An Advocate's Guide to Rural Housing Preservation

142 Pages·2017·5.32 MB·English

An Advocate’s Guide
to Rural Housing Preservation:
Prepayments, Mortgage Maturities, and Foreclosures
Copyright © 2018, National Housing Law Project
AN ADVOCATE’S GUIDE TO RURAL HOUSING PRESERVATION:
PREPAYMENTS, MORTGAGE MATURITIES, AND FORECLOSURES
ISBN 978-0-9606098-8-8
This Manual was produced to provide accurate and authoritative information about
preserving rental housing administered by the United States Department of Agriculture
and the laws that affect those homes. While it was written by attorneys, it is not intended as
a substitute for the advice of an attorney who is familiar with your case and circumstances.
If you need legal advice, contact an attorney or other professional where you live.
An Advocate’s Guide
to Rural Housing Preservation:
Prepayments, Mortgage Maturities, and Foreclosures
The National Housing Law Project
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1663 Mission St. Suite 460
San Francisco, CA 94103
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www.nhlp.org
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415-546-7000 [email protected]
© 2018 by The National Housing Law Project
ACKNOWLEDGMENTS
This guide was authored by Jessica Cassella, a NHLP Staff Attorney and Gideon Anders, a
NHLP Senior Attorney. The writing and publication of this guide was funded by the Legal
Services Trust Fund of the State Bar of California under its Community Stabilization and
Reinvestment Grants Program. We are grateful and thankful to the State Bar of California for its
generous support of our work.
This advocacy guide is designed to assist legal services attorneys and tenant advocates in
understanding and preventing prepayments, mortgage maturities, and foreclosures in U.S.
Department of Agriculture Rural Development (RD) properties. This advocacy guide and other
information about RD housing programs are also posted on our website at http://nhlp.org.
Table of Contents
I. Introduction ........................................................................................................................................... 1
A. Defining “Rural” Communities ........................................................................................................ 1
B. Understanding Rural Communities ................................................................................................... 3
C. About USDA Rural Development .................................................................................................... 5
D. Overview of Key RD Programs ........................................................................................................ 6
i. Section 515 Rural Rental Housing Program ................................................................................. 6
ii. Section 521 Rural Rental Assistance Program.............................................................................. 7
iii. Section 514/516 Farm Labor Housing Program ....................................................................... 8
iv. RD Rural Voucher Program ...................................................................................................... 8
E. Understanding the History of Prepayment Threats ......................................................................... 10
F. Understanding Mortgage Maturities ............................................................................................... 12
G. Understanding Rural Foreclosures .................................................................................................. 13
H. Finding Prepayments and Mortgage Maturities in Your Community ............................................. 14
II. Section 515/514 Prepayments ............................................................................................................. 15
A. Overview of Prepayment Process ................................................................................................... 15
B. Step 1: Owner Submits Prepayment Request to RD ....................................................................... 16
C. Step 2: RD Provides Prepayment Request Notice to Tenants ......................................................... 18
D. Step 3: RD Offers Incentives to Owner .......................................................................................... 19
E. Step 4: RD Evaluation of Impact on Minority Housing Opportunities ........................................... 20
F. Step 5: RD Evaluation of Adequate Comparable Housing ............................................................. 22
G. Step 6: Owner Offers to Sell to Nonprofit or Public Agency ......................................................... 23
H. Step 7: Accepting the Prepayment .................................................................................................. 25
i. Owner Notice .............................................................................................................................. 25
ii. Tenant Notice .............................................................................................................................. 25
iii. LOPES .................................................................................................................................... 25
iv. Tenants’ Right to Appeal ........................................................................................................ 27
I. Step 8: After the Prepayment .......................................................................................................... 28
i. Continuation of Current leases. ................................................................................................... 28
ii. Effect of Use Restrictions ........................................................................................................... 29
iii. The RD Voucher Program ...................................................................................................... 31
III. Section 515/514/516 Maturing Mortgages...................................................................................... 33
© 2018 National Housing Law Project
A. Mortgage Maturity Process ............................................................................................................. 33
B. Responding to Maturing Mortgages ............................................................................................... 35
IV. RD Foreclosures .............................................................................................................................. 36
A. Background ..................................................................................................................................... 36
B. Project Suitability ............................................................................................................................ 37
i. Appraisal of the Project’s Ownership ......................................................................................... 37
ii. Determination of the Need for the Development ........................................................................ 37
iii. Determination of Whether the Project is Obsolete ................................................................. 38
C. Non-Program Designation .............................................................................................................. 40
D. Accelerating and Foreclosing on Loans .......................................................................................... 40
V. Litigation and Strategy Issues ............................................................................................................. 43
VI. Conclusion ...................................................................................................................................... 48
VII. Appendix ......................................................................................................................................... 49
A. Legal Authorities ............................................................................................................................ 49
B. Example Pleadings and Case Materials .......................................................................................... 56

© 2018 National Housing Law Project
I. Introduction
A. Defining “Rural” Communities
Organizations and individuals often define “rural” communities in many different ways. This
handbook utilizes the federal legal definition of “rural,” as stated in 42 U.S.C. § 1490 (last
amended by the Agricultural Act of 2014, Pub. L. 113–79, title VI, § 6208 (Feb. 7, 2014)). This
statute defines a rural community as one that is:
any open country, or any place, town, village, or city which is not (except in the
cases of Pajaro, in the State of California, and Guadalupe, in the State of Arizona)
part of or associated with an urban area and which (1) has a population not in
excess of 2,500 inhabitants, or (2) has a population in excess of 2,500 but not in
excess of 10,000 if it is rural in character, or (3) has a population in excess of
10,000 but not in excess of 20,000,1 and (A) is not contained within a standard
metropolitan statistical area, and (B) has a serious lack of mortgage credit for
lower and moderate-income families, as determined by the Secretary and the
Secretary of Housing and Urban Development.
Thus, the U.S. Department of Agriculture Rural Development (RD) defines a rural community
based upon two key factors: population size and community character.2 Population size is based
on the most recent decennial census. When determining whether a community is “rural in
character,” federal regulations direct the Under Secretary of Rural Development to consider
whether the community has geographically distant boundaries and the proximity of the
community to an urban area.3
As illustrated in the map below,4 every state in the U.S. contains at least one rural community
within its boundaries:
1 Congress recently made an exception to this limit to allow rural communities that had less than 20,000 people
according to the 1990 census to remain eligible for RD programs until the release of the 2020 census results, as long
as the population of the community does not exceed 35,000 and it remains rural in character. 42 U.S.C. § 1490.
Because many Section 515 developments were financed in the 1960s, 1970s, and 1980s, they may now be located in
communities that are no longer rural.
2 U.S. DEP’T OF AGRICULTURE, REPORT ON THE DEFINITION OF “RURAL” (2013),
https://www.rd.usda.gov/files/RDRuralDefinitionReportFeb2013.pdf.
3 7 C.F.R. 4280.103 (2017) states: “The determination that an area is “rural in character” under this definition will
apply to areas that are within: (A) An urbanized area that has two points on its boundary that are at least 40 miles
apart, which is not contiguous or adjacent to a city or town that has a population of greater than 150,000 inhabitants
or the urbanized area of such a city or town; or (B) An urbanized area contiguous and adjacent to a city or town of
greater than 50,000 inhabitants that is within 1/4 mile of a Rural Area.”
4 HOUSING ASSISTANCE COUNCIL, TAKING STOCK: RURAL PEOPLE, POVERTY, AND HOUSING IN THE 21ST CENTURY
14 (2012), http://www.ruralhome.org/storage/documents/ts2010/ts_full_report.pdf.
© 2018 National Housing Law Project 1
This means that the service area of RD rural housing programs is very large:5

In fact, 87% of all U.S. counties have at least one RD Section 515 property.6 In many of these
communities, RD-subsidized housing provides the only sources of affordable and habitable
5 Id.
6 Affordable Rural Rental Housing: Policy Background and Update: Congressional Briefing, HOUSING ASSISTANCE
COUNCIL (Sept. 8, 2017).
© 2018 National Housing Law Project 2
housing in the community. As discussed below, this reinforces the need to preserve this critically
important housing.
B. Understanding Rural Communities
In order to appreciate the critical need for affordable housing in rural communities, it is
important to understand the scope, demographics, and needs of rural communities.
One-fifth of people living in the United States live
in rural communities.7 In contrast, almost half
(48%) of the U.S. population lives in suburban or
exurban communities, while 31% live in urban
areas.8
Between 2000 and 2010, rural population growth
was greatest in the western and southern U.S.,
especially in Arizona, Utah, Hawaii, and Florida.9
In contrast, Midwest states like North Dakota, Iowa, Illinois, Nebraska, and Kansas experienced
significant population loss in rural communities.10 This significant population loss in the rural
Midwest, as well as in communities in Central Appalachia, the South, and the Northeastern “rust
belt,” are often due to a decline in agricultural employment,
lack of amenities, and an inability to attract industry. While
agriculture is extremely important to rural communities,
education, health, and social services industries are usually
the largest job sources in rural communities.11
Demographically, rural areas are less racially diverse than
the U.S. as a whole. Approximately 78% of the rural
communities identify as white and non-Hispanic, compared
to 64% of the country as a whole.12 In 2010, Hispanics
comprised 9.2% of the rural population, surpassing African
Americans (8.2%) as the largest rural minority group.13
While less than 2% of rural communities identify as Native American, more than half of all
Native Americans reside in rural or small town areas.14

7 HOUSING ASSISTANCE COUNCIL, TAKING STOCK: RURAL PEOPLE, POVERTY, AND HOUSING IN THE 21ST CENTURY
2, 11, 12, 14 (2012), http://www.ruralhome.org/storage/documents/ts2010/ts_full_report.pdf.
8 Id. at 11.
9 Id. at 12.
10 Id.
11 Id. at 12, 23-25.
12 Id. at 16.
13 Id.
14 Id. at 16.
© National Housing Law Project 2018 7
Rural communities often include affordable housing challenges that differ significantly from
those in urban communities. Rural communities often experience unique challenges posed by
absentee homeownership, an aging population, persistent and high poverty rates, lack of
enforced state and local housing codes, extremely low housing density, and other challenges. The
lack of enforced state and local housing codes can often result in low-quality or uninhabitable
housing. For example, the Housing Assistance Council map below shows that many housing
units in rural communities lack basic plumbing.

When this is combined with extremely low housing density, residents living in rural communities
are left with few, if any, quality housing options.
Additionally, rural communities often experience high and persistent poverty rates, as shown on
the next page:
© 2018 National Housing Law Project 4