Agriculture is the Foundation of Manufacture and Commerce…and housing?
On December 9, 2013 the U.S. Department of Agriculture (USDA) published in the Federal Register final rules which will replace the current body of Rural Development (RD) regulations implementing the Single Family Housing Guaranteed Loan Program (SFHGLP), set forth in 7 CFR Pt. 1980, with new ones under new 7 CFR Pt. 3555. These new rules become effective on September 1, 2014.
This rule was originally proposed in 1999 (see 64 FR 70124 ). The purpose for this rule, as explained by the USDA, is to “attempt to meld the better features of conventional loan programs and other Government loan programs to make the SFHGLP as easy for lenders to use as possible.” (78 FR 73929 )
The USDA is accomplishing this by providing a new handbook for the SFHGLP (HB-1-3555), which will be one of the primary sources (besides the administrative regulations) for determining whether an RD loan is in compliance or not with USDA regulations. A draft copy of this handbook, plus draft copies of some of the new forms which will be required, training resources, checklists, and other useful resources can be found at https://usdalinc.sc.egov.usda.gov/USDALincTrainingResourceLib.do.
With these new regulatory changes come new program policies. Among them include:
1. Providing financing for existing homes located in a Special Flood Hazard Area (SFHA). Financing may, under certain conditions, also be extended to new or proposed homes is such areas (see 7 CFR § 3555.5).
2. Capping seller-contributions for closing costs to 6% of the property’s sales price (see Ibid. § 3555.102).
3. Capping interest rates on SFHGLP loans to the greater of:
- The current FNMA posted yield for 90-day delivery for 30-year fixed rate conventional loans plus 1 percent, rounded to the nearest one-quarter of 1 percent; or
- The current FHLCM required net yield for 90-day delivery for 30-year fixed rate conventional loans plus 1 percent, rounded up to the nearest one-quarter of 1 percent (see Ibid. § 3555.104).
4. The restrictions on the term of the loan being “not less than 30 years from the date of the note and not more than 30 years form the date of the first scheduled payment” (Ibid. § 1980.321) will be repealed and the loan term may be for a period less than 30 years (see Ibid.).
5. Current homeowners may be eligible to obtain a SFHGLP loan, as long as certain conditions are met, such as (but not limited to) their ability to own more than one home, if they will occupy the subject property as their primary residence, and if their current home no longer adequately meets their family’s needs (see Ibid. § 3555.151).
6. No longer tying late fee restrictions to corresponding FNMA, FHLMC, or HUD restrictions. Late fees which are assessed must now be “reasonable and customary for the area” (Ibid. § 3555.253).
New disclosure forms will also be used, which will replace most of the current ones. Among these include Forms RD 1980-11, 1980-12, 1980-13, 1980-17, 1980-18, and 1980-21, which will be replaced by (fundamentally) updated equivalents of these forms, which will be renumbered as 3555-11, 3555-12, etc. Notably, Form 1980-19 will still retain its current numbering.
Rural Development has provided, in regards to questions on how to deal with loans during the transition period between the old and the new rules, that “for loans in process, complete loan applications received prior to September 1 (the implementation date of the new rule) will be processed under the existing rule, 1980-D. Complete applications received on or after September 1, will be subject to the new rule, 3555.” (see “Frequently Asked Questions”, available on the website listed above).
This marks a significant and much needed change to the SFHGLP. Compliance and legal researchers have had to muddle through a hodge-podge of administrative laws, Federal Register updates to Rural Housing Service (RHS) guidelines, administrative notices, and internal agency administrative instructions in order to answer some of the most basic compliance questions. Frustration has been the natural consequence, as a good deal of the time these rules conflict with each other, are ambiguous, or outdated.
By providing a new handbook and a fresh set of new regulations, the research process should be more streamlined and consistent, which should in turn lead to better compliance management and mitigate lending risks.