Guaranteed Rural Rental Housing Program; Secondary Mortgage Market Participation, 2927-2934 [05-1034]

Agencies

• DEPARTMENT OF AGRICULTURE
• Rural Housing Service

[Federal Register Volume 70, Number 12 (Wednesday, January 19, 2005)]
[Rules and Regulations]
[Pages 2927-2934]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-1034]



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Federal Register / Vol. 70, No. 12 / Wednesday, January 19, 2005 / 
Rules and Regulations

[[Page 2927]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3565

RIN 0575-AC28


Guaranteed Rural Rental Housing Program; Secondary Mortgage 
Market Participation

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Housing Service (RHS) is amending its regulations 
for the Guaranteed Rural Rental Housing Program (GRRHP). Under the 
GRRHP, RHS guarantees loans for the development of housing and related 
facilities for low or moderate-income families in rural areas. RHS 
administers the GRRHP under the authority of the Housing Act of 1949. 
The GRRHP regulations are being amended to allow RHS, in the case of a 
default, to buy back guaranteed loans from investors, lower the minimum 
level of rehabilitation work when guaranteed loans are used for 
acquisition and rehabilitation, and clarify certain matters involving 
Ginnie Mae. These regulatory changes are made to increase participation 
by the secondary mortgage market in the GRRHP.

DATES: Effective Date: February 18, 2005.

FOR FURTHER INFORMATION CONTACT: Arlene Nunes, Senior Loan Specialist, 
Multi-Family Housing Processing Division, Rural Housing Service, USDA, 
STOP 0781, 1400 Independence Avenue SW., Washington, DC 20250-0781, 
telephone: (202) 401-2307.

SUPPLEMENTARY INFORMATION:

Classification

    This rule has been determined to be significant for purposes of 
Executive Order 12866 and therefore has been reviewed by the Office of 
Management and Budget (OMB).

Paperwork Reduction Act

    The information collection requirements contained in this 
regulation have been previously approved by OMB under the provisions of 
44 U.S.C. chapter 35 and this regulation has been assigned OMB control 
number 0575-0174, in accordance with the Paperwork Reduction Act of 
1995. There is a slight increase in the collection requirements from 
those previously approved by OMB. The Holder of the guarantee will be 
required to submit a demand letter to the lender and Agency requesting 
payment if the loan goes into default and the Holder wishes to be 
bought out. This change has been approved through OMB.

Civil Justice Reform

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. In accordance with this rule: (1) All state and local 
laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) administrative proceedings in accordance with 7 CFR part 11 must be 
exhausted before bringing suit in court challenging action taken under 
this rule.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, RHS 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures to State, local, or tribal governments, in 
the aggregate, or to the private sector, of $100 million or more in any 
one year. When such a statement is needed for a rule, section 205 of 
the UMRA generally requires RHS 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 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector. Therefore, this rule is not subject 
to the requirements of sections 202 and 205 of the UMRA.

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose substantial direct compliance costs on state and local 
governments. Therefore, consultation with the states is not required.

Programs Affected

    The affected program is listed in the Catalog of Federal Domestic 
Assistance under Number 10.438, Section 538 Rural Rental Housing 
Guaranteed Loans.

Intergovernmental Consultation

    For the reasons contained in the Final Rule related Notice to 7 CFR 
part 3015, subpart V, this program is subject to Executive Order 12372 
which requires intergovernmental consultation with State and local 
officials. RHS has conducted intergovernmental consultation in the 
manner delineated in 7 CFR part 3015, subpart V.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It is the determination of RHS 
that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment and in 
accordance with the National Environmental Policy Act of 1969, Public 
Law 91-190, an Environmental Impact Statement is not required.

Regulatory Flexibility Act

    This 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 of 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.

[[Page 2928]]

Public Comments

    The Agency received the following comments as a result of the 
publication of the regulation as a Proposed Rule in the Federal 
Register on June 10, 2003, (68 FR 34552).
    The Agency received thirteen responses on the regulation. The 
commentators represented the following:

 Mortgage Bankers and Users of the Program
 Attorneys
 Investment Firms
 Public Bodies
 Rating Agency
 Interest Groups

    Recurring topics of discussion in the comments include increasing 
the interest accrual period, making payment on the guaranteed loan in a 
timely manner, addressing certainty of the guarantee, reducing 
servicing fees, increasing the percentage of the guarantee, clarifying 
the definition of ``Holder'' and the liquidation process, increasing 
the program size, changing the lender approval requirements, and 
integrating the Section 538 program with expiring Section 515 projects.
    The comments that were adopted in the regulation are as follows:
    1. Two commentators suggested that the Agency revise the term 
``bar'' in Sec.  3565.52 because of the connotation of the term in the 
industry. The term was eliminated in this section.
    2. Two respondents recommended including a timeframe for the lender 
to respond to a repurchase demand from the Holder. In Sec.  3565.405(a) 
of the final rule the lender has 10 business days from the date on a 
demand letter to respond to the Holder's request for repurchase. The 
Agency believes that the lender will have made this decision long 
before the Holder demands repurchase.
    3. Two commentators considered the Agency's right to declare the 
guarantee unenforceable in the case where negligent servicing or 
origination is involved as arbitrary. To address the issue, the Agency 
provides a definition of ``negligent servicing or origination'' in 
Sec.  3565.3 and describes the circumstances and procedural actions 
that the Agency must take before the guarantee is rendered 
unenforceable in Sec.  3565.52(a).
    4. One commentator suggested that the Agency substitute ``eligible 
construction expenses'' with ``eligible uses of loan proceeds'' in 
Sec.  3565.52(c)(2) because ``eligible construction expenses'' are not 
defined. The Agency accepted the recommendation and made the change in 
that section.
    5. One commentator recommended clarification of Sec.  3565.52(c)(2) 
on what happens if the required levels of occupancy are not attained 
and/or conversion to a permanent loan does not occur. This section was 
expanded to explain that the guarantee will cover a permanent loan if 
even the required level of occupancy is not obtained if an additional 
operating reserve equal to 2% of the appraised value of the project or 
total development costs, whichever is greater, is set aside prior to 
closing of the construction loan. This cash contribution is an 
additional amount, over and above the required initial operating and 
maintenance reserve contribution.
    6. One commentator questioned why in Sec.  3565.405(b)(3) the 
Holder is responsible for resolving disputes regarding discrepancies 
between the amount claimed by the Holder and the information submitted 
by the lender. The Agency can only coordinate the resolution of the 
discrepancy. The Agency does not have independent knowledge of the 
amount due. Language was added in Sec.  3565.405(b)(3) to clarify this.
    7. Four comments were received about the date that interest starts 
to accrue once a loan is in default. The final rule in Sec.  3565.452 
defines the date interest starts to accrue as the date the Agency 
approves the lender's liquidation plan. If the Agency fails to respond 
to the lender's proposal or advise the lender to make revisions to the 
plan within 20 calendar days, the liquidation plan is approved by 
default.
    8. One commentator recommended clarification on when a lender can 
file an estimated loss claim. Section 3565.453(d) was amended to 
require the lender to file an ``estimated loss claim'' with the 
liquidation plan if the lender expects the liquidation to exceed 90 
calendar days.
    9. Two commentators recommended eliminating moderate or substantial 
rehabilitation of 15 percent of the total estimated replacement cost of 
the project and setting the threshold to $6,500 per unit in Sec.  
3565.252. They argued that moderate or substantial rehabilitation of 15 
percent of the total replacement cost of the project could be a value 
equal to or greater than the current level ($15,000 in the current 
rule), thus defeating the purpose of lowering the threshold to $6,500. 
The Agency agrees. The final rule in Sec.  3565.252 has been changed 
accordingly.
    10. The Agency has been advised that certain provisions needed to 
be added to the proposed rule so that section 538 loans could back 
securities that are guaranteed by the Government National Mortgage 
Association (Ginnie Mae). Ginnie Mae is a government corporation within 
the Department of Housing and Urban Development. Ginnie Mae's mortgage-
backed securities program is governed by the National Housing Act, 12 
U.S.C. 1716 et seq.; by its regulations, 24 CFR 300 et seq.; and by the 
Ginnie Mae Mortgage-Backed Securities Guide. To ensure compatibility 
between GRRHP and Ginnie Mae's mortgage-backed securities program, a 
Subpart K has been added to the final rule. This Subpart K addresses 
requirements for Agency guaranteed loans that back Ginnie Mae 
guaranteed securities. By adding Subpart K to the final rule, a 
securitization option will be available to lenders through Ginnie Mae.
    The issues that the Agency did not adopt are as follows:
    1. Three commentators identified the need to reduce the annual 
servicing fee in Sec.  3565.53(b). The Agency has considered decreasing 
annual fees and concluded that the fees charged by the program are 
within industry standards.
    2. Five respondents recommended a change in Sec.  3565.52(a) to 
reflect a government guarantee of 100% instead of the 90% guarantee. A 
100% guarantee is not permitted by the authorizing statute (42 U.S.C. 
1490 p-2).
    3. Three commentators argued against a limitation on interest 
accrual in Sec.  3565.52(c)(1) and (2). The Agency understands the 
fundamental financial concept of interest accrual on borrowing. 
However, the term limit on interest accrual serves as an incentive for 
lenders to expedite the liquidation process.
    4. Two commentators justified the need to increase program size, 
citing the prohibitive costs of making small loans as a disincentive to 
participation in the program. The Agency is unable to independently 
increase the size of the program since Congress appropriates funds to 
all federal programs.
    5. Two commentators have suggested that the Agency use the section 
538 program to meet the section 515 program's rehabilitation and 
preservation needs. The Agency is reviewing this possibility but has 
not yet been able to develop a model that would keep section 515 rents 
within the affordable income range that its tenants can afford.
    6. Two commentators recommended changing requirements for program 
lender approval in Sec.  3565.103(d)(1). They argue that lenders should 
not be required to obtain a rating from a lender rating agency if the 
lender has demonstrated financial capacity and stability. The Agency 
uses lender rating

[[Page 2929]]

agency information to ascertain the financial capacity and stability of 
the prospective lender. Government use of lender rating agencies is a 
cost-effective means of assessing financial capacity and stability.
    7. Two commentators proposed the expansion of the definition of 
``Holder'' in Sec.  3565.3 so that a bond issuer or trustee may demand 
repurchase directly from the Agency upon loan default. The Agency would 
not be able to identify payments to individual Holders of the guarantee 
if payments were made to an intermediary unless the Holder of the 
guarantee designates another entity to receive payment on his/her 
behalf.

Background

    GRRHP is a relatively new program that is administered by RHS. The 
GRRHP was operated as a pilot program in 1996 and 1997 and has been a 
permanent program since 1998. The program has been designed to increase 
the availability of affordable multifamily housing in rural America 
through partnerships between the Agency and lending sources, as well as 
with state and local housing finance agencies and bond issuers. During 
the early stages of the program, barriers were identified that have 
limited the success of the program. One of the primary barriers has 
been the inability of lenders to close loans due to the limited 
interest of the secondary mortgage market. As a result, the Agency held 
a stakeholders' meeting in December 2000 to identify problem areas. The 
purpose of the following changes is to make the program more attractive 
to the industry without jeopardizing the best interests of the 
Government.
    Allow for a timely payment to investors. In other Rural Development 
guaranteed programs, the security Holder may demand that either the 
lender or the Government buy out the guaranteed portion of the loan 
from the Holder if payments are delinquent by at least 60 calendar 
days, or if the lender has failed to remit to the Holder its pro rata 
share of any payment made by the borrower within 30 calendar days of 
its receipt. While the Holder is effectively taken out prior to 
liquidation of the loan, the lender must continue to meet all of its 
obligations to the Government under the Lender's Agreement and Loan 
Note Guarantee. The inclusion of this provision in Sec.  3565.405(a) 
and (b) is important to investors because they do not want to wait for 
the lender to liquidate the collateral to be reimbursed for their 
investment, enabling them to put their money to better use elsewhere. 
By this rule change, the Agency is also adding definitions to Sec.  
3565.3 for the terms ``Holder,'' ``Negligent servicing or 
origination,'' ``Ginnie Mae,'' ``Government National Mortgage 
Association,'' and amending definitions for the terms `` Interest 
credit'' and ``Permanent loan''.
    Define conditions of the guarantee. A common concern found among 
lenders reviewing the GRRHP were the policies on termination or 
reduction of the guarantee due to a performance failure of the lender. 
It was the consensus that these policies needed to be more clearly 
delineated. In Sec.  3565.52(a), the Agency identifies under what 
circumstances the Agency will exercise its right to terminate the 
guarantee. In addition, the Agency clarifies in Sec.  3565.52(c)(1) the 
items that are included in the maximum guarantee for a permanent loan. 
The maximum guarantee covers 90 percent of the unpaid balance and 
accrued interest up to 90 days after loan default. Penalties incurred 
because of loan default are not covered by the guarantee. Moreover, it 
is important for the regulation to make clear that the investor will be 
held harmless unless they are complicit with the lender in cases 
involving fraud or misrepresentation of fact. This issue has been 
addressed in the revision of Sec.  3565.52.
    Allow the accrual of interest for 90 calendar days after loan 
default. When the lender is liquidating a guaranteed loan and owns any 
of the guaranteed portion of the loan, it may request a tentative loss 
estimate. Currently, interest accrual terminates on the defaulted loan 
if an estimated payment of loss is made. This revision made in Sec.  
3565.452(a) allows interest to accrue for 90 calendar days after the 
date the Agency approves liquidating the loan. This interest accrual 
policy is consistent with other RD loan guarantee programs. Based on 
the weight of the factors used to calculate the program's subsidy rate, 
the impact of this interest accrual policy would be negligible.
    In case of default, the Holder of a Loan Note Guarantee issued 
prior to the effective date of this final rule will stipulate, in a 
written demand for repurchase, its preference for repurchase in 
accordance with the Loan Note Guarantee issued prior to the effective 
date of this final rule. If the demand for repurchase does not 
stipulate a preference for repurchase in accordance with the Loan Note 
Guarantee issued prior to the effective date of this final rule, the 
Agency will process the demand for repurchase allowing accrual of 
interest for 90 calendar days after loan default as stated in this 
final rule.
    The Holder must stipulate a preference for repurchase in accordance 
with the Loan Note Guarantee issued prior to the effective date of this 
final rule in the first demand for repurchase. The Holder of the Loan 
Note Guarantee issued prior to the effective date of this final rule 
cannot make a subsequent demand for repurchase changing the preference 
stipulated in the original demand for repurchase.
    Lower per unit threshold for acquisition with rehabilitation from 
$15,000 per unit to $6,500 per unit. Lowering the per unit 
rehabilitation threshold in Sec.  3565.252 affords new opportunities to 
preserve affordable housing in a rural community.
    Eliminate the timeframe for liquidation, which is currently at 9 
months. Eliminating the liquidation timeframe in Sec.  
3565.453(a)(9)(c) affords the lender the opportunity to sell the 
property for the highest and best price in accordance with market 
conditions.
    Amend Sec.  3565.212 by eliminating the word ``; and'' from 
paragraph (c) and adding a period in its place and by eliminating 
paragraph (d). This modification to Sec.  3565.212 is necessary because 
paragraph (d) prohibits the Agency from guaranteeing a loan, which 
contains tax-exempt financing. Paragraph (d) of Sec.  3565.212 
contradicts Sec.  3565.6, which allows tax-exempt financing to be used 
as a source of capital for the guaranteed loan.
    Amend Sec.  3565.103 by adding Ginnie Mae in paragraph (d)(1). This 
modification to Sec.  3565.103 is necessary because lenders who are 
Ginnie Mae issuers must provide proof of their status as an issuer on a 
continuing basis when a lender becomes approved as a section 538 
program lender.
    Add Subpart K to final rule to explain the conditions under which 
Ginnie Mae will securitize Section 538 loans. To ensure compatibility 
between GRRHP and Ginnie Mae's mortgage-backed securities program a 
Subpart K has been added to the final rule. Subpart K addresses the 
requirements for Agency guaranteed loans that back Ginnie Mae 
guaranteed securities. By adding Subpart K to the final rule, a 
securitization option will be available to lenders through Ginnie Mae.

List of Subjects in 7 CFR Part 3565

    Bankruptcy, Banks, Conflict of interests, Credit, Environmental 
impact statements, Fair housing, Government procurement, Guaranteed 
loans, Hearing and appeal procedures, Housing standards, Lobbying, Low 
and moderate income housing, Manufactured homes, Mortgages, Real 
property acquisition, Surety bonds.

[[Page 2930]]


0
Therefore, chapter XXXV, title 7, Code of Federal Regulations is 
amended to read as follows:

PART 3565--GUARANTEED RURAL RENTAL HOUSING PROGRAM

0
1. The authority citation for part 3565 continues to read as follows:

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

Subpart A--General Provisions

0
2. Section 3565.3 is amended by adding, in alphabetical order, a 
definition of ``Ginnie Mae'', ``Government National Mortgage 
Association'', ``Holder'', and ``Negligent servicing or origination,'' 
and by revising the definitions for ``Interest credit'' and ``Permanent 
loan'' to read as follows:


Sec.  3565.3  Definitions.

* * * * *
    Ginnie Mae. Ginnie Mae is a reference to the Government National 
Mortgage Association.
    Government National Mortgage Association. The Government National 
Mortgage Association (Ginnie Mae) is a government corporation within 
the Department of Housing and Urban Development. Ginnie Mae guarantees 
privately issued securities backed by mortgages or loans which are 
insured or guaranteed by the Federal Housing Administration (FHA), the 
Department of Veterans Affairs (VA), or the Rural Housing Service (RHS) 
and certain other loans or mortgages guaranteed or insured by the 
Government.
* * * * *
    Holder. A person or entity, other than the lender, who owns all or 
part of the guaranteed portion of the loan with no servicing 
responsibilities. When the single note option is used and the lender 
assigns a part or all of the guaranteed note to an assignee, the 
assignee becomes a Holder only when the Agency receives notice and the 
transaction is completed through use of an assignment guarantee 
agreement form approved by the Agency.
* * * * *
    Interest credit. A subsidy available to eligible borrowers that 
reduces the effective interest rate of the loan to the Applicable Long 
Term Monthly AFR.
* * * * *
    Negligent servicing or origination. Negligent servicing or 
origination is a failure to perform those services which a reasonably 
prudent lender would perform in servicing or originating its own 
portfolio and includes not only the failure to act but also the failure 
to act in a timely manner.
* * * * *
    Permanent loan. A permanent loan is defined as a mortgage loan 
usually covering development costs, interim loans, construction loans, 
financing expenses, marketing, administrative, legal, and other Agency 
approved costs. This loan differs from the construction loan in that 
financing goes into place after the project is completely constructed 
and open for occupancy. It is a long-term obligation, generally for a 
period of no less than 25 years and no more than 40 years.
* * * * *

Subpart B--Guarantee Requirements

0
3. Section 3565.52 is revised to read as follows:


Sec.  3565.52  Conditions of guarantee.

    A loan guarantee under this part will be evidenced by a Loan Note 
Guarantee issued by the Agency. Each lender will execute a Lender's 
Agreement. If a valid Lender's Agreement already exists, it is not 
necessary to execute a new Lender's Agreement with each loan guarantee.
    (a) Rights and liabilities. A guarantee under this part is backed 
by the full faith and credit of the United States and is incontestable 
except for fraud or misrepresentation of which the lender had knowledge 
at the time the lender acquired the guarantee or assigned the loan, or 
in which a lender participates or condones. The guarantee will be 
unenforceable by the lender to the extent any loss is occasioned by a 
violation of usury laws, negligent servicing or origination by the 
lender, including a failure to acquire required security, or as a 
result of a use of loan funds for purposes other than those authorized 
by the Agency. The acts in the previous sentence constitute grounds for 
the refusal to make full payment under the guarantee to the lender, and 
will not be taken until the Agency gives the lender notice of the acts 
or omissions that it considers to constitute such grounds, specifying 
the applicable provisions of the Statute, Regulations, Loan Note 
Guarantee, or Lender's Agreement; the lender has not cured the acts or 
omissions within 90 calendar days after such notice; and the acts or 
omissions can reasonably be expected to have a material adverse effect 
on the credit quality of the guaranteed mortgage or the physical 
condition of the property securing the guaranteed mortgage. If such 
acts or omissions cannot be cured within a 90 calendar day period, the 
90 calendar day cure period automatically shall be extended so long as 
curative activities are commenced during the 90 calendar day period. At 
no time shall the curative period extend more than 270 calendar days 
from the expiration of the original 90 calendar day cure period. When a 
guaranteed portion of a loan is sold to a Holder, the Holder shall 
succeed to all rights of the lender under the Loan Note Guarantee to 
the extent of the portion purchased. The lender will remain bound to 
all obligations under the Loan Note Guarantee, Lender's Agreement, and 
the Agency program regulations.
    (b) Liability of the Holder. The Holder shall not be liable for the 
actions of the lender including, but not limited to, negligence, fraud, 
abuse, misrepresentation or misuse of funds, and its rights under the 
guarantee shall be fully enforceable notwithstanding the actions of the 
lender, unless the Holder has knowledge of fraud, misrepresentation or 
misuse of funds when it becomes the Holder or condones or participates 
in such actions.
    (c) Guarantee percentage and payment. Both permanent loans and 
combination construction and permanent loans are eligible for a 
guaranty subject to the following limitations:
    (1) Permanent loans. The Agency will issue a permanent loan 
guarantee after a minimum level of acceptable occupancy of 90% for 90 
consecutive days is attained or an additional operating reserve equal 
to 2% of the appraised value of the project or total development costs, 
whichever is greater, is set aside. This cash contribution is an 
additional amount, over and above the required initial operating and 
maintenance reserve contribution. In either case, the permanent 
guarantee will be issued when the 2% additional reserve amount is set 
aside prior to closing the construction loan or the minimum level of 
occupancy is attained prior to the expiration of the Conditional 
Commitment, including any extensions thereto. The maximum guarantee 
payment for a permanent loan will be 90 percent of the unpaid principal 
and interest up to default and accrued interest 90 calendar days from 
the date the liquidation plan is approved by the Agency, as defined in 
Sec.  3565.452. Penalties incurred as a result of default are not 
covered by the guarantee. The Agency may provide a lesser guarantee 
percentage based upon its evaluation of the credit quality of the loan. 
The Agency liability under any guarantee will decrease or increase, in 
proportion to any increase or decrease in the amount of the unpaid 
portion of

[[Page 2931]]

the loan, up to the maximum amount specified in the Loan Note 
Guarantee.
    (2) Combination construction and permanent loans. For combination 
construction and permanent loans, the Agency will guarantee advances 
during the construction loan period, which cannot exceed 24 months. The 
guarantee of construction loan advances will cover a permanent loan 
once the minimum level of acceptable occupancy of 90% for 90 
consecutive days is attained or an additional operating reserve equal 
to 2% of the appraised value of the project or total development costs, 
whichever is greater, is set aside prior to closing the construction 
loan. This cash contribution is an additional amount, over and above 
the required initial operating and maintenance reserve contribution. 
The maximum guarantee of construction advances related to a combination 
construction and permanent loan will not at any time exceed the lesser 
of 90 percent of the amount of principal and interest up to default 
advanced for eligible uses of loan proceeds or 90 percent of the 
original principal amount and interest up to default of the combination 
loan. Penalties incurred as a result of default are not covered by the 
guarantee. The Agency may provide a lesser guarantee percentage based 
upon its evaluation of the credit quality of the loan. Conversion to a 
permanent loan guarantee will become effective when the Agency provides 
the lender with written confirmation of the conversion date.
    In addition, the lender shall require credit enhancements to 
protect the Government's guarantee. Acceptable credit enhancements 
include:
    (i) Surety bonding or performance and payment bonding (the 
preferred credit enhancement);
    (ii) An irrevocable letter of credit acceptable to the Agency; or
    (iii) A pledge by the lender of acceptable collateral.
    (3) Maximum loss payment. The maximum loss payment to a lender or 
Holder is as follows:
    (i) To any Holder, 100 percent of any loss sustained by the Holder 
on the guaranteed portion of the loan and on interest due on such 
portion.
    (ii) To the lender, the lesser of:
    (A) Any loss sustained by the lender on the guaranteed portion, 
including principal, interest and accrued interest up to 90 days 
evidenced by the notes or assumption agreements and secured advances 
for protection and preservation of collateral made with the Agency's 
authorization; or
    (B) The guaranteed principal advanced to or assumed by the borrower 
and any interest and accrued interest up to 90 days due thereon.

Subpart C--Lender Requirements

0
4. Section 3565.102 is amended by revising paragraph (b) to read as 
follows:


Sec.  3565.102  Lender eligibility.

* * * * *
    (b) Meet the qualifications and be approved by Fannie Mae, Freddie 
Mac or Ginnie Mae to make multifamily housing loans that are to be sold 
to or securitized by such corporations;
* * * * *

0
5. Section 3565.103 is amended by revising paragraph (d)(1) to read as 
follows:


Sec.  3565.103  Approval requirements.

* * * * *
    (d) * * *
    (1) Overall financial strength, including capital, liquidity, and 
loan loss reserves, to have an acceptable level of financial soundness 
as determined by a lender rating service (such as Sheshunoff, Inc.); or 
to be an approved Fannie Mae, Freddie Mac, Ginnie Mae or HUD Federal 
Housing Administration multifamily lender; or, if a state housing 
finance agency, to have a top tier rating by a rating agency (such as 
Standard and Poor's Corporation);
* * * * *

Subpart E--Loan Requirements


Sec.  3565.212  [Amended]

0
6. Section 3565.212 is amended by removing the word ``; and'' from 
paragraph (c) and adding a period in its place and by removing 
paragraph (d).

Subpart F--Property Requirements

0
7. Section 3565.252 is revised to read as follows:


Sec.  3565.252  Housing types.

    The property may include new construction or rehabilitation of 
existing structures. The units may be attached, detached, semi-
detached, row houses, modular or manufactured houses, or multifamily 
structures. Manufactured housing must meet Agency requirements 
contained in 7 CFR part 1924, subpart A or a successor regulation. The 
Agency will guarantee proposals for new construction or acquisition 
with moderate or substantial rehabilitation of at least $6,500 per 
dwelling unit. The portion of guaranteed funds available for 
acquisition with rehabilitation may be limited in the annual Notice of 
Fund Availability.

Subpart I--Servicing Requirements

0
8. Section 3565.403 is amended by redesignating paragraphs (a), (b), 
(c), and (d) as paragraphs (b), (c), (d), and (e), respectively, and by 
adding a new paragraph (a) to read as follows:


Sec.  3565.403  Special servicing.

* * * * *
    (a) Repurchase from Holder. For securitized loans, the Holder may 
require the lender or Government to repurchase the security in 
accordance with the provisions of Sec.  3565.405.
* * * * *


Sec.  3565.404  [Amended]

0
9. Section 3565.404 is amended by revising the heading to read as 
follows:


Sec.  3565.404  Transfer of loans or mortgage servicing.

0
10. Section 3565.405 is added to read as follows:


Sec.  3565.405  Repurchase of guaranteed loans.

    (a) Repurchase by lender. The Holder may make written demand on the 
lender to repurchase the unpaid guaranteed portion of the loan when the 
borrower is in default not less than 60 calendar days on principal or 
interest due on the loan; or the lender has failed to remit to the 
Holder its pro rata share of any payment made by the borrower within 30 
calendar days of receipt by the lender. The Holder must concurrently 
send a copy of the demand letter to the Agency. The lender will notify 
the Holder and the Agency of its decision to repurchase within 10 
business days from the date of the written demand letter by the Holder. 
The lender may agree to repurchase the unpaid portion of the entire 
loan from the Holder, even though the guarantee does not cover any 
unguaranteed portion of the loan held by the Holder. If the lender 
decides to repurchase, the lender has 30 calendar days from the date of 
the Holder's written demand letter to do so. The guarantee does not 
cover any unguaranteed portion of the loan or the note interest to the 
Holder on the guaranteed loan accruing after 90 calendar days from the 
date of the Holder's demand letter to the lender requesting the 
repurchase. The lender may deduct the lender's servicing fee from the 
repurchase amount. The lender will accept an assignment without 
recourse from the Holder upon repurchase. The lender is encouraged to 
repurchase the loan to facilitate the accounting of funds, resolve 
problems, and to prevent default where and when reasonable.

[[Page 2932]]

    (b) Repurchase by Agency. (1) If the lender does not repurchase the 
loan as provided in paragraph (a) of this section, the Agency will 
purchase from the Holder the unpaid principal balance of the guaranteed 
portion together with accrued interest to date of repurchase, less the 
lender's servicing fee, within 30 calendar days after written demand to 
the Agency from the Holder. The guarantee will not cover the note 
interest to the Holder on the guaranteed loan accruing after 90 
calendar days from the date of the original demand letter of the Holder 
to the lender requesting the repurchase.
    Holders of Loan Note Guarantees that have been issued prior to the 
effective date of this final rule may opt to adhere to the terms and 
conditions of the Loan Note Guarantee then in effect. In case of loan 
default, the Holder of a Loan Note Guarantee issued prior to the 
effective date of this final rule will stipulate, in a written demand 
for repurchase, its preference for repurchase in accordance with the 
Loan Note Guarantee issued prior to the effective date of this final 
rule. If the demand for repurchase does not stipulate a preference for 
repurchase in accordance with the Loan Note Guarantee issued prior to 
the effective date of this final rule, the Agency will process the 
demand for repurchase as stated in this final rule. The Holder must 
stipulate a preference for repurchase in accordance with the Loan Note 
Guarantee issued prior to the effective date of this final rule in the 
first demand for repurchase. The Holder of the Loan Note Guarantee 
issued prior to the effective date of this final rule cannot make a 
subsequent demand for repurchase changing the preference stipulated in 
the original demand for repurchase.
    (2) The Holder's demand to the Agency must include a copy of the 
written demand made to the lender. The Holder must also include 
evidence of its right to require payment from the Agency. Such evidence 
will consist of either the original of the Loan Note Guarantee properly 
endorsed to the Agency or the original of an Agency approved assignment 
guarantee agreement, properly assigned to the Agency without recourse 
including all rights, title, and interest in the loan. The Holder must 
include in its demand the amount due including unpaid principal, unpaid 
interest to date of demand, and interest subsequently accruing from 
date of demand to proposed payment date. The Agency will be subrogated 
to all rights of the Holder.
    (3) The Agency will notify the lender of its receipt of the 
Holder's demand for payment. The lender must provide the Agency with 
the information necessary for the Agency to determine the appropriate 
amount due the Holder within 10 business days from the date of the 
written demand letter to the lender from the Holder requesting 
repurchase of the guaranteed portion. The lender will furnish a current 
statement certified by an appropriate authorized officer of the lender 
stating the unpaid principal and interest then owed by the borrower on 
the loan and the amount then owed to any Holder. Any discrepancy 
between the amount claimed by the Holder and the information submitted 
by the lender must be resolved between the lender and the Holder before 
payment will be approved. The Agency will coordinate the resolution of 
the discrepancy. Such conflict will suspend the running of the 30 
calendar day payment requirement.
    (4) Purchase by the Agency does not change, alter, or modify any of 
the lender's obligations to the Agency arising from the loan or 
guarantee nor does it waive any of the Agency's rights against the 
lender. As Holder, the Agency will have the right to set-off any 
payments the Agency owes the lender.

Subpart J--Assignment, Conveyance, and Claims

0
11. Section 3565.452 is amended by revising paragraph (a) to read as 
follows:


Sec.  3565.452  Decision to liquidate.

    (a) A decision to liquidate shall be made when it is determined 
that the default cannot be cured through actions contained in Sec.  
3565.403 or it has been determined that it is in the best interest of 
the Agency and the lender to liquidate. For interest accrual purposes, 
interest will accrue for 90 calendar days after the date the 
liquidation plan is approved by the Agency. If within 20 calendar days 
of the Agency's receipt of the liquidation plan, the Agency fails to 
respond to the lender's proposal or advise the lender to make revisions 
to the plan that was submitted, the liquidation plan will be approved 
by default, and the 90 calendar day period for interest accrual will 
commence.
* * * * *

0
12. Section 3565.453 is revised to read as follows:


Sec.  3565.453  Disposition of the property.

    (a) Submission of the liquidation plan. The lender will, within 30 
calendar days after a decision to liquidate, submit to the Agency in 
writing, its proposed detailed plan of liquidation. The Agency will 
inform the lender, in writing, whether the Agency concurs in the 
lender's liquidation plan. Should the Agency and the lender not agree 
on the liquidation plan, negotiations will take place between the 
Agency and the lender to resolve the disagreement. When the liquidation 
plan is approved by the Agency, the lender will proceed expeditiously 
with liquidation. The liquidation plan submitted to the Agency by the 
lender shall include:
    (1) Satisfactory proof of the lender's ownership of the guaranteed 
loan promissory note and related security instruments.
    (2) A copy of the payment ledger or equivalent which reflects the 
current loan balance and accrued interest to date and the method of 
computing the interest.
    (3) A full and complete list of all collateral including any 
personal and corporate guarantees.
    (4) The recommended liquidation methods for making the maximum 
collection possible on the indebtedness and the justification for such 
methods, including recommended actions for:
    (i) Obtaining an appraisal of the collateral;
    (ii) Acquiring and disposing of all collateral;
    (iii) Collecting from guarantors;
    (iv) Setting the proposed date of foreclosure; and
    (v) Setting the proposed date of liquidation.
    (5) Necessary steps for protection of the tenants and preservation 
of the collateral.
    (6) Copies of the borrower's latest available financial statements.
    (7) Copies of the guarantor's latest available financial 
statements.
    (8) An itemized list of estimated liquidation expenses expected to 
be incurred along with justification for each expense.
    (9) A schedule to periodically report to the Agency on the progress 
of liquidation.
    (10) Estimated protective advance amounts with justification.
    (11) Proposed protective bid amounts on collateral to be sold at 
auction and a breakdown to show how the amounts were determined.
    (12) If a voluntary conveyance is considered, the proposed amount 
to be credited to the guaranteed debt.
    (13) Any legal opinions supporting the decision to liquidate.
    (14) The lender will obtain a complete appraisal report on all 
collateral securing the loan, which will reflect the fair market value 
and potential liquidation value, and an examination of the title on the 
collateral. In order to formulate a liquidation plan, which maximizes 
recovery, collateral must be

[[Page 2933]]

evaluated for hazardous substances, petroleum products, or other 
environmental hazards, which may adversely impact the market value of 
the collateral.
    (b) A transfer and assumption of the borrower's operation can be 
accomplished before or after the loan goes into liquidation. However, 
if the collateral has been purchased through foreclosure or the 
borrower has conveyed title to the lender, no transfer and assumption 
is permitted.
    (c) A protective bid may be made by the lender, with prior Agency 
written approval, at a foreclosure sale to protect the lender's and the 
Agency's interest. The protective bid will not exceed the amount of the 
loan, including expenses of foreclosure, and should be based on the 
liquidation value considering estimated expenses for holding and 
reselling the property. These expenses include, but are not limited to, 
expenses for resale, interest accrual, length of weatherization, and 
prior liens.
    (d) Filing an estimated loss claim. When the lender is conducting 
the liquidation and owns any or all of the guaranteed portion of the 
loan, the lender will file an estimated loss claim with the liquidation 
plan if the lender expects liquidation to exceed 90 calendar days. The 
estimated loss payment will be based on the outstanding loan amount 
minus the liquidation value of the collateral. For the purpose of 
reporting and loss claim computation, the loss claim will be promptly 
processed in accordance with applicable Agency regulations, as set 
forth in this section. The loss claim calculation will include 90 
calendar days of interest accrual on the defaulted loan at the time the 
estimated loss claim is paid by the Agency. If the lender estimates 
that there will be no loss after considering the costs of liquidation, 
the lender submits an estimated loss claim of zero. Interest accrual 
will cease 90 calendar days after the date the liquidation plan is 
approved by the Agency.
    (e) Property disposition. Once the liquidation plan has Agency 
approval, the lender must make every effort to liquidate the property 
in a manner that will yield the highest market value consistent with 
the protections afforded to tenants in 7 CFR part 1944, subpart L or 
successor regulation.
    (f) Accounting and reports. When the lender conducts liquidation, 
the lender will account for funds during the period of liquidation and 
provide the Agency with reports at least quarterly on the progress of 
liquidation, including disposition of collateral, resulting costs, and 
additional procedures necessary for successful completion of the 
liquidation.
    (g) Transmitting payments and proceeds to the Agency. When the 
Agency is the Holder of a portion of the guaranteed loan, the lender 
will transmit to the Agency its pro rata share of any payments received 
from the borrower, liquidation, or elsewhere.

0
13. Section 3565.457 is revised to read as follows:


Sec.  3565.457  Determination of claim amount.

    In all liquidation cases, final settlement will be made with the 
lender after the collateral is liquidated, unless otherwise designated 
as a future recovery or after settlement and compromise of all parties 
has been completed.
    (a) Report of loss form. An Agency approved form will be used for 
calculations of all estimated and final loss determinations. Estimated 
loss payments will only be paid by the Agency after it has approved a 
liquidation plan.
    (b) Estimated loss. An estimated loss claim based on liquidation 
appraisal value will be prepared and submitted by the lender.
    (1) The estimated loss payment shall be applied as of the date of 
such payment. The total amount of the loss payment paid by the Agency 
will be applied by the lender on the loan debt. Such application does 
not release the borrower from liability.
    (2) The Government's written authorization is required for all 
protective advances in excess of $5,000. Protective advances include, 
but are not limited to, advances made for property taxes, annual 
assessments, ground rent, hazard or flood insurance premiums affecting 
the collateral, and other expenses necessary to preserve or protect the 
security. Attorney fees are not a protective advance. A protective 
advance claim will be paid only at the time of the final report of loss 
payment except in certain transfer and assumption situations with 
Agency approval.
    (c) Final loss. Within 30 calendar days after liquidation of all 
collateral, except for certain unsecured personal or corporate 
guarantees (as provided for in this section) is completed, a final 
report of loss on a form approved by the Agency must be prepared and 
submitted by the lender to the Agency. Before approval by the Agency of 
any final loss report, the lender must account for all funds during the 
period of liquidation, disposition of the collateral, all costs 
incurred, and any other information necessary for the successful 
completion of liquidation. Upon receipt of the final accounting and 
report of loss, the Agency may audit all applicable documentation to 
determine the final loss. The lender will make its records available 
and otherwise assist the Agency in making any investigation. The 
documentation accompanying the report of loss must support the amounts 
shown on the report of loss form.
    (1) A determination must be made regarding the collectibility of 
unsecured personal and corporate guarantees. If reasonably possible, 
such guarantees should be promptly collected prior to completion of the 
final loss report. However, in the event that collection from the 
guarantors appears unlikely or will require a prolonged period of time, 
the report of loss will be filed when all other collateral has been 
liquidated, and unsecured personal or corporate guarantees will be 
treated as a future recovery with the net proceeds to be shared on a 
pro rata basis by the lender and the Agency.
    (2) The lender must document that all of the collateral has been 
accounted for and properly liquidated and that liquidation proceeds 
have been properly accounted for and applied correctly to the loan.
    (3) The lender will show a breakdown of any protective advance 
amount as to the payee, purpose of the expenditure, date paid, and 
evidence that the amount expended was proper and that payment was 
actually made.
    (4) The lender will show a breakdown of liquidation expenses as to 
the payee, purpose of the expenditure, date paid, and evidence that the 
amount expended was proper and that payment was actually made. 
Liquidation expenses are recoverable only from collateral proceeds.
    (5) Accrued interest will be supported by documentation as to how 
the amount was accrued.
    (6) Loss payments will be paid by the Agency within 60 calendar 
days after the receipt of the final loss report and accounting of the 
collateral.
    (7) Should there be a circumstance where the lender cannot or will 
not sign a final report of loss, the State Director may complete the 
final report of loss and submit it to the Finance Office without the 
lender's signature. Before this action can be taken, all collateral 
must be disposed of or accounted for; there must be no evidence of 
fraud, misrepresentation, or negligent servicing by the lender; and all 
efforts to obtain the cooperation of the lender must have been 
exhausted and documented.
    (d) Maximum guarantee payment. The maximum guarantee payment will 
not exceed the amount of guarantee

[[Page 2934]]

percentage as contained in the guarantee agreement (but in no event 
more than 90%) times the allowable loss amount.
    (e) Rent. Any net rental or other income that has been received by 
the lender from the collateral will be applied on the guaranteed loan 
debt after paying operating expenses of the property.
    (f) Liquidation costs. Liquidation costs will be deducted from the 
proceeds of the disposition of primary collateral. If changed 
circumstances after submission of the liquidation plan require a 
substantial revision of liquidation costs, the lender will procure the 
Agency's written concurrence prior to proceeding with the proposed 
changes.
    (g) Payment. When the Agency finds the final report of loss to be 
proper in all respects, it will approve the form and proceed as 
follows:
    (1) If the loss is greater than any estimated loss payment, the 
Agency will pay the additional amount owed by the Agency to the lender.
    (2) If the loss is less than the estimated loss payment, the lender 
will reimburse the Agency for the overpayment.
    (3) If the Agency determines that it is in the Government's best 
interest to take assignment of the loan and conduct liquidation, as 
stipulated in 42 U.S.C. 1490(i)(3), Assignment by Secretary, the Agency 
will pay the lender in accordance with the Loan Note Guarantee.
    (h) Date of loss. The date of loss is the date on which the 
collateral will be liquidated in the liquidation plan, unless an 
alternative date is approved by the Agency. Where the Agency chooses to 
accept an assignment of the loan or conveyance of title, the date of 
loss will be the date on which the Agency accepts assignment of the 
loan or conveyance of title.
    (i) Allowable claim amount. The allowable claim amount must be 
calculated by:
    (1) Adding to the unpaid principal and interest on the date of 
loss, an amount approved by the Agency for payments made by the lender 
for amounts due and owning on the property, including:
    (i) Property taxes and other protective advances as approved by the 
Agency;
    (ii) Water and sewer charges and other special assessments that are 
liens prior to the guaranteed loan;
    (iii) Insurance of the property; and
    (iv) Reasonable liquidation expenses.
    (2) And by deducting the following items:
    (i) Any amount received by the lender on the account of the 
guaranteed loan after the date of default;
    (ii) Any net income received by the lender from the secured 
property after the date of default; and
    (iii) Any cash items retained by the lender, except any amount 
representing a balance of the guaranteed loan not advanced to the 
borrower. Any loan amount not advanced will be applied by the lender to 
reduce the outstanding principal on the loan.
    (j) Lender certification. The lender must certify that all 
possibilities of collection have been exhausted and that all of the 
items specified in paragraph (c) of this section have been identified 
and reported to the Agency as a condition for payment of claim.

0
14. A new subpart K, consisting of Sec. Sec.  3565.501 through 3565.550 
is added to read as follows:

Subpart K--Agency Guaranteed Loans That Back Ginnie Mae Guaranteed 
Securities

Sec.
3565.501 Applicability.
3565.502 Incontestability.
3565.503 Repurchase.
3565.504 Transfers.
3565.505 Liability.
3565.506-3565.549 [Reserved]
3565.550 OMB control number.


Sec.  3565.501  Applicability.

    The provisions of this subpart apply when Agency guaranteed loans 
are used to back Ginnie Mae securities. In instances where this subpart 
applies, the provisions of this subpart prevail over any other 
provisions of this part.


Sec.  3565.502  Incontestability.

    In the case of loans that back Ginnie Mae securities or loans that 
are acquired by Ginnie Mae as a consequence of its guaranty, the Agency 
guarantee under this part is incontestable except that the guarantee 
may not be enforced by a lender who commits fraud or misrepresentation 
or by a lender who had knowledge of the fraud or misrepresentation at 
the time such a lender acquired the guarantee or was assigned the loan.


Sec.  3565.503  Repurchase.

    Lenders and security Holders must comply with Ginnie Mae 
requirements regarding the repurchase of loans from pools backing 
Ginnie Mae guaranteed securities.


Sec.  3565.504  Transfers.

    (a) Loans and/or mortgage servicing on loans backing Ginnie Mae 
guaranteed securities may only be transferred to a Ginnie Mae issuer 
and may only be transferred with prior Ginnie Mae approval.
    (b) Agency approval shall not be required for transfer of the 
servicing on the guaranteed mortgages to Ginnie Mae.


Sec.  3565.505  Liability.

    (a) Ginnie Mae shall not be liable for the actions of the lender 
including, but not limited to, negligence, fraud, abuse, 
misrepresentation or misuse of funds, property condition, or violations 
of usury laws.
    (b) Ginnie Mae's rights under the guarantee shall be fully 
enforceable notwithstanding the actions of the lender.


Sec. Sec.  3565.506-3565.549  [Reserved]


Sec.  3565.550  OMB control number.

    According to the Paperwork Reduction Act of 1995, no party is 
required to respond to a collection of information unless it displays a 
valid OMB control number. The valid OMB control number for this 
information collection is 0575-0174.

    Dated: January 11, 2005.
Gilbert Gonzales,
Acting Under Secretary, Rural Development.
[FR Doc. 05-1034 Filed 1-18-05; 8:45 am]
BILLING CODE 3410-XV-U