RHS/RD Direct and Guaranteed Loans

Introduction
Rural Development (RD), a division of the U.S. Department of Agriculture, makes or guarantees loans for the purchase and construction of single-family homes in rural areas. Loans are made to low- and moderate-income households under income guidelines that are established by RD. Direct loans, which are typically subsidized, are made by RD to individuals and are then serviced by RD’s Central Servicing Center (CSC), which is based in St. Louis, Missouri. Guaranteed loans are made and serviced by private banks throughout the country. Since 1950, RD has made over 2 million direct single-family home loans. It has guaranteed over 480,000 loans since the program was authorized in 1991.

RD Direct Loans
Because direct loans are subsidized they typically serve lower-income households than guaranteed loans, which are generally not subsidized. The subsidy mechanisms used by RD in the direct loan program vary depending on when the household qualified for the loan. Generally, they require the household to pay the higher of a certain percentage of income for shelter (principal, interest, taxes and insurance) or the equivalent of a 1% loan amortized over a 33-year term. Households are required to recertify their income annually and the amount of subsidy that the household receives is adjusted accordingly.

The subsidy received by direct home loan borrowers is subject to partial recapture when the borrower sells or transfers the home to another person.

When household income increases substantially or home equity becomes significant, direct borrowers are required to refinance their loans in the private market.

Low-income households’ income frequently fluctuates due to economic conditions or due to a loss of job, illness or death of a family member. RD has a number of loan servicing options that it is authorized and required to use to assist households who default on their direct loans. RD’s failure to consider the extension of these servicing options to borrowers frequently gives rise to defenses to RD foreclosure actions. The most frequently used servicing options are additional payment agreement, increased interest subsidies, a moratorium on payments, loan re-amortization and refinancing.

Direct loan borrowers and applicants have the right to appeal any adverse RD decision to a hearing officer who is part of the Department of Agriculture’s National Appeals Division. They are also entitled to seek a further review of the hearing officer’s decision from a higher official in the National Appeals Division. The failure to extend the right to an appeal or review has also been used successfully in defending against RD foreclosures.

Foreclosures under the direct loan program are usually carried out under state law. If state law allows for non-judicial foreclosure, RD will use that process to foreclose on the loan. In these states advocates need to file an affirmative case in order to challenge RD loan servicing practices. In judicial foreclosure states, RD typically uses private attorneys to initiate the judicial foreclosure. In some cases, the United States Attorney for the state will initiate the foreclosure case. RD loan servicing errors can be asserted as defenses in these foreclosure actions.

RD Guaranteed Loans
Except for routine servicing actions undertaken by most private lenders, RHS does not require guaranteed lenders to extend any major foreclosure avoidance servicing options to guaranteed borrowers that are available to direct loan borrowers. This is true despite the fact that the same statutory provisions apply to both programs. Recently, guaranteed borrowers in Ohio and Michigan filed law suits challenging RHS’ failure to implement several statutory loan servicing provisions that apply to both direct and guaranteed borrowers as well as more recently enacted statutory loan loss mitigation provisions that are specifically directed to guaranteed loan borrowers. Tone v. USDA, , No. 1:10-cv-00891-SJD (E.D. Ohio, filed Dec. 15, 2010), Sheldon v. USDA, Civil No. 1:11-cv-10487 (E.D. Mich. filed Jan. 7, 2011). These provisions were enacted as part of Helping Families Save Their Homes Act of 2009, P.L. 111-22. Both of these cases are currently in the very early stages of litigation.

To determine whether a client has an RHS guaranteed loan, you should ask the client to bring in the loan closing package. Two documents in that package should disclose whether RHS is guaranteeing the loan. The first is the HUD-1 Settlement Statement. If the loan is guaranteed by RHS, the RHS box, at the top of the form, should be checked. In addition, there should be a RD or RHS guarantee fee on the second page of the form. The second form is Form RD 1980-21 Request for Single Family Housing Loan Guarantee. It is a four page form that requests RHS to guarantee the loan made by the lender. If the client does not have these documents, call the lender and ask whether the loan is guaranteed by RHS.

Cases

U.S. v. Gomiller, 545 F.Supp. 17 (N.D. Miss. 1981)

The court found that a borrower with limited education, who was advised by a Farmers Home Administration (RD’s predecessor agency) official that she did not qualify for a moratorium based on his informal calculations, did not waive the right to apply for a moratorium even after she received additional notices advising her of the availability of moratorium relief because she was discouraged from making further inquiries or to appeal the informal adverse decision.

U.S. v. Villanueva, 453 F.Supp. 17 (E.D. Wash. 1978)

The court held that the Farmers Home Administration’s failure to consider moratorium relief after the loan was accelerated was inconsistent with the moratorium authorizing statute.

U.S. v. White, 429 F.Supp. 1245 (D.C.Miss. 1977)

The court set aside nonjudicial foreclosure sale of a borrower’s home when Farmers Home Administration failed to provide the borrower adequate notice of the availability of moratorium relief and of the right to appeal adverse decisions. Farmers Home Administration’s failure constituted a violation of the borrower’s constitutional rights.

U.S. v. Rodriguez, 453 F.Supp. 21 (E.D. Wash. 1978)

The court denied Farmers Home Administration’s motion for summary judgment in foreclosure action on the ground that the borrower did not receive written notice of availability of moratorium and that the failure was not excused by the fact that the loan had been accelerated. Farmers Home Administration’s argument that moratoriums are not available after acceleration is inconsistent with the moratorium authorizing statute.

Johnson v. U.S.D.A., 734 F.2d 774 (11th Cir. 1984)

The court of appeals reversed the district court’s decision to deny a state-wide class of Farmers Home Administration borrowers a preliminary injunction to enjoin the agency from continuing to file non-judicial foreclosures in Alabama. The court found that there was a substantial likelihood that mortgagors would prevail, at least in part, on their due process and equal protection claims against the Farmers Home Administration for its failure to properly and consistently service loans in the state.

U.S. v. Garner, 767 F.2d 104 (5th Cir. 1985)

The court of appeals affirmed a district court decision that held that a Farmers Home Administration’s regulation that prohibits the refinancing of Section 502 loans was not adopted in accordance with the notice and comment requirements of the Administrative Procedures Act and was therefore invalid.

U.S. v. Shields, 733 F.Supp. 776 (D. Vt. 1989)

Farmers Home Administration regulation that prohibits moratorium post-acceleration was contrary to a statute authorizing moratorium relief at any time that the loan is outstanding. Moreover, the court found that the agency failed to provide the spouse of the borrower adequate notice of availability of moratorium. Accordingly, the court granted the borrower summary judgment.

U.S. v. Childers, 152 Ohio App. 3d 622, 789 N.E.2d 691 (Ohio Ct. App. 2003)

The court reversed a lower court decision granting summary judgment to Farmers Home Administration in a foreclosure action. The court held that the borrower is entitled to show that she asked for moratorium assistance from Farmers Home Administration and that no one responded to her request for assistance. Since a borrower is entitled to file an application for assistance, the fact that the agency did not assist her violates her statutory rights and precludes the entry of summary judgment.

Statutes and Regulations

Statutes

42 U.S.C. § 1471 (general eligibility criteria for RD home loans)
42 U.S.C. § 1472 (a) and (b) (authorization for Section 502 direct home loans)
42 U.S.C. § 1472 (h) (authorization for Section 502 guaranteed home loans)
42 U.S.C. § 1475 (a) (authorization for moratorium relief)
42 U.S.C. § 1480(g) (authorization for the right to appeal adverse decisions)
42 U.S.C. § 1490a (a) (1) (authorization for interest subsidy)

Regulations

7 C.F.R. Part 3550 (regulations governing Section 502 direct loan program)
7 C.F.R. § 3550.68 (regulations governing interest subsidies for direct loans)
7 C.F.R. § 3550.207 (regulations governing moratorium program for direct loans)
7 C.F.R. Part 3550 Subpart E (servicing regulations for direct loans)
7 C.F.R. § 3550.4 (right to appeal RD decisions)
7 C.F.R. Part 11 (USDA National Appeals Division regulations)
7 C.F.R. §§ 1980.301 – 1980.399 (regulations governing Section 502 Guaranteed Loan Program)

Administrative Notices

RD Administrative Notices (ANs) are available here. ANs typically clarify programs regulations. They are published regularly and are usually in effect for one year, although they are frequently renewed. Unfortunately, the RD website does not maintain copies of expired ANs.

Handbooks

RD has two handbooks on the Section 502 Single Family Direct Home Loan Program (HB-1-3550 DLOS Field Office Handbook HB-2-3550 DLOS Centralized Service Center). They are available here. The RD handbooks are not published for notice and comment and technically do not have the force and effect of law, particularly with respect to third parties. Unfortunately, the handbooks contain provisions that are not in the regulations yet frequently affect the rights of borrowers in ways that are not detailed in the RD regulations.

Unnumbered Letters

RD publishes administrative letters to its field and national office staff that it routinely posts to its website. The letters most often deal with administrative matters but at times have substantive housing information. The administrative letters are available here.

Forms

Current RD loan forms may be found here. The site has two versions of RD forms. The first is a blank version of the form and the second is an explanation of what should be included in the forms. The explanatory versions are denominated as FMIs (Forms Manual Insert).

Links