The Rural Housing Service published a Notice in the Federal Register on June 18, 2015, amending its regulation to change the requirements of the reserve account for direct Multifamily Housing (MFH) loans. The purpose of the Notice is to address the reserve account requirement of the Agency to countersign with the borrower when a Section 538 guaranteed loan is involved, and to also clarify that reserve account funds cannot be used to pay for fees associated with the Section 538 guaranteed loan program. This final rule will be effective August 17, 2015.
The current requirement [7 CFR 3560.306(e)(2)] states that reserve accounts require the Agency to countersign with the borrower on all withdrawals. The Section 538 Guaranteed Rural Rental Housing (GRRH) Program often provides funding to an existing direct MFH loan property. The program regulation [7 CFR 3565.402(a)] requires that all property reserve accounts be held by the lender (not the owner), which eliminates the unauthorized use of these funds by the borrower since the borrower does not have access to the funds. This creates conflict between the two sets of regulation, pitting the requirement for the Agency to countersign for funds against the requirement that lenders have unfettered control of funds under the 538 program. In order to meet the requirements of many of the 538 lenders, the reserve accounts cannot be countersigned with any other party. This rule relieves the Agency of its countersignature responsibility for properties with Section 538 funding, but leaves the requirement in place for direct MFH loans (e.g., Section 515 Program). In order to ensure protection of the Agency’s interests, the lender will still be required to obtain prior Agency approval before disbursing funds from the account.
The final rule also clarifies that reserve account funds cannot be used to pay fees associated with the loan guarantee. Lenders have been using the replacement reserve account to pay fees associated with the loan guarantee, i.e., the annual renewal fee. These fees are considered a project expense and must be paid from the operating account, not the replacement reserve account.
Borrowers who want additional information on this change should contact Tammy Daniels in the Multi-Family Housing Guaranteed Loan Division at the Rural Housing Service. Her phone number is 202-720-0021.