such transfers.

Response: The Agency appreciates this comment and has considered whether to adopt this recommendation. However, the Agency has made no change to the interim final rule because it has determined that while such a donation or below-market sale may benefit the owner, the project may not benefit from such action.

Topic: Several comments addressed § 3560.408(b), asking why borrowers are prohibited from leasing their property to public housing authorities and suggesting that there may be times when it is in the Government's interest to allow this practice.

Response: The Agency acknowledges the comments. However, the commenters did not provide any examples when it would be advantageous and therefore the Agency has declined to make the change in the regulation.

Topic: One comment was made regarding the requirement that lessees pay all prorated expenses associated with what is being leased. The Start Printed Page 69084commenter believed that this may be difficult to determine and, instead, such lessees should only demonstrate that they are in the financial best interest of the project and tenants, and that the project itself will not be adversely affected financially.

Response: The Agency appreciates this comment but has made no change to the interim final rule. The rule is written to protect any expenses to the project that were not previously taken care of prior to the lessor leasing the property to the lessee. There is no way to know if some unforeseen expenses will adversely affect the property or not; therefore, by having rules in place to cover the cost ensures the financial stability of the property.

Topic: The Agency received a comment specifying that the new loans obtained by nonprofit purchasers seeking to acquire and preserve section 515 properties generally cover the following: (1) Cost of improvements or repairs, (2) a payment to seller, (3) purchaser's due diligence and transaction costs, (4) a debt service reserve for the new lender, and (5) lender's fee and cost of counsel. The commenter believed that nonprofit purchasers should not be expected to come out of pocket with monies to accomplish a preservation transaction.

Response: The Agency appreciates this comment but made no changes to the interim final rule. It is the Agency's position that these costs are part of the cost of doing business that every entity must be responsible for addressing.

Topic: A commenter stated that under existing regulations, phased properties could be consolidated as long as the entities were the same, regardless of when they were closed. A commenter asked whether this practice would still be allowed.

Response: The Agency acknowledges the commenter's position and there was no change in the new regulations. Consolidations are permitted as long as they are feasible and in the best interest of the government.

Topic: Several comments were received regarding loan consolidations. Commenters urged the Agency to add a paragraph to the regulation allowing loans for projects made to multiple borrowers to be consolidated when transferred to a new single borrower.

Response: The Agency wants to clarify that the proposed rule allows this type of loan consolidation and § 3560.410 of the interim final rule continues this policy. No change was needed. It should be noted that for a consolidation to occur the same borrower must own all projects that are to be consolidated. This common ownership can occur after a transfer as described by the commenter.

Subpart J—Special Servicing, Enforcement, Liquidation, and Other Actions

Topic: The Agency received several comments expressing concern about a loophole related to acceleration that was not closed by the language in the proposed rule. Commenters noted that this loophole could allow borrowers to save their property during acceleration after the restrictive-use provisions have been removed and thereby circumvent the established prepayment process. Commenters stated that the loss of use restrictions after acceleration results in a loss of affordable housing, and some claimed that it is an approach used by owners to avoid being subjected to such provisions. Commenters requested that the Agency add language to the regulation allowing RHS to retain restrictive-use provisions on a property during and after acceleration and foreclosure.

Response: The Agency acknowledges these comments and has made revisions to the interim final rule to address owners that force acceleration in an effort to evade the prepayment process. The Agency has added language to § 3560.456 in the interim final rule that allows it to take alternative actions, such as suing for specific performance, when the Agency determines that the owner's motivation is to circumvent the prepayment process.

Topic: Several commenters requested that RHS adopt additional remedies and actions as part of special servicing actions. The objective of these remedies, proposed by commenters, is designed to preserve the supply of affordable housing. Suggested additional actions included being able to impose fines, appointing a receiver, recasting a portion of the RHS loan as a soft note payable from cash flow, and adding restrictive-use provisions in conjunction with special servicing actions, including loan restructuring.

Response: The Agency acknowledges the concerns raised by the commenters. RHS has authority to use a number of enforcement actions beyond those established in the current instruction. These additional actions have been incorporated into the interim final rule in § 3560.460 through § 3560.463 and have expanded the enforcement tools available to the Agency. RHS has also added the authority to require that expiring loan or assistance agreements not be extended unless the owner executes an agreement to comply with additional conditions prescribed by the Agency, or executes a loan or assistance agreement in the form prescribed by the Agency. The Agency is currently reviewing its ability to recast a portion of the loan as a note not requiring fixed installment payments (soft note).

Topic: A commenter recommended that the Agency acknowledge that past servicing actions may have an impact on the cash flow for a project, which can affect a borrower's ability to address deteriorated physical conditions. The concern expressed is that some projects' cash flow may be insufficient to quickly correct deficiencies, particularly physical deficiencies. The commenter asked that the Agency explicitly recognize in the rule that some projects may need additional time to correct deficiencies due to the extent of funds available to the project.

Response: The Agency acknowledges that there are situations and circumstances that will require additional time to correct deficiencies. In such cases, the Agency requires the borrower to submit a workout agreement that identifies the time periods required to address these deficiencies.

Topic: A commenter requested that the regulation cross-reference 7 CFR part 1900, subpart D and the administrative appeals rules.

Response: The Agency notes that a cross reference to 7 CFR part 11 and 7 CFR part 1900, subpart D appears in §§ 3560.9 and 3560.10 of subpart A, and this reference continues in the interim final rule.

Topic: A commenter suggested that workout agreements should supersede management plans and requested that the Agency be required to notify an owner before canceling a workout agreement so that the owner has an opportunity to respond to Agency concerns.

Response: The Agency views the two documents—workout agreement and management plan—as serving distinct, but related, functions. RHS disagrees that the workout agreement should supersede the management plan. Rather, the two need to be consistent. The Agency has retained the language from the proposed rule in § 3560.453 (e)(i) of the interim final rule, which establishes that updating the management plan to be consistent with the content of the workout agreement is a condition of Agency approval of the workout agreement. Further, RHS has added language to § 3560.453(e)(2) of the interim final rule indicating that the Agency will provide notice to the borrower upon cancellation of the workout agreement for a property.

Topic: With regard to the occupancy waiver in § 3560.454(b), a commenter Start Printed Page 69085raised the concern that the language as written could create an impasse at properties where the vacancy issue is the need for rental assistance and none is currently available. The commenter suggested that the requirement for housing applicants on the waiting list before any over-income applicant be revised so that it better matches with the availability of rental assistance.

Response: The Agency recognizes that in circumstances when RA is not available, higher income tenants need to be considered for occupancy and § 3560.454(b) of the interim final rule allows for this type of situation.

Topic: Multiple commenters requested that the Agency allow a borrower to reamortize its loan if the borrower is current with all payments. One commenter suggested that an appraisal should not be required as part of a reamortization regardless of debt, with proper cash flow.

Response: The Agency wants to clarify that a reamortization is allowable in these circumstances as is shown in § 3560.455(b)(3) of the interim final rule. The circumstances when appraisals are required are covered in § 3560.455(b)(3) of the interim final rule. As long as there is other adequate evidence that the Agency's security interest is protected as required by § 3560.455(b)(1)(ii), an appraisal would not be necessary. Finally, § 3560.454(b) of the interim final rule does allow for reamortizations in situations other than just delinquency.

Topic: A commenter requested further clarification from the Agency on the meaning of “suspending” rental assistance.

Response: Information regarding suspension of rental assistance can be found at § 3560.456(b)(2) of the interim final rule. The Agency notes that, generally, rental assistance is suspended when interest credit has been cancelled due to a default. The rental assistance can be restored once the default has been resolved.

Topic: A few commenters addressed the write-down provisions in § 3560.455. One commenter recommended that the Agency change the requirement from one write-down per property to one write-down per owner. Another commenter stated that the sections dealing with write-downs and reamortizations were excellent and would help maintain viable projects in very rural areas.

Response: The Agency agrees with the comment that requiring no previous write-down of indebtedness associated with a housing project as a condition to receive a write-down is too restrictive. The Agency has removed this condition from the interim final rule. The Agency has not further restricted these requirements to one write-down per owner because the Agency does not believe the servicing remedy is necessarily related to the owner but rather to the performance of the property.

Topic: A commenter requested that the Agency allow for a write-down of debt without a change to the current ownership, if there are no issues with the ownership members.

Response: The Agency wants to clarify that the interim final rule does allow loan write-downs for the current ownership as specified in § 3560.455(c).

Topic: A commenter requested that § 3560.456 be revised to specifically include the ability to make a reasonable bid at a foreclosure sale. The commenter recommended that the regulation allow a discounted bid, as allowed by Single Family Housing, to include holding time, sale cost, and other factors.

Response: The Agency appreciates the commenter's suggestion and has incorporated the language from 7 CFR 3550 (at 3560.456(c)), which gives the Agency additional flexibility to accept a discounted bid.

Topic: In reference to § 3560.452, a commenter requested that the proposed rule explicitly allow RHS to extend the time period for correction or resolution of a default.

Response: The Agency notes that the proposed rule does allow for workout agreements to extend beyond 2 years. This provision under § 3560.453(e) allows the Agency to extend the period.

Topic: A few commenters requested that the Agency include a provision under § 3560.454 that would allow an applicant or resident who does not want to provide income and asset documentation, but is willing to pay market rent, be allowed to live in the property on an ineligible basis. Such residents would need to vacate the unit if needed by an eligible applicant.

Response: The Agency understands the commenters' concern but has made no change to § 3560.454. Under the applicable statute, RHS must have documentation of a tenant's eligibility for occupancy. Section 3560.454(b) and § 3560.158(c) allow for ineligible applicants to reside in a property with Agency approval if the specific unit type has no waiting list, or if accepting an over-income tenant is necessary to maintain the financial viability of a property. An Agency waiver is required in these circumstances, and only properties that have received a waiver may admit tenants that do not meet or will not document income eligibility requirements.

Topic: A few respondents commented on the authority of State and Field Offices to approve workout agreements and other special servicing actions. One commenter appreciated the Agency position of not requiring State Office approval of workout agreements longer than 2 years. Other commenters requested that the Agency provide the authority below the State Office for approval of Affirmative Fair Housing Marketing Plans, workout agreements, servicing market rents, and change of project designation.

Response: Approval levels are internal Agency procedure and not set forth in Agency regulations.

Topic: A few commenters noted that subpart J in the proposed rule did not include specific language on enforcement.

Response: The Agency has added four sections to the interim final rule to more specifically address enforcement: § 3560.460 (Double damages), § 3560.461 (Enforcement provisions), § 3560.462 (Money laundering), and § 3560.463 (Obstruction of Federal audits).

Topic: A commenter noted the actions that an owner may take or fail to take that would cause the Agency to determine that the loan is at risk. The commenter noted that the Agency may remove the management agent if the Agency determines that a compliance violation or loan default was caused, in full or in part, by the management agent. The commenter stated that it agreed with the Agency's strengthened ability to remove a management agent that causes compliance violations or loan defaults.

Response: The Agency appreciates the commenter's support.

Topic: A commenter inquired whether equity skimming is considered a non-monetary default under § 3560.462.

Response: The Agency appreciates this comment and agrees that equity skimming is a form of non-monetary default but has made no changes to § 3560.462. Additional procedural information on handling suspected cases of equity skimming are addressed in the Agency's internal procedures.

Topic: A commenter requested that the Agency provide clear definitions for when a payment is considered past due and how the Agency calculates 10-, 20-, and 30-days past due.

Response: The language in the definitions section of subpart A for “Default,” and in §§ 3560.401(c) and 3560.451(c) has been revised to provide that a past due obligation is one which remains unpaid or unperformed for more than 30 days after the due date. Start Printed Page 69086The references to 10 and 20 days in the proposed rule were clear and were not changed.

Topic: A commenter noted that § 3560.452(e) included an incorrect cross-reference to enforcement and liquidation sections.

Response: The Agency appreciates this comment and has corrected the cross-reference in the interim final rule.

Topic: A commenter noted that the discussion in § 3560.453 concerning workout agreement budgets does not reflect the fact that the Agency may not be the senior debt. The commenter recommended that the Agency add language reflecting Agency procedures when it is in a junior lien position.

Response: The Agency appreciates this comment and has added language to § 3560.453(d) in the interim final rule recognizing the prior lienholder's position, if any, in the order of cash disbursements under a workout agreement budget.

Topic: In reference to § 3560.454(e) regarding the termination of the management agreement, a commenter stated that the Agency must give the management agent and owner due process and allow them a joint opportunity to contest the termination.

Response: The Agency agrees with the commenter that the management agent and owner have the right to contest a termination but has made no changes to this section in the interim final rule because these rights are provided under the Agency's appeals procedures.

Topic: A commenter noted that procedures for the Debt Collection Improvement Act of 1996 were developed for the Agency, but that MFH was excluded because its own handbook was under development. The commenter recommended that the rule refer to 7 CFR part 3 covering debt collection for the Department or include language directly in the regulation.

Response: The Agency appreciates the comment and has added language regarding debt collection procedures to § 3560.460 in the interim final rule.

Topic: A few commenters noted typographical errors in §§ 3560.455 and 3560.456.

Response: The Agency appreciates these comments and has corrected these errors in the interim final rule.

Topic: A few commenters noted that § 3560.456(a)(2) regarding payment subsidy conflicts with guidance provided in the draft Project Servicing Handbook which was made available online when the proposed rule was published.

Response: The Agency appreciates this comment. The regulation is correct as written and changes have been made to the Agency's internal procedures to ensure that it reflects the regulation.

Topic: With regard to § 3560.456(a)(2), a commenter asked whether the Agency needs to wait until the appeals process is complete, rather than immediately following acceleration, to suspend interest credit and rental assistance.

Response: The Agency has removed the phrase “immediately following the issuance of an acceleration notice” from the regulation to clarify that interest credit and rental assistance will be suspended upon acceleration.

Topic: With regard to § 3560.456(c), a commenter asked whether the Agency has the ability to foreclose on a mortgage without going through the U.S. Attorney's office, which can slow down the process.

Response: The Agency appreciates this comment but has made no changes because representation of the Agency by the Department of Justice is a Federal requirement and litigation is necessary to initiate a judicial foreclosure action in those states requiring judicial foreclosure.

Topic: A commenter stated that the Agency's procedures in dealing with deceased owners were unclear, in particular when there is no heir who wants to operate the property as affordable housing.

Response: The Agency appreciates this comment but the property is still subject to the restrictions and the Agency will work with the heirs, as necessary, to facilitate the transfer of the property to an eligible borrower.

Subpart K—Management and Disposition of Real Estate Owned (REO) Properties

Topic: A few commenters requested that preference be given to eligible nonprofit organizations for the disposition of REO property.

Response: Section 3560.504(c)(1) of the interim final rule has been revised to explain that the Agency will publicly solicit requests for sealed bids and publicize auctions. The successful bidder will be the applicant with the highest bid. It is the Agency's policy to get the best price for the property and not limit the potential pool of applicants.

Topic: A commenter requested that the Agency include language similar to the language from the current regulation in 7 CFR 1965.223(c), which provides for the continuation of restrictive-use provisions on projects sold out of inventory.

Response: The Agency appreciates this comment and believes its interim final rule adequately addresses this issue. When inventory properties are sold as “program”, then § 3560.505(d) of the interim final rule requires the loan closing follow the requirements of subpart B (see § 3560.62(a)(2) of the interim final rule) for executing a restrictive-use contract acceptable to the Agency.

Topic: A commenter requested that the Agency change the requirement for nonprofit organizations from having experience in the Agency's MFH programs to having experience in providing affordable housing.

Response: The Agency appreciates this comment but has determined that all applicants need experience in operating MFH to be eligible to own and manage this type of housing. The Agency notes that § 3560.102(e) of the interim final rule adequately covers acceptable management agent criteria and, therefore, determined that no change to the regulation is needed.

Topic: A commenter recommended that the Agency revise its policy stated in § 3560.504(c)(1) that the Agency will make an award to the first offer drawn as part of a sealed bid process for REO property. The commenter suggested that it would be in the Agency's interest to open all bids and accept the highest eligible bid.

Response: The Agency agrees with this comment and has revised § 3560.504(c)(1) of the interim final rule to clarify that RHS will accept the highest eligible bid or, if no acceptable bids are received, the Agency may negotiate a sale without further public notice.

Subpart L—Off-Farm Labor Housing

Topic: Several comments were received on § 3560.576 (formerly § 3560.575(b)(2) of the proposed rule) and the requirement that a substantial portion of income for Farm Labor Housing households come from farm labor employment. Commenters expressed concern that the standard for domestic and migrant farm laborers will increase so greatly that it will make many existing tenants ineligible, limit new occupancy, hurt the people that the program was intended to serve, and place existing properties at risk. Other commenters expressed concern because they were not able to see specifically how the income standard would change and there was no definition. One commenter also noted that exhibit J of RD Instruction 1944-D (available in any Rural Development office) has not been published annually by the Agency.

Response: Section 514 of the Housing Act of 1949 defines “domestic farm labor,” in part, as “* * * any person (and the family of such person) who receives a substantial portion of his or Start Printed Page 69087her income from primary production of agriculture or aquaculture commodities * * *.” Previously, exhibit J of RD Instruction 1944-D (available in any Rural Development office) provided “Federal Regional Income Limits for Hired Farmworkers.” Domestic farm labors, other than migrant farmworkers, were required to earn actual dollars from farm labor for at least 65 percent of the annual income limits found in exhibit J. Migrant farmworkers were required to have at least 50 percent of the annual income limits. Exhibit J was distributed as a Procedural Notice on July 2, 1986, and has not been updated since that time. The proposed rule indicated that the Agency would be replacing exhibit J and updating the limits. However, the Agency has not changed its basic policy here in the interim final rule.

The Agency believes that commenters misunderstood the Agency's intent and the policy presented in the proposed rule. The examples provided suggest that the commenters interpreted the proposed rule as requiring the use of the income limits published by the Agency for eligibility in RRH as the basis for calculating 65 percent or 50 percent of income from farm labor. The Agency is not using the RRH income limits as the basis for the income standard for percentage of income from farm labor.

The Agency has retained the basic method used in § 3560.576(b)(2)(i)(A) of the interim final rule to determine whether a substantial portion of a household's income comes from farm labor employment. However, the Agency has raised the income limits that were previously published in exhibit J by 50 percent to reflect increases in farm worker incomes since 1986 (when the income limits were last published). When revising the income limits, the Agency used data from the Bureau of Labor Statistics. The new limits are found in internal Agency guidance and will be updated periodically, not annually, to reflect changes in the workforce. The changes will be announced in the Federal Register prior to the time that they take effect. The Agency has revised language from the proposed rule in an effort to clarify its policy on this topic.

Topic: One commenter questioned the statutory basis by which the Agency uses income to determine eligibility and stated that the proposed rule should comply with the statute. Further, the commenter added that if “Congress had intended to place income limits on tenants, it would have explicitly said so in the Act.” Another commenter recommended that moderate-income farmworker families be able to live in section 514/516 projects with continued use of the priority system (preferred no change to the existing system).

Response: The Agency has made no change to the current policy. Section 3560.576 of the interim final rule continues the current eligibility policy requirement that farmworkers must not have income which exceeds the moderate income limit (previously published at 7 CFR 1944.153) but will also continue to allow farmworkers with above moderate incomes to occupy units if there are no eligible applicants on the waiting list.

Topic: Several commenters were concerned with tenant priorities for off-farm labor housing. These commenters felt that the priorities were too confusing and cumbersome.

Response: The Agency agreed with these comments and has simplified the priorities in the interim final rule at § 3560.577(a).

Topic: One commenter said that priority for occupancy in off-farm labor housing should be based on annual household income, rather than on the percentage derived from farm labor.

Response: The Agency agrees with this comment and has eliminated this requirement from the interim final rule but still has to meet the definition of Domestic Farm Laborer which includes receiving a substantial portion of their income from the primary production of agricultural or aquacultural commodities or the handling of such commodities in the unprocessed stage.

Topic: A number of commenters felt that the requirements for a nonprofit organization should be simplified and that too much emphasis was placed on local representation. One commenter asked the Agency to use a standard definition of a nonprofit organization—one similar and/or used for other programs such as the LIHTC program. The commenter also thought it would be appropriate to include public agencies, such as public housing authorities and redevelopment Agencies.

Several others requested clarification on what “reflect the demographics of the community” means as opposed to “representation on the board from the area where the housing is located” because the proposed language in §§ 3560.55(a) and (b) does not speak to reflecting community demographics and § 3560.55(c) only lists additional eligibility requirements for nonprofit organizations. The commenters thought that the three sections do not address the instruction in § 3560.555(a)(1) that requires board representation from the housing area instead of a board that reflects the community's demographics. One commenter also stated that paragraph (9) in the definition of non-profit organization (§ 3560.11) requires “capacity” as an underwriting issue and should not be in the definition; the Agency should clarify its intent prior to finalizing the proposed rule.

Response: As stated in the description of comments for subpart A, the Agency agrees and has revised the definition of a nonprofit organization. The Agency has also added, language to § 3560.555 to specify that to be eligible for an off-farm labor housing loan or grant, a nonprofit organization must be a “broad-based” nonprofit organization. RHS has added this language so that the regulation is consistent with sections 514 and 516 of the Housing Act of 1949. The Agency has brought forward a sentence from the current regulation to describe what is meant by a “broad-based” nonprofit organization.

Topic: Several commenters questioned why limited partnerships were ineligible for Farm Labor Housing grants.

Response: The Agency notes that there is no authority under section 516 of the Housing Act of 1949 to provide grants to limited partnerships. For this reason, limited partnerships remain ineligible for Farm Labor Housing grants.

Topic: Several comments were received concerning § 3560.559, some of which concerned the requirement that off-farm labor housing incorporate exterior washing facilities (showers) as necessary to protect the resident and the property from excess dirt and chemical exposure. A few commenters thought that exterior washing facilities should be encouraged but not required.

Response: The Agency agrees with these comments and has revised its position in the interim final rule.

Topic: Another commenter thought that the Agency should use different terminology so that “washing facilities” is not confused with “laundry facilities.”

Response: The Agency agrees with this comment and has changed “exterior washing” facilities to “outdoor showers, boot washing station, and/or hose bibb” in the interim final rule.

Topic: A commenter contended that exterior washing facilities were not needed and thought that the idea sounded discriminatory.

Response: The Agency does not agree with the commenter and believes that there are instances when outdoor showers can improve the quality of life of farmworkers by giving them the opportunity to wash off excess dirt and chemicals before entering their homes.

Topic: Several comments were received concerning construction Start Printed Page 69088financing requirements for off-farm labor housing. These commenters want the Agency to allow grant funds to be used before loan funds to reduce interest costs.

Response: The Agency has made no change to the requirement because it contends that a borrower's own resources, including loans, need to be utilized prior to the disbursement of grant funds. The Agency notes, however, that this section of the regulation has been rewritten to state that equity contributions being made by the borrower or grantee must be contributed and disbursed prior to the disbursement of loan or grant funds.

Topic: One commenter also asked that the Agency include fees for oversight in its provisions for an asset management fee for owners of Farm Labor Housing projects that are not self-managed in subpart L. An additional comment wanted the Agency to allow an operating line item for the provision of services because the provision of services is used as criteria for funding projects by both Rural Development and some states.

Response: In the proposed rule, the Agency inadvertently left out the key language from the earlier Operating Subsidy Proposed Rule. The Agency has inserted the missing language into the interim final rule. The Agency believes that this additional language addresses the commenter's concerns. In accordance with § 3560.303(b), cooperatives and nonprofit organizations may use housing project funds, with prior Agency approval, for asset management expenses directly attributable to ownership responsibilities. The Agency has decided not to include a separate operating line item for the provision of services. However, if a Farm Labor Housing complex has a Tenant Services Plan and incurs administrative expenses while carrying out that Plan, those expenses can be budgeted for on the budget's “Other Administrative Expenses” line provided the expenses are directly attributable to housing project operations and are necessary to carry out successful operations.

Topic: A number of commenters expressed their concern with the distinction between off-farm and on-farm labor housing. One commenter noted that the Agency does not define the terms and suggested that they are used inconsistently.

Response: Definitions for the terms “On-farm labor housing” and “Off-farm labor housing” have been added to the definition section of the interim final rule in § 3560.11.

Topic: The Agency was asked by two commenters to provide more detail to § 3560.556. The first commenter asked that the Agency specifically use “may” instead of “will” in the final regulatory text and consider offering over-the-counter funds from time to time without being tied to a formal NOFA process. The second commenter asked to make § 3560.556 similar to § 3560.56 and to provide more detail. The commenter suggested that the minimum acceptable level of detail would be that a proposal or initial application should be submitted in accordance with the NOFA and those with the highest rankings will submit a final application.

Response: The NOFA that is annually published by the Agency contains much of the same detailed information that is found in § 3560.56. In this manner, the Agency will have more flexibility in modifying the application and processing procedures, without having to implement a change to the regulations. It may be necessary to have this flexibility to respond to changes in funding levels or shifts in program priorities. The Agency also retained the words “will be published” because the Agency will continue with a competitive application process, rather than making funds available “over-the-counter” from time to time, as suggested by the commenter.

Topic: One commenter asked the Agency to provide more flexibility in its occupancy limits for seasonal housing. The 6-month limit may be too restrictive, such as in the Northwest where seasonal work can last for 10 months per year. They offered that different units should be on a rolling seasonal schedule so that all do not close on one date, but perhaps on different dates throughout the off-months. The commenter also asked to have more flexible opening and closing dates for off-farm units.

Response: The Agency believes that the commenter misunderstood § 3560.60 as it does not establish an 8-month occupancy limit for seasonal housing. Section 3560.559 establishes a design requirement for off-farm labor housing that is housing occupied less than 8 months per year. The Agency has made one additional change from the proposed rule to allow seasonal housing to be constructed for full-year occupancy to provide additional flexibility with regard to this issue according to § 3560.559(a).

Topic: Two commenters were concerned with § 3560.562 and its use of the terms “security value” and “value-in-use,” both of which one commenter asked the Agency to clarify in its final rule. Specifically, the commenter thought that value-in-use should actually refer only to the value of the subject real estate, as restricted. The commenter felt that the problem with basing the term security value on the term value-in-use is that the value-in-use of a subject property, as restricted including the value of the interest credit subsidy, does represent security value, but the value-in-use of a subject property, as restricted including the value of the interest credit subsidy and the value of the section 516 grant, does not represent security value.

This commenter believed that there is a catch-22 for securing section 516 grants because their value must be added to the value-in-use of the subject property to secure the grant but value cannot be added because it does not represent security value. The commenter suggested revising §§ 3560.562(a) and (c) so that section 516 grants do not have to be secured by the value-in-use of the Farm Labor Housing project but instead, are based strictly on total development cost, not on security value.

The second commenter also had issues with the proposed regulatory language in that both the loan and grant must be securitized by the value of an appraisal or the total development cost, if it is less; yet, there are few comparable properties upon which to base “comps” in rural areas, so appraisals often come in below the total development costs. Since these rural area projects are often only feasible as a result of grants (RHS and others) the commenter requested that the Agency either not require an appraisal to cover the grant or allow exceptions to the appraisal requirements.

Response: The Agency acknowledges the commenters' concern and has revised §§ 3560.562(a) and (c) to clarify that the maximum amount of the grant is not limited by the security value of the property. The grant is limited to the lesser of: (1) 90 percent of the total development cost or (2) that portion of the total development cost which exceeds the sum of any amount provided by the applicant from their own resources plus the amount of any loans approved for the applicant, considering the capacity of the applicant to amortize the loan.

Topic: Multiple commenters asked whether it is practical (as stated at § 3560.565(b)(2) of the proposed rule) to lock the Agency into providing 100 percent of rental assistance if there are more affordable, alternate sources available.

Response: The Agency appreciates the comment and has revised the language Start Printed Page 69089in § 3560.565(b) of the interim final rule to delete the 100 percent requirement.

Topic: A commenter wondered why the Agency allows the 50-year grant term to exceed the 33-year loan amortization period.

Response: The Agency has revised § 3560.566(c) of the interim final rule by removing the reference to a 50-year grant term. This was done so that the regulation is consistent with the grant agreement. The grant agreement requires that the housing be used for authorized purposes for as long as it is needed.

Topic: Several commenters focused on Agency requirements for loan and grant closings. One commenter suggested that all loan applicants should be executing loan agreements, and all such loan and grant agreements, regardless of applicant, should include the provisions listed in § 3560.571(b)(1) through (3). Three others asked the Agency to ensure that the documentation requirements for loan and grant closings are the same.

One of these commenters asked about the restrictive-use period, which the proposed rule states is specified in subpart N. They were uncertain if this referred to § 3560.662(a) with its 20-year restrictive-use period. They asked whether the Agency would disallow prepayment (commensurate with the section 515 program) and instead require a 33-year restrictive-use period (commensurate with the section 514 loan term).

Response: The Agency has deleted § 3560.571(b)(1) through (3) and has also revised § 3560.571 in the interim final rule to clarify the restrictive-use provisions for off-farm labor housing. Additional details are provided in § 3560.72(a)(2) and subpart N. The Agency agreed with the commenters and revised this section. The items that were listed in § 3560.571(b)(1) through (3) have been deleted from this section and have been placed in the Agency-approved loan and/or grant resolution, loan agreement, and grant agreement forms.

Topic: Two commenters stated that the Agency should include provisions governing the alternative option to use section 521 rental assistance as an operating subsidy in off-farm migrant labor projects. They added that the option was “enacted into law a number of years ago and there is no legitimate reason for omitting it here.”

Another commenter was disappointed that provisions for an operating subsidy on seasonal units was not incorporated into the Agency's proposed rule.

Response: The Agency has adopted the language from the earlier Operating Subsidy Proposed Rule for the interim final rule.

Topic: Two commenters expressed their support for the Agency's effort to provide increased latitude in verifying Farm Labor Housing tenant income and farm employment.

Response: The Agency appreciates the commenters' support for this provision.

Topic: The Agency heard from a commenter asking that provisions for section 514/516 technical assistance grants be included in the final rule.

Response: The Agency has adopted the commenter's suggestion in the interim final rule at § 3560.553(b) and (c).

Topic: A commenter stated that § 3560.575(a) be modified to clarify that for Farm Labor Housing properties operated under the LIHTC program, the borrower may restrict occupancy to only those farm laborers who also qualify under the LIHTC program.

Response: The Agency has made no change because the tenants, by definition, must comply with the LIHTC program requirements.

Topic: Multiple commenters requested a reduced servicing requirement for grant-only projects, one for § 3560.577 and one for § 3560.578 (which is now § 3560.578 and § 3560.579 in the interim final rule).

Response: The Agency will not reduce servicing requirements for grant-only projects because RHS believes these activities are necessary to ensure the continued viability and compliance of such projects.

Topic: A commenter stated that § 3560.574 should be moved to subpart M since it deals with on-farm labor housing only.

Response: The Agency believes that the commenter may have misunderstood the intent of § 3560.574 since it does not deal with on-farm labor housing, so it has made no change.

Topic: One commenter saw no reason to distinguish between domestic and migrant farmworkers in the Agency's programs. They anticipate that the 50 percent requirement included for migrant farmworkers would be less onerous to both residents and borrowers.

Response: The Agency has made no change because this distinction is necessary, since migrant farmworkers are the ones in greatest need and are the program's primary focus.

Topic: Multiple commenters were interested in ensuring that surviving households be able to remain in housing but did not expect or think it reasonable for this to be a priority to gain tenancy.

Response: The Agency appreciates the comment and has deleted the provision from § 3560.576(d)(1), which addresses a surviving household of a deceased farm laborer. The rights of surviving households to remain in their units are already addressed in § 3560.158.

Topic: Multiple commenters stated that developers are recognizing the need for senior Off-Farm Labor Housing projects and asked that the Agency expressly state that elderly Farm Labor Housing applications may be targeted for admission.

Response: The Agency has revised § 3560.576(b) and (c) to make retired farm laborers a priority for such housing, with “retired farm laborer” being defined in subpart A to be workers at or in excess of 55 years old. Although the Agency does not finance Farm Labor Housing projects that are restricted to the elderly, Farm Labor Housing should be marketed to all eligible persons, including, but not limited to, persons who meet the definition of a retired domestic farm laborer.

Topic: A commenter asked about the policy in § 3560.575(d) in which the Agency allows section 514/516 properties to be rented to non-farmworkers. The commenter notes this section does not provide a process for seeking approval or setting time limits and asks that a formal waiver process be included in the final rule.

Multiple commenters stated that the Agency should broaden its Farm Labor Housing statute definition to meet Congressional intent. One commenter suggested that the Agency mirror that of HUD (reference 42 U.S.C. 1436a(a)) and thereby address Congressional intent; specifically, the Agency should adopt the “legal or qualified alien” definition for all Farm Labor Housing, just as it has for other multi-family housing.

Response: The Agency appreciates the first commenter's suggestion and has revised § 3560.575(d) in the Interim Final Rule to account for the suggested change. The Agency has made no change to the definitions because its requirements for citizenship are statutory.

Topic: A commenter asked that § 3560.575(d) be revised to address when areas cease to have farmworkers, which would include identifying the exception process to allow the development to permanently rent to non-farm laborers.

Response: The Agency has revised its proposal to identify a process by which non-farm laborer tenants are able to occupy units. In the interim final rule, § 3560.576(e), the Agency has reserved however, the authority for such units to revert to farm laborer tenants if the need again arises. Start Printed Page 69090

Subpart M—On-Farm Labor Housing

Topic: Commenters stated that as long as the Agency's loan is adequately secured, then the Agency should not prescribe what comprises adequate security.

Response: The Agency understands this point and has revised § 3560.610(b) to read: “When feasible, the on-farm labor housing will be located on a tract of land that is surveyed such that, for security purposes, it is considered separate and distinct from the farm. The security for the loan must include a lien on the tract of land where the on-farm labor housing is located and the security must have adequate value to protect the Federal Government's interest. The Agency will seek a first or parity lien position on Agency-financed property in all instances, however, the Agency may accept a junior lien position if the Federal Government's interests are adequately secured.” This language is both less prescriptive and less restrictive and should address the commenters' concerns.

Topic: Regarding the on-farm labor housing program, several commenters said that rather than providing flexibility, the proposed regulation would add many restrictions that would disqualify agricultural housing providers. One commenter pointed out that the proposed regulation fails to recognize or provide a transition for owners with section 514 loans who agreed not to charge rent to their farmworkers.

Response: The Agency appreciates the commenters' concerns. However, the proposed regulations do not add any restrictions that are not currently in place. With respect to a transition for farmworkers who agreed not to charge rent, the regulations do not require that farmworkers pay rent; the regulations require that if rent is charged, it must first be approved by the Agency.

Topic: Several comments were received regarding the regulations on on-farm farm labor housing. Commenters were concerned that the regulation creates barriers to housing access for farmworkers and similarly disqualifies agricultural housing providers. One commenter noted that requiring proof of the tenant's eligibility prior to move in would make seasonal housing especially difficult to secure; in most cases, tenants do not usually have to certify their eligibility until after they move in. Another commenter noted that the proposed regulation would disqualify agricultural housing providers, such as a farmer with two or more employees, and such restrictions are unhelpful.

Response: The Agency does not know what was meant by the term “agricultural housing provider.” However, the regulation does not make farmers with two or more employees ineligible. Requiring proof of tenant eligibility prior to move in simply conforms the on-farm regulations with other MFH provided by the Agency.

Topic: Commenters stated that the program should use language to facilitate growth of the Farm Labor Housing program and increased connections between affordable housing nonprofit organizations and farm owners. One commenter suggested that the program should be brought in line with other owned and operated rental properties by allowing a professional property manager firm to manage the property so that the farmers can concentrate on farming. Another commenter said that the proposed rule should allow limited partnerships to participate in the ownership of on-farm housing, similar to that done with LIHTC projects.

Response: The Agency acknowledges the commenters' concerns. While nonprofit organizations are allowed to work with farmers to develop on-farm labor housing by statute, this is not a specific objective of the program. While farmers are encouraged to manage their on-farm labor housing properties effectively, these are not conventional properties and should not be managed as such. However, there is nothing in the interim final rule to preclude professional management of on-farm labor housing projects. At the same time, the Agency does not anticipate the need for professional management except, perhaps, on rare occasions when there are a significant number of on-farm housing units at one farm. There is no statutory authority to allow on-farm labor housing loans to be made to limited partnerships.

Topic: One comment noted that in addition to the program objectives in § 3560.602, farmers should be allowed to receive grants as an incentive for providing affordable housing.

Response: Under section 516 of the Housing Act of 1949, only the following entities are eligible for farm labor housing grants: States or political subdivisions thereof, Indian tribes, broad-based public or private nonprofit organizations incorporated within the state, and nonprofit organizations of farmworkers incorporated within the state.

Topic: One commenter noted that the proposed rule should give leasing and renting priority to employees of the farmer but should also allow nonemployee agricultural workers an opportunity to rent or lease a unit if the units are vacant for an extended amount of time. Another commenter noted that farm borrowers should be allowed, on a case-by-case basis, to provide housing for immediate relatives if the Agency can document that these family members are farmworkers in the best interest of both parties and essential for farm operation.

Response: The Agency acknowledges the commenters' concerns. The interim final rule gives the Agency the authority to provide exceptions to on-farm labor housing borrowers to enable them to rent to ineligibles on a temporary basis. The borrower must, however, demonstrate that efforts have been made to fill the units with eligible applicants.

Topic: Several comments were received concerning the limitations of the definitions of “farmer” and “farm owner” found in § 3560.11. Many commenters were concerned that such definitions might significantly restrict the pool of eligible farmer applicants. The commenter thought that this section should be amended to remove references to “family size farm” requirements and the reference to 7 CFR 1941.4. The commenter believed that the regulation “de-motivates” farmers who are legitimately interested in housing their workforce but cannot participate because they are not included in this definition. One commenter noted that the program should be available to all farmers on an equal basis because the one being helped is the farmworker, not the farmer; further, the section about ineligible farmers should be eliminated.

Response: The Agency acknowledges the commenters' concerns. The Agency has revised definitions of “farm” and “farm owner” in the interim final rule to be consistent with the current regulation and statute. In addition, a definition for “farm” is now included in the interim final rule. The revised definitions are less restrictive than those included in the proposed rule.

Topic: One commenter expressed concern that the proposed rule would increase the amount of work farmers have to do, especially when having to provide information from lenders indicating that they are unqualified to obtain credit from a commercial source.

Response: The Agency acknowledges the commenter's concern. The requirement that borrowers must provide documentation that they have sought credit elsewhere and have been refused is not a new one. The goal of the section 514 program is to provide financing to those who cannot obtain credit elsewhere. The “test for credit” requirement is a statutory requirement. Start Printed Page 69091Section 3560.605(a)(3) of the interim final rule has been revised so that it is consistent with the statute and the prior regulation.

Topic: Several commenters expressed concern over the strong language about demonstrating that the farmer could not develop the housing without the USDA assistance. They felt that the requirement is counterproductive and should be removed; tying financing to borrowers' financial resources misses the mission of the Farm Labor Housing program.

Response: The Agency wishes to clarify the policy described by the commenters. Section 3560.605(a)(3) states that the applicant must be unable to provide the housing using the applicant's own resources. This is true for all the Agency's direct MFH loans. The Agency's mission is to provide financing for MFH in rural areas and/or for farmworkers by providing financing to those who cannot obtain it from another source. The requirement is a statutory requirement.

Topic: Several comments were received regarding the accessibility of the labor housing. One commenter noted that the farmer should only be required to add accessibility features on a reasonable accommodation basis rather than a mandatory feature; mandatory accessibility design feature requirements increase costs and may act as a disincentive for farmers to provide affordable housing for workers.

Response: The Agency acknowledges the commenters' concerns and has added § 3560.605(d) to state: “On-farm labor housing that consists of buildings with less than three units, need not meet the requirement that five percent of the units be constructed as fully accessible units, as described in § 3560.60(d).”

Topic: Several comments addressed site and construction requirements. One commenter said that all housing should be built to permanent unit requirements because of the low-construction quality and lack of maintenance of seasonal units. The commenter went on to suggest building an integrated community of permanent and seasonal worker units, which would be easier to maintain and manage.

Response: The Agency acknowledges the commenters' concerns and has modified § 3560.608(c)(2) to state: “Seasonal housing may be constructed in accordance with exhibit I of 7 CFR part 1924, subpart A. If constructed in accordance with exhibit I, the housing must be suitable to allow for conversion to full-year occupancy if the need for migrant farmworkers in the area declines.”

Topic: There were several comments made concerning reserve accounts. One comment suggested that the reserve account requirement apply only when on-farm housing operations include 13 or more units, rather than the proposed number of five or more units. Another commenter noted that imposing standards on only five or more units sounds good but is an unnecessary burden and could discourage some farmers from applying.

Response: The Agency thanks the commenters for raising this issue and has modified § 3560.614 to state that the reserve account requirement applies when on-farm housing operations include 12 or more units.

Topic: Several comments were received regarding participation with other funding sources. One commenter noted that § 3560.615 cross-references § 3560.66, discussing the availability of rental assistance, but should make clear that on-farm labor housing projects may not receive rental assistance. Another commenter said that encouraging the use of other funding sources is incongruent with the rest of the proposed rule—the goal is to obtain nondebt financing for projects, not more debt financing. The commenter said that the regulation is written as if USDA were providing 100 percent of the financing, which is not always the case; this does nothing to help USDA partner with funding sources, an essential element.

Response: The Agency acknowledges the commenters' concerns. The reference to § 3560.66 in § 3560.615 refers to situations in which the borrower obtains other funding sources. With regard to additional funding sources, the Agency's intent is to encourage on-farm labor housing borrowers to obtain other funding sources, either debt or non-debt. There is no restriction against nonprofit organizations assisting farmers to obtain funds from other sources. Section 3560.254 has been revised to clarify that on-farm labor housing is not eligible for rental assistance.

Topic: One comment noted that the term of the loan should be 50 years instead of 33 years to allow for lower monthly debt service payments and lower monthly rent payments by the tenant.

Response: The Agency appreciates the commenter's concern but has made no change because the 33-year limit is statutory.

Topic: One commenter suggested that funds for on-farm labor housing should only be provided as permanent financing after the development work is complete.

Response: The Agency notes that on-farm labor housing borrowers are subject to the same financing requirements as off-farm labor housing and section 515 borrowers, as described in § 3560.71.

Topic: The Agency received several comments concerning housing management and occupancy restrictions. One commenter noted that on-farm labor housing borrowers generally have a single-family unit, where imposing a management plan requirement is burdensome for both Rural Development staff and the borrower.

Response: The Agency acknowledges these concerns. The requirements for management plans for on-farm labor housing projects are minimal.

Topic: Several comments were received concerning tenant eligibility. One commenter stated that any change in tenant eligibility should take previously existing tenants into consideration or grandfather them in. Another commenter noted that a definition of eligibility for Farm Labor Housing projects based on “annual income limits published by the Agency” will have very negative consequences for existing tenants; given that farmworkers are often some of the lowest paid workers, many of these tenants could be displaced if the proposed rule is adopted as currently written.

Response: The Agency acknowledges the commenters' concerns. However, the Agency wants to clarify that it has not changed the eligibility requirements for tenants of on-farm labor housing, and the annual income limits only apply to tenants of off-farm labor housing projects with a nonrestrictive farm labor clause, as stated in § 3560.575(b)(2)(iv).

Topic: One commenter noted that the proposed rule requires an Affirmative Fair Housing Marketing Plan even though on-farm labor housing is by definition restricted to employees only. The commenter thought that the regulatory language should explain clearly what is expected given these circumstances.

Response: Borrower's with on-farm labor housing loans for less than 5 units are not required to submit an Affirmative Fair Housing Marketing Plan. The Agency acknowledges that the Affirmative Fair Housing Marketing Plan might be an abbreviated version since the borrower is required to restrict occupancy to farm employees. However, the Agency intention is to ensure that there are no violations of fair housing and civil rights laws in providing on-farm labor housing. Start Printed Page 69092

Topic: Regarding establishing and modifying rental charges, one commenter noted that the Agency should only require sufficient financial information to show that the housing operation is operating in a nonprofit manner for the rental rate imposed. The commenter felt that the owners should be allowed the flexibility to provide budget information for the unit that is acceptable to the State Director.

Response: The Agency wishes to clarify the issue raised by the commenter. The interim final rule states that the borrower is to document the need for a rent increase and obtain approval from the Agency in accordance with subpart E. Subpart E does not specify what the borrower must submit to the Agency; only that “borrowers must fully document that changes to rents and utility allowances are necessary to cover housing or utility costs.”

Topic: One commenter thought that the regulations pertaining to the on-farm program should continue to ensure that existing borrowers not charge rent to their laborers.

Response: The Agency appreciates the comment. The Agency's policy is that the on-farm borrower can choose to charge rent or not. The interim final rule provides the option in § 3560.628 by stating “If it becomes necessary to establish or modify a shelter cost, the borrower must obtain Agency approval as specified in subpart E of this part.”

Topic: One comment was received regarding security deposits. The commenter noted that this should only be addressed as required lease language and make no reference to multi-family regulations as stated as § 3560.204.

Response: The Agency wishes to clarify this issue. On-farm labor housing borrowers are not required to charge security deposits. If they choose to do so, however, the terms set forth in § 3560.204 must be followed to protect both the tenant and borrower and ensure that the borrower is in compliance with applicable State and local laws.

Subpart N—Housing Preservation

Topic: The Agency received numerous comments on the sale to nonprofit organizations or to public agencies and the priority for local nonprofits. Some commenters indicated that this requirement is too restrictive and will slow down the preservation process as it limits the entities that can participate. Some suggested broadening the definition of nonprofits to facilitate the participation of National and regional nonprofit organizations (which are limited by the board composition requirements under the current definition), as well as nonprofit general partners who otherwise agree to the use restrictions (which would allow for the use of LIHTCs and tax-exempt bonds). Others suggested eliminating the preference all together to allow for limited nonprofit and for-profit entities that agree to use restrictions. Other commenters, however, stated that the priority of nonprofit buyers is critical to the preservation of affordable housing and should be made more explicit in the regulation. It was also suggested that nonprofits be offered all available incentives to assist them in acquiring and preserving properties.

Response: The Agency has not removed the sale to the nonprofit organization and public body process from the interim final rule because the requirement is statutory. However, the Agency has simplified the definition, as stated above under subpart A. The rule will retain the preference to local nonprofits, as that is required by statute as well. The Agency has also taken several administrative and procedural steps to facilitate nonprofit purchases by providing them better access to loans and advances.

Topic: The Agency received numerous comments about restrictive-use provisions. Comments fell into four major categories:

  • A lack of clarity about how the provisions are determined,
  • Opposition to restrictive-use provisions,
  • A call for greater use and enforcement of restrictive-use provisions, and
  • The impact of the restrictive-use provisions on future transfers.

Topic: There were general complaints about lack of clarity about the Agency's regulatory authority to require restrictive-use provisions and the process by which they are determined. Commenters raised questions about specific dates cited in the rule, the application of the requirements to limited partnerships, language on affected households, and the exception for properties receiving another USDA loan. They also argued that there are no standards laid out in the rule for determining the applicable-use restrictions and objected to language stating that the provisions will be “as determined by the Agency.”

Response: The Agency acknowledges the commenters' concern and while the requirements are statutory, the Agency has revised § 3560.658 and § 3560.662 to clarify its requirements and provide the terms of the restriction. The statute (42 U.S.C. 1472(c)) specifies which loans are subject to restrictive-use provisions and provides the terms of the restriction. The Agency cannot change this. The Agency incorporated the specific language for restrictions into forms, guided by the detailed descriptions at § 3560.662.

Topic: There were also significant objections to the restrictive-use provisions in general. Commenters indicated that these provisions place an undue burden on borrowers who have already fulfilled the obligations of their agreements. Commenters also indicated that, in some cases, the restrictive-use provisions are not needed (e.g., in areas where other housing opportunities exist or in properties where other loans place restrictive-use provisions on the property). They also questioned the 10- and 20-year extensions to use restrictions.

Response: The Agency has not removed the requirement for restrictive-use provisions because it is statutory. However, the rule does allow alternative options for properties that are not needed in the program or have other restrictions in place. The Agency added the 10-year use restriction to provide owners with additional options when agreeing to sell to a nonprofit organization or public body, rather than imposing additional requirements.

Topic: Several commenters stressed the need for effective enforcement of the restrictive-use provisions. They indicated that tenant involvement is important to enforcement efforts but that Agency action will be important as well. They suggested that language about Agency enforcement of provisions be included in the applicable legal documents. Commenters also expressed concern that some properties have not had restrictive-use provisions applied because of their section 8 status. They indicated that a property might lose its section 8 assistance and no longer be subject to affordability requirements.

Response: The Agency will use the resources it has available to enforce its restrictive-use provisions; however, the involvement of tenants and other interested parties will be critical to maximizing the Agency's enforcement resources. The restrictive-use provisions required by § 3560.662 will have to be included in Agency approved legal documents. Current regulations require that the availability of section 8 will not be considered when determining if restrictions are required. The Agency contemplates no change in that administrative process.

Topic: Several commenters stated that the proposed rule places another restriction on the property if bought by a nonprofit/public body—not only must it be operated as affordable housing for Start Printed Page 69093the remaining useful life of the housing, but it cannot be transferred to new owners without Agency concurrence. The commenters asked why the Agency must approve subsequent transfers if restrictive-use provisions bind the purchasers.

Response: The Agency acknowledges the commenters' concerns but has made no change to § 3560.659 as this requirement is required by 42 U.S.C. 1472(c)(5)(E).

Topic: The list of requirements for prepayment requests drew many comments and question on this list of items, the burden of complying, and how to comply.

Topic: The Agency received numerous comments on the list of items required for a preservation application and suggested edits and changes. Several commenters said that requirement to provide 3 years of operating budgets should be eliminated because if the purchaser provides the Agency with a market study, the Agency should be assured that the market rents are sufficient to cover the property's operating costs. Several commenters, however, suggested that the requirement for a market study be eliminated because of the cost factor involved, unless the cost can be funded through incentives. Commenters also suggested that the requirement to provide a balance sheet be eliminated, as the Agency should already have a copy, and that the request for the waiting list should be eliminated because it is irrelevant in determining prepayment eligibility. One commenter also suggested that the Agency distinguish between “complete information” and “responsive information” as a way to pare down the materials to be submitted.

Response: The Agency appreciates these comments and has significantly reduced the number of submissions, eliminating the requirements for the balance sheet, waiting list, operating budgets, and market study. The remaining required submissions include only evidence of the borrower's ability to prepay and documentation of the borrower's willingness to comply with applicable State and Federal laws on prepayment, including Fair Housing rules and tenant protection through the lease. With this greatly reduced reporting burden the Agency sees no need for a further delineation between “complete” and “responsive” submissions.

Topic: The requirements for prepayment requests also elicited numerous comments and questions about the burden associated with the application packet. Some stated that the amount of information required posed a burden on the borrowers and that the Agency should take on more responsibilities as outlined in the Emergency Low Income Housing Preservation Act (ELIPHA). One commenter indicated that compliance with State laws is important and agreed that the burden should be on the borrower to demonstrate compliance.

Response: The Agency has made a serious effort to balance the burden of compliance with the Agency's responsibility to assess the prepayment requests. The changes discussed above reduce the borrower's burden considerably without jeopardizing the Agency's ability to assess the request.

Topic: Finally, commenters raised a number of questions about the contents of prepayment requests, specifically, how to demonstrate ability to prepay, lease language on prepayment, and the Fair Housing certification.

Response: The Interim Final Rule outlines the required submissions while leaving the detail on how to submit them in the handbook. The Agency recognizes the complexity of these issues and provides additional detail on how the Agency will make these review determinations in Agency guidance about program procedures.

Topic: The Agency received many comments on the prepayment notice requirements, regarding the new frequency of the notices, the tenant/Agency meetings, the way notice is provided, and responsibilities regarding new tenants.

Topic: Commenters offered different points of view on the new prepayment notice and meeting requirements. Some argued that the new notices and the Agency meeting are overly burdensome and tend to cause confusion among tenants rather than provide useful information. However, others stressed the critical importance of informing tenants through the notices and meetings, and argued for further requirements to strengthen the notice requirements, such as requiring borrowers to provide tenant names and addresses as part of their prepayment application, allowing greater response time for tenants, and including the sample notices, currently found in internal Agency guidance. Commenters also had suggestions for the delivery of the notices related to the language, the use of regular versus certified mail, and the Agency's responsibility for delivering the notices.

Response: The Agency appreciates all the comments. The notices as outlined in the proposed rule are not new and represent, in the Agency's estimation, the best compromise between burden for the borrowers and for the Agency and the tenants' need for information. For example, the Agency automated information system called MFIS currently contains information on tenant names and addresses, and their income status, so borrower provision of these data is redundant and was eliminated. The rule establishes minimum requirements for keeping tenants adequately informed of the prepayment process at all stages including response times. All notices must be approved by the Agency and the Agency will consider adopting a pre-approved sample notice. The Agency feels that a further level of detail is unnecessary in its regulations. The Agency will issue subsequent guidance on approved notice procedures including content and delivery and how the notification process fits into the prepayment process. The Agency's regulations do not require it to provide the notices.

Topic: One commenter raised an issue regarding the notification of new tenants after a borrower has applied to prepay a loan. The commenter indicated that some borrowers might use this provision to warn potential tenants about the potential changes in the property to discourage low-income tenants from taking the units, thereby reducing their prepayment obligations. The commenter asserted that provisions should be put in the rule to limit this behavior.

Response: The Agency acknowledges this comment. However, based on the Agency's experience as it has worked with borrowers during the prepayment process, RHS has found that this type of action is not common practice. Further, the significant loss of rental revenue that would occur if borrowers took this type of action in an effort to obtain possible relief from prepayment obligations to tenants is a strong disincentive against this practice. For this reason, the Agency decided to make no change to the interim final rule.

Topic: The Agency received many comments on the timeframes established for receiving incentives and closing deals with nonprofit organizations or public agencies. On the 15-month timeframe for receiving incentives, several commenters stated that the new process is not significantly improved and urged additional streamlining to reduce the 15-month wait time. Others stressed the importance of securing adequate funding in the Agency budget to meet the 15-month deadline. Still others opposed the 15-month cap, stating that it violates the Agency's responsibilities under ELIPHA to preserve housing and Start Printed Page 69094will allow borrowers to opt out. On the 24-month timeframe, several commenters welcomed the limit but requested that an exception be made in cases where the purchaser has not received adequate cooperation from the Agency or the borrower. Some argued for a 48-month timeframe to address the intense competition for resources, while others stated that 24-months is commercially unreasonable. Some commented on wait list procedures and proposed putting borrowers on the list sooner to speed up the process.

Response: The Agency acknowledges the commenters' concerns and has revised § 3560.660(a) to incorporate the suggestion for an exception to the 24-month deadline. The Agency has significantly reduced the waiting period for incentives since the proposed rule was published and expects that performance to continue. Otherwise, the timeframes and wait list procedures remain in effect, as the most feasible compromises among the various interests. Additional details on these timeframes and procedures are covered in Agency guidance about program procedures. The Agency appreciates the commenter' suggestions about the borrower's desire to opt out but hopes to have sufficient resources available so that the waiting list timeframes remain relatively short, although overall program funding is not under the control of the Agency. We also note that borrow cooperation is a critical component to help meet timeframes. For wait list integrity, the borrower must accept an incentive offer before they can establish a position on the waiting list.

Topic: Several comments were received regarding the third party financing in preservation transactions. Several commenters said that the proposed rule does not enumerate the authorities that permit use of third party financing and instead refers back to subpart I. The commenters further state that § 3560.406(f) prohibits the use of project funds to pay for such financing, which effectively eliminates all third-party financing options.

Response: The Agency thanks the commenters for highlighting this issue and has modified § 3560.406(f) so that it does not eliminate participation of third party financing during the transfer process. Also, § 3560.657 clarifies that third party loans are acceptable as part of the prepayment process. The Agency has been and intends to continue using third party financing as an option when prepayment is requested.

Topic: Commenters also discussed third-party loans as possible incentives. They asked that provisions be added to the rule to specifically allow borrowers to obtain an outside equity loan as a possible incentive. Commenters also asked the Agency to revise the regulation to more clearly recognize the range of financing mechanisms it has recently implemented through Administrative Notices that allow third parties to bring private and public financing into the section 515 program.

Response: The Agency finds that the interim final rule allows third party financing in § 3560.659(g). Third-party equity loans are permissible as long as they are approved by the Agency in accordance with subpart I.

Topic: The Agency also heard from commenters focused on appraisal issues under subpart N. Several of these commenters stated that the requirement for two appraisals, especially for a sale to a nonprofit organization, is excessive. They stated that if the borrower and the Agency can agree to a sales price after one appraisal is conducted, then a second one should not be required. Similarly, commenters suggested that if the difference between the two appraisals is less than 10 percent they should split the difference, rather than seek a third appraisal. Commenters also suggested that to help streamline the process, the Agency should allow for the owner to provide an appraisal, subject to review and approval by the Agency. Finally, there were some comments indicating that the appraisal requirements are not clear.

Response: While the Agency appreciates these suggestions, it has made no change because the requirement for two or three appraisals is statutory. In response to several commenters who stated that the appraisal requirements are confusing, the Agency recommends reviewing subpart P of this part for detailed information on appraisal requirements.

Topic: The Agency received several comments on identity-of-interest relationships in preservation transactions. These commenters said that prohibiting any identity-of-interest between seller and buyers, particularly nonprofit buyers, punishes persons who seek to convert ownership from for-profit to nonprofit status. The commenters suggested that the Agency adopt the IRS antichurning rule standards that any person or entity that has an interest in the seller must have a less than 10 percent owner interest in the buyer.

Response: While the Agency acknowledges the commenters' concerns, it believes that there are sufficient numbers of nonprofit organizations that do not have an identity-of-interest relationship with borrowers of section 515 properties. The prohibition on IOI relationships is statutory.

Topic: The Agency received several comments on the determination of minority impact. Some commenters asked for additional information on how the determination is made and clearer definitions of such terms as “market area,” “adverse impact,” and “housing opportunities for minorities.” Several commenters indicated that this determination is of such importance that the standards for conducting this analysis should be included in the interim final rule instead of in the handbooks. Commenters also expressed concern that these determinations sometimes fail to correctly identify adverse impacts. Specifically, they stated that the Agency sometimes made incorrect assumptions about the need for the housing based on availability of section 8 housing, the lack of minorities in the property, or the size of the units. They suggested additional tools for the analysis, including the local section 8 wait list and a stronger definition of the term “market area.” Finally, some commenters ventured that the standard creates a new barrier to prepayment and is virtually impossible to meet.

Response: The requirement regarding minority impact is statutory. While some commenters feel review criteria were too loose and others express concern that they will be too tight, the Agency strives to review relevant criteria in an objective manner. The Agency added language in § 3560.658(b) that describes the information that will be reviewed when the Agency makes this determination. The Agency agrees that “market area” needed a better definition and has added one to subpart A. Further the Agency agreed that “adverse impact” needed further clarification and has clarified that the adverse impact should be disproportionate. The Agency also felt that some clarification was needed for “housing opportunities for minorities.” Therefore the Agency has clarified that an evaluation must be made of housing opportunities for minority tenants, applicants, and the market area in general. As to the suggestion of using local section 8 waiting lists in making these determinations, the Agency feels that this level of detail is unnecessary in its regulations. Additional details on how the Agency will review relevant information is available in Agency guidance about program procedures.

Topic: Several comments were received regarding the borrower's right to prepay. These commenters said that the Agency has no right to prohibit prepayment because the provisions of ELIPHA are no longer valid, and they Start Printed Page 69095stressed the Agency's obligation to comply with the terms of their loan agreements. In addition, several commenters said that given the Agency chooses not to acknowledge the borrower's right to prepay, it should further streamline the prepayment process to assist in the preservation of affordable housing.

Response: The Agency's right to establish conditions for prepayment is statutory. The Agency has simplified the provisions throughout subpart N of the interim final rule to reduce the burden of preparing a prepayment application and retain only the requirements necessary to meet the statutorily required process.

Topic: The Agency received several comments stating that the rule does little to clarify or streamline the process and stressing the need for alternatives to the prepayment process. Commenters emphasized the importance of an efficient process to keep properties in the program and to facilitate the borrower's ability to bring new financing (such as tax credits) into the property. Some suggested revising specific timeframes for review and response. Others suggested creating separate tracks and alternative mechanisms for dealing with properties that meet certain conditions. For example, they suggested that the Agency create an expedited process for properties that are prepaying but remain subject to use restrictions because of another loan, for properties where the borrower preemptively rejects incentives, and for obsolete and high-vacancy properties. Several commenters stated there should be two tracks for preservation deals, one for prepayment without restrictions and another for prepayment with restrictions, and that the timelines for each should be 180 and 90 days, respectively. Others stated that the transfer process should be streamlined to facilitate transfers to nonprofit organizations and loan assumptions where the same rates and terms remain in place, which could alleviate some of the strain on the prepayment process by taking some properties out of that process. Finally, they suggested that the roles of the Preservation Office and the State Offices be clarified to avoid operational issues.

Response: The Agency has made many changes to reduce burden and simplify the process, in administrative practices, and both in the proposed rule and in the interim final rule, as the statute allows. The Agency has also streamlined the procedures for transfers and now allows for equity loans at the time of transfer in subpart I and encourages borrowers to take this route in lieu of prepayment. In essence, these actions have now created two tracks for borrowers to follow to exit the program while preserving the affordable rental housing project. Otherwise the Agency has not adopted a separate track program nor a special process for nonprofits because the prepayment statute (42 U.S.C. 1472(c)) provides for a linear single track process. One of those tracks is within subpart I while the other is found in subpart N. Actions taken administratively have already reduced processing timeframes for most prepayments below the 180- and 90-day timeframes mentioned by the commenter. For example, offering general incentives has been a method the Agency has administratively implemented that greatly reduces processing time when a borrower indicates they have no desire to receive a specific incentive offer. Our discussion of the improvements made to the transfer process are detailed in our comments on subpart I including bringing new financing into the property.

Topic: Several commenters stated that the processing of prepayment requests takes more time than it should, and that the interim final rule should include an application processing timeline. They questioned the validity of the 180-day threshold for submitting a proposal given the process can take longer than that and also questioned the 180-day rule for restricted loans as these loans already stipulate timeframes in the loan documents. They also suggested adding a 30-day deadline for Agency review of the application.

Response: The Agency appreciates these comments and, as described in the Agency response to other public comments on subpart N, RHS has taken many steps to reduce burden, streamline the process and minimize delays. The 30-day tenant and nonprofit and public body notice and the 180-day advertisement period for sales to a nonprofit and public body are statutory (42 U.S.C. 1472(c)). Additional information on internal Agency processing timelines is included in Agency guidance about program procedures. The Agency has retained the 180-day period before an anticipated prepayment as a reasonable attempt to allow borrowers sufficient time to meet their plans for a payment date in light of the procedural steps and possible contingencies they may face. Of course the 180-day period is a minimum notice period and the borrower can provide earlier notice if they feel that it is required. The interim final rule significantly reduced the number of required components of a complete application subject to review. This fact, by itself should greatly reduce the amount of time required by the Agency to review a prepayment application. However, the Agency has not adopted the suggestion for a 30-day review period because it considers this to be a matter of internal Agency procedure.

Topic: The Agency received numerous comments on the public notice requirements. While some commenters indicated that the lower burden on the Agency would be helpful to the overall process, others complained that the requirements shift the notice responsibility from the Agency to the borrower and that this is burdensome to the borrower. They stated that the notice to other Agencies should be an Agency responsibility. They also stated that there is no mechanism for maintaining the contact lists and that existing lists are incomplete, outdated, and include insufficient contact information. They suggested that the owner be permitted to select a nonprofit organization to sell to, without going through the notice requirements, subject to Agency approval of the buyer. They also suggested that public notice be made the Agency's responsibility instead of the borrower's.

Response: The Agency agrees with these comments and has adopted them into subpart N. Specifically, the Agency has developed a Web-based system, called the Prepayment Information Exchange (PIX), for providing electronic notices required during the prepayment process. PIX will also include a listing or nonprofit and public bodies that wish to be notified of prepayment requests or sales offers. The Agency also made changes to subpart N of the interim final rule that will permit the Agency to determine that no local nonprofits are available, to allow faster access to regional and national nonprofits.

Topic: The discussion of incentives generated significant numbers of comments. These comments fell into three major areas: (1) The availability of incentives, (2) the structure of incentives, and (3) the process for calculating incentives.

Topic: On the availability of incentives, commenters stressed the importance of providing promised incentives in a timely manner if the incentives are to be attractive to borrowers. They emphasized the need for sufficient budget and adherence to the timeframes in the processing timeline.

Response: The Agency recognizes the need for timely provision of incentives and has tried to reduce burden and streamline the process precisely for this Start Printed Page 69096reason. The Agency also worked to open avenues to third party resources to provide funding for equity when a prepayment request has been filed. Agency guidance about program procedures outlines the Agency's procedures for adhering to established timeframes. The Agency is unable to control its budget.

Topic: Commenters also had a number of questions and comments about how incentives are structured: first, there was approval of the increased clarity on what the Agency can offer as incentives; however, this increased clarity inevitably raises new questions. One commenter asked if the Agency intends to retain both the specific and the general incentive offers. Several commenters asked why equity loans are capped at 90 percent. Some commenters asked that the Agency exercise flexibility with regard to exception rents where this is the most economically feasible approach to keeping a borrower in the program. And commenters had questions about the 50-year amortization period for 1 percent loans. Others proposed edits for clarity around such concepts as equity and investment.

Response: The Agency has developed detailed procedures for developing offers, which will be described in Agency guidance about program procedures. The general and specific incentive offer will be retained. The 90 percent limitation on equity loan incentives is statutory. The Agency has reserved the authority to exceed market rents and will follow procedural guidance on establishing the most valid amortization period. The Agency has developed these procedures with careful consideration to provide a fair incentive that assures adequate resources to borrowers so they can operate the properties in conformance with applicable property standards while meeting the Agency's statutory responsibility to retain affordable housing units. The Office of Rural Housing Preservation will work to coordinate preservation efforts so that processes are followed consistently and compatible guidance is developed as new issues emerge. The Agency adopted all edits which it felt added clarity to its prepayment process.

Topic: Commenters raised a number of questions about how the incentives are calculated. Some asked that if the Agency provides an increase in annual return on the investment, the increase should be included in the project's operating expense budget to ensure that the borrower actually receives the money. Others asked about the applicability of the 30-year Treasury rate and what to do in the absence of such a rate. Some asked how to factor deferred maintenance into the determination of incentives. Others had questions about the statement that once established, incentive offers can not be renegotiated, though they can be changed. Still others had questions about the determination for equity loans that other incentives are not adequate.

Response: When the Agency develops an incentive, it commits to rents sufficient to fund the incentive. The 30-year Treasury rate has been changed to the 15-year Treasury rate. Further procedural guidance has been developed to clarify what the Agency interprets as deferred maintenance. Incentives are not renegotiated to preserve the integrity of the original commitment. These and other topics related to process rather than policy are described in Agency guidance about program procedures. The statute requires the Agency to determine that other incentives are not adequate to encourage an owner to accept additional restrictions prior to offering an equity loan. The Agency makes this determination based on its knowledge of the market and the borrowers' interests.

Topic: Commenters questioned when LOPEs would be used, given the prohibition on prepayment in properties where there is an adverse impact on tenants. Commenters also stated that LOPEs are not sufficient to guarantee housing in tight markets. Further, they asked why there was a time limit placed on tenants seeking LOPEs.

Response: The Agency expects that the LOPEs will be used in properties where prepayment is approved. The Agency recognizes that the LOPEs do not address all housing problems faced by tenants.

Topic: A number of commenters raised questions about the applicability of prepayment rules. One commenter observed that this subpart should specify that it does not apply to borrowers who make their last payment in accordance with their promissory note and amortization schedule. Another stated that the rule should allow for prepayment only in cases of payment in full as the current procedure does. And one commenter stated that all distressed properties should be eligible for prepayment incentive assistance, not simply those between 1979 and 1989.

Response: The Agency has made no changes to the eligibility for prepayment, or the incentives, as the statute establishes both. The statute does not distinguish between distressed or fully operational properties. Paying off a mortgage in accordance with the last scheduled payment at the end of the loan's full amortization schedule does not constitute prepayment.

Topic: A few commenters suggested that the Office of Rental Housing Preservation (ORHP) adopt a broader strategy for preserving housing that addresses the long-term upkeep and rehabilitation of properties and the need to do this for funding and for new owners to achieve these goals. One commenter suggested a “recovery program” under which the ORHP would review and restructure financing on aging properties, working with for-profit and nonprofit developers who focus on troubled properties. Through this recovery effort, the ORHP would expedite transfers, prepayments, and loan workouts and would provide a subsidy clearinghouse for owners willing to take on troubled properties.

Response: The Agency appreciates these comments and is examining new ways to facilitate these actions including examining the issues surrounding the “recovery program” concept. Any procedural changes made are covered in Agency guidance about program procedures. Any changes in policy identified by the Agency will be addressed in subsequent rulemaking as needed and appropriate.

Topic: There were several comments on appeal rights. Some commenters questioned whether borrowers had the right to appeal the prepayment decisions. Others asked the tenants' rights to an appeal and suggested that notices provided to tenants should advise them of this right.

Response: The Agency notes that subpart A states that Agency decisions that may negatively affect an applicant or borrower may be appealed pursuant to 7 CFR part 11. Tenants have a right to file grievances in cases where owners do not fulfill their responsibilities under the program, as outlined in subpart D, however, they cannot file grievances in cases of displacement or other adverse actions as a result of loan prepayment.

Topic: One commenter asked if in § 3560.655 whether the Agency meant “expired restricted loan” or “expired restrictive-use provisions.”

Response: The Agency did not find the reference, however, at § 3560.652, the Agency explicitly refers to “expired restrictive-use provisions.”

Topic: Commenters suggested several minor editorial changes for clarity in the section on borrower rejection of the incentives and asked for more detail on the definition of the market area.

Response: The Agency has made several editorial changes to this section for clarity. Market area is now defined in subpart A of the interim final rule. Start Printed Page 69097

Topic: A commenter asked if the language in § 3560.659(e) inappropriately excludes new moderate-income residents from moving into a property that is in the process of accepting restrictions.

Response: Any moderate-income exclusion is prescribed by statute (42 U.S.C. 1472(c)(5)(B)). The moderate-income exclusion would only take effect if a nonprofit or public body buys the project and leaves the program.

Topic: Commenters had many questions about the process for selling to nonprofit organizations and public agencies. These comments focused on the advances, the selection of buyers, the sales process, and bona fide offers.

Topic: Commenters welcomed the provision for advances to nonprofit organizations but suggested that more money is needed to make these sales occur and asked for more information about how the advances will occur. They also suggested that in addition to the funds, technical assistance would be helpful to nonprofits.

Response: The Agency appreciates these comments and is striving to maximize the resources available to properties. The procedural guidance on how advances are requested and approved is covered in Agency guidance about program procedures. The Agency believes this guidance will be adequate and no significant change is anticipated from previous guidance provided in previous Agency instructions.

Topic: Several commenters had questions about the selection of the nonprofit buyer. Some asked for more information on how to contact nonprofit organizations. The language in § 3650.659(d) confused several commenters. They asked if the Agency is limiting nonprofit organizations to acquire, at most, one prepaid section 515 property. Other commenters asked for guidance on how to select among qualified nonprofits and asked that the rule specify that it is permissible to accept the highest acceptable offer.

Response: The Agency notes that § 3650.659(d) addresses identity-of-interest issues and does not limit the number of properties a nonprofit organization can acquire. The prohibition on the IOI between purchasing nonprofit or public body entities and entities that have prepaid a loan is statutory. The rule does address the selection between similar offers at § 3560.659(f).

Topic: Commenters also had questions on the sales process in general. They suggested edits to several parts of § 3560.659 for clarity. Commenters asked for more clarity on the information to be provided to potential nonprofit buyers and offered some additional suggestions. Two commenters also asked that the rule specify some limits on the disclosure of information provided by the borrower to a prospective buyer.

Response: Section 3650.659 of the interim final rule describes the types of information to be made available so that potential purchasers understand the project's physical and operational status. The Agency guidance about program procedures provides specific examples and added clarity of what borrowers must release to potential nonprofit buyers to provide sufficient information to allow for an informed offer to purchase.

Topic: Commenters asked for a more extensive definition of a “bona fide” offer, for example, clarifying how committed an offerer's financing must be.

Response: No further guidance will be provided on whether an offer is bona fide in this rule. The Agency feels that sufficient guidance is already provided in the rule and also independently reviews this issue (for example see § 3560.659(e)(3)). However the Agency does want to note that in order to be a bona fide offer, the offer must be consistent with the appraised value established in accordance with § 3560.659(a). The Agency will subsequently provide additional guidance on the factors it will use to evaluate whether an offer is bona fide. Section 3650.659(k) of the interim final rule also establishes a 24-month timeframe for the completion of the transaction. Since this is a business transaction, the credibility of any sales transaction will not be established in a regulation but by the terms of the sales contract.

Topic: Commenters noted that all agreements currently reference 7 CFR part 1930, subpart C and will therefore need to be updated.

Response: The Agency appreciates these comments and has updated the references in the agreements.

Subpart O—Unauthorized Assistance

Topic: One commenter expressed concern that the focus of this subpart was solely on unauthorized assistance, and that the Agency also specifically should address cases where tenants receive “too little assistance” because they inadvertently over report their income or do not know the exclusions or deductions to which they are entitled.

Response: The Agency appreciates the concern and will consider this suggestion as it updates its internal Agency procedures.

Topic: Another commenter noted that the proposed rule does not explicitly establish the policy that repayment plans need to be feasible given an tenant's capacity to pay.

Response: The Agency believes that § 3560.705(c) provides adequate guidance regarding this issue. No set structure is given intentionally, so flexibility is available depending on the tenant's situation. It should be noted, that the Agency is committed to collecting unauthorized assistance that was received by either the borrower or tenant.

Topic: Multiple commenters indicated that they did not see an explicit statement in the rule establishing that when tenants receive unauthorized assistance due to borrower error, the borrower may not seek to recover this unauthorized assistance from the tenant.

Response: The Agency acknowledges the comment, and notes that this was the Agency's intent in the proposed rule. RHS has revised the language in § 3560.708(d) to clarify this policy.

Topic: Several commenters addressed the topic of using project funds to pay for unauthorized assistance. Several commenters agreed with the language in the proposed rule prohibiting the use of project funds to pay for unauthorized assistance due to borrower error. Other commenters strongly disagreed, noting that because the program rules are complex, honest and/or inadvertent mistakes can occur. These commenters noted that in the cases of honest mistakes, the additional funds go to the project or the tenant, not to the manager or borrower. They requested that the Agency prohibit the use of project funds to repay unauthorized assistance only in cases of borrower fraud.

Response: The Agency agrees with the commenters that the prohibition on using project funds to repay unauthorized assistance should only apply to cases of borrower fraud. The Agency has made this change in § 3560.705(g).

Topic: Several commenters addressed the language in the proposed rule relieving borrowers of responsibility for seeking repayment of unauthorized assistance to tenants in cases when the tenant has moved out of the property. Numerous commenters agreed with this change, noting that borrowers have very little practical authority to compel tenants to repay such funds once they no longer live at the property. They also noted that the process of trying to pursue former tenants can often be difficult and time-consuming for staff, Start Printed Page 69098and collection agencies may not always be a viable option. Other commenters strongly disagreed with the policy as presented in the proposed rule. They indicated that borrowers often have the best information about such persons and often have provided the information to a collection agency. These commenters expressed concern that relieving borrowers of this responsibility will only increase the burden on Rural Development staff who are not in as strong a position to collect these funds.

Response: The Agency acknowledges the concerns raised by commenters but has decided to retain the policy as described in the proposed rule because this policy gives RHS greater flexibility to apply resources cost-effectively toward the cases that most deserve to be pursued and reduces the burden on borrowers and projects. No changes to the regulation were made in response to these comments.

Topic: Multiple commenters expressed concern that some of the language in the subpart appeared to hold borrowers responsible for the acts of residents. The commenters agreed that borrowers have a responsibility to take action to identify and collect unauthorized assistance received by tenants but took the position that borrowers are not responsible for another party's fraud or misrepresentations of income.

Response: Borrowers must use due diligence in verifying tenant income. The Agency, however, acknowledges the concerns expressed by the commenters and has simplified and clarified the language in § 3560.708.

Topic: Multiple commenters expressed support for the use of offsets as an effective tool for collecting unauthorized assistance, and one commenter described how it and the Treasury's Cross-Servicing Program had worked well.

Response: The Agency appreciates these comments.

Topic: One commenter questioned the reference to 7 CFR 3550.210 regarding the use of offsets and asked whether a more appropriate reference would be to 7 CFR part 3.

Response: The Agency understands the question but has made no change because the reference to the Single Family Housing regulation is specific to housing programs.

Topic: Multiple commenters asked questions about procedures related to unauthorized assistance and enforcement referrals. Another commenter perceived inconsistencies between the proposed rule and the program handbooks.

Response: The Agency will describe how it intends to address unauthorized assistance and enforcement referrals when it updates its internal Agency procedures in conjunction with the issuance of the interim final rule.

Topic: One commenter suggested asking tenants to sign a document similar to an Applicant Certification related to Federal Collection Policies for Consumer or Commercial Debt at the time that they apply for occupancy as a possible way to further protect the government's interests.

Response: This form is not necessary to be completed by the tenant. The Tenant Certification form has been amended to provide adequate language to protect the government's interests.

Subpart P—Appraisals

Topic: Several commenters asked the Agency to clarify the circumstances when the different types of appraisals identified in the regulation should be performed. In particular, multiple commenters asked that the regulation indicate that a “value-in-use” appraisal is needed when a project is receiving another type of housing assistance. Another commenter wanted clarification that an “as-improved” appraisal is needed when a project is being rehabilitated. Further, some commenters asked for clarification about the methods to be used in conducting the appraisals.

Response: The Agency has clarified the language in this subpart. In making the revisions, the Agency has used terminology that reflects current use within the appraisal industry in an effort to reduce the potential for confusion when a borrower or Rural Development requests an appraisal. Information about methods to be used when conducting appraisals will be provided in the program handbooks.

Topic: Multiple commenters expressed concern about the language in the proposed rule restricting the release of appraisals to borrowers.

Response: The Agency acknowledges the concern raised by the commenters and has revised § 3560.752(c) of the proposed rule (now § 3560.752(d) of the interim final rule) to allow the release of appraisals to borrowers or applicants upon their request.

Topic: One commenter expressed concern that the terms “security value” and “value-in-use” were not adequately defined.

Response: The Agency provides further clarification of the definition of “security value” in the handbooks. RHS has deleted the term “value-in-use” from the regulation and has included the term “market value, subject to restricted rents”, along with a definition, in this subpart. The latter term will be more readily understood by appraisers and users of appraisals.

Topic: One commenter expressed concern that the language in this subpart contradicts the definition of current appraisal in subpart A.

Response: The Agency has made the language consistent with the subpart A definition.

Topic: One commenter expressed concern about using appraisals that are more than 12 months old if there is mutual agreement between the Agency and the borrower or applicant because this allowance could be abused.

Response: An exception to the use of a current appraisal if the Agency and the applicant or borrower mutually agree to the use of an appraisal that is not current is considered by the Agency a prudent policy that allows for flexibility in individual cases that warrant it. It is unlikely that this policy could be abused if the Agency and the applicant, or borrower, both agree to it. Therefore, no change has been made based on this comment.

Topic: One commenter stated that § 3560.753 implied that appraisers had to be members of a professional organization to do appraisals, which conflicts with State licensing laws.

Response: The Agency did not intend that membership in a professional organization is a qualification requirement for appraisers to write appraisals for the Agency. The Agency revised paragraph (b) of this section to clarify that MFH appraisals prepared for the Agency will be written by Agency appraisers or independent fee appraisers who are State-certified general appraisers, certified or licensed in the state where the property is located.

Topic: One commenter requested that the proposed rule include a statement on due diligence and that due diligence be conducted in accordance with American Society for Testing and Materials standards.

Response: Agency appraisal procedures concerning environmental issues that might impact value simply clarify established regulatory requirements and are being provided in the updated internal Agency procedures being prepared in conjunction with the issuance of the interim final rule.

Topic: One commenter questioned whether the phrase “consummation of a sale as of a specified date” in § 3560.752 is inconsistent with the sale to a nonprofit organization under subpart N.

Response: The Agency has made no change based on this comment because the phrase “consummation of a sale as Start Printed Page 69099of a specified date” is part of the most commonly used definition of “market value” used in the appraisal industry. The phrase is an essential part of the definition and is not inconsistent with sale procedures under subpart N.

Topic: One commenter expressed concern that subpart P uses terms and language that are inconsistent with the Uniform Standards of Professional Appraisal Practice (USPAP) and appraisal literature in general.

Response: The Agency has made minor wording changes throughout the subpart as suggested to be consistent with USPAP.

Topic: One commenter suggested that the Agency's handbook language regarding appraisals could be a guide for the regulation.

Response: The Agency agrees with the commenter. Updated Agency internal procedures being issued in conjunction with the interim final rule will clarify procedures for satisfying the requirements established by this subpart.

Discussion of Comments—Proposed Rule Regarding Operating Assistance for Off-Farm Migrant Farmworker Projects

The proposed rule was published in the Federal Register on November 2, 2000 (65 FR 65790), with a 60-day comment period that ended January 2, 2001. Four comments were received about the language in the proposed rule.

The public comments about the proposed rule are discussed below. The regulatory provisions of operating assistance for Off-Farm Labor Housing projects are now addressed in 7 CFR part 3560, subpart L. RHS sincerely appreciates the time and effort of all commenters.

Topic: Several commenters noted that Pub. L. 106-569 had been enacted since the publication of the proposed rule, and suggested that the rule be revised to include the provisions from this statute allowing the use of section 521 funds as an operating subsidy in Off-Farm Labor Housing projects that house both migrant and year-round farmworkers.

Response: The Agency agreed with the commenters and incorporated the provisions of Pub. L. 106-569 allowing the use of section 521 as an operating subsidy in Off-Farm Labor Housing projects that house both migrant and year-round farmworkers in § 3560.575(a) of the interim final rule.

Topic: Multiple commenters expressed concern that in some cases MTFS data will not exist and suggested that the regulations allow alternative methods for establishing prevailing migrant farmworker incomes and the amount of income from farmwork.

Response: The Agency agreed with the commenters. Neither the proposed rule nor the final rule mandated the use of MTFS data. Owners may utilize other reliable data to establish the average adjusted monthly household income of migrant farmworker households in the area.

Topic: One commenter stated that 30 percent of a migrant worker's income is more than a worker can afford for rent because most migrant workers also have to bear the cost of housing at their home base as well. This commenter suggested that 20 percent is a more reasonable portion of a migrant farmworker's income to be used for housing.

Response: The Agency acknowledges the commenter's concern and considered the suggestion. However, the Agency retained 30 percent as the standard for the amount of income occupants of such housing are able to pay toward shelter costs in § 3560.574 (c)(1) of the interim final rule. The Agency retained this standard because it enables the program to serve more farmworkers with the available funds, while keeping the amount that tenants must pay for shelter reasonable by the standard used in many other affordable housing programs, such as the section 515 program. Further, the Agency retained this standard to keep it consistent with the standard used in the Agency's section 515 rental housing program.

Topic: One commenter suggested that operating assistance be paid in a single annual payment, instead of the proposed equal monthly payments. The commenter observed that during the peak operating season cash demands are higher and that monthly payments could cause cash flow problems for properties during the peak season.

Response: The Agency acknowledges the commenter's concern and considered the suggestion. However, the Agency retained the monthly payment provision in § 3560.574(c)(3) of the interim final rule. The Agency acknowledges that cash flow may vary during the year, however, it believes that these fluctuations should not be a problem for borrowers operating such projects. Existing projects should be fiscally sound and have adequate operating reserves to cover any short-term operating deficiencies. Further, new projects are required to have a two percent operating reserve to offset any short-term cash deficiencies.

Topic: One commenter noted that since operating assistance payments are estimated, there should be a mechanism for adjusting the actual assistance payments if estimates are incorrect.

Response: The Agency agrees with the commenter's remark. The Agency notes that the provision for annual adjustments was contained in the proposed rule at § 1944.182(b)(3) and is included in the interim final rule. In § 3560.574(a) of the interim final rule, the Agency established that the amount of operating assistance payments is determined each year based on the project's budget, and may not exceed 90 percent of the annual operating costs attributable to the migrant units. The Agency notes that if the payments for the previous year resulted in a shortfall or a surplus, these circumstances can be addressed in the budget for the coming year, and consequently in the operating assistance payment amounts for the coming year.

Regulatory Crosswalk

The following is a crosswalk that shows where the content of the 14 regulations that have been consolidated can be found in 7 CFR part 3560.

TopicPrevious locationLocation in:
7 CFR part 3560Handbooks
General Provisions and Definitions:Numerous Instructions:Subpart A:All Three Handbooks:
Civil rights7 CFR part 1901, subpart E§ 3560.2Loan Origination Chapters 1 & 3, Asset Management Chapter 1, Project Servicing Chapter 1.
State, local, or tribal laws7 CFR 1930.105(b)(6); 7 CFR 1944.53(c)(1); 7 CFR 1944.164(e)(2)(ii); 7 CFR 1944.169(c)(3); 7 CFR 1944.224(d)§ 3560.5Loan Origination Chapter 1, Asset Management Chapter 1, Project Servicing Chapter 1.
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Borrower responsibility and requirements7 CFR 1944.211(b); 7 CFR 1930.101; 7 CFR part 1930, subpart C, Exhibit B, Para. III§ 3560.6Loan Origination Chapters 3-13, Asset Management Chapters 3-9, Project Servicing Chapters 4-15.
Administrator's exception authority7 CFR 1930.144§ 3560.8Loan Origination Chapter 1, Asset Management Chapter 1, Project Servicing Chapter 1.
DefinitionsAll regulations listed under “Implementation Proposal”§ 3560.11Loan Origination, Asset Management, Project Servicing, Throughout all three.
Direct Loan and Grant Origination:7 CFR Part 1944, Subpart E:Subpart B:Loan Origination:
Eligible use of funds7 CFR 1944.212§ 3560.53Loan Origination, Chapter 4.
Processing Section 515 housing proposals7 CFR 1944.231§ 3560.56Loan Origination, Chapter 4.
Initial operating capital contribution7 CFR 1944.211(a)(6)§ 3560.64Loan Origination, Chapter 4.
Reserve account7 CFR part 1944, subpart E, Exhibit A-9, Para. 10.b§ 3560.65Loan Origination, Chapter 4.
Participation with other funding or financing sources7 CFR 1944.233§ 3560.66Loan Origination, Chapter 4.
Rates and terms for section 515 loans7 CFR 1944.214§ 3560.67Loan Origination, Chapter 5.
Permitted return on investment (ROI)7 CFR 1944.215(n)§ 3560.68Loan Origination, Chapter 5.
Supplemental requirements for congregate housing and group homes7 CFR 1944.224§ 3560.69Loan Origination, Chapter 11.
Subsequent loans7 CFR 1944.237§ 3560.73Loan Origination, Chapter 10.
Borrower Management and Operations Responsibilities:7 CFR Part 1930, Subpart C, Exhibit B:Subpart C:Asset Management:
Housing project management7 CFR part 1930, subpart C, Exhibit B, Para. V§ 3560.102Asset Management, Chapter 3.
Maintaining housing projects7 CFR part 1930, subpart C, Exhibit B, Para. X§ 3560.103Asset Management, Chapter 5.
Fair housing7 CFR 1930.103 and 104, 7 CFR Part 1930, Subpart C, Exhibit B, Para. VI§ 3560.104Chapter 1 in all 3 Handbooks Asset Management Chapter 6.
Insurance and taxes7 CFR part 1930 subpart C, Exhibit B, Para. XV§ 3560.105Asset Management Chapter 3.
Multi-Family Housing Occupancy:7 CFR Part 1930, Subpart C, Exhibit B:Subpart D:Asset Management:
Tenant eligibility7 CFR part 1930, subpart C, Exhibit B, Para. VI§ 3560.152Asset Management Chapter 6.
Calculation of household income and assets7 CFR part 1930, subpart C, Exhibit B, Para. VII§ 3560.153Asset Management Chapter 6.
Tenant selection7 CFR part 1930, subpart C, Exhibit B, Para. VI§ 3560.154Asset Management Chapter 6.
Assignment of rental units and occupancy policies7 CFR part 1930, subpart C, Exhibit B, Para. VI§ 3560.155Asset Management Chapter 6.
Lease requirements7 CFR part 1930, subpart C, Exhibit B, Para. VIII§ 3560.156Asset Management Chapter 6
Occupancy rules7 CFR part 1930, subpart C, Exhibit B, Para. VIII§ 3560.157Asset Management Chapter 6.
Changes in tenant eligibility7 CFR part 1930, subpart C, Exhibit B, Para. VI§ 3560.158Asset Management Chapter 6.
Termination of occupancy7 CFR part 1930, subpart C, Exhibit B, Para. XIV§ 3560.159Asset Management Chapter 6.
Tenant grievances7 CFR part 1944, subpart L§ 3560.160Asset Management Chapter 6.
Rents:7 CFR Part 1930, Subparts B and C:Subpart E:Asset Management:
Establishing rents and utility allowances7 CFR part 1930, subpart C, Exhibit C§ 3560.202Asset Management Chapter 7.
Tenant contributions7 CFR part 1930, subpart C, Exhibit B, Para. II§ 3560.203Asset Management Chapter 7.
Security deposits and membership fees7 CFR part 1930, subpart C, Exhibit B, Para. VIII H§ 3560.204Asset Management Chapter 7.
Rent and utility allowance changes7 CFR part 1930, subpart C, Exhibit C§ 3560.205Asset Management Chapter 7.
Rents during eviction or failure to recertify7 CFR part 1930, subpart C, Exhibit B, Para. XIV.A§ 3560.208Asset Management Chapter 7.
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Special note rents (SNRs)7 CFR part 1930, subpart C, Exhibit C, Para. IX§ 3560.210Asset Management Chapter 7.
Rental Subsidies:7 CFR Part 1930, Subpart C, Exhibit E :Subpart F:Asset Management:
Authorized rental subsidies7 CFR part 1930, subpart C, Exhibit E, Para. II§ 3560.252Asset Management Chapter 8.
Eligibility for rental assistance7 CFR part 1930, subpart C, Exhibit E, Para. II. A§ 3560.254Asset Management Chapter 8.
Rental assistance payments7 CFR part 1930, subpart C, Exhibit E, Para. X§ 3560.256Asset Management Chapter 8.
Assigning rental assistance7 CFR part 1930, subpart C, Exhibit E, Para. XI§ 3560.257Asset Management Chapter 8.
Rental subsidies from non-Agency sources7 CFR part 1930, subpart C, Exhibit B, Paras. IV. C, D, and E§ 3560.260Asset Management Chapter 8
Financial Management:7 CFR Part 1930, Subpart C, Exhibit B:Subpart G:Asset Management:
Accounting, bookkeeping, budgeting, and financial management systems7 CFR 1930.122, 7 CFR part 1930, subpart C, Exhibit B, Para. XIII§ 3560.302Asset Management Chapter 4.
Housing project budgets7 CFR part 1930, subpart C, Exhibit B, Para. XII.A§ 3560.303Asset Management Chapter 4.
Initial operating capital7 CFR part 1930, subpart C, Exhibit B, Para. XIII.B.2.a.(1)§ 3560.304Asset Management Chapter 4.
Return on investment7 CFR part 1930, subpart C, Exhibit B, Para. XII.A.8§ 3560.305Asset Management Chapter 4.
Reserve account7 CFR part 1930, subpart C, Exhibit B, Para. XIII.B.2.c§ 3560.306Asset Management Chapter 4.
Annual financial reports7 CFR 1930.122(b)(4); 7 CFR part 1930, subpart C, Exhibit A-1§ 3560.308Asset Management Chapter 4.
Agency Monitoring:7 CFR Part 1930, Subpart C:Subpart H:Asset Management:
Agency monitoring scope, purpose, and borrower responsibilities7 CFR 1930.109, 110, 113, 117§ 3560.352Asset Management Chapter 9.
Scheduling of on-site monitoring reviews7 CFR 1930.119(d)§ 3560.353Asset Management Chapter 9
Borrower response to monitoring review notifications7 CFR 1930.119(f)§ 3560.354Asset Management Chapter 9.
Servicing:7 CFR Part 1951, Subpart A and 7 CFR Part 1965, Subpart B:Subpart I:Project Servicing:
Account servicing7 CFR part 1951, subpart A§ 3560.403Project Servicing Chapter 4.
Final loan payments7 CFR part 1951, subpart D§ 3560.404Project Servicing Chapter 4.
Borrower organizational structure or ownership interest changes7 CFR 1965.63§ 3560.405Project Servicing Chapter 5.
Multi-family housing ownership transfers or sales7 CFR 1965.65§ 3560.406Project Servicing Chapter 7
Subordinations or junior liens against security property7 CFR 1965.83§ 3560.409Project Servicing Chapter 8.
Consolidations7 CFR 1965.68§ 3560.410Project Servicing Chapter 11.
Special Servicing, Enforcement, Liquidation, and Other Actions:Numerous Instructions:Subpart J:Project Servicing:
Monetary and non-monetary defaults7 CFR 1955.15(d)(2)§ 3560.452Project Servicing Chapter 10
Workout agreements7 CFR part 1965, subpart B, Exhibit B§ 3560.453Project Servicing Chapter 10.
Special servicing actions related to housing operations7 CFR part 1930, subpart C, Exhibit C, Para. IX§ 3560.454Project Servicing Chapter 10
Special servicing actions related to loan accounts7 CFR 1965.85§ 3560.455Project Servicing Chapter 10.
Liquidation7 CFR part 1955, subpart A§ 3560.456Project Servicing Chapter 12
Negotiated debt settlement7 CFR 1956.57(c)§ 3560.457Project Servicing Chapter 12.
Management and Disposition of Real Estate Owned (REO) Properties:7 CFR Part 1955, Subparts B and C:Subpart K:Project Servicing:
Conversion of single family type REO property to multi-family housing use7 CFR 1955.114(c)§ 3560.506Project Servicing Chapter 14.
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Off-Farm Labor Housing:7 CFR Part 1944, Subpart D:Subpart L:Loan Origination:
Eligibility requirements for off-farm labor housing loans and grants7 CFR 1944.157§ 3560.555Loan Origination Chapter 13.
Design and construction requirements7 CFR part 1944, subpart D, Exhibit A-3§ 3560.559Loan Origination Chapters 3 & 13.
Loan and grant limits7 CFR 1944.164§ 3560.562Loan Origination Chapters 5 & 13.
Participation with other funding or financing sources7 CFR 1944.163§ 3560.565Loan Origination Chapters 6 & 12.
Loan and grant rates and terms7 CFR 1944.159§ 3560.566Loan Origination Chapters 5 & 13.
Supplemental requirements for seasonal off-farm labor housing7 CFR 1944.163(e)§ 3560.568Loan Origination Chapter 13.
Rental assistance7 CFR 1944.182§ 3560.573Loan Origination Chapters 4 & 13, Asset Management Chapter 8.
Occupancy restrictions7 CFR 1944.154§ 3560.576Loan Origination Chapter 13, Asset Management Chapter 6.
Tenant priorities for labor housing7 CFR 1944.154§ 3560.577Loan Origination Chapter 13, Asset Management Chapter 6.
On-Farm Labor Housing:7 CFR Part 1944, Subpart D:Subpart M:Loan Servicing:
Eligibility requirements7 CFR 1944.157§ 3560.605Loan Origination Chapter 13.
Site and construction requirements7 CFR part 1944, subpart D, Exhibit A-3§ 3560.608Loan Origination Chapters 3 & 13.
Loan limits7 CFR 1944.164§ 3560.612Loan Origination Chapters 5 & 13.
Reserve accounts7 CFR part 1944, subpart E, Exhibit A-9, Para. 10.b§ 3560.614Loan Origination Chapters 4 & 13.
Participation with other funding sources7 CFR 1944.163§ 3560.615Loan Origination Chapters 6 & 13.
Rates and terms7 CFR 1944.159§ 3560.616Loan Origination Chapters 5 & 13.
Supplemental requirements for on-farm labor housing7 CFR 1944.163(e)§ 3560.618Loan Origination Chapter 13.
Housing management and operations7 CFR part 1944, subpart D, Exhibit B§ 3560.623Loan Origination Chapters 13, Asset Management Chapter 3.
Occupancy restrictions7 CFR 1944.154§ 3560.624Loan Origination Chapters 13, Asset Management Chapter 6.
Housing Preservation:7 CFR Part 1965, Subpart E:Subpart N:Project Servicing:
Prepayment and restrictive-use categories7 CFR 1965.208 and 209§ 3560.652Project Servicing Chapter 15.
Prepayment requests7 CFR 1965.205§ 3560.653Project Servicing Chapter 15.
Tenant notification requirements7 CFR 1965.206(b)(5) and (b)(6); 7 CFR 1965.215(e)(3) and (f)(2)§ 3560.654Project Servicing Chapter 15.
Agency requested extension7 CFR 1965.215(f)(2)§ 3560.655Project Servicing Chapter 15.
Incentive offers7 CFR 1965.213§ 3560.656Project Servicing Chapter 15.
Processing and closing incentive offers7 CFR 1965.214§ 3560.657Project Servicing Chapter 15.
Borrower rejection of incentive offer7 CFR 1965.214(b)§ 3560.658Project Servicing Chapter 15.
Sale or transfer to nonprofit organizations and public bodies7 CFR 1965.217§ 3560.659Project Servicing Chapter 15.
Acceptance of prepayments7 CFR 1965.215§ 3560.660Project Servicing Chapter 15.
Unauthorized Assistance:7 CFR Part 1951, Subpart N:Subpart O:Project Servicing:
Identification of unauthorized assistance7 CFR 1951.656§ 3560.703Project Servicing Chapter 9.
Unauthorized assistance determination notice7 CFR 1951.657§ 3560.704Project Servicing Chapter 9.
Recapture of unauthorized assistance7 CFR 1951.658§ 3560.705Project Servicing Chapter 9.
Program participation and corrective actions7 CFR 1951.658(b)§ 3560.707Project Servicing Chapter 9.
Unauthorized assistance received by tenants7 CFR 1951.661(a)(3)§ 3560.708Project Servicing Chapter 9.
Demand letter7 CFR 1951.658(c)§ 3560.709Project Servicing Chapter 9.
Appraisals:7 CFR Part 1922, Subpart B:Subpart P:Project Servicing:
Appraisal use, request, review, and release7 CFR 1922.52§ 3560.752Loan Origination Chapter 7, Project Servicing Chapter 8.
Agency appraisal standards and requirements7 CFR part 1922, subpart B, Exhibit A§ 3560.753Loan Origination Chapter 7, Project Servicing Chapter 7.
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List of Subjects

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Therefore, Chapters XVIII and XXXV, title 7, Code of Federal Regulations are amended as follows:

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Chapter XVIII—[Amended]

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PART 1806—INSURANCE

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1. The authority citation for part 1806 continues to read as follows:

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Authority: 75 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

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Subpart A—Real Property Insurance

[Amended]
Start Amendment Part

2. Section 1806.4 is amended in the introductory text of paragraph (a)(2) by removing the sentence after the paragraph heading.

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Subpart B—National Flood Insurance

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3. Section 1806.21 is amended in paragraph (a) by adding a sentence at the end of the paragraph to read as follows:

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General.

(a) * * * This subpart does not apply to the Rural Rental Housing, Rural Cooperative Housing, or Farm Labor Housing programs of the Rural Housing Service.

* * * * *
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PART 1822—RURAL HOUSING LOANS AND GRANTS

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4. The authority citation for part 1822 is revised to read as follows:

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

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Subpart G—Rural Housing Site Loan Policies, Procedures, and Authorizations

[Amended]
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5. Section 1822.271 is amended:

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a. In the table in paragraph (e) by removing the entire entry for “Form FmHA or its successor agency under Public Law 103-354 1944-50” and by revising the form number “1944-51” to read “3560-51” in the last entry of the table.

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b. In paragraph (g), in the second sentence of the introductory text, by removing the words “and submit to the FmHA or its successor agency under Public Law 103-354 Finance Office through field office terminals that information contained in Form FmHA or its successor agency under Public Law 103-354 1944-50, ‘Multiple Family Housing Borrower/Project Characteristics.’ ”

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c. By revising paragraph (d)(1) to read as follows:

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Processing applications.
* * * * *

(d) * * *

(1) Request for obligation of funds and fund analysis. Form RD 3560-51, “Multiple Family Housing Obligation Fund Analysis” will be completed in accordance with the Forms Manual Insert (FMI).

* * * * *
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6. Section 1822.272 is revised to read as follows:

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Approval or disapproval of a loan.

The provisions of 7 CFR part 3560, subpart B will be followed.

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7. Section 1822.273 is revised to read as follows:

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Actions subsequent to loan approval.

After the loan is approved, actions to be taken will be in accordance with 7 CFR part 3560, subpart B.

[Amended]
Start Amendment Part

8. Section 1822.274 is amended by revising the words “Form FmHA or its successor agency under Public Law 103-354 1944-52” to read “Form RD 3560-52” in both the introductory text of paragraph (c) and in paragraph (c)(2), and by revising the words “Form FmHA or its successor agency under Public Law

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[Amended]
Start Amendment Part

9. Section 1822.277 is amended by revising the words “§ 1944.239 of part 1944, subpart E of this chapter” to read “

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[Amended]
Start Amendment Part

10. Section 1822.278 is amended in paragraph (f) by revising the words “Form FmHA or its successor agency under Public Law 103-354 1944-52” to read “Form RD 3560-52.”

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11. Section 1822.279 is revised to read as follows:

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Loan supervision and servicing.

Loan supervision and loan servicing will be provided according to 7 CFR part 3560.

Start Part

PART 1902—SUPERVISED BANK ACCOUNTS

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12. The authority citation for part 1902 continues to read as follows:

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Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 7 U.S.C. 6991, et seq.; 42 U.S.C. 1480; Reorganization Plan No. 2 of 1953 (5 U.S.C. App.).

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Subpart A—Disbursement of Loan, Grant, and Other Funds

[Amended]
Start Amendment Part

13. Section 1902.1 is amended in paragraph (a) by revising the words “Form FmHA or its successor agency under Public Law 103-354 1944-51” to read “Form RD 3560-51” in both places.

End Amendment Part
[Amended]
Start Amendment Part

14. Section 1902.2 is amended in paragraph (d) by revising the words “Form FmHA or its successor agency under Public Law 103-354 1944-51” to read “Form RD 3560-51” and in paragraph (e) by revising the words “Form FmHA or its successor agency under Public Law 103-354 1944-53” to read “Form RD 3560-53.”

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[Amended]
Start Amendment Part

15. Section 1902.4 is amended:

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a. In paragraph (a)(4) by revising the words “subpart C of part 1930 of this chapter” to read “

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b. In paragraph (a)(5) by revising the words “subpart C of part 1930 of this chapter” to read “

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c. In paragraph (a)(6) by revising the words “subpart C of part 1930 of this chapter” to read “

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PART 1925—TAXES

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16. The authority citation for part 1925 is revised to read as follows:

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

End Authority

Subpart A—Real Estate Tax Servicing

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17. Section 1925.3 is amended by revising the last sentence in paragraph (c) to read as follows:

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Servicing taxes.
* * * * *

(c) * * * The Multi-Family Housing Information System (MFIS) will be used in posting servicing actions on delinquent taxes.

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PART 1930—GENERAL

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18. The authority citation for part 1930 continues to read as follows:

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Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.

End Authority

Subpart C—Management and Supervision of Multiple Family Housing Borrowers and Grant Recipients

Start Amendment Part

19. Subpart C (§§ 1930.1930.101 through 1930.150 and all exhibits) is removed and reserved.

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PART 1940—GENERAL

End Part Start Amendment Part

20. The authority citation for part 1940 continues to read as follows:

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

End Authority

Subpart L—Methodology and Formulas for Allocation of Loan and Grant Program Funds

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21. Exhibit B to subpart L of part 1940 is amended by revising paragraphs IV., VII.A., and VII.F. to read as follows:

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Exhibit B to Subpart L of Part 1940—Section 515 Nonprofit Set Aside (NPSA)

* * * * *

IV. Nondiscrimination. Rural Development reemphasizes the nondiscrimination in use and occupancy and location requirements of 7 CFR 3560.104.

* * * * *

VII. * * *

A. Preapplications/applications for assistance from eligible nonprofit entities under this subpart must continue to meet all loan making requirements of 7 CFR part 3560, subpart B.

* * * * *

F. Provisions for providing preference to loan requests from nonprofit organizations is contained in 7 CFR 3560.56. Limited partnerships, with a nonprofit general partner, do not qualify for nonprofit preference.

* * * * *
Start Part

PART 1942—ASSOCIATIONS

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22. The authority citation for part 1942 continues to read as follows:

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Authority: 5 U.S.C. 301; 7 U.S.C. 1989.

End Authority

Subpart A—Community Facility Loans

[Amended]
Start Amendment Part

23. Section 1942.17 is amended by removing paragraph (q)(1)(iii) and redesignating paragraph (q)(1)(iv) as (q)(1)(iii).

End Amendment Part Start Part

PART 1944—HOUSING

End Part Start Amendment Part

24. The authority citation for part 1944 continues to read as follows:

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

End Authority

Subpart B—Housing Application Packaging Grants

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25. Exhibit B to subpart B of part 1944 is amended by revising paragraph II.(B)(4) to read as follows:

End Amendment Part

Exhibit B to Subpart B of Part 1944—Housing Application Packaging Grant (HAPG) Fee Processing

* * * * *

II. * * *

(B) * * *

(4) The 55 percent balance paid when the loan is approved. Funds for this 55 percent will be drawn from loan funds in accordance with 7 CFR 3560.53 (o).

* * * * *
Start Amendment Part

26. Exhibit C to subpart B of part 1944 is revised to read as follows:

End Amendment Part

Exhibit C to Subpart B of Part 1944—Requirements for Housing Application Packages

A package will consist of the following requirements for the respective program.

A. Section 502—Complete application packages will be submitted in accordance with the requirements of 7 CFR part 3550. The package must also include the following:

Form RD 410-9—“Statement Required by the Privacy Act”

Form RD 1910-11—“Applicant Certification Federal Collection Policies for Consumer or Commercial Debts”

Form RD 1944-3—“Budget and/or Financial Statement”

B. Section 504—Complete application packages will be submitted in accordance with 7 CFR part 3550. The package must include the forms listed in paragraph A. of this exhibit and the following:

The appropriate Agency application form for Rural Housing assistance (non-farm tract) (available in any Rural Development office).

The appropriate Agency form to request verification of employment (available in any Rural Development office).Start Printed Page 69105

The appropriate Agency Rural Housing Loan application package (available in any Rural Development office).

Evidence of ownership in accordance with 7 CFR part 3550.

Cost estimates or bid prices for removal of health or safety hazards in accordance with 7 CFR part 3550.

C. Section 514/516—Complete application packages will be submitted in accordance with the Notice of Funding Availability that will be published in the Federal Register each Fiscal Year.

D. Section 515—Complete application packages will be submitted in accordance with the Notice of Funding Availability that will be published in the Federal Register each Fiscal Year.

E. Section 524—Complete application packages will be submitted in accordance with § 1822.271(a) of subpart G of part 1822 of this chapter (paragraph XI.A. of RD Instruction 444.8). After Rural Development's review and as instructed, the application should be completed in accordance with § 1822.271(c) of subpart G of part 1822 of this chapter (paragraph XI.C. of RD Instruction 444.8).

F. Section 533—Complete application packages will be submitted in accordance with the requirements of subpart N of part 1944 of this chapter.

Subpart D—Farm Labor Housing Loan and Grant Policies, Procedures, and Authorizations

Start Amendment Part

27. Subpart D (§§ 1944.151 through 1944.200 and all exhibits) is removed and reserved.

End Amendment Part

Subpart E—Rural Rental and Rural Cooperative Housing Loan Policies, Procedures, and Authorizations

Start Amendment Part

28. Subpart E (§§ 1944.201 through 1944.250 and all exhibits) is removed and reserved.

End Amendment Part

Subpart I—Self-Help Technical Assistance Grants

Exhibit F to Subpart I of Part 1944 [Amended]

Start Amendment Part

29. Exhibit F to subpart I of part 1944 is amended in paragraph VII by revising the words “Form FmHA or its successor agency under Public Law 103-354 1944-51” to read “Form RD 3560-51.”

End Amendment Part

Subpart L—Farmers Home Administration or Its Successor Agency Under Public Law 103-354 Tenant Grievance and Appeals Procedure

30. Subpart L (§§ 1944.551 through 1944.600 and all exhibits) is removed and reserved.

Subpart N—Housing Preservation Grants

Start Amendment Part

31. Section 1944.656 is amended by revising the definition of “Overcrowding” to read as follows:

End Amendment Part
Definitions.
* * * * *

Overcrowding. Guidance is provided at 7 CFR 3560.155(e). These guidelines should result in an ideal range of persons per housing unit.

* * * * *
Start Part

PART 1951—SERVICING AND COLLECTIONS

End Part Start Amendment Part

32. The authority citation for part 1951 continues to read as follows:

End Amendment Part Start Authority

Authority: 5 U.S.C. 301; 7 U.S.C. 1932 Note; 7 U.S.C. 1989; 31 U.S.C. 3716; 42 U.S.C. 1480.

End Authority

Subpart A—Account Servicing Policies

[Amended]
Start Amendment Part

33. Section 1951.1 is amended by revising the words “subpart K of part 1951 of this chapter” to read “

End Amendment Part

Subpart D—Final Payment on Loans

Start Amendment Part

34. Section 1951.151 is amended by revising the last sentence to read as follows:

End Amendment Part
Purpose.

* * * This subpart does not apply to direct single family housing customers or to the Rural Rental Housing, Rural Cooperative Housing, or Farm Labor Housing programs of the RHS.

Subpart E—Servicing the Community and Direct Business Programs Loans and Grants

[Amended]
Start Amendment Part

35. Section 1951.220 is amended:

End Amendment Part Start Amendment Part

a. In the last sentence of paragraph (f) by revising the words “noted on Form FmHA or its successor agency under Public Law 103-354 1905-10 ‘Management System Card—Association’ ” to read “tracked in the Multi-Family Housing Information System (MFIS).”

End Amendment Part Start Amendment Part

b. In the last sentence of paragraph (g) by revising the words “on Form FmHA or its successor agency under Public Law 103-354 1905-10” to read “in MFIS.”

End Amendment Part
[Amended]
Start Amendment Part

36. Section 1951.223 is amended in paragraph (b)(4) by revising the words “Form FmHA or its successor agency under Public Law 103-354 1951-33” to read “Form RD 3560-15” and in paragraph (c)(3) by revising the words “Form FmHA or its successor agency under Public Law 103-354 1951-33” to read “Form RD 3560-15.”

End Amendment Part

Subpart F—Analyzing Credit Needs and Graduation of Borrowers

Start Amendment Part

37. Section 1951.266 is revised to read as follows:

End Amendment Part
Special requirements for MFH borrowers.

All requirements of 7 CFR part 3560, subpart K must be met prior to graduation and acceptance of the full payment from an MFH borrower.

Subpart K—Predetermined Amortization Schedule System (PASS) Account Servicing

Start Amendment Part

38. Subpart K (§§ 1951.501 through 1951.550) is removed and reserved.

End Amendment Part

Subpart N—Servicing Cases Where Unauthorized Loan or Other Financial Assistance Was Received—Multiple Family Housing

Start Amendment Part

39. Subpart N (§§ 1951.651 through 1951.700) is removed and reserved.

End Amendment Part Start Part

PART 1955—PROPERTY MANAGEMENT

End Part Start Amendment Part

40. The authority citation for part 1955 continues to read as follows:

End Amendment Part Start Authority

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

End Authority

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

Start Amendment Part

41. Section 1955.1 is amended by adding a sentence at the end to read as follows:

End Amendment Part
Purpose.

* * * This subpart does not apply to the Rural Rental Housing, Rural Cooperative Housing, or Farm Labor Housing programs of RHS.

Start Amendment Part

42. Section 1955.10 is amended by revising paragraph (d)(9) and in paragraph (h)(6) by removing the fifth sentence and by revising the last two sentences to read as follows:

End Amendment Part
Voluntary conveyance of real property by the borrower to the Government.
* * * * *

(d) * * *

(9) For MFH loans, assignment of Housing Assistance Payments (HAP) Contracts will be obtained. Rental Assistance will be retained until the State Director is advised by OGC that Start Printed Page 69106the Agency has title to the property. After a voluntary conveyance, the Agency may transfer Rental Assistance in accordance with 7 CFR part 3560, subpart F.

* * * * *

(h) * * *

(6) * * * If the project is to be removed from the Rural Development program, a minimum of 180 days' notice to the tenants is required. Letters of Priority Entitlement must be made available to any tenants that will be displaced.

* * * * *
Start Amendment Part

43. Section 1955.15 is amended in paragraph (d)(2)(v) by removing the fifth sentence and by revising the first and last sentences to read as follows:

End Amendment Part
Foreclosure by the Government of loans secured by real estate.
* * * * *

(d) * * *

(2) * * *

(v) For MFH loans, the acceleration notice will advise the borrower of all applicable prepayment requirements, in accordance with 7 CFR part 3560, subpart N. * * * Letters of Priority Entitlement must be made available.

* * * * *

Subpart B—Management of Property

Start Amendment Part

44. Section 1955.51 is amended in the introductory text by adding a sentence after the third sentence to read as follows:

End Amendment Part
Purpose.

* * * This subpart does not apply to the Rural Rental Housing, Rural Cooperative Housing, or Farm Labor Housing programs of RHS. * * *

* * * * *
Start Amendment Part

45. Section 1955.55 is amended in paragraph (b)(2)(i) by revising the words “Subpart C of Part 1930 of this chapter” to read “

End Amendment Part
Taking abandoned real or chattel property into custody and related actions.

(a) * * * (Multi-family housing type loans will be handled in accordance with 7 CFR part 3560, subpart J.) * * *

* * * * *
[Amended]
Start Amendment Part

46. Section 1955.61 is amended by revising the words “Subpart L of Part 1944 of this chapter” to read “

End Amendment Part Start Amendment Part

47. Section 1955.65 is amended in paragraph (c)(1) by removing the fourth sentence and by revising the sixth sentence to read as follows:

End Amendment Part
Management of inventory and/or custodial real property.
* * * * *

(c) * * *

(1) * * * For MFH projects, tenant occupancy and selection will be in accordance with the occupancy standards set forth in 7 CFR part 3560, subpart D. * * *

* * * * *
[Amended]
Start Amendment Part

48. Section 1955.66 is amended in paragraph (a)(2)(ii) by revising the words “subpart C of part 1930 of this chapter” to read “

End Amendment Part

Subpart C—Disposal of Inventory Property

[Amended]
Start Amendment Part

49. Section 1955.101 is amended by adding the words “or to the Rural Rental Housing, Rural Cooperative Housing, and Farm Labor Housing programs” to the end of the last sentence.

End Amendment Part
[Amended]
Start Amendment Part

50. Section 1955.114 is amended:

End Amendment Part Start Amendment Part

a. In paragraph (b) by revising the words “subpart E of part 1965 of this chapter” to read “

End Amendment Part Start Amendment Part

b. In paragraph (c)(3) by revising the words “the information outlined in Exhibit A-7 of subpart E of part 1944 of this chapter” to read “documentation as required by the Agency.”

End Amendment Part Start Amendment Part

c. In paragraph (c)(4) by revising the words “subpart E of part 1944 of this chapter” to read “

End Amendment Part Start Amendment Part

d. In paragraph (c)(5) by revising the words “the definition of ‘project’ set forth in subpart E of part 1944 of this chapter” to read “the requirements of

End Amendment Part
[Amended]
Start Amendment Part

51. Section 1955.115 is amended in paragraph (b) by revising the words “subpart E of part 1965 of this chapter” to read “

End Amendment Part
[Amended]
Start Amendment Part

52. Section 1955.117 is amended in paragraph (c) by revising the words “FmHA or its successor agency under Public Law 103-354 1944-51” to read “RD 3560-51.”

End Amendment Part
[Amended]
Start Amendment Part

53. Section 1955.118 is amended in paragraph (b)(3) by revising the words “Form FmHA or its successor agency under Public Law 103-354 1944-51” to read “Form RD 3560-51.”

End Amendment Part
[Amended]
Start Amendment Part

54. Section 1955.141 is amended:

End Amendment Part Start Amendment Part

a. In paragraph (d) by revising the words “Exhibit C of Subpart C of Part 1930 of this chapter” to read “

End Amendment Part Start Amendment Part

b. In paragraph (e) by revising the words “Exhibit E of subpart C of part 1930 of this chapter” to read “

End Amendment Part Start Part

PART 1956—DEBT SETTLEMENT

End Part Start Amendment Part

55. The authority citation for part 1956 continues to read as follows:

End Amendment Part Start Authority

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 31 U.S.C. 3711; 42 U.S.C. 1480.

End Authority

Subpart B—Debt Settlement—Farm Loan Programs and Multi-Family Housing

Start Amendment Part

56. Section 1956.51 is amended by revising the last sentence to read as follows:

End Amendment Part
Purpose.

* * * This subpart does not apply to RHS direct Single Family Housing (SFH) loans, RHS NP loans secured by SFH property, or to the Rural Rental Housing, Rural Cooperative Housing, and Farm Labor Housing programs.

[Amended]
Start Amendment Part

57. Section 1956.85 is amended in paragraph (b)(1) by removing the words “on Form FmHA or its successor agency under Public Law 103-354 1944-9, “Multiple Family Housing Payment Transmittal,”.”

End Amendment Part

Subpart C—Debt Settlement—Community and Business Programs

[Amended]
Start Amendment Part

58. Section 1956.143 is amended in paragraph (c)(3)(iv)(G)(

End Amendment Part Start Part

PART 1965—REAL PROPERTY

Subpart B—Security Servicing for Multiple Housing Loans

End Part Start Amendment Part

59. Subpart B (§§ 1965.51 through 1965.100) is removed and reserved.

End Amendment Part

Subpart E—Prepayment and Displacement Prevention of Multi-Family Housing Loans

Start Amendment Part

60. Subpart E (§§ 1965.201 through 1965.250 and all exhibits) is removed and reserved.

End Amendment Part

Chapter XXXV—[Amended]

Start Amendment Part

61. Part 3560, consisting of subparts A through P, is added to read as follows:

End Amendment Part Start Part Start Printed Page 69107

PART 3560—DIRECT MULTI-FAMILY HOUSING LOANS AND GRANTS

Subpart A—General Provisions and Definitions
3560.1
Applicability and purpose.
3560.2
Civil rights.
3560.3
Environmental requirements.
3560.4
Compliance with other Federal requirements.
3560.5
State, local or tribal laws.
3560.6
Borrower responsibility and requirements.
3560.7
Delegation of responsibility.
3560.8
Administrator's exception authority.
3560.9
Reviews and appeals.
3560.10
Conflict of interest.
3560.11
Definitions.
3560.12-3560.49
[Reserved]
3560.50
OMB control number.
Subpart B—Direct Loan and Grant Origination
3560.51
General.
3560.52
Program objectives.
3560.53
Eligible use of funds.
3560.54
Restrictions on the use of funds.
3560.55
Applicant eligibility requirements.
3560.56
Processing section 515 housing proposals.
3560.57
Designated places for section 515 housing.
3560.58
Site requirements.
3560.59
Environmental requirements.
3560.60
Design requirements.
3560.61
Loan security.