Continuous Construction-Permanent Loan Guarantees Under the Section 538 Guaranteed Rural Rental Housing Program, 4707-4710 [2010-1792]

Agencies

• DEPARTMENT OF AGRICULTURE
• Rural Housing Service

[Federal Register Volume 75, Number 19 (Friday, January 29, 2010)]
[Proposed Rules]
[Pages 4707-4710]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-1792]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 75, No. 19 / Friday, January 29, 2010 / 
Proposed Rules

[[Page 4707]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3565

RIN-0575-AC80


Continuous Construction-Permanent Loan Guarantees Under the 
Section 538 Guaranteed Rural Rental Housing Program

AGENCY: Rural Housing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: The Rural Housing Service (an agency within the Rural 
Development mission area) is proposing an additional form of guarantee 
under the Guaranteed Rural Rental Housing Program regulation. This 
action is taken to enhance efficiency, flexibility, and effectiveness 
in managing the program. The Agency currently offers a guarantee on a 
permanent loan only and a guarantee on construction advances and the 
permanent financing phase of a project. In addition to the proposed 
form of guarantee, the Agency will continue to offer the two types of 
guarantees currently provided.

DATES: Written or e-mail comments must be received on or before March 
30, 2010.

ADDRESSES: You may submit comments to this rule by any of the following 
methods:
     E-Mail: comments@wdc.usda.gov. Include ``RIN No. 0575-
AC80'' in the subject line of the message.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Submit written comments via the U.S. Postal Service 
to the Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., 
Washington, DC 20250-0742.
     Hand Delivery/Courier: Submit written comments via Federal 
Express Mail or other 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, Washington, 
DC 20024.
    All written comments will be available for public inspection during 
regular work hours at 300 7th Street, SW., 7th Floor address listed 
above.

FOR FURTHER INFORMATION CONTACT: Tammy S. Daniels, Financial and Loan 
Analyst, USDA Rural Development Guaranteed Rural Rental Housing 
Program, Multi-Family Housing Guaranteed Loan Division, U.S. Department 
of Agriculture, South Agriculture Building, Room 1271, STOP 0781, 1400 
Independence Avenue, SW., Washington, DC 20250-0781. E-mail: 
tammy.daniels@wdc.usda.gov. Telephone: (202) 720-0021. This number is 
not toll-free. Hearing or speech-impaired persons may access that 
number by calling the Federal Information Relay Service toll-free at 
(800) 877-8339.

SUPPLEMENTARY INFORMATION: 

Classification

    This rule has been determined not to be significant for the 
purposes of Executive Order 12866 and, therefore, has not been reviewed 
by the Office of Management and Budget (OMB).

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. If this rule is adopted: (1) Unless otherwise 
specifically provided, 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 except as specifically prescribed in 
the rule; and (3) the appeal procedures of the National Appeals 
Division (7 CFR part 11) must be exhausted before bringing suit.

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, the 
Agency generally must prepare a written statement, including a cost-
benefit analysis, for final rules with ``Federal mandates'' that may 
result in expenditures to State, local, or tribal governments, in the 
aggregate, or to the private sector, of $100 million or more in any one 
year. When such a statement is needed for a rule, section 205 of the 
UMRA generally requires the Agency to identify and consider a 
reasonable number of regulatory alternatives and adopt the least 
costly, 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

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

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
Sec.  1940.310(e)(3). Rural Development has determined 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 (NEPA) of 1969, 42 U.S.C. 4321 et seq., an 
Environmental Impact Statement is not required. Loan applications will 
be reviewed individually to determine compliance with NEPA.

Regulatory Flexibility Act

    This 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. This rule will affect both small and large entities in 
the same manner. This rule has no significant changes in information 
collection or regulatory requirements that would have a negative impact 
on either small or large entities in an economic way.

[[Page 4708]]

Programs Affected

    This program is listed in the Catalog of Federal Domestic 
Assistance under Number 10.438.

Intergovernmental Consultation

    For the reasons set forth 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. The Agency has conducted intergovernmental consultation in 
the manner delineated in RD Instruction 1940-J (available in any Rural 
Development office).

Paperwork Reduction Act of 1995

    The information collection requirements contained in this 
regulation have been approved by OMB under the provisions of 44 U.S.C. 
chapter 35 and have been assigned OMB control number 0575-0174 in 
accordance with the Paperwork Reduction Act of 1995. No person is 
required to respond to a collection of information unless it displays a 
valid OMB control number.

E-Government Act Compliance

    Rural Development is committed to complying with the E-Government 
Act to promote the use of the Internet and other information 
technologies to provide increased opportunities for citizen access to 
Government information and services and for other purposes.

Background Information

    The Guaranteed Rural Rental Housing Program (GRRHP) currently 
offers two forms of guarantees: (1) A guaranty for permanent loans and 
(2) a guarantee which provides a limited duration guarantee for 
advances during the construction period with the limited duration 
provision being automatically removed if certain conditions are met. 
Under this proposed rule, the Agency proposes, for loans that meet 
certain criteria, to provide a single, continuous guarantee during the 
construction phase for construction advances and the permanent 
financing phase of the project. This third form of guarantee is being 
proposed in response to input from GRRHP stakeholders who believe that 
this option will allow the program to serve more borrowers thus making 
affordable housing available for more low to moderate income families.
    In addition, the proposed rule makes several technical corrections 
and clarifications and eliminates the anachronistic requirement that 
lenders certify that their computer systems comply with year 2000 
technology.

List of Subjects in 7 CFR Part 3565

    Bankruptcy, Banks, Banking, civil rights, 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 bonding.

    Accordingly, chapter XXXV, title 7, Code of Federal Regulations is 
proposed to be amended as follows:

PART 3565--GUARANTEED RURAL RENTAL HOUSING PROGRAM

    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

    2. Section 3565.3 is amended by removing the definition for 
``combination construction and permanent loan'' and by adding 
alphabetically a definition for ``construction and permanent loan,'' 
``construction contingency reserve,'' ``lease-up period,'' ``lease-up 
reserve,'' ``loan-to-cost ratio,'' and ``operating and maintenance 
reserve,'' to read as follows:


Sec.  3565.3  Definitions.

* * * * *
    Construction and permanent loan. A loan which provides advances 
during the construction period and remains in place as a permanent loan 
at the completion of construction.
    Construction contingency reserve. A cash reserve of at least 2 
percent of the construction contract, inclusive of the contractor's 
fee, and all hard and soft costs, that must be set up and fully funded 
by the closing of the construction loan. This reserve will be held by 
the lender and will only be disbursed for Agency and lender approved 
change order requests.
* * * * *
    Lease-up period. The period of time that begins when the first unit 
in the project receives a certificate of occupancy until the time that 
occupancy of 90% of the units for a minimum of 90 consecutive days is 
achieved.
    Lease-up reserve. A cash deposit which is available to a property 
to help pay operating costs and debt service at the initiation of 
operations while units are being leased to their initial occupants.
* * * * *
    Loan-to-cost ratio. The amount of the loan divided by the total 
cost to develop the project.
* * * * *
    Operating and maintenance reserve. A cash reserve required of all 
projects of at least 2 percent of the loan amount held by the lender 
that is used for the up-keep of the project.
* * * * *

Subpart B--Guarantee Requirements

    3. Section 3565.51 is revised to read as follows:


Sec.  3565.51  Eligible loans and advances.

    Upon approval of an application from an eligible or approved 
lender, the Agency will commit to providing a guarantee for a permanent 
loan or a construction and permanent loan, subject to the availability 
of funds.
    4. Section 3565.52 is amended by revising paragraph (c) and adding 
a new paragraph (d) and (e) to read as follows:


Sec.  3565.52  Conditions of guarantee.

* * * * *
    (c) Types of guarantees. The Agency may provide a lesser guarantee 
based upon its evaluation of the credit quality of the loan. Penalties 
incurred as a result of default are not covered by the guarantee. 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 the loan, up to the maximum amount specified in the Loan 
Note Guarantee. The Agency will not guarantee construction loans only. 
The Agency offers the following types of guarantees:
    (1) Option One. The Agency may guarantee permanent loans subject to 
the conditions specified in Sec.  3565.303(d). The maximum guarantee 
for a permanent loan will be 90 percent [unless the Agency established 
a different percent and announces this different percent through a 
Notice in the Federal Register] 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.
    (2) Option Two. The Agency may provide a guarantee which will cover 
construction loan advances (advances) during construction. The maximum 
guarantee of construction advances related to a construction and 
permanent loan will not at any time exceed the lesser of 90 percent [or 
the percent established by the Agency and announced through a Notice in 
the Federal Register] of the amount of

[[Page 4709]]

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 Loan. The Agency's guarantee will cover losses to the 
extent aforementioned once all sureties/insurances and or performance 
and payment bonds have fully performed their contractual obligations. A 
construction contingency reserve is required. This guarantee will be 
enforceable during the construction period, but will cease to be 
enforceable once construction is completed unless and until the 
requirements for the continuation of the guarantee contained in the 
Conditional Commitment and this part are completed and approved by the 
Agency by the date stated in the Conditional Commitment and any Agency 
approved extension(s). The Agency will provide written confirmation to 
the lender when all of the requirements for continuation of the 
guarantee to cover the permanent loan have been satisfied. Any losses 
sustained while the guarantee is unenforceable (after the end of the 
construction period and, if applicable, before the continuation of the 
guarantee) are not covered by the guarantee. For purposes of this 
guarantee, the construction period will end on the earlier of:
    (i) 24 months from the closing of the construction loan, if the 
certificates of occupancy for all units in the project have not been 
issued by then, or
    (ii) The date of the issuance of the last certificate of occupancy, 
if the certificates of occupancy for all units in the project are 
issued on or before 24 months from the closing of the construction 
loan.
    (3) Option Three. The Agency may provide a single, continuous 
guarantee for construction and permanent loans. Only projects that have 
low loan-to-cost ratios, as specified by the Agency in a Notice 
published periodically in the Federal Register, are eligible for this 
type of guarantee. A construction contingency reserve is required. The 
Agency may require that a lease-up reserve, in an amount established by 
the Agency and announced through a Notice in the Federal Register, be 
set-aside prior to closing the construction loan. This lease-up reserve 
is an additional amount, over and above the required initial operating 
and maintenance contribution. The maximum guarantee of construction 
advances will not at any time exceed the lesser of 90 percent [or the 
percent established by the Agency and announced through a Notice in the 
Federal Register] 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.
    (d) Maximum loss payment. The maximum loss payment to a lender or 
Holder is as follows:
    (1) 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.
    (2) To the lender, the lesser of:
    (i) 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
    (ii) The guaranteed principal advanced to or assumed by the 
borrower and any interest and accrued interest up to 90 days due 
thereon.
    (e) Funding of reserves. For each Option under paragraph (c) of 
this section, the lender must require an operating and maintenance 
reserve and provide the Agency adequate evidence of the funding of all 
required reserves.
    (1) For Option 1 under paragraph (c) of this section, the funding 
schedule for the lease-up reserve and the operating and maintenance 
reserve, must be included in the Agency-approved construction budget 
and be fully funded before the issuance of the permanent guarantee.
    (2) For Option 2 under paragraph (c) of this section, the funding 
schedule for the lease-up reserve and the operating and maintenance 
reserve must be included in the Agency-approved construction budget and 
be fully funded before the issuance of the permanent guarantee.
    (3) For Option 3 under paragraph (c) of this section, the lease-up 
reserve, and the operating and maintenance reserve, must be fully 
funded before the issuance of the guarantee.

Subpart C--Lender Requirements


Sec.  3565.103  [Amended]

    5. Section 3565.103 is amended by removing paragraph (d)(9).


Sec.  3565.106  [Amended]

    6. Section 3565.106 is amended by removing the word 
``combination.''

Subpart G--Processing Requirements

    7. Section 3565.303 is amended by revising paragraphs (c) and (d) 
to read as follows:


Sec.  3565.303  Issuance of loan guarantee.

* * * * *
    (c) Guarantee during construction. When requesting a guarantee on 
construction loan advances under Sec.  3565.52(c)(2) and (c)(3), the 
Agency will only issue a guarantee to an approved lender that the 
Agency determines is eligible under Sec.  3565.106 of this part.
    (1) This guarantee will be subject to the limits contained in 
subpart B of this part and in the loan closing documentation.
    (2) In all cases, the lender must obtain one of the following 
protections:
    (i) Surety bonding or performance and payment bonding acceptable to 
the Agency;
    (ii) An irrevocable letter of credit acceptable to the Agency; or
    (iii) A pledge to the lender of collateral that is acceptable to 
the Agency.
    (3) The lender must verify amounts expended prior to each payment 
for completed work and certify that an independent inspector has 
inspected the property and found it to be in conformance with Agency 
standards. The lender must provide verification that all subcontractors 
have been paid and no liens have been filed against the property.
    (d) Permanent loan guarantee. The guarantee of a permanent loan 
provided under Sec.  3565.52(c)(1) or (c)(2) will be issued once the 
following items have been submitted to and approved by the Agency:
    (1) Certification from the lender stating that the lender or its 
qualified representative inspected the property and found that the 
construction meets the Government's requirements for the standards and 
conditions for housing and facilities in 7 CFR part 1924, subpart A and 
the standards for site development in 7 CFR part 1924, subpart C;
    (2) Cash flow certification--lender certifies in writing the 
project's cash flow assumptions are still valid and depict compliance 
with the section 538 program's debt service coverage ratio requirement 
of at least 1.15, based on the lender's analysis of current market 
conditions and comparable properties in the project's market area;
    (3) Documentation that either:
    (i) The project has attained a minimum level of acceptable 
occupancy of 90% for 90 continuous days within the 120-day period 
immediately preceding the issuance of the permanent guarantee, or
    (ii) Additional funds, supplementing the funds required under Sec.  
3565.303(d)(1) have been added to the lease-up reserve in an amount the

[[Page 4710]]

Agency determines is necessary to cover projected shortfalls.
    (4) An appraisal of the project as built. Upon a lender's written 
request, the Agency may exempt a project from this requirement if 
requested by the lender and the project meets the following criteria:
    (i) Original appraisal--an original appraisal that meets Agency's 
appraisal requirements with a valuation date no older than 36 months;
    (ii) Valuation--the appraisal's lowest valuation regardless of 
valuation approach and rent restrictions considered, is greater than 
the section 538 guaranteed loan amount; and
    (iii) Guaranteed loan balance--the Agency's guaranteed loan's 
principal balance does not exceed 50 percent [unless a different 
percent has been announced in a Notice published in the Federal 
Register] of the project's total development costs.
    (5) A certificate of substantial completion;
    (6) A certificate of occupancy or similar evidence of local 
approval;
    (7) A final inspection conducted by a qualified Agency 
representative;
    (8) A final cost certification in a form acceptable to the Agency;
    (9) A submission to the Agency of the complete closing docket;
    (10) A certification by the lender that the project has reached an 
acceptable minimum level occupancy;
    (11) An executed regulatory agreement;
    (12) The Lender certifies that it has approved the borrower's 
management plan and assures that the borrower is in compliance with 
Agency standards regarding property management, contained in subparts E 
and F of this part;
    (13) Necessary information to complete an updated necessary 
assistance review by the Agency; and
    (14) Compliance with all conditions contained in the conditional 
commitment for guarantee.
* * * * *

Subpart J--Assignment, Conveyance, and Claims


Sec.  3565.457  [Amended]

    8. Section 3565.457 is amended in paragraph (c)(1) by revising the 
word ``collectibility'' to read ``collectability.''

     Dated: January 21, 2010.
Tammye Trevino
Administrator, Rural Housing Service.
[FR Doc. 2010-1792 Filed 1-28-10; 8:45 am]
BILLING CODE 3410-XV-P