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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.