Nine respondents fully supported the Agency's proposal to add provisions allowing an increased interest rate for interim construction financing during the construction period. This provision will increase participation in the single close loan program by lenders who utilize a warehouse line of credit during construction.

One respondent replied unfavorably to the Agency's proposal to allow a higher rate of interest during the construction period, expressing concern that the current interest rate cap should stay in place to ensure customers falling within the lower income brackets have a chance at becoming homeowners. The Agency appreciates the comment; however, if warehouse lenders cannot recover their construction costs, they will not make such loans at all, since the current regulations are too restrictive. The changes do not take away existing loan opportunities from customers—rather, the changes allow single close loans to become available to more borrowers. In addition, lenders must still underwrite loans in accordance with existing regulations and guidance on applicant income, debt ratios, repayment ability, and other aspects that contribute to affordable loans and successful homeownership. Loans are also subject to the disclosure requirements of the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).

Allowing the higher interest rate during the construction period will expand opportunities for warehouse lenders to participate in the SFHGLP increasing competition in the marketplace. Encouraging new construction increases affordable housing opportunities in rural communities removing barriers to homeownership for low- to moderate-income applicants. The higher interest rate would be for a limited time and amortized on the loan advances, not the entire loan amount, and the interest costs can be included as an eligible loan purpose.

Therefore, the Agency is finalizing the proposal to allow a higher interest rate for warehouse lender interim construction financing accrued during the construction period up to twelve months. The interest rate must revert to a rate that is no higher than the promissory note rate once the construction period has ended. The Agency clarifies in the final rule that the higher interest rate for interim construction financing is only available for loans made by warehouse lenders. In addition, the Agency retains the authority to establish a maximum interest rate in the handbook as necessary to further program goals and protect the best interest of the government.

Two respondents recommended the Agency to raise or remove the maximum interest rate cap program wide for all SFHGLP loans, not just for the single close loans. Both respondents commented that raising or removing the current interest rate cap provides lenders the flexibility to offer reasonable rates to their clients or participate in a concurrent affordable housing product offered by a Housing Finance Agency (HFA). In response to the RFI which sought opinion regarding the reduction or elimination of the interest rate cap for all SFHGLP loans, most comments were in favor of eliminating the interest rate cap, citing the inability of the HFAs to adequately price the SFHGLP product. The Agency agrees with the comments and will revise section 3555.10 and 3555.104(a)(3) to eliminate the maximum interest rate cap, and instead require approved lenders and borrowers to negotiate the best interest rate in compliance with all applicable laws. The change is also consistent with policies of other federal mortgage credit programs, such as the Department of Veterans Affairs and Department of Housing and Urban Development. All loans must still meet program underwriting requirements and are subject to RESPA and TILA.

Nine respondents fully supported the Agency's proposal to allow a reserve of up to 12 months of the borrower's regularly scheduled PITI payments during the construction period.

The proposed rule used “reserve” and “escrow” interchangeably when discussing this PITI account. Based on feedback regarding industry standards, the final rule refers to the PITI account as a “reserve”, not an “escrow”. The PITI reserve is separate from the construction escrow and the two accounts must not be combined.

One respondent supported the regulation changes for the single close option but requested clarification on fair market appraisal value and the appraiser's ability to use the cost approach to determine fair market value. The respondent expressed concern that the inclusion of a reserve account for twelve months PITI payments as an eligible loan cost could potentially increase the loan amount over the fair market appraised value, forcing the borrower to incur out of pocket expenses. The Agency agrees that in some circumstances the home may not appraise for the full value of the dwelling and construction. In such cases, a conditional commitment will not be issued, the loan will not be closed, construction will not be initiated, and the borrower will not incur out of pocket expenses; however, when the appraiser has been fully informed of all the hard and soft costs for the new construction, including any reserves, the homes are more likely to appraise for the complete cost or value of the new construction. No change is made to the provision.

One respondent requested the Agency to allow the use of the cost approach to determine the fair market value of single close construction properties. The respondent believes the appraiser should determine if the cost approach or sales comparison approach will best determine property value. Currently, the Agency considers the sales comparison approach (also referred to as the market value approach) as the principal method for appraisers to determine their opinion of value. However, the Uniform Standards of Professional Appraisal Practices (USPAP) also provide for appraisers to use the cost approach to value. The Agency agrees the cost approach is a useful tool for appraisers to use. While the current regulation can encompass both cost approach and sales comparison approach, the Agency will update § 3555.105(d)(2) to reiterate that appraisals must be conducted in accordance with USPAP and clarify in the handbook that either the cost or market value approach is acceptable. No other change is made in this provision.

One respondent requested the Agency to provide clear guidance addressing the collection and financing of the PITI reserve account along with any refund policy for the PITI reserve account should the property sell within twelve months. Typically, a property will not be sold within the construction period without extenuating circumstances. Under § 3555.105(g), in the event of unplanned changes during construction, a lender remains responsible for completion of improvements satisfactory to Rural Development, and that the loan will be serviced in accordance with applicable regulations. As explained in Chapter 12 of Handbook 3555, all available funds in the construction escrow account would be used to complete the project and remaining funds would be applied as a principal reduction. This final rule clarifies such policy in § 3555.105(g) and extends the policy to any remaining PITI reserve funds. Therefore, under the final rule, in the event of unplanned changes preventing completion of construction, the lender must complete improvements to the satisfaction of Rural Development and apply any remaining PITI reserve and construction escrow funds (after satisfactory improvements are complete) as a principal reduction. The lender would proceed with loan servicing options as appropriate. The Agency is also amending § 3555.105(e) to require mortgage file documentation evidencing the lender's use of any remaining PITI reserve or construction escrow funds for principal reduction.

One respondent requested the Agency to provide additional guidance for the distribution of loan funds during construction and clarification on whether the lender or servicer will be responsible for the distribution of those funds. It is the responsibility of the lender to pay out monies from escrow to the builder during construction upon written approval from the borrower and to document that the appropriate work was completed in accordance with § 3555.105(a)(5). No change is made in this provision.

One respondent supported the changes to the single close loan program but requested the Agency to remove the requirement to conduct individual credit checks on contractors. Section 3555.105(b) does not require individual credit checks on contractors; however, the Agency will clarify the administrative guidance (Handbook 3555 Chapter 12) providing options to determine and document a builder's credit history. No change is made in this provision.

Three respondents fully supported the Agency's proposed amendments to the single close loan program and requested the Agency to extend the program to include rehabilitation loans. The Agency agrees with the comments submitted and will amend the language in § 3555.105(c) and § 3555.105(e) to include rehabilitation with the purchase of an existing dwelling as an allowable single close loan purpose.

After careful review and consideration of the comments submitted, the Agency decided the addition of rehabilitation in the single close loan program will increase inventory options and expand construction opportunities for rural applicants and lenders. The revisions allow the lender to finance the rehabilitation and purchase of an existing dwelling, to recapture interest accrued on a business line of credit during construction, and to reserve the entire regularly scheduled fully amortized PITI payment for the construction period. Allowable rehabilitation costs are those required to bring the dwelling into compliance with program standards. The need for these types of repairs are typically mentioned in the appraisal or inspection report. Single close loans may not be used to finance standalone rehabilitation without purchase of the dwelling that will be rehabilitated.

Current regulation prohibits the use of single close loans for condominiums. While SFHGLP loans are rarely used for condominiums in general, the Agency will clarify in this final rule that “condominiums” ineligible for single close loans include detached and site condominiums. The clarification is made in response to evolving types of condominiums, all of which are still excluded from single close loan purposes.

The Agency is updating the mortgage file documentation requirements in § 3555.105(e) to reflect the addition of rehabilitation as an allowable single close loan purpose.

Overall, the regulatory revisions will reduce the burden of construction financing on small and medium sized lenders, streamline and expand the program, and provide lenders the ability to quickly transfer closed loans to program investors.

Warehouse lender. A non-depository lender who utilizes short-term revolving lines of credit to finance loan origination and or construction financing.

(a) * * *

(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.

(c) * * *

(1) The loan is to finance the purchase of real estate and construction of a single family dwelling or the purchase and required rehabilitation of an existing single family dwelling. Condominiums, including detached condominiums and site condominiums, are ineligible for combination construction and permanent loans.

(2) * * *

(iv) The costs of an interim construction financing interest rate and PITI reserve under § 3555.104(e) and § 3555.105(d)(7), respectively.

(d) * * *

(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.

(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) * * *

(1) The actual cost to construct or rehabilitate the subject dwelling.

(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.

(g) Unplanned changes during construction. Should an unplanned change occur with the borrower or contractor preventing completion of construction, the lender remains responsible for completion of improvements satisfactory to Rural Development. The loan will be serviced in accordance with subparts F and G of this part. Funds remaining in all PITI reserve and construction escrow accounts after full disbursement of construction costs will be applied by the lender as a principal payment.