7 CFR Part 3555 — Guaranteed Rural Housing Program

PART 3555—GUARANTEED RURAL HOUSING PROGRAM Authority: 5 U.S.C. 301; 42 U.S.C. 1471 et seq. Source: 78 FR 73941, December 9, 2013, unless otherwise noted. Subpart A—General § 3555.1 Applicability. This part sets forth policies for the Single Family Housing Guaranteed Loan Program (SFHGLP) administered by USDA Rural Development. It addresses the requirements of section 502(h) of the Housing Act of 1949, as amended, and includes policies regarding originating, servicing, holding and liquidating SFHGLP loans. Any provision regarding the expenditure of funds under this part is contingent upon the availability of funds. § 3555.2 Purpose. (a) General. (b) Demonstration programs. § 3555.3 Civil rights. Rural Development, lenders, and their agents must administer the program fairly, and in accordance with both the letter and the spirit of all equal opportunity, equal credit opportunity and fair housing legislation, and applicable executive orders. Loan guarantees, services, and benefits provided under this part shall not be denied to any person based on race, color, national origin, sex, religion, marital status, familial status, age (provided the applicant has the capacity to enter into a binding contract), handicap, receipt of income from public assistance, sexual orientation, or because the applicant has, in good faith, exercised any right under the Consumer Credit Protection Act (15 U.S.C. 1601 et seq. § 3555.4 Mediation and appeals. Whenever Rural Development makes a decision that will adversely affect a participant, the participant may proceed with alternative dispute resolution including mediation and a USDA National Appeals Division hearing in accordance with 7 CFR parts 1 and 11. The participant also may request an informal review of the adverse decision made by Rural Development. Except when the adverse decision applies to a loss claim, the applicant or borrower and the lender may participate in the appeal process. Adverse decisions made by the lender cannot be appealed unless concurrence by Rural Development was required by this subpart and obtained by the lender. § 3555.5 Environmental requirements. (a) Policy. (b) Regulatory references. (c) Agency responsibilities. (d) Lender and loan applicant responsibilities. (2) Mortgage loan transactions will be subject to the requirements of the 1994 National Flood Insurance Reform Act to determine if the dwelling is located in a Special Flood Hazard Area (SFHA). (3) On an as needed basis, lenders and loan applicants will assist Rural Development in obtaining such information as Rural Development needs to complete its environmental review and to cooperate in the resolution of environmental problems. (4) Lenders will become familiar with Agency environmental requirements, so they can advise applicants and reduce the probability of unacceptable applications being submitted to Rural Development. (5) The lender must comply with Federally mandated flood insurance purchase requirements. Existing dwellings in a SFHA are not eligible under the SFHGLP unless flood insurance through the FEMA National Flood Insurance Program (NFIP) is available for the community and flood insurance, whether NFIP, “write your own,” or private flood insurance, is purchased by the borrower. The lender will require the borrower to obtain, and maintain for the term of the mortgage, flood insurance for any property located in a SFHA, listing the lender as a loss payee. Purchase of existing structures within the federally regulated floodplain will not require consideration of alternatives to avoid adverse effects and incompatible development in floodplains; (6) The borrower must obtain, and continuously maintain for the life of the mortgage, flood insurance on the security property in an amount sufficient to protect the property securing the guaranteed loan. Flood insurance policies must be issued under the NFIP, or by a licensed property and casualty insurance company authorized to participate in NFIP's “Write Your Own” program or private flood insurance policy, as approved by the lender. Lenders are required to accept private flood insurance policies, when purchased by a borrower, that meet the requirements of 42 U.S.C. 4012a (b)(1)(A). Lenders remain responsible to ensure a private flood insurance policy meets the requirements of 42 U.S.C. 4012a (b)(1)(A). (7) Rural Development will not guarantee loans for new or proposed homes in an SFHA unless the lender obtains a final Letter of Map Amendment (LOMA) or a final Letter of Map Revision (LOMR) that removes the property from the SFHA, or performs an alternatives analysis in compliance with the Agencies National Environmental Policy Act regulation and obtains a FEMA elevation certificate that shows that the lowest floor (including basement) of the dwelling and all related building improvements are built at or above the 100-year flood plain elevation in compliance with the NFIP. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6428, Feb. 8, 2016; 81 FR 11048, Mar. 2, 2016] § 3555.6 State and local law. Lenders will comply with applicable State and local laws and regulations, including the laws of American Indian tribes. Supplemental guidance will be issued in the case of any conflict with or significant differences from provisions of this part. § 3555.7 Exception authority. The Administrator of the Agency, or a designee, may make an exception to any requirement or provision of this part or to address any omissions in this part, when the Administrator, or designee, determines that application of the requirement or failure to take action would adversely affect the Government's interest. Any exception must be consistent with the authorizing statute and other applicable laws. § 3555.8 Conflict of interest. (a) Applicant or borrower responsibility. (b) Lender responsibility. (c) Prohibited relationships and associations. (1) Immediate family members, including parents and children, whether related by blood or marriage; (2) Close relatives, including grandmother, grandfather, aunt, uncle, sister, brother, niece, nephew, granddaughter, grandson, or first cousin, whether related by blood or marriage; (3) Any household residents; (4) Immediate working relationships, including coworkers in the same office, subordinates, and immediate supervisors; and (5) Close business associations, including business partnerships, joint ventures, or closely held corporations. (d) Result of disclosure. § 3555.9 Enforcement. Rural Development will take such actions as are appropriate and necessary to enforce the provisions of these regulations. Such actions will include, but not be limited to, reduction of the loss claim payment; termination of a lender's or servicer's participation in the SFHGLP; suspension and debarment of participation in this or other Federal programs; and, any other appropriate administrative, civil, or criminal actions as allowed by law. Rural Development may assess civil monetary penalties pursuant to Section 543 of the Housing Act of 1949, 42 U.S.C. 1409s(b). § 3555.10 Definitions and abbreviations. The definitions and abbreviations in this section apply to this part. Acceleration. Adjusted annual income. Agency. Agency employee. Alien. Amortization. Amortized payment. Annual fee. Annual income. Applicant. Area median income. Assumption. Borrower. Combination construction and permanent loan. Community land trust. Conditional commitment. Condominium project. Debarment. Default. Delegated Lender. Disability. Dwelling. Elderly family. (1) A person who is the head, spouse, or sole member of a household and who is 62 years of age or older, or who is disabled, and is an applicant or borrower; (2) Two or more persons who are living together, at least one of whom is age 62 or older, or disabled, and who is an applicant or borrower; or (3) Where the deceased borrower or spouse in a household was at least 62 years old or disabled, the surviving household member shall continue to be classified as an elderly household for the purpose of determining adjusted income, even though the surviving members may not meet the definition of an elderly family on their own, provided: (i) They occupied the dwelling with the deceased household member at the time of the death; (ii) If one of the surviving household members is the spouse of the deceased household member, the surviving household shall be classified as an elderly family only until the remarriage or death of the surviving spouse; and (iii) At the time of the death of the deceased household member the dwelling was financed with a Guaranteed Rural Housing loan. Escrow account. Existing dwelling. Extended-term loan modification. Fannie Mae. FEMA. FHA. FHLB. First-time homebuyer. (1) An individual who has had no ownership interest in a principal residence during the three-year period ending on the date of loan closing. (2) An individual who is a displaced homemaker and who, except for owning a home with a spouse, has had no ownership interest in a principal residence during the three-year period ending on the date of loan closing. Displaced homemakers include any individual who is: (i) An adult; (ii) Unemployed or underemployed; (iii) Experiencing difficulty in obtaining or upgrading employment; and (iv) In recent years has worked primarily without remuneration to care for the home and family, but has not worked full-time, full-year in the labor force. (3) An individual who is a single parent and who, except for owning a home with a spouse, has had no ownership interest in a principal residence during the three-year period ending on the date of loan closing. Single parents include any individual who is: (i) Unmarried or legally separated; and (ii) Has custody or joint custody of one or more children, or is pregnant. Forbearance agreement. Freddie Mac. Funded buydown account. Ginnie Mae. Household. Housing Act of 1949. et seq. HUD. Interest assistance. IRS. Leasehold estate. Lender. Live-in aide. (1) Lives with an elderly person or a person with a disability and (2) Is essential to that person's care and well-being, and (3) Is not obligated for the person's support, and (4) Would not be living in the unit except to provide the support services. Loan modification. Low-income. Manufactured home. Market value. Median income. Moderate income. (1) 115 percent of the U.S. median family income, (2) The average of the state-wide and state non-metro median family income, (3) 115/80ths of the area low-income limit adjusted for household size for the county or MSA where the property is, or will be, located. Modest housing. Mortgage. Mortgage credit certificate. Mortgage payment to income ratio. Mortgage recovery advance. MSA (Metropolitan Statistical Area). Net family assets. Net recovery value. New dwelling. Participant. Person with a disability. Planned Unit Development. (1) The individual unit owners own a parcel of land improved with a dwelling. This ownership is not in common with other unit owners; (2) The development is administered by a homeowners association that owns and is obligated to maintain property and improvements within the development (for example, greenbelts, recreation facilities and parking areas) for the common use and benefit of the unit owners; and (3) The unit owners have an automatic, non-severable interest in the homeowners association and pay mandatory assessments. Pre-foreclosure sale. Primary residence. Principal residence. Prior lien. Qualified alien. Real estate taxes. REO (Real Estate Owned). Repayment income. Rural area. Rural Development. Scheduled payment. Secured loan. Security instrument. Security property. Settlement date. (1) Actual foreclosure date; (2) The closing date, if sold to a third party at the foreclosure sale; (3) The date the borrower sells the property to a third party in order to avoid or cure a default situation, with prior approval of the lender; and (4) When title is acquired to the security following the expiration of any state-required redemption or confirmation period. (5) The date title is acquired upon recordation of a deed-in-lieu of foreclosure, with prior approval of the lender. SFHGLP. Short sale. Streamlined-assist refinance. Supplemental loan. Suspension. Total debt to income ratio. Unauthorized assistance. United States citizen. USDA. U.S. non-citizen national. VA. Veterans' preference. (1) During the period of April 6, 1917, through March 31, 1921; (2) During the period of December 7, 1941, through December 31, 1946; (3) During the period of June 27, 1950, through January 31, 1955; (4) For a period of more than 180 days, any part of which occurred after January 31, 1955, but on or before May 7, 1975; (5) During the period beginning August 2, 1990, and ending January 2, 1992, provided, of course, that the veteran is otherwise eligible; or (6) During any other period as prescribed by Presidential proclamation or law. Warehouse lender. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 26464, May 3, 2016; 84 FR 29038, June 21, 2019; 84 FR 35006, July 22, 2019; 84 FR 70886, Dec. 26, 2019; 90 FR 203, Jan. 3, 2025; 91 FR 13216, Mar. 19, 2026] §§ 3555.11-3555.49 [Reserved] § 3555.50 OMB control number. The report and recordkeeping requirements contained in this subpart have been approved by the Office of Management and Budget and have been assigned OMB control number 0575-0179. Subpart B—Lender Participation § 3555.51 Lender eligibility. A lender must meet the requirements described in this section to be approved for participation in the SFHGLP. (a) Ability to underwrite and service loans. (1) A State Housing Agency; (2) A lender approved as a supervised or nonsupervised mortgagee by HUD with direct endorsement authority for submission of applications for Federal Housing Mortgage Insurance; (3) A supervised or nonsupervised mortgagee with authority to close VA-guaranteed loans on the automatic basis; (4) A lender approved by Fannie Mae for single-family loans; (5) A lender approved by Freddie Mac for single-family loans; (6) A Farm Credit System institution that provides documentation of its ability to underwrite and service single-family loans. Lenders who are a Farm Credit System lender with direct lending authority meet demonstrated ability; (7) A lender participating in other Rural Development or Farm Service Agency guaranteed loan programs that provide documentation of its ability to underwrite and service single family loans. Documentation criteria for other Rural Development or Farm Service Agency guarantee loan programs require an active lender agreement; or (8) A Federally supervised lender that provides documentation of its ability to originate, underwrite, and service single-family loans. Acceptable sources of supervision include: (i) Being a member of the Federal Reserve System. (ii) The Federal Deposit Insurance Corporation (FDIC). (iii) The National Credit Union Administration (NCUA). (iv) The Office of the Comptroller of the Currency (OCC). (v) The Federal Housing Finance Board regulating lenders within the Federal Home-Loan Bank (FHLB) system. (9) If lenders cannot meet the requirements under paragraphs (a)(1) through (8) of this section, they may demonstrate its ability to originate and underwrite loans by submitting appropriate documentation, examples of which include, but are not limited to: (i) A summary of residential mortgage lending activity. (ii) Written criteria outlining the lender's policy and procedures for originating, underwriting and closing residential mortgage loans. (iii) Evidence of an experienced loan underwriter on staff. (iv) Certification the lender will contract with an Agency-approved lender meeting the criteria to participate in the program as a servicer. (10) A lender that proposes to service loans that cannot meet paragraphs (a)(1) through (8) of this section must demonstrate its ability by submitting appropriate documentation, examples of which include but are not limited to: (i) Evidence of a written plan when contracting for escrow services. (ii) Evidence the lender has serviced single-family residential mortgage loans in the year prior to request lender approval to participate in the SFHGLP. (11) The financial requirements for non-supervised lenders not covered in paragraph (a)(8), must have: (i) A minimum adjusted net worth of $250,000, or $50,000 in working capital plus one percent of the total volume in excess of $25 million in guaranteed loans originated, serviced, or purchased during the lender's prior fiscal year, up to a maximum required adjusted net worth of $2.5 million, and (ii) One or more lines of credit with a minimum aggregate of one million dollars. (b) SFHGLP participation requirements. (1) Keep up to date, and comply with, all Agency regulations and handbooks, including all amendments and revisions of program requirements and policies. Lenders must also comply with all other applicable federal, state, and local laws, rules, and requirements, including those under the purview of the Consumer Financial Protection Bureau, such as the Real Estate Settlement Procedures Act and the Truth in Lending Act. Lenders who originate a minimal number loans, as determined by the Agency, in a 24 month time frame may be required to take updated training to ensure a lender's continued knowledge of the program; (2) Regularly check Rural Development's Web site for new issuances related to the program; (3) Underwrite loans according to Rural Development regulations and process and approve loans in accordance with program instructions; (4) Review loan applications for accuracy and completeness, (5) Ensure that applicant income limits are not exceeded; (6) Ensure that borrowers have adequate loan repayment ability and acceptable credit histories; (7) Ensure that loss claims include only supportable costs; (8) Cooperate fully with Agency reporting and monitoring requirements; (9) Comply with limitations on loan purposes, loan limitations, interest rates, and loan terms; (10) Inform Rural Development immediately after the sale, transfer, or change of servicers of any Agency guaranteed loan; (11) Maintain reasonable and prudent business practices consistent with generally accepted mortgage industry standards, such as maintaining fidelity bonding; (12) Remain responsible for servicing even if servicing has been contracted to a third party; (13) Use Rural Development, HUD, Fannie Mae, or Freddie Mac forms, unless otherwise approved by Rural Development; (14) Maintain eligibility under paragraph (a) of this section; (15) Notify Rural Development if there are any material changes in organization or practices; (16) Be neither debarred nor suspended from participation in Federal programs, not debarred, suspended or sanctioned under state licensing and certification laws and regulation; (17) Notify Rural Development in the event of its bankruptcy or insolvency; (18) Remain free from default and delinquency on any debt owed to the Federal government; (19) Allow Rural Development or its representative access to the lender's records, including, but not limited to, records necessary for on-site and desk reviews of the lender's operation and the operations of any of its agents to verify compliance with Agency regulations and guidelines; (20) Maintain adequate operational quality control and reporting procedures to prevent mortgage fraud; (21) Maintain complete loan files with all required documentation that is accessible by the Agency upon request for review; and (22) Execute a lender's agreement provided by Rural Development. (23) Provide documentation as required by the Agency to be reviewed every two years for lender participation and, (24) Provide evidence that principal officers have a minimum of two years of experience in originating or servicing guaranteed mortgage loans as recommended in OMB Circular A-129. [78 FR 73941, Dec. 9, 2013, as amended at 84 FR 70886, Dec. 26, 2019; 87 FR 53371, Aug. 31, 2022] § 3555.52 Lender approval. (a) Initial approval. (b) Conditions of approval. (c) Termination of approval. (1) Lapse of any eligibility requirement. (2) Voluntary withdrawal. § 3555.53 Contracting for loan origination. Lenders may contract with mortgage brokers, non-approved lenders, or other entities for loan origination services, closing services, or both, provided the loan is transferred immediately after closing to an Agency approved lender to which the guarantee will be issued. The approved lender is responsible for ensuring that the loan is properly underwritten, obtaining the conditional commitment, ensuring that the loan is properly closed, and ensuring that all closing costs, financing, and settlement fees meet Agency program requirements. § 3555.54 Sale of loans to approved lenders. Lenders may sell SFHGLP loans only to other Agency-approved lenders, Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. In such a sale, the purchasing lender acquires all rights of the selling lender under the Loan Note Guarantee, and assumes all of the selling lender's obligations contained in any note, security instrument, or Loan Note Guarantee in connection with the loan purchased. The purchasing lender may be subject to any defenses, claims, or offsets that Rural Development would have had against the selling lender if the selling lender had continued to hold the loan. The lender must notify Rural Development immediately upon the sale or transfer of servicing of a SFHGLP loan. § 3555.55 Delegated Lenders. (a) General requirements. (1) Application priority processing procedures under § 3555.107(a) are not applicable to applications processed by Delegated Lenders. (2) Delegated Lenders must ensure appraisals meet the requirements under § 3555.107(d); however, loans made by Delegated Lenders are not subject to Agency administrative appraisal reviews prior to loan approval under § 3555.107(d)(4). (3) The requirements relating to Conditional Commitments under § 3555.107(f) is not applicable to those lenders approved by the Agency as Delegated Lenders under the provisions of this subpart. (b) Modifications. (1) Applications processed by Delegated Lenders with a conflict of interest under § 3555.8 are not subject to the requirements under § 3555.8(d). The other paragraphs of § 3555.8 still apply. (2) Environmental reviews will be completed under § 3555.5 and 7 CFR part 1970 prior to loan approval. SFHGLP loans are generally considered to meet the requirements for a categorical exclusion from the environmental review process described in the cited authorities, absent any extraordinary circumstances. If there is an extraordinary circumstance, the Delegated Lender must notify the Agency to decide the appropriate course of action. (c) Eligibility. (1) Have participated in the SFHGLP for at least the previous two years; (2) Met the performance standards established by the Agency for delinquency, default, loss claims, etc. for the previous two years; and (3) Complete Agency sponsored training each year. (d) Automated underwriting system. (e) Oversight. (f) Termination of delegated authority. (i) Approving loans that do not meet Agency guidelines. (ii) Providing data to the Agency's automated underwriting system which is not supported by documentation retained by the lender. (iii) Unacceptable portfolio performance as evidenced by delinquency, loss claim, default rates, material deficiencies, or any other performance metric established by the Agency; and (iv) Noncompliance with other requirements described in § 3555.51, or if the Agency determines that other good cause exists. (2) Termination of a Delegated Lender's participation in the SFHGLP under § 3555.52 automatically revokes Delegated Lender status without separate Agency action under paragraph (g) of this section. (g) Revocation of delegated status. (h) Administration of delegated program. [91 FR 13216, Mar. 19, 2026] §§ 3555.56-3555.99 [Reserved] § 3555.100 OMB control number. The report and recordkeeping requirements contained in this subpart have been approved by the Office of Management and Budget and have been assigned OMB control number 0575-0179. Subpart C—Loan Requirements § 3555.101 Loan purposes. Loan funds must be used to acquire a new or existing dwelling to be used by the applicant as a principal residence. (a) Eligible purposes. (1) The construction or purchase of a new dwelling; (2) The cost of acquisition of an existing dwelling; (3) The cost of repairs associated with the acquisition of an existing dwelling; or (4) Acquisition and relocation of an existing dwelling. (b) Eligible costs. (1) Purchase and installation of essential household equipment in the dwelling such as wall-to-wall carpeting, ovens, ranges, refrigerators, washing machines, clothes dryers, heating and cooling equipment, and other similar items as long as the equipment is conveyed with the dwelling and such items are typically included in the purchase of similar dwellings in the area. (2) Purchase and installation of energy-saving measures. (3) Site preparation including grading, foundation, plantings, seeding or sodding, trees, walks, fences, and driveways to the home. (4) A supplemental loan to provide funds for seller equity or essential repairs when an existing guaranteed loan is assumed simultaneously. (5) Special design features or equipment when necessary because of a physical disability of the applicant or a member of the household. (6) Loan funds may be used to pay for reasonable and customary expenses related to obtaining the loan. Allowable loan expenses include: (i) Legal, architectural, and engineering fees; (ii) Title exam, title clearance and title insurance; (iii) Transfer taxes and recordation fees; (iv) Appraisal, property inspection, surveying, environmental, tax monitoring, and technical services; (v) Homeownership education. (vi) Reasonable and customary loan discount points to reduce the note interest rate from the rate authorized in § 3555.104(a). (vii) Reasonable and customary non-recurring closing costs associated with the mortgage transaction that do not exceed those charged other applicants by the lender for similar transactions such as FHA-insured or VA-guaranteed first mortgage loans. If the lender does not participate in such programs, the loan closing costs may not exceed those charged other applicants by the lender for a similar loan program that requires conventional mortgage insurance or guarantee. Allowable closing costs include the actual cost of credit reports, the loan origination fee, settlement fee, deposit verification fees, document preparation fees (if performed by a third party not controlled by the lender), and other reasonable and customary costs as determined by Rural Development. Payment of finder's fees or placement fees for the referral of an applicant to the lender is prohibited. (viii) Reasonable connection fees, assessments, or the pro rata installment costs for utilities such as water, sewer, electricity and gas for which the borrower is responsible. (ix) The prorated portion of real estate taxes that is due and payable on the property at the time of closing and to establish escrow accounts for real estate taxes, hazard and flood insurance premiums, and related costs. (x) The amount of the loan up-front guarantee fee required by § 3555.107(g). (xi) The cost of establishing a cushion in the mortgage escrow account for payment of the annual fee required by § 3555.107(h), not to exceed 2 months. (xii) If the seller or other third party pays any of the costs described in this section, the amount of the costs paid by the seller or other third party may not be included in the loan amount to be guaranteed. (c) Combination construction and permanent loan. (d) Refinancing. (1) The loan may be used for permanent financing when temporary financing to construct a new dwelling, or to purchase and improve an existing dwelling, is arranged as a part of the loan package. (2) In the case of loans for a site on which a dwelling is not constructed prior to issuance of the Loan Note Guarantee, refinancing is permitted if: (i) The site is free and clear of debt; (ii) The debt to be refinanced was incurred for the sole purpose of purchasing the site; (iii) The applicant is unable to acquire adequate housing without refinancing; and (iv) An appropriate dwelling will be constructed on the site. (3) The loan is a present Section 502 Direct or guaranteed loan, authorized under the Housing Act of 1949 subject to the following additional requirements: (i) Three options for refinancing may be offered: Streamlined, non-streamlined, and streamlined-assist. Other than provided in this paragraph, no cash out is permitted for any refinance. Documentation costs and underwriting requirements of subparts D, E, and F of this part apply to streamlined and non-streamlined refinances. (A) Lenders may offer a streamlined refinance for existing Section 502 Guaranteed loans, which does not require a new appraisal. The lender will pay off the balance of the existing Section 502 Guaranteed loan. (B) Lenders may offer non-streamlined refinancing for existing Section 502 Guaranteed or Direct loans, which requires a new and current market value appraisal. The amount of the new loan must be supported by sufficient equity in the property as determined by an appraisal. The appraised value may be exceeded by the amount of up-front guarantee fee financed, if any, when using the non-streamlined option. (C) A streamlined-assist refinance loan is a special refinance option available to existing Section 502 direct and guaranteed loan borrowers. Applicants must meet the income eligibility requirements of § 3555.151(a), and must not have had any defaults during the 12 month period prior to the refinance loan application. There are no debt-to-income calculation requirements, no credit report requirements, no property inspection requirements, and no loan-to-value requirements. There is no appraisal requirement except for Section 502 direct loan borrowers who have received a subsidy. (ii) The interest rate of the new loan must be fixed and must not exceed the interest rate of the original loan being refinanced. (iii) Existing borrowers seeking to refinance must have demonstrated their ability to meet payment demands by maintaining a current account for the 180 days prior to application. (iv) The loan security must include the same property as the original loan and be owned and occupied by the borrowers as their principal residence. (v) The maximum loan amount cannot exceed the balance of the loan being refinanced including accrued interest, the guarantee fee, and reasonable and customary closing costs. When a direct loan is refinanced, any recapture amount owed may be included in the loan amount or deferred as long as the recapture amount takes a subordinate lien position to the new SFHGLP loan. A discount on the recapture amount may be offered if the borrower does not defer recapture or includes the recapture amount in the new loan. (vi) Two options for refinancing can be offered. Lenders may offer a streamlined refinance for existing Section 502 Guaranteed loans, which does not require a new appraisal. Streamlined financing may not be available for existing Section 502 Direct loans. The lender will pay off the principal balance of the existing Section 502 Guaranteed loan. The new loan amount cannot include any accrued interest, closing costs or lender fees. The refinance up-front guarantee fee as established by the Agency can be included in the loan to be refinanced to the extent financing does not exceed the original loan amount. Lenders may offer non-streamlined refinancing for existing Section 502 Guaranteed or Direct loans, which requires a new and current market value appraisal. The new loan may include the principal and interest of the existing Agency loan, reasonable closing costs and lenders fees to extent there is sufficient equity in the property as determined by an appraisal. The appraised value may be exceeded by the amount of up-front guarantee fee financed, if any, when using the non-streamlined option. Documentation, costs, and underwriting requirements of subparts D, E, and F of this part apply to refinances, unless otherwise provided by the Agency. (vii) Lenders may require property inspections and/or repairs as a condition to loan approval. Expenses related to property inspections and repairs required of the lender may not be financed into the new loan amount. (viii) The lender pays a guarantee fee as established by the Agency. (ix) The refinance loan may be subject to an annual fee as established by the Agency; and (x) The Agency may limit the number of guaranteed loans made for refinancing purposes based on market conditions and other appropriate factors. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6428, Feb. 8, 2016; 81 FR 26464, May 3, 2016] § 3555.102 Loan restrictions. A guarantee will not be issued if loan funds are to be used for: (a) Existing manufactured homes. (b) Income producing land or buildings. (c) Business or income-producing enterprise. (d) Loan discount points. (e) Refinancing. (f) Buydown. (g) Lease. (h) Seller concessions. § 3555.103 Maximum loan amount. The amount of the loan must not exceed the lesser of: (a) Market value. (b) Purchase price and acquisition costs. (c) Newly constructed dwelling—limited to 90 percent. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6428, Feb. 8, 2016] § 3555.104 Loan terms. (a) Interest rate. (1) Is fixed over the term of the loan; (2) Shall be negotiated between the lender and the borrower to allow the borrower to obtain the best available rate in compliance with all applicable laws. (3) If the interest rate increases between the time of the issuance of the conditional commitment and the loan closing, the lender will submit appropriate documentation and underwriting analysis to confirm that the applicant is still eligible. (4) The warehouse lender may charge an interest rate for interim construction financing that exceeds the underlying promissory note rate. After construction ends, the interest rate must revert to a rate that is no higher than the underlying promissory note rate. The Agency reserves the right to establish a maximum amount for the interim construction financing interest rate in the handbook, as necessary to further program goals and protect the best interests of the government. (b) Repayment period. (c) Repayment schedule. (d) Negative amortization. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6428, Feb. 8, 2016; 84 FR 35006, July 22, 2019] § 3555.105 Combination construction and permanent loans. Guarantees of combination construction and permanent loans are subject to the following conditions: (a) Lender requirements. (1) Have two or more years experience making and administering construction loans. (2) Submit an executed construction contract with each loan application package. (3) Review and approve construction contractors or builders. The lender will conduct due diligence investigations to determine that the contractor or builder meets the minimum requirements in paragraph (b) of this section. Evidence of the contractor or builder's compliance must be made available by the lender upon request of the Agency. (4) Close the loan prior to the start of construction with proceeds disbursed to cover the cost of, or balance owed on, the land and the balance into escrow. (5) Pay out monies from escrow to the builder during construction. The lender must obtain written approval from the borrower before each draw payment is provided to the builder. The borrower and lender are jointly responsible for approving disbursements during the construction phase. The lender must ensure that the appropriate work has been completed prior to releasing each draw. The Agency may require the lender to submit a draw and disbursement ledger for any loan guarantee upon request. (6) Obtain documentation that confirms the construction of the subject property is complete. (b) Contractor or builder requirements. (1) Two or more years experience building or constructing all aspects of single family dwellings similar to the type of project being proposed; (2) State-issued construction or contractor licenses, as required by State or local law; (3) Insurance for commercial general liability of at least $500,000; (4) Contractors or builders who are constructing their own residence are ineligible. (c) Use of loan funds. (2) The loan amount may include: (i) The price of the lot. (ii) Reasonable and customary construction costs related to the construction administration, such as architectural and engineering fees, building permits and fees, surveys, title updates, contingency reserves, not exceeding a percentage specified by the Agency of the cost of construction, draw control and inspection fees, builder's risk insurance or course of construction insurance, and landscaping costs; (iii) Reasonable and customary closing costs as defined at § 3555.101; and (iv) The costs of an interim construction financing interest rate and PITI reserve under § 3555.104(e) and § 3555.105(d)(7), respectively. (3) Funds remaining after full disbursement of construction costs will be applied by the lender as a principal payment. Borrowers are not to receive funds after closing except that the borrower may receive funds remaining from certain unused prepaid expenses if the borrower used personal, non-loan funds to pay those expenses. (d) Terms. (1) The interest rate for the construction and permanent loan will be established in accordance with § 3555.104 at the time the rate is locked, which must occur prior to closing. (2) The fair market value as determined by a licensed or certified appraiser in accordance with regulation 3555.107(d) will be used to establish the maximum loan amount. (3) Annual fees will begin in the month immediately following loan closing and will not be affected by loan reamortization following the completion of construction. Lenders may fund a lender imposed escrow account for borrower payments of the annual fee in accordance with § 3555.101(b)(6)(xi), as an eligible loan purpose, provided the market value of the property is not exceeded. (4) Interest on the construction loan is payable monthly either directly from the borrower or indirectly drawn from an established interest reserve. Real estate taxes and property insurance due during the construction period may also be paid using the same draw process. The annual fee will be due and payable from the lender on the 1st of the month following the anniversary date the construction to permanent loan closed. (5) Initial payment of the regularly scheduled (amortized) principal and interest payment may be postponed up to one year, if necessary, based upon the construction period. Local conditions and the proposed construction contract may dictate the term. (6) The loan will be modified and re-amortized to achieve full repayment within its remaining term once construction is complete. Within a reasonable time, as specified by the Agency, after the final inspection, the borrower will begin making regularly scheduled (amortized) principal and interest payments once the loan is re-amortized. (7) Lenders may fund a reserve account for up to 12 months of regularly scheduled (amortized) principal and interest payments along with taxes and insurance (PITI). In such cases, a loan modification is not required after construction is complete. Funds remaining in the PITI reserve after construction is complete will be applied by the lender as a principal payment. (e) Mortgage file documentation. (1) The actual cost to construct or rehabilitate the subject dwelling. (2) The acquisition, transfer of ownership, and/or ownership of land; (3) Certification of construction completion and that construction costs have been fully drawn; (4) Closing costs; (5) Certification that property is free and clear of all other liens after conversion to permanent loan; (6) Required inspections and warranties; (7) Loan modification agreement, once construction is complete, confirming the existence of a permanent loan and the amortizing interest rate on the loan; and (8) Evidence that all funds remaining in the construction escrow or PITI reserve accounts have been applied as a principal curtailment once construction or rehabilitation is complete. (f) Loan Note Guarantee. (1) Request by the approved lender; (2) The lender's submission of the closing documentation acceptable to Rural Development demonstrating that the loan was properly closed; (3) Payment of the guarantee fee; and (4) The lender's compliance with other requirements under § 3555.107. (g) Unplanned changes during construction. (h) Reservation of funding. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016; 84 FR 35006, July 22, 2019; 87 FR 53372, Aug. 31, 2022] § 3555.106 [Reserved] § 3555.107 Application for and issuance of the loan guarantee. (a) Processing of applications. (1) If analysis of the utilization of funds during the fiscal year indicates that, at the rate of current utilization, funds may not be sufficient to sustain that level of activity for the remainder of the fiscal year, the Agency may determine a shortage of funds exists. (2) When there is a shortage of funds, the Agency will limit SFHGLP loans to first-time homebuyers or veterans. First-time homebuyers and veterans will be served in the order their applications are received. (b) Automated underwriting. (1) Lenders are responsible for ensuring all data is true and accurately represented in the automated underwriting system. (2) Full documentation and verification, in accordance with Subparts C, D and E of this part, will be retained in the lender's permanent loan file and must confirm the applicant's eligibility, creditworthiness, repayment ability, eligible loan purpose, sufficient collateral, and all other regulatory requirements. (3) The use of Rural Development's automated underwriting system subjects the lender to indemnification requirements in accordance with § 3555.108. (4) If a loan receives an “Accept” underwriting recommendation, the lender is generally permitted to submit minimal documentation including the appraisal, flood hazard determination and fully executed request for guarantee, unless the lender is instructed to provide other documentation. (5) Loan requests that receive a “Refer” or “Refer with Caution” underwriting recommendation require further review and manual underwriting by the lender to determine whether the applicant meets SFHGLP eligibility requirements. (6) Lenders will validate findings based on the output report of the automated underwriting system. (7) The final submission of the last scoring event must be retained in the lender's permanent loan file. (c) Manual underwriting. (1) Loans downgraded by Rural Development's automated system. These loans are manually underwritten by the lender and submitted utilizing Rural Development's automated system. (2) Loans that are not supported by Rural Development's automated systems. These loans are manually underwritten by the lender and submitted by secure email or other electronic means approved by the Agency. (d) Appraisals. (1) Appraisals must be conducted in accordance with the Uniform Standards of Professional Appraisal Practices. (2) Approved lenders are responsible for selecting a qualified appraiser and the integrity, accuracy and thoroughness of the appraisals used to support their loan guarantee request. (3) The appraiser must report all readily observable property deficiencies, potential environmental hazards, as well as any adverse conditions discovered performing the research involved in completing the appraisal. (4) The Agency will conduct reviews of the appraisals prior to issuance of the conditional commitment, and other reviews may be conducted to ensure overall quality of appraisals. The lender is responsible for correcting any appraisal deficiencies reported by the Agency. (5) The Agency may determine an appraiser ineligible to conduct appraisals for SFHGLP due to the failure to comply with applicable requirements and regulations. Appraisals from the ineligible appraisers will not be accepted. (6) Use of an alternative approach to value for appraisals performed in remote rural areas, on tribal lands, or where a lack of market activity exists may be accepted at the Agency's discretion. (7) The validity period of an appraisal will be 120 days, unless otherwise provided by the Agency. (e) Environmental requirements. (f) Issuance of a conditional commitment. (1) The conditional commitment will expire in 90 days from issuance, unless new construction is involved. (2) The expiration of a conditional commitment may coincide with projected completion of new construction. (3) An extension may be granted if the loan cannot be closed due to circumstances beyond the lender's control. (4) Lenders may accept or decline the conditional commitment, or submit requests for changes with adequate support and documentation to be reviewed by the Agency. (g) Loan guarantee fee. http://www.rurdev.usda.gov/rd_instructions.html. (h) Annual fee. (i) Proper closing and requesting the loan note guarantee. (1) Within 30 days of loan closing, the lender must request issuance of a loan guarantee. (2) The lender will certify the loan was closed in accordance with the conditional commitment and that no major changes have taken place since issuance of a commitment, except any changes specifically approved by the Agency. (3) The lender will maintain evidence of hazard insurance and, if applicable, flood insurance. (4) For all loan submissions, evidence of documentation supporting the properly closed loan will be submitted using Rural Development's automated systems. (j) Issuance of the guarantee. (1) The lender transmits the required up-front guarantee fee, the lender certification form provided by Rural Development, and loan closing documents to Rural Development; (2) The lender meets all other conditions set out in the conditional commitment; (3) The loan is current at the time the lender requests the loan guarantee; (4) Any construction or rehabilitation, is complete except for development described in §§ 3555.101(c) and 3555.202(c); and (5) Rural Development issues the loan guarantee document. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016; 87 FR 6776, Feb. 7, 2022; 91 FR 13217, Mar. 19, 2026] § 3555.108 Full faith and credit. (a) General. (b) Interest. (c) Violations. (d) Indemnification. (1) To indemnify the Agency for the loss, if the default leading to the payment of loss claim occurred within five (5) years of loan closing, when one or more of the following conditions is satisfied: (i) The originating lender utilized unsupported data or omitted material information when submitting the request for a conditional commitment to the Agency; (ii) The originating lender failed to properly verify and analyze the applicant's income and employment history in accordance with Agency guidelines; (iii) The originating lender failed to address property deficiencies identified in the appraisal or inspection report that affect the health and safety of the occupants or the structural integrity of the property; (iv) The originating lender used an appraiser that was not properly licensed or certified, as appropriate, to make residential real estate appraisal in accordance with § 3555.103(a); or, (2) To indemnify the Agency for the loss regardless of how long ago the loan closed or the default occurred, if the Agency determines that fraud or misrepresentation was involved with the origination of the loan. (3) In addition, the Agency may use any other legal remedies it has against the originating lender. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016; 81 FR 26464, May 3, 2016] § 3555.109 Qualified mortgage. A qualified mortgage is a guaranteed loan meeting the requirements of this part and applicable Agency guidance, as well as the requirements in 12 CFR 1026.43(e)(2)(i) through (iii) and 12 CFR 1026.43(e)(3). An extension of credit made pursuant to a program administered by a State Housing Finance Agency is exempt from this requirement as defined in 12 CFR 1026.43(a)(3)(iv). Lenders will be allowed to cure unintentional errors and retain the qualified mortgage status if the conditions set in 12 CFR 1026.31(h) are met. [81 FR 26464, May 3, 2016] §§ 3555.110-3555.149 [Reserved] § 3555.150 OMB control number. The report and recordkeeping requirements contained in this subpart are currently with the Office of Management and Budget under review and awaiting approval. Subpart D—Underwriting the Applicant § 3555.151 Eligibility requirements. (a) Income eligibility. (b) Citizenship status. (c) Principal residence. (d) Adequate dwelling. (e) Eligibility of current homeowners. (1) The applicants are not financially responsible for another Agency guaranteed or direct home loan by the time the guaranteed home loan is closed; (2) The current home no longer adequately meets the applicants' needs; (3) The applicants will occupy the home financed with the SFHGLP loan as their primary residence; (4) The applicants are without sufficient resources or credit to obtain the dwelling on their own without the guarantee; (5) No more than one single family housing dwelling other than the one associated with the current loan request may be retained; and (6) The applicants must be financially qualified to own more than one home. In order for net rental income from the retained dwelling to be considered for the applicant's repayment ability, the consistency of the rental income must be demonstrated for at least the previous 24 months, and the current lease must be for a term of at least 12 months after the loan is closed. (f) Legal capacity. (g) Suspension or debarment. (h) Repayment ability. (1) A repayment ratio will be used to determine an applicant's ability to repay a loan. The Agency will utilize two ratios, principal, interest, taxes and insurance (PITI) ratio and total debt (TD) ratio, to determine adequate repayment for the requested loan. The Agency reserves the right to consider calculation of a single ratio in determining repayment for the requested loan. (i) An applicant is considered to have adequate repayment ability when the monthly amount required for payment of PITI, homeowners' association dues, the monthly calculation of an annual fee, as applicable, and other real estate assessments does not exceed 29 percent of the applicant's repayment income and the monthly amount of PITI plus recurring monthly debts (total debt) does not exceed 41 percent of the applicant's repayment income. (ii) For home purchases under the Rural Energy Plus provision of § 3555.209, the Agency reserves the right to allow flexibility in the PITI and TD ratio. The handbook will define what flexibilities can be extended. (iii) Contributions to personal income taxes, retirement accounts (including the repayment of personal loans from those retirement accounts), savings (including repayment of loans secured by such funds), the cost to commute, membership fees in unions or like organizations, childcare or other voluntary obligations will not be considered in the TD ratio. (iv) Except for obligations specifically excluded by State law, the debts of non-purchasing spouse must be included in the applicant's repayment ratios if the applicant resides in a community property state. (2) The repayment ratio may exceed the percentage in paragraph (h)(1) of this section when certain compensating factors exist. The handbook, HB-1-3555, Appendix I, located at https://www.rd.usda.gov/sites/default/files/hb-1-3555.pdf, (i) A credit score at an acceptable level of 680 or higher for any applicants, unless otherwise provided by the Agency. The Agency reserves the right to change the acceptable level of credit score. (ii) A minimal increase in housing expense, i.e. the current rent payment is comparable to the proposed mortgage loan payment PITI and if applicable, homeowner association dues. (iii) The demonstrated ability to accumulate savings and cash reserves post loan closing. (iv) Continuous employment with a current primary employer. (3) Loan ratio exceptions require written approval by Rural Development, or acceptance by an Agency approved automated underwriting system. Flexibilities surrounding loan ratio exceptions will be further clarified in the handbook. Lenders with loans accepted by an Agency approved automated underwriting system need not submit documentation for the need for a ratio waiver. (4) If an applicant does not meet the repayment ability requirements, the applicant can increase repayment ability by having other eligible household members join the application. (5) Mortgage Credit Certificates may be considered in determining an applicant's repayment ability. (6) Section 8 Homeownership Vouchers may be used in determining an applicant's repayment ability. The monthly subsidy may be treated as repayment income in accordance with § 3555.152(a) or offset in the PITI. (7) A funded buydown account may be used to reduce the borrower's monthly mortgage payment during the early years of repayment when all of the following requirements are met: (i) The loan will be underwritten at the note rate. (ii) The interest rate may be bought down to no more than 2 percentage points below the note rate. (iii) The interest rate paid by the borrower may increase no more frequently than annually. (iv) The interest rate paid by the borrower may increase no more than 1 percentage point annually. (v) Funds must be placed in an escrow account with monthly releases scheduled directly to the lender. (vi) Funds must be placed with a Federal- or state-regulated lender. (vii) The escrow account must be fully funded for the buydown period. (viii) The borrower is not permitted to use personal funds or funds borrowed from another source to establish the escrow account for the buydown. (ix) The borrower must not be required to borrow or repay the funds. (i) Credit qualifications. (1) Except as provided in paragraph (i)(6) of this section, the applicant's credit history must demonstrate a past willingness and ability to meet credit obligations to enable the lender to evaluate each applicant and draw a logical conclusion about the applicant's commitment and ability to handling financial obligations successfully and ability to make payments on the new mortgage obligation. (2) A loan's acceptance by an Agency approved automated underwriting system eliminates the need for the lender to submit documentation of the credit qualification decision as loan approval requirements will be incorporated in the automated system. (3) For manually underwritten loans, lenders must submit documentation of the credit qualification decision. Lenders will use credit scores to manually underwrite loan mortgage requests. Lenders are required to validate the credit scores utilized in the underwriting determination. Indicators of significant derogatory credit will require further review and documentation of that review. Indicators of significant derogatory credit include, but are not limited to: (i) A foreclosure that has been completed in the 36 months prior to application by the applicant. (ii) A bankruptcy in which debts were discharged within 36 months prior to the date of application by the applicant. A lender may give favorable consideration to applicants who have entered into a bankruptcy debt restructuring plan who have completed 12 months of consecutive payments. The payment performance must have been satisfactory with all required payments made on time, and the Trustee or the Bankruptcy Judge must approve of the new credit. (iii) One rent or mortgage payment paid 30 or more days late within the last 12 months prior to application by the applicant. (iv) A previous Agency loan that resulted in a loss to the Government. (4) When evidence of significant derogatory credit is present, lenders may consider extenuating circumstances, including but not limited to, whether the problems were caused by factors temporary in nature, if the circumstances leading to the derogatory credit were beyond the control of the applicant, and if the loan would significantly reduce the applicant's housing expenses. (5) In all cases, the applicant cannot have an outstanding Federal judgment, other than a judgment obtained in the United States Tax Court, or a delinquent non-tax Federal debt that has not been paid in full or otherwise satisfied. (6) For applicants without an established credit history, alternative methods may be used to evidence an applicant's willingness to pay, such as a non-traditional mortgage credit report or multiple independent verifications of trade references. (7) A credit report for a non-purchasing spouse must be obtained in order to determine the debt-to-income ratio referenced at § 3555.151(h) if the applicant resides in a community property state. (8) Lenders are encouraged to offer or provide for home ownership counseling. Lenders may require first-time homebuyers to undergo such counseling if it is reasonably available in the local area. When home ownership counseling is provided or sponsored by Rural Development or another Federal agency in the local area, the Lender must require the borrower to successfully complete the course. (9) Applicants with delinquent child support payments subject to collection by administrative offset are ineligible unless the payments are brought current, the debt is paid in full, or otherwise satisfied. (j) Obtaining credit. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016; 87 FR 6776, Feb. 7, 2022; 87 FR 53372, Aug. 31, 2022] § 3555.152 Calculation of income and assets. The lender must obtain and maintain documentation in the loan file supporting the lender's determination of all income and assets described in this section. (a) Repayment income. (1) The lender must examine the applicant's past income record for at least the past 2 years and any applicable training and/or education. The Agency may require additional information and documentation from self-employed applicants and applicants employed by businesses owned by family members. (2) The lender must establish an applicant's anticipated amount of repayment income and the likelihood of its continuance for at least the next 3 years to determine an applicant's capacity to repay a requested mortgage loan in accordance with § 3555.151(h)(1). (3) Income may not be used in calculating an applicant's ratios if it is from any source that cannot be verified, is not stable, or is likely not to continue. (4) The following types of income are examples of income not included in repayment income: (i) Any student financial aid received by household members for tuition, fees, books, equipment, materials, and transportation; (ii) Amounts received that are specifically for, or in reimbursement of the cost of medical expenses for any family member; (iii) Temporary, nonrecurring, or sporadic income (including gifts); (iv) Lump sum additions to family assets such as inheritances, capital gains, insurance payments and personal or property settlements; (v) Payments for the care of foster children or adults; and (vi) Supplemental Nutrition Assistance Program payments. (b) Annual income. (1) Applicants must provide the income, expense and household information necessary to enable the lender to make income determinations. (2) Lenders must verify employment and income information provided by the applicant for all household members. Lenders will verify the income for each adult household member for the previous 2 years. Written or oral verifications provided by third-party sources or documents prepared by third-party sources are acceptable. Lenders must project the expected annual income for the next 12 months from the verified sources. (3) The lender remains responsible for the quality and accuracy of all information used to establish a household's eligibility. (4) Household income from all sources including, but not limited to, income from temporarily absent household members, allowances for tax-exempt income and net family assets as defined in paragraph (d) of this section are to be considered in the calculation of annual income. (5) The following sources of income will not be considered in the calculation of annual income: (i) Earned income of persons under the age of 18 unless they are an applicant or a spouse of a member of the household; (ii) Payments received for the care of foster children or foster adults and incomes received by foster children or foster adults who live in the household; (iii) Amounts granted for, or in reimbursement of, the cost of medical expenses; (iv) Earnings of each full-time student 18 years of age or older, except the head of household or spouse, that are in excess of any amount determined pursuant to HUD definition of annual income at 24 CFR 5.609(c); (v) Temporary, nonrecurring, or sporadic income (including gifts); (vi) Lump sum additions to family assets such as inheritances; capital gains; insurance payments under health, accident, or worker's compensation policies; settlements for personal or property losses; and deferred periodic payments of supplemental social security income and Social Security benefits received in a lump sum; (vii) Any earned income tax credit; (viii) Adoption assistance in excess of any amount determined pursuant to HUD's definition of annual income at 24 CFR 5.609(c); (ix) Amounts received by the family in the form of refunds or rebates under State or local law for property taxes paid on the dwelling; (x) Amounts paid by a State agency to a family with a developmentally disabled family member living at home to offset the cost of services and equipment needed to keep the developmentally disabled family member at home; (xi) The full amount of any student financial aid; (xii) Any other revenue exempted by a Federal statute, a list of which is available from any Rural Development office; (xiii) Income received by live-in aides, regardless of whether the live-in aide is paid by the family or a social service program; (ix) Employer-provided fringe benefit packages unless reported as taxable income; and (x) Amounts received through the Supplemental Nutrition Assistance Program. (c) Adjusted annual income. (1) A reduction for each family member, except the head of household or spouse, who is under 18 years of age, 18 years of age or older with a disability, or a full-time student, the amount of which will be determined pursuant to HUD definition of adjusted income at 24 CFR 5.611. (2) A deduction of reasonable expenses for the care of a child 12 years of age or under that: (i) Enables a family member to work, to actively seek work, or to further a member's education; (ii) Are not reimbursed or paid by another source; and (iii) In the case of expenses to enable a family member to work, do not exceed the amount of income, including the value of any health benefits, earned by the family member enabled to work. If the child care provider is a household member, the cost of the children's care cannot be deducted. (3) A deduction of reasonable expenses related to the care of household members with disabilities that: (i) Enable a family member or the individual with disabilities to work, to actively seek work, or to further a member's education; (ii) Are not reimbursed from insurance or another source; and (iii) Are in excess of 3 percent of the household's annual income and do not exceed the amount of earned income included in annual income by the person who is able to work as a result of the expenses. (4) For any elderly family, a deduction in the amount determined pursuant to HUD definition of adjusted income at 24 CFR 5.611. (5) For elderly and disabled families only, a deduction for household medical expenses that are not reimbursed from insurance or another source and which, in combination with any expenses related to the care of household members with disabilities described in paragraph (c)(3) of this section, are in excess of 3 percent of the household's annual income. (d) Net family assets. (1) Net family assets include, but are not limited to, the actual or imputed income from: (i) Equity in real property or other capital investments, other than the dwelling or site; (ii) Cash on hand and funds in savings or checking accounts; (iii) Amounts in trust accounts that are available to the household; (iv) Stocks, bonds, and other forms of capital investments that is accessible to the applicant without retiring or terminating employment; (v) Lump sum receipts such as lottery winnings, capital gains, and inheritances; (vi) Personal property held as an investment; and (vii) Any value, in excess of the consideration received, for any business or household assets disposed of for less than fair market value during the 2 years preceding the income determination. The value of assets disposed of for less than fair market value shall not be considered if they were disposed of as a result of foreclosure, bankruptcy, or a divorce or separation settlement. (2) Net family assets for the purpose of calculating annual income do not include: (i) Interest in American Indian restricted land; (ii) Cash on hand which will be used to reduce the amount of the loan; (iii) The value of necessary items of personal property; (iv) Assets that are part of the business, trade, or farming operation of any member of the household who is actively engaged in such operation; (v) Amounts in voluntary retirement plans such as individual retirement accounts (IRAs), 401(k) plans, and Keogh accounts (except at the time interest assistance is initially granted); (vi) The value of an irrevocable trust fund or any other trust over which no member of the household has control; (vii) Cash value of life insurance policies; and (viii) Other amounts deemed by the Agency not to constitute net family assets. §§ 3555.153-3555.199 [Reserved] § 3555.200 OMB control number. The report and recordkeeping requirements contained in this subpart are currently with the Office of Management and Budget under review and awaiting approval. Subpart E—Underwriting the Property § 3555.201 Site requirements. (a) Rural areas. (1) Existing conditional commitments in the former rural area will be honored; (2) A supplemental loan may be made in accordance with § 3555.101 in conjunction with a transfer and assumption of a guaranteed loan; (3) Loan requests where the application and purchase contract was complete prior to the area designation change may be approved; and (4) REO property sales and transfers with assumption may be processed. (b) Site standards. (1) The site size must be typical for the area. (2) The site must not include income-producing land or buildings to be used principally for income-producing purposes. Vacant land without eligible residential improvements, or property used primarily for agriculture, farming or commercial enterprise is ineligible for a loan guarantee. (3) The site must be contiguous to and have direct access from a street, road, or driveway. Streets and roads must be hard surfaced or all weather surfaced and legally enforceable arrangements must be in place to ensure that needed maintenance will be provided. (4) The site must be supported by adequate utilities and water and wastewater disposal systems. Certain water and wastewater systems that are privately-owned may be acceptable if the lender determines that the systems are adequate, safe, compliant with applicable codes and requirements, and the cost or feasibility to connect to a public or community system is not reasonable. Certain community-owned water and wastewater systems may be acceptable if the lender determines that the systems are adequate, safe, and compliance with applicable codes and requirements. The Agency may require inspections on individual, central, or privately-owned and operated water or waste systems. § 3555.202 Dwelling requirements. (a) New dwellings. (b) Existing dwellings. (1) Be structurally sound; (2) Be functionally adequate; (3) Be in good repair, or to be placed in good repair with loan funds; and (4) Have adequate and safe electrical, heating, plumbing, water, and wastewater disposal systems. (c) Escrow account for exterior or interior development. (1) The incomplete work does not affect the habitability of the dwelling, nor the health or safety of the housing occupants. (2) The cost of any remaining interior or exterior work is not greater than 10 percent of the final loan amount. (3) An escrow account is funded in an amount sufficient to assure the completion of the remaining work. This figure must be at least 100 percent of the cost of completion but may be higher if the lender determines a higher amount is needed. (4) The builder or a licensed contractor has executed a contract providing for completion of the planned development within 180 days of loan closing. If the borrower will be completing the planned development on an existing dwelling without the services of a contractor, the requirement for an executed contract is waived when all of the following conditions are met: (i) The estimated cost to complete the work is less than 10 percent of the total loan amount; (ii) The escrow amount is less than or equal to $10,000; and (iii) The lender has determined the borrower has the knowledge and skills necessary to complete the work. (5) The lender may release escrowed funds only after obtaining a final inspection report acknowledged by the borrower and indicating all planned development has been satisfactorily completed. (6) The lender remains responsible to ensure a final inspection is performed and required repairs are completed. (7) The settlement statement reflects the amounts escrowed. § 3555.203 Ownership requirements. After the loan is closed, the borrower must have an acceptable ownership interest in the property as evidenced by one of the following: (a) Fee-simple ownership. (b) Secured leasehold interest. (1) The applicant is unable to obtain fee simple title to the property; (2) Such leaseholds are fully marketable in the area, except in the case of properties located on American Indian restricted land; (3) The lease has an unexpired term of at least 45 years from the date of loan closing, except in the case of properties located on Tribal Trust land, individual (allotted) Trust land, or Tribal restricted fee land, where the lease must have an unexpired term at least equal to the term of the loan. Leases on Tribal Trust land, individual Trust (allotted) land, or Tribal restricted fee land, for period of 25 years which are renewable for a second 25 year period are permissible, as are leases of a longer duration. For new energy efficient manufactured and modular home financing in land-lease communities operating on a nonprofit basis and on Tribal Trust land, the Agency will accept a lease with an unexpired term that is at least two years longer than the loan term; (4) The mortgage must cover both the property improvements and the leasehold interest in the land; (5) The leasehold estate must constitute real property, be subject to the mortgage lien, be insured by a title policy, be assignable or transferable and cannot be terminated except for nonpayment of lease rents; and (6) The lease must be recorded in the appropriate local real estate records. [78 FR 73941, December 9, 2013, as amended at 90 FR 203, Jan. 3, 2025] § 3555.204 Security requirements. Rural Development will only guarantee loans that are adequately secured. A loan will be considered adequately secured only when all of the following requirements are met: (a) Recorded security document. (b) Prior liens. (c) Adequate security. (d) Collateral. § 3555.205 Special requirements for condominiums. Loans may be guaranteed for condominium units in condominium projects that meet all the requirements of this part, as well as the standards for condominium standards established by HUD, Fannie Mae, VA, or Freddie Mac, including those related to self-certification, warranty, underwriting, and ineligible condominium projects. § 3555.206 Special requirements for community land trusts. A community land trust must meet the definition in accordance with § 3555.10 and other requirements described in this subpart. Loans may be guaranteed for dwellings on land owned by a community land trust only if: (a) Rural Development review. (b) Foreclosure termination. (c) Organization. (1) Be organized under State or local laws. (2) Members, founders, contributors or individuals cannot benefit from any part of net earnings of the organization. (3) The organization must be dedicated to decent affordable housing for low-and moderate-income people. (4) Comply with financial accountability. (d) Lender documentation. (e) Appraisals. § 3555.207 Special requirements for Planned Unit Developments (PUDs). Loans may be guaranteed for PUDs that meet all of the requirements of this part, as well as the criteria for PUDs established by HUD, VA, Fannie Mae, or Freddie Mac. § 3555.208 Special requirements for manufactured homes. Loans may be guaranteed for manufactured homes if all the requirements in this section are met. (a) Eligible costs. (1) Purchase of a new manufactured home, transportation, permanent foundation, and installation costs of the manufactured home, and purchase of an eligible site if not already owned by the applicant; and (2) Site development work properly completed to HUD, state and local government standards, as well as the manufacturer's requirements for installation on a permanent foundation. (3) An existing unit and site, provided: (i) The unit was constructed in conformance with the Federal Manufactured Home Construction and Safety Standards (FMHCSS) as evidenced by both an affixed HUD Certification label and HUD Data Plate; and (ii) The unit was installed on a permanent foundation in accordance with the manufacturer's requirements and HUD installation standards. Certification of a proper foundation is required; and (iii) The unit has not been previously installed on a different homesite, or had any alterations since construction in the factory, except for porches, decks or other structures which were built to engineered designs or were approved and inspected by local code officials; and (iv) The unit was constructed on or after a date determined by the Agency. (b) Loan restrictions. (1) A loan will not be guaranteed if it is used to purchase a site without also financing a new unit. (2) A loan will not be guaranteed if it is used to purchase furniture, including but not limited to: movable articles of personal property such as drapes, beds, bedding, chairs, sofas, divans, lamps, tables, televisions, radios, and stereo sets. Furniture does not include wall-to-wall carpeting, refrigerators, ovens, ranges, washing machines, clothes dryers, heating or cooling equipment, or other similar items. (3) A loan will not be guaranteed to purchase an existing manufactured home and site unless: (i) The unit and site are already financed with an Agency direct single family or guaranteed loan; (ii) The unit and site are being sold by Rural Development as REO property; (iii) The unit and site are being sold from the lender's inventory, and the loan for which the unit and site served as security was a loan guaranteed by Rural Development; or (iv) The existing manufactured home meets all of the following requirements: (A) The unit was constructed in conformance with the Federal Manufactured Home Construction and Safety Standards (FMHCSS) as evidenced by an affixed HUD Certification label and HUD Data Plate; (B) The unit was installed on a permanent foundation complying with manufacturer and HUD installation standards. The foundation design meets HUD standards for manufactured housing; (C) The unit has not had any alterations or modifications since construction in the factory, except for porches, decks or other structures which were built to engineered designs or were approved and inspected by local code officials; and (D) The unit was constructed on or after a date determined by the Agency. (4) A loan will not be guaranteed for repairs to an existing unit, unless the unit meets the requirements of § 3555.208(b)(3). (5) A loan will not be guaranteed for the purchase of an existing manufactured home that has been moved from another site. (c) Construction and development. (2) The unit must be properly installed on a permanent foundation according to HUD standards, and the manufacturer's requirements for installation on a permanent foundation. A certification of proper foundation is required. (3) All wheels, axles, towing hitches and running gear must be removed from the manufactured home. (4) Unit construction must conform to the Federal Manufactured Home Construction and Safety Standards (FMHCSS) and be constructed in compliance with the HUD heating and cooling requirements for the State in which the unit will be located. Any alterations, such as garage construction, as a new unit must comply with FMHCSS. (5) The site development, installation and set-up must conform to the HUD requirements and the manufacturer's requirements for a permanent installation. (6) The unit must meet or exceed the IECC in effect at the time of construction. (7) The lender must maintain documentation of construction plans and required certifications. (d) Warranty requirements. (2) The warranty must identify the unit by serial number. (3) The lender and applicant must obtain certification that the manufactured home has sustained no hidden damage during transportation and, if manufactured in separate sections that the sections were properly joined and sealed according to the manufacturer's specifications. (4) The manufactured home must be affixed with a data plate, placed inside the unit, and a certification label, affixed to each transportable section at the tail-light end of each unit which indicates that the home was designed and built in accordance with HUD's construction and safety standards in effect on the date the home was manufactured. (5) The lender must retain a copy of all manufacturers' warranties in the lender file. (e) HUD requirements. (f) Title and lien requirements. (1) A manufactured home loan must be secured by a perfected lien on real property consisting of the manufactured home and the land; (2) The manufactured home must be taxed as real estate as applicable under State law, including relevant statutes, regulations, and judicial decisions; (3) The security instrument must be recorded in the land records and must identify the encumbered property as including both the home and the land; (4) If applicable State law so permits, any certificate of title to the manufactured home must be surrendered to the appropriate State government authority. If the certificate of title cannot be surrendered, the lender must indicate its lien on the certificate; (5) The mortgage must be covered by a standard real property title insurance policy and any other endorsement required in the applicable jurisdiction for manufactured home ensuring the manufactured home is part of the real property that secures the loan; and (6) The borrower must acknowledge the unit is a fixture and part of the real estate securing the mortgage. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016; 90 FR 203, Jan. 3, 2025] § 3555.209 Rural Energy Plus loans. Loans guaranteed under Rural Energy Plus provisions are for the purchase of energy-efficient homes. Homes that meet the most current IECC standards including existing homes that are retrofitted to those standards are eligible. Energy-efficient homes result in lower utility bills, conserve energy, and thus, make more income available for monthly debt obligations. For loans guaranteed under this subpart, the lender will certify that the home meets the most current IECC standards. The Handbook will define what further flexibilities can be extended. §§ 3555.210-3555.249 [Reserved] § 3555.250 OMB control number. The report and recordkeeping requirements contained in this subpart are currently with the Office of Management and Budget under review and awaiting approval. Subpart F—Servicing Performing Loans § 3555.251 Servicing responsibility. (a) Servicing action. (b) Third party servicer. (c) Transfer of servicing. (d) Non-compliance. § 3555.252 Required servicing actions. Lender servicing responsibility includes, but is not limited to, the following actions. (a) Collecting regularly scheduled payments. (b) Payment of taxes and insurance. (1) Establish escrow account. (2) Plan and responsibility of lender to ensure payment. (c) Insurance. (2) Lenders must ensure that borrowers immediately notify them of any loss or damage to insured property securing guaranteed loans and collect the amount of the loss from the insurance company. Unless the borrower pays off the guaranteed loan using the insurance proceeds, the following requirements must be met: (i) All repairs and replacements using the insurance proceeds must be planned, performed, and inspected in accordance with Agency construction requirements and procedures. (ii) When insurance funds remain after payments for all repairs, replacements, and other authorized disbursements have been made, the funds must be applied in the following order: prior liens (including past-due property taxes); past-due amounts; protective advances; and released to the borrower if the lender's debt is adequately secured. (3) If the insurance claim is de minimis as determined by the Agency, the lender may release the funds directly to the borrower to advance funds to contractors, provided that the account is current and the borrower has a history of timely payments; the borrower occupies the property; and the borrower executes an affidavit agreeing to apply the funds for repairs or reconstruction of the dwelling. (d) Credit reporting. (e) Bankruptcy actions. § 3555.253 Late payment charges. Late payment charges will not be covered by the guarantee and cannot be added to the principal and interest due under any guaranteed note. (a) Maximum amount. (b) Loans with interest assistance. § 3555.254 Final payments. Lenders may release security instruments only after payment for the satisfaction of the full debt, including any recapture, has been received and verified. [81 FR 6429, Feb. 8, 2016] § 3555.255 Borrower actions requiring lender approval. (a) Mineral leases. (1) If the proposed activity is likely to decrease the value of the security property, the lender may consent to the lease only if the borrower assigns 100 percent of the income from the lease to the lender to be applied to reduce the principal balance, and the total rent to be paid is at least equal to the estimated decrease in the market value of the security property. (2) If the proposed activity is not likely to decrease the value of the security property, the lender may consent to the lease if the borrower agrees to use any damage compensation received from the lessee to repair damage to the site or dwelling, or to assign it to the lender to be applied to reduce the principal balance. (b) Partial release of security property. (1) The borrower will receive adequate compensation, and either make a reduction to the principal balance or make improvements to the security property, in order to maintain the current loan-to-value ratio for the guaranteed loan. (i) For sale of security property, the borrower must receive cash in an amount equal to or greater than the value of the security property being sold or interests being conveyed. (ii) For exchange of security property, the borrower must receive another parcel of property with value equal to or greater than that being disposed of. (iii) For granting an easement or right-of-way, the borrower must receive benefits that are equal to or greater than the value of the security property being disposed of or interests being conveyed. (2) An appraisal of the security property will be conducted by the lender if the most current appraisal is more than 1 year old or if it does not reflect current market value. (3) The security property, after the transaction is completed, will continue to be an adequate, safe, and sanitary dwelling. (4) Repayment of the guaranteed debt will not be jeopardized. (5) When exchange of all or part of the security property is involved, title clearance will be obtained before release of the existing security. (6) Proceeds from the sale of a portion of the security property, granting an easement or right-of-way, damage compensation, and all similar transactions requiring the lender's consent, will be used in the following order: (i) To pay customary and reasonable costs related to the transaction that must be paid by the borrower. (ii) To be applied on a prior lien debt, if any. (iii) To be applied to the guaranteed indebtedness or used for improvements to the security property consistent with the purposes and limitations applicable for use of guaranteed loan funds. The lender must ensure that the proceeds are used as planned. (7) The lender will seek Agency concurrence, unless otherwise provided by the Agency, by submitting documentation supporting the borrower's reason for request, the proposed use of the land with supporting plans, specifications, cost estimates, surveys, disclosures of restrictions, legal description modification, title clearance related to the transaction request, as applicable, and any other documents necessary for the Agency to make a determination. § 3555.256 Transfer and assumptions. (a) Transfer without assumption. (2) Except as described in paragraph (d) of this section, if a security property is transferred with the lender's knowledge without assumption of the debt, Rural Development will void the guarantee. (b) Transfer with assumption. (2) Rural Development may approve a transfer with an assumption of the outstanding debt if the following conditions are met: (i) The transferee must assume the entire outstanding debt and acquire all property securing the guaranteed loan balance; however, the transferor must remain personally liable. The transferor must pay any recapture as a result of interest subsidy granted, if applicable, owed at the time of the transfer and assumption. (ii) The transferee must meet the eligibility requirements described in subpart D of this part. (iii) The property must meet the site and dwelling requirements described in subpart E of this part, or be brought to those standards prior to the transfer. Guaranteed loans secured by properties located in areas that have ceased to be rural may be assumed notwithstanding the fact that the property is located in a non-rural area. (iv) The priority of the existing lien securing the guaranteed loan must be maintained or improved. (v) Any new rates and terms must not exceed the rates and terms allowed for new loans under this part, and the interest rate must not exceed the interest rate on the initial loan. (vi) A new guarantee fee, calculated based on the remaining principal balance, must be paid to Rural Development in accordance with § 3555.107(g). (vii) If additional financing is required to complete the transfer and assumption or to make needed repairs, Rural Development may approve a supplemental guaranteed loan provided adequate security exists. (viii) The lender must verify and document their permanent file in accordance with subpart C of this part. (ix) A written request supported by the lender demonstrating the applicant's credit worthiness, income eligibility and underwriting analysis must be submitted to the Agency for approval of a transfer and assumption. (x) The lender may close the loan in accordance with § 3555.107. (c) Transfer without approval. (1) Notify Rural Development and continue the loan without the guarantee; or (2) Obtain Agency approval for the transfer with assumption; or (3) Liquidate the guaranteed loan and submit a claim for any loss. (d) Transfer without triggering the due-on-sale clause. (i) A transfer from the borrower to a spouse or children not resulting from the death of the borrower; (ii) A transfer to a relative, joint tenant, or tenant by the entirety resulting from the death of the borrower; (iii) A transfer to a spouse or ex-spouse resulting from a divorce decree, legal separation agreement, or property settlement agreement; (iv) A transfer to a person other than a deceased borrower's spouse who wishes to assume the loan for the benefit of persons who were dependent on the deceased borrower at the time of death, if the dwelling will be occupied by one or more persons who were dependent on the borrower at the time of death, and there is a reasonable prospect of repayment; or (v) A transfer into an inter vivos trust in which the borrower does not transfer rights of occupancy in the property. (2) When a transferee obtains a property with a guaranteed loan through a transfer that does not trigger the due-on-sale clause: (i) The lender will notify Rural Development of the transfer; (ii) Rural Development will continue with the guarantee, whether or not the transferee assumes the guaranteed loan; (iii) The transferee may assume the guaranteed loan on the rates and terms contained in the promissory note. If the account is past due at the time an assumption agreement is executed, the loan may be re-amortized to bring the account current; (iv) The transferee may assume the guaranteed loan under new rates and terms if the transferee applies and is eligible. (3) Any subsequent transfer of title, except upon the death of the inheritor or between inheritors to consolidate title, will trigger the due-on-sale clause. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016] § 3555.257 Unauthorized assistance. (a) Unauthorized assistance due to false information. (2) If the borrower receives a guaranteed loan based on false information provided by the lender, Rural Development may void the guarantee subject to the provisions of § 3555.108. (3) If the borrower or lender provides false information, Rural Development may pursue criminal and civil false claim actions, suspension and/or debarment, and take all other appropriate action. (b) Unauthorized assistance due to inaccurate information. §§ 3555.258-3555.299 [Reserved] § 3555.300 OMB control number. The report and recordkeeping requirements contained in this subpart are currently with the Office of Management and Budget under review and awaiting approval. Subpart G—Servicing Non-Performing Loans § 3555.301 General servicing techniques. In accordance with industry standards and as provided by the Agency: (a) Prompt action. (b) Evaluation of borrower. (c) Prompt contact. (d) Determine ability to cure. (e) Communication. (f) Prior to liquidation. (g) Maintain documentation. (h) Formal servicing plan. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6429, Feb. 8, 2016; 84 FR 70886, Dec. 26, 2019] § 3555.302 Protective advances. Lenders may pay the following pre-liquidation expenses necessary to protect the security property and charge the cost against the borrower's account. (a) Advances for taxes and insurance. (b) Advances for costs other than taxes and insurance. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6430, Feb. 8, 2016; 84 FR 70886, Dec. 26, 2019] § 3555.303 Traditional servicing options. (a) Eligibility. (1) The borrower presently occupies the property; (2) The borrower is in default or facing imminent default for an involuntary reason. A borrower is “facing imminent default” if that borrower is current or less than 30 days past due on the mortgage obligation and is experiencing a significant reduction in income or some other hardship that will prevent him or her from making the next required payment on the mortgage during the month in which it is due. The borrower must be able to document the cause of the imminent default, which may include, but is not limited to, one or more of the following types of hardship: (i) A reduction in or loss of income that was supporting the mortgage loan; (ii) A change in household financial circumstances; (3) The borrower demonstrates a reasonable ability to support repayment of the debt in the future; (4) There are no adverse property conditions that inhibit the inhabitability or use of the property; and (5) The borrower has not received assistance due to the submission of false information by the borrower. (b) Servicing options. (1) Repayment agreement. (2) Special forbearance agreement. (3) Loan modification plan. (ii) Loan modifications must be a fixed interest rate and cannot exceed the market interest rate at the time of modification. (iii) Loan modifications may capitalize all or a portion of the arrearage and/or reamortization of the balance due including foreclosure fees and costs associated with the delinquency, tax and insurance advances, and past due Agency annual fees imposed by the lender. Late charges and lender fees may not be capitalized. (iv) If necessary to demonstrate repayment ability, the loan term after reamortization may be extended for up to 40 years from the date of the loan modification. (v) Lenders may require that borrowers complete a trial payment plan prior to making scheduled payments amended by the traditional loan servicing loan modification. (vi) Traditional servicing options shall be used in the order established in this section to reduce the borrower's mortgage payment to income ratio as close as possible to 31 percent of gross monthly income. (vii) If the targeted mortgage payment to income cannot be achieved using a loan modification alone, the lender may consider a mortgage recovery advance under this section in addition to the loan modification. (4) Mortgage recovery advance. (i) Borrowers may be eligible for multiple Mortgage Recovery Advances up to a cumulative amount that is less than or equal to 30 percent of the unpaid principal balance as of the date of the initial default. (ii) If the borrower's total monthly mortgage payment is within a reasonable percent of the borrower's ability to repay prior to an extended term loan modification, the mortgage recovery advance can be used to cure the borrower's delinquency without changing the terms of the promissory note. (iii) The principal deferment amount for a specific case shall be limited to the amount that will bring the borrower's total monthly mortgage payment to 31 percent of gross monthly income. (iv) If the borrower is eligible for a mortgage recovery advance, the servicer will advance the funds to the borrower's account and create a non-interest-bearing recoverable servicing advance. The balance is to be provided on the mortgage statements along with the principal balance of the loan, but no payment arrangement will be required. (v) Prior to making a mortgage recovery advance, the lender must perform an escrow analysis to ensure that the payment made on behalf of the borrower accurately reflects the escrow amount required for taxes and insurance. (vi) The lender may request reimbursement from the Agency for a mortgage recovery advance. The lender shall repay any such reimbursement as provided in this section. (vii) The following terms apply to the repayment of a mortgage recovery advance: (A) Borrowers are not required to make any monthly or periodic payments on the mortgage recovery advance; however, borrowers may voluntarily submit partial payments without incurring any prepayment penalty. (B) The borrower is responsible for payment of the mortgage recovery advance to the lender in full at the earlier of the following: ( 1 ( 2 (C) The lender shall remit to the agency the amount mortgage recovery advance reimbursed by the Agency for a mortgage recovery advance, as described in this part, at the earliest of the following: ( 1 ( 2 ( 3 ( i ( ii ( iii (c) Terms of loan note guarantee. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6430, Feb. 8, 2016; 84 FR 70886, Dec. 26, 2019; 89 FR 66193, Aug. 15, 2024; 90 FR 9375, Feb. 12, 2025] § 3555.304 Streamline servicing options. (a) General. (2) Use of streamline loan servicing does not change the terms of the loan note guarantee. (3) Streamline options may be provided to the borrower with at least a 10 percent reduction to their principal and interest payment with no consideration of the borrower's financials. (b) Conditions for streamline servicing options. (1) The borrower must be at least 90 days past due and prior to initiation of any acceleration or foreclosure action. (2) The borrower must successfully complete a trial payment plan of sufficient duration, as determined by the Agency, to demonstrate that the borrower will be able to make regularly scheduled payments as modified by the special loan servicing. (3) Expenses related to streamline loan servicing including, but not limited to, title search and recording fees, shall not be charged to the borrower. (4) Capitalization of late charges and lender fees is not permitted in the special loan servicing option. (c) Extended streamline loan modification. (1) Streamline loan modifications may capitalize all or a portion of the arrearage and/or reamortization of the balance due including, tax and insurance advances and past due Agency annual fees imposed by the lender. Late charges and lender fees may not be capitalized. (2) Streamline loan modifications must be a fixed interest rate and cannot exceed the current market interest rate at the time of modification. When reducing the interest rate, the maximum rate is subject to paragraph (c)(3) of this section. (3) The term shall be extended to a maximum of 40 years as noted above to provide the borrower with at least a 10 percent reduction in their principal and interest payment. (4) If the targeted mortgage payment reduction cannot be achieved using a modification as described in this section, the loan is not eligible for streamline loan servicing and foreclosure may be initiated. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6430, Feb. 8, 2016; 84 FR 70886, Dec. 26, 2019; 89 FR 66194, Aug. 15, 2024; 90 FR 9375, Feb. 12, 2025] § 3555.305 Voluntary liquidation. The lender must have exhausted the servicing options outlined in §§ 3555.302 through 3555.304 to cure the delinquency before considering voluntary liquidation. The methods of voluntary liquidation of the security property outlined in this section may be used to protect the interests of the Government. (a) Eligibility. (1) The loan is at least 30 days delinquent or meets the imminent default definition as outlined in § 3555.303(a)(2); (2) The default was caused by an involuntary reason; and (3) The borrower must presently occupy the property except in situations where the borrower does not occupy the property due to the same involuntary reason that led to the default. (b) Pre-foreclosure or short sale. (c) Deed in lieu of foreclosure. (d) Offer by junior lienholder. (e) Other methods of voluntary liquidation. [78 FR 73941, Dec. 9, 2013, as amended at 84 FR 70886, Dec. 26, 2019] § 3555.306 Liquidation. (a) General. (2) Prior to acceleration the lender must have advised the borrower, in writing, of available foreclosure avoidance options and the borrower must have failed to request such options. (3) The lender must accelerate the guaranteed loan, with a demand letter, when the account is three scheduled payments past due unless there is a reasonable prospect of resolving the delinquency through another method. (4) The borrower is responsible for all expenses associated with liquidation and acquisition. (b) Foreclosure. (2) Lenders must exercise due diligence in completing the liquidation process to ensure the foreclosure is cost effective, expeditious, and completed in an efficient manner, as otherwise provided by the Agency. The lender must choose the foreclosure method representing the best interest of the Federal Government. (3) The lender's decision to bid at foreclosure and any bid amount will be based upon the property value, whether the property value is sufficient to cover the existing debt and incurred costs, and any potential to recover a deficiency. The lender will encourage third party bidding at a foreclosure sale when the total debt, including the cost of acquiring, managing and disposing of the property, if acquired, is greater than the gross proceeds expected from a foreclosure sale at market value. (c) Unless State law imposes other requirements, the lender may reinstate an accelerated account if the borrower pays, or makes acceptable arrangements to pay, all past-due amounts, any protective advances, and any foreclosure-related costs incurred by the lender. (d) Bankruptcy. (2) The lender may accept conveyance of security property by the trustee in the bankruptcy, or the borrower, if the bankruptcy court has approved the transaction, and the lender will acquire title free of all liens and encumbrances except the lender's liens. (3) Whenever possible after the borrower has filed for protection under Chapter 7 of Title 11 of the United States Code, a reaffirmation agreement will be signed by the borrower and approved by the bankruptcy court prior to discharge, if the lender and the borrower decide to continue with the loan. (4) The lender must protect the guaranteed loan debt and all collateral securing the loan in bankruptcy proceedings. (5) The lender can include principal and interest lost as a result of bankruptcy proceedings in any claim filed in accordance with § 3555.354. (e) Maintain condition of security property. (f) Lender acquisition of title. (g) Debt settlement reporting. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6430, Feb. 8, 2016; 81 FR 31164, May 18, 2016; 84 FR 70886, Dec. 26, 2019] § 3555.307 Assistance in natural disasters. (a) Policy. (b) Evaluating the damage. (c) Special relief measures. (d) Insurance claim settlements. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 6430, Feb. 8, 2016] §§ 3555.308-3555.349 [Reserved] § 3555.350 OMB control number. The report and recordkeeping requirements contained in this subpart are currently with the Office of Management and Budget under review and awaiting approval. Subpart H—Collecting on the Guarantee § 3555.351 Loan guarantee limits. (a) Original loan amount. (b) Maximum loss payment. (1) 90 percent of the Original Loan Amount; or (2) 100 percent of any loss equal to or less than 35 percent of the Original Loan Amount plus 85 percent of any remaining loss up to 65 percent of the Original Loan Amount. § 3555.352 Loss covered by the guarantee. Subject to § 3555.351, the loss claim payment will be calculated as the difference between the Total Indebtedness on the loan and the Net Recovery Value calculated according to § 3555.353. The Total Indebtedness on the loan includes: (a) Principal balance. (b) Accrued interest. (c) Additional interest. (d) Protective advances. (e) Liquidation costs. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 31164, May 18, 2016; 84 FR 70886, Dec. 26, 2019] § 3555.353 Net recovery value. The net recovery value of the property is determined differently for properties that have been sold than for properties that remain in the lender's inventory at the time the loss claim is filed. (a) For a property that has been sold. (1) The proceeds from the sale plus any other amounts recovered, minus (2) The amount of actual liquidation and disposition costs provided those costs are reasonable and customary for the area. Costs incurred by in-house staff may not be included. (b) For a property that has been acquired. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 31165, May 18, 2016; 84 FR 70887, Dec. 26, 2019] § 3555.354 Loss claim procedures. All lenders must use a web-based automated system designated by the Agency to submit all loss claim requests. (a) Sold property. (b) REO. https://www.benefits.va.gov/HOMELOANS/servicers_valeri.asp. (c) Deficiency judgments. [78 FR 73941, Dec. 9, 2013, as amended at 81 FR 31165, May 18, 2016; 84 FR 70887, Dec. 26, 2019] § 3555.355 Reducing or denying the claim. (a) Determination of loss payment. (1) Failure to adhere to required servicing and liquidation procedures as set forth in Agency regulations and guidance, including the payment of real estate taxes or hazard insurance when due; (2) Failure to report defaulted loans to Rural Development within required timeframes; (3) Failure to ensure that the security property is adequately maintained during liquidation; (4) Delay in filing a loss claim; (5) Claiming unauthorized expenses; (6) Providing unauthorized assistance; (7) Failure to obtain the required security or maintain the security position; (8) Violating usury laws; (9) Negligence, gross negligence or misrepresentation; or (10) Committing fraud, or failing to report knowledge of fraud or false information. (b) Disputes. §§ 3555.356-3555.399 [Reserved] § 3555.400 OMB control number. The report and recordkeeping requirements contained in this subpart are currently with the Office of Management and Budget under review and awaiting approval.

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