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Rural Housing Developments: Legislation Introduced to Allow Section 515 Loan Repayment

MPLP Summer 2006 Housing Law Section Newsletter Article

Issue 31, Summer 2006

Rural Housing Developments


Legislation Introduced to Allow Section 515 Loan Repayment


This piece was prepared by Travis Montgomery, a Michigan State University law student interning at MPLP this Summer, and is a summary of "Legislation Authorizing Prepayment of Section 515 Loans Introduced", Housing L. Bull. (Nat' Housing L. Project, Oakland, CA), April 2006, at 93.


Rep. Geoff Davis (R-KY) introduced the Saving Americas Rural Housing Act of 2006 [1] on March 29. The bill simultaneously attempts to revitalize the current inventory of Rural Development (RD) Rural Rental Housing loans and lift the prepayment restrictions placed on these Section 515 loans by the Emergency Low Income Housing Preservation Act of 1987 (ELIHPA). Additionally, the bill seeks to protect low income tenants, who might be displaced by loan prepayment, by authorizing a voucher program. However, an owners ability to prepay is not conditioned on the availability of vouchers under the proposed legislation. As a result, over 50,000 households could face displacement with no guarantee of protection.

After the U.S. Court of Claims decided in 2003 [2] that ELIHPA restrictions constitute a compensable regulatory taking, a government study concluded it would be more cost effective to repeal the restrictions and provide vouchers to displaced residents than to risk paying hundreds of millions to claimants seeking damages in the wake of the 2003 decision. The study also found the stock of Section 515 housing needed revitalization that could not be paid for with existing funds in project reserves. The 2003 Court of Claims decision and subsequent study paved the way for the newly introduced bill.

ELIHPA places restrictions on prepayment of Section 515 loans if prepayment will affect minority housing or displace current residents. If prepayment would displace residents, owners are required to extend residents right to remain in their homes indefinitely. The new bill would lift those restrictions on developments financed before December 15, 1989, but place new restrictions on those financed after December 21, 1979. The practical result would prohibit Section 515 owners who financed between 1986 and 1989 from prepaying until the twenty-year use restrictions on their property have expired and would prohibit owners who have accepted incentives in lieu of prepaying within the past nineteen years from prepaying until the use restrictions accompanying those incentives have expired. [3] The bill would be effective immediately upon passage, but owners would be required to notify residents of the availability of vouchers, and how to acquire them, ninety days prior to prepayment. Once providing notice, the owner would have to wait seventy-five days before transferring the property to a purchaser unwilling to maintain the property as affordable housing for an additional twenty years, though the owner could negotiate such a transfer at any time. RD would maintain a database of potential nonprofit buyers and could give funding priorities for new Section 515 home construction in areas affected by prepayment.

 A voucher program, very similar to the current USDA Voucher Demonstration Program [4] , would attempt to protect residents displaced by prepayment. However, residents would not be guaranteed assistance, prepaying owners would not be required to accept vouchers, and prepayment would not be conditioned on voucher availability. Further, the bill does not specifically require prepaying owners to honor current leases after prepayment. Though the bill requires owners to give ninety-day notice before prepaying, residents cannot use that time to mitigate the consequences because they must remain in the Section 515 unit until prepayment in order to receive vouchers. The requirement is especially problematic for residents whose lease ends on or near the prepayment date, as they may be forced to pay unaffordable rent until a voucher is approved, assuming vouchers will be available at all. Because the program would be administered in accordance with HUDs Housing Choice Voucher Program, local public housing authorities could apply their own eligibility requirements and deny assistance to otherwise qualified residents who would still be receiving assistance if not for their landlords prepayment. Residents lucky enough to receive assistance would have no guarantee that their subsidies will increase if rent increases or income decreases. The vouchers value would be the difference between (1) the lesser of (a) the rent charged for their Section 515 unit post-prepayment or (b) the comparable market rent, and (2) the lesser of (a) household rent payment as of prepayment or (b) 30% of adjusted family income. The amount could be increased in tight rental markets, but if the surrounding markets are even tighter, the portability of the voucher is effectively destroyed. RD could impose minimum rents up to $25 and maximum rents up to 30% of adjusted family income. In an attempt to preserve and improve Section 515 housing, RD would also be authorized to provide financial incentives to owners who agree to revitalize their property and maintain its use as affordable housing for twenty more years. Agreements accompanying these incentives would call for a comprehensive needs assessment and a viable plan to institute the necessary improvements, but the bill would not protect residents from displacement during revitalization or grant a right to return if displaced. Even with a provision to allow sale of revitalized property to a tenant-based co-op, most owners are unlikely to enter into these voluntary agreements since the financial benefits of pre-payment and shifting to an open-market commercial use of property far outweigh the proposed incentives.

Without conditioning prepayment of loans on the availability of funding for vouchers, and without guaranteeing displaced residents a right to remain or a right to obtain assistance through the voucher program, the proposed bill poses a serious threat to the 50,000 households who could be displaced. Additionally, the incentives offered to owners to remain in the Section 515 program are unlikely to be accepted, and revitalization will likely have to come from some other source, if at all. Serious changes must be made to the bill if it is to reach its dual goal of revitalizing the stock of affordable rural housing and protecting current residents who may be displaced.

[1] H.R. 5039, 109th Cong. (2006). View here.

[2] See Franconia Asscs. v. United States, 2004 W.L. 1941215 (Fed. Cl., 2004).

[3] Section 514 housing would not be affected.

[4] See USDA Voucher Program, 71 Fed. Reg. 14,084 (Mar. 20, 2006). View here. C.f., USDA and HUD Implement Rural Housing Voucher Demonstration Program, Hous. L. Bull. (Natl Housing L. Project, Oakland, CA), April 2006, at 87.


USDA and HUD Implement Rural Housing Voucher Demonstration Program [1]

This piece was prepared by Travis Montgomery, a Michigan State University law student interning at MPLP this Summer, and is a summary of a same-titled article in the Housing L. Bull. (Natl Housing L. Project, Oakland, CA), April 2006, at 87.

In March, the USDA and HUD jointly published notice outlining implementation of the USDA Rural Housing Voucher Demonstration Program approved by Congress as part of the FY 2006 Agricultural Appropriations Act. The program is designed to protect Section 515 housing residents who face possible displacement as their landlords become eligible to prepay the Section 515 loan. Pending legislation aimed at lifting current restrictions on loan prepayment could add over 50,000 resident households to the number already in jeopardy of displacement.

Rural Development (RD), the USDAs implementation instrument at the local level, lacks the resources and experience to administer a national voucher program. Instead, HUD has accepted responsibility for administration of the voucher program and will subcontract to local PHAs. HUD regulations applicable to the Section 8 Housing Choice Voucher program [2] will be generally applicable to the USDA voucher program, and the PHAs will administer the program accordingly.

Qualified Residents must be low-income (a determination made by the USDA) and must be living in the Section 515 unit on the date the loan is prepaid, which must fall after September 30, 2005. Even if otherwise qualified, a resident may be denied assistance by the local PHA for any reason provided by the applicable HUD regulations. [3] Also, landlords are not required to accept vouchers after prepayment, and no right to remain exists for residents desiring to stay in their current units. As a result, there is no guarantee that a Section 515 will keep his tenancy or his subsidy upon prepayment of the loan.

Additional pitfalls pervade the implementation plan. The amount of the voucher awarded is the difference between comparable market rent determined by RD and tenant contribution measured by the most recent income certification and subsidy that was available to the resident. No provisions exist to alter the assistance in the event of income decrease or household size increase. None of the three responsible agencies (USDA, HUD, local PHA) is bound by any timeline, and untimely action by any or all may prove detrimental to innocent residents seeking assistance. No clear plan exists to adequately notify residents of impending prepayments, consequences of prepayment, available options and rights under the new program or appropriate course of action. PHAs are required to conduct HQS inspections of proposed new homes for voucher holders before providing assistance, which means Section 515 residents who relocated after September 30, 2005 but prior to notice publication may be precluded from receiving retroactive assistance. Requiring residents to reside in the Section 515 unit on the date of prepayment may force some to either holdover, find alternative housing and gain approval for it in a very short time, or pay an unaffordable rent if their current lease term ends on or near the date of prepayment. Finally, the plan lacks a contingency in the event Congress refuses to fund the voucher program beyond FY 2006.

While the voucher program is a welcome alternative to complete inaction, implementation of the program must be significantly restructured to assure affected residents will maintain adequate subsidies for shelter.

[1] USDA Voucher Program, Notice, 53 Fed. Reg. 14,084 (Mar. 20, 2006). View here.

[2] See 24 C.F.R. Part 982 (2005). View here. Some provisions are not applicable. See Notice, supra note 1, at 14,086 (ΒΆ II, 7).

[3] 24 C.F.R. 982.552, 982.553 (2005). View here.




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