By Angela Sisco, RCAC rural development specialist

On July 22 USDA RD published a special Procedural Notice making significant changes to Section 502 Direct loans packaging and processing guidance.

Some of the language incorporated the Final Rule, some made the temporary authorizations issued earlier this year permanent, and some changed altogether. The PN in its entirety is here and below are what I believe are the significant changes that will affect your daily packaging of 502 loans for self-help:

Chapter 4:

Paragraph 4.3 (A), to revise the full amount of periodic payments received from Social Security to include amounts received by an applicant who is a representative payee for an adult household member who will reside in the property. To remove certain language regarding alimony and child support to clarify that applicants do not need to take legal action to collect amounts due as a precursor to eligibility;

Paragraph 4.3 (E), to revise the oral verification requirement to only be completed if the applicant has worked for the employer for less than a year or other types of verification are inconsistent or suspicious; to revise the disability expense verification requirement to permit certain forms of income (social security disability) to be used as a method to verify disability; and, to remove language regarding assets disposed of for less than fair market value in the past 2 years;

Procedure Notice 519 dated Nov. 19, 2018, Handbook-1-3550, Paragraph 3.15 A. 3 was revised to limit the use of oral verification to situations where the applicant has worked for the employer for less than a year or where the other types of verification are inconsistent or suspicious. While conforming changes to other impacted chapters are pending, staff should amend application processing accordingly to reflect the guidance in Paragraph 3.15 A. 3. For example, the preferred source of wage verification would just be four consecutive weeks of pay stubs. An oral verification would only need to complement the pay stubs if the applicant has worked for the employer for less than a year or the other types of wage verification are inconsistent or suspicious.

If the applicant receives Social Security Disability Income, for example, this would be used to verify disability and no other verification would be needed.

Paragraph 4.5, to clarify that net family assets are considered for annual income and down payment purposes as applicable but shall be excluded from repayment income. To revise Exhibit 4-3 to exclude cash value of life insurance policies, clarify that retirement assets of applicants only are to be considered, and to exclude tax advantaged health, medical, and college savings plans from consideration;

RD will exclude net family assets from repayment income calculations because repayment income focuses on the income of those who sign the promissory note, whereas net family assets considers other family members. Net family assets will still be considered for annual income and down payment purposes.

RD is revising the regulation so that the list of net family assets considered for annual income and down payment purposes would exclude amounts in voluntary retirement accounts such as individual retirement accounts (IRAs), 401(k) plans, Keogh accounts, and the cash value of life insurance policies. In addition, they are excluding the value of tax advantaged college savings plans, the value of tax advantaged health or medical savings or spending accounts, and other amounts deemed by the Agency, from net family assets considered in the determination of annual income and down payments. Excluding these types of assets when considering annual income or down payment requirements will help safeguard the assets for their intended purposes and promote a healthy financial support system for the household when it does incur education and health care costs, or enters retirement.

Paragraph 4.5 (A), to eliminate the requirement that assets disposed of for less than fair market value in the past 2 years be considered;

Paragraph 4.7, to remove language pertaining to assets disposed of for less than fair market value in the past 2 years, and to clarify that applicable net family assets are considered for computing annual income;

Paragraph 4.8, to remove language pertaining to assets disposed of for less than fair market value in the past 2 years;

These changes recognize that it is not productive or meaningful to consider assets that have been disposed of in the past. RD is also removing from net family assets the value, in excess of the consideration received, for any business or household assets disposed of for less than the fair market value during the two years preceding the income determination.

Paragraph 4.10, to clarify Exhibit 4-4 regarding installment or revolving accounts, which shall be evaluated on a per account basis;

This reiterates the CFR language that, for example, multiple accounts from the same lender are separate trade lines (separate rates and terms listed separately on the credit report).

Paragraph 4.12, to eliminate requirements regarding reliability of credit scores (throughout subparagraphs). If an applicant has at least two credit scores on the Tri-Merge Credit Report (TMCR), the applicable score will automatically be deemed reliable. No consideration will be given to the number of opened and active trade lines on the credit report;

This one’s a biggie. Credit scores are now used to reduce the time necessary to conduct credit analyses: For applicants with no outstanding judgments obtained by the United States in a federal court, with no significant delinquency, and who have more than one credit score listed on their TMCR that result in a credit score of 640 or higher on their TMCR, Exhibit 4-4 need not be used to identify indicators of unacceptable credit handling. In addition, a verification of rent and Form RD 1944-61, Credit History Worksheet, need not be completed. These applicants are automatically classified as having acceptable credit histories regardless of what is listed on the TMCR. To avoid potential disparate treatment, additional credit analysis is not appropriate.

Credit scores are used to reduce the time necessary to conduct credit analyses, but under no circumstance can credit scores be used to make adverse decisions.

Here’s how it breaks down

If the applicant has at least two credit scores on the TMCR, the applicable score is reliable regardless of how many trade lines are on the TMCR:

Then, if that reliable score is 640 or higher:

  • Don’t need to verify their rental history
  • Don’t look at alternative credit or the indicators of unacceptable credit provided that the applicant has no outstanding judgments from the United States in federal court and no significant delinquency
  • Don’t need to look at the number of open/active trade lines

Loan originators must obtain nontraditional credit verification to augment a credit report if the applicant has less than two scores. However, non-traditional credit must never be used to enhance the credit of an applicant with a negligent credit history (poor payment history, excessive use of credit, over the credit limit balances, etc.) or to offset derogatory references found in the applicant’s traditional credit report, such as collections and judgments, even if the traditional credit is insufficient.

If, and only if, the applicant’s credit score is unreliable and/or is less than 640, the loan originator should send Form RD 1944-60, Landlord’s Verification, and Form RD 410-8, Applicant Reference Letter. If the score is 640 and above, you do not need to obtain the Landlord Verification.  If it’s 639 or less, it’s required (unless they have never rented).

Let us remember, a significant delinquency indicates there is a high level of risk that the applicant may be unable and/or unwilling to handle their mortgage payments.  An outstanding collection, while an indicator of unacceptable credit handling when the applicant has a credit score of less than 640 or an unreliable credit score, is not considered a significant delinquency.

Significant delinquency (only) includes the following:

  • A foreclosure, deed-in-lieu of foreclosure, short sale, or mortgage charge-off that has been completed within the last 36 months.
  • A Chapter 7 bankruptcy discharged less than 36 months prior to the application date.
  • A Chapter 13 bankruptcy where the applicant has not successfully completed the debt restructuring plan or has not demonstrated a willingness to meet obligations when considering the last 12-month payments made under the restructuring plan.
  • Agency debts that were debt settled within the past 36 months, or are being considered for debt settlement

Paragraph 4.14 (A), to remove language regarding compensating factors when making exceptions for adverse credit;

Paragraph 4.14 (B), to add guidance that an applicant with a Chapter 13 bankruptcy must obtain written permission from the bankruptcy court to enter a financial obligation with the Agency, as applicable;

Paragraph 4.16, to add guidance that any applicants qualifying for payment assistance are presumed to be unable to obtain credit from other sources, and that the Loan Approval Official should determine whether other applicants must provide written documentation from another source that they were unable to obtain credit on reasonable terms and conditions;

Paragraph 4.22 (B), to add guidance related to student loans to allow the State Office to grant a case-by-case waiver to any condition (e.g. the applicant has a reliable credit score of 640 or higher) that must be met to use the applicant’s actual monthly payment under an income-driven repayment plan;

Based on the temporary authorization this was originally published earlier this year, this is meant to be a relaxation of the guidance and is now permanent.

Paragraph 4.22 (C), to add guidance that once a property is identified, if the adjusted term is not necessary than the loan should be closed using the standard loan term;

Paragraph 4.24 (A), to revise language so that Field Offices should obtain reasonable documentation that a property will be built to certification standards, and that once construction is complete the Field Office must obtain verification that the property is certified through one of the applicable energy efficiency programs;

Chapter 5:

Paragraph 5.4, to clarify guidance about modest sites including the addition of language about income-producing land and zoning;

Income-Producing Land. The site must not have income-producing land that will be used principally for income producing purposes. Vacant land or properties used primarily for agricultural, farming or commercial enterprise are ineligible.

Zoning. The property must comply with applicable zoning and restrictions. If an existing property does not comply with all current zoning ordinances, but it is accepted by the local zoning authority, the appraiser must report the property as legal non-conforming. The appraisal must reflect any adverse effect of the legal non-conforming use on the value and marketability of the property.

Paragraph 5.5, to clarify that when a road is privately maintained by an association, there must be a legally enforceable arrangement for ongoing maintenance;

Paragraph 5.6 (A), to revise guidance on establishing area loan limits. Standard area loan limits are 80% of the local HUD 203(b) limit unless otherwise approved by the SFH Deputy Administrator.

Area Loan Limits were previously obtained through market analysis and will now be 80percent of the FHA Forward One-Family mortgage limits (the HUD 203(b) limit). This became effective August 5.

Paragraph 5.6 (C), to add guidance regarding minimum and maximum square footage considerations;

Maximum: Agency financed properties should generally not exceed 2,000 square feet living area, above grade as a general guideline, but not a firm limitation. The square footage consideration may be waived by the Loan Approval Official’s next-level supervisor when the field office determines certain conditions. The maximum standard square footage consideration is based on gross living area that is above grade. An attached garage and a basement (including a basement that is partially above grade or is a walk-out) should not be included in the square footage calculation.

Minimum: Agency financed dwellings are generally not less than 400 square feet to ensure they are designed and constructed for permanent occupancy and contain permanent areas for cooking, eating, sleeping and sanitary needs. Water and wastewater systems must be permanently connected. This square footage consideration may be waived by the loan approval official’s next-level supervisor when the field office determines a smaller dwelling or “tiny home” otherwise meets the same property standards as other agency financed dwellings.

And, finally, the last change I would like to highlight is:

To replace the term and/or acronym ‘Customer Service Center (CSC)’ with ‘National Finance and Accounting Operations Center (NFAOC)’