On August 13, 2014, the Rural Housing Service (RHS) issued a Proposed Rule to amend 7 CFR 3560.306 (e) (2) to change the requirements of the Reserve Account for Section 515 Rural Rental Housing Projects that also have funding from the Section 328 program. The amendment also clarifies that reserve account funds cannot be used to pay for fees associated with the Section 538 guaranteed loan program.
The current requirement states that reserve accounts require Agency countersignature with the borrower on all withdrawals. The Section 538 Guaranteed Rural Rental Housing Program (GRRHP) often provides funding to an existing Section 515 property. The GRRHP regulations require that all property reserve accounts be held by the lender, which eliminates the unauthorized use of these funds by the borrower since the borrower does not have access to the funds.
Many Section 538 loans are sold on the secondary market, and in most cases, transferred to Ginnie Mae. Ginnie Mae requires that property reserve accounts be pledged as collateral for the loan. In order to meet this secondary market requirement, the reserve accounts must be titled exclusively in the lender’s name, and cannot be countersigned by any other party. Requiring the RHS signature on all withdrawals ensures that the borrower does not have uncontrolled use of the funds and this requirement will remain in place for properties that have only Section 515 direct loans. The proposed amendment will eliminate the requirement that the Agency countersign on properties with Section 538 loans. The Agency’s interest in the reserve accounts will still be protected by the change in the regulation, since the lender is required to get Agency approval before funds can be disbursed from the reserve account. Therefore, funds from the lender controlled reserve account cannot be used for items not agreed to by the Agency.
Additionally, RHS proposes to amend 3560.306(g) to clarify that reserve account funds cannot be used to pay fees associated with the loan guarantee. Lenders are currently using the Replacement Reserve to pay fees associated with the loan guarantee, such as the annual renewal fee. These fees are considered a project expense and must be paid from the operating account – not the replacement reserve account.
Comments on this proposed regulation are due on or before October 14, 2014.