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Section 538 of the Housing Act of 1949, as amended (42 U.S.C. section 1490p-2), authorizes the Secretary of Agriculture to charge certain fees to lenders for loan guarantees to offset costs associated with loan guarantees.

The Agency’s implementing regulation at 7 CFR part 3565 currently sets the exact amount of the initial guarantee fee and the annual guarantee fee that is being charged by the Agency. The Agency is proposing to amend the regulation by removing the language that indicates the specific amount of the initial guarantee fee and the annual guarantee fee currently being charged by the Agency. The Agency is making this change to allow for flexibility. Currently, the Agency intends to decrease the fee percentage because:

Decreasing the annual guarantee fee for affordable transactions (LIHTC, HOME, AHP, HTF, 515, or HAP Contract, etc.) would align with other federal financing products.

RD will become more competitive with market rate financing.

Reduction of the fee could allow for somewhat higher loan amounts to offset rising interest rates and rising construction costs. Standard practice is that fees are passed on to the borrower.

The ability for slightly larger 538 loan amounts could help offset the lack of other funding sources unavailable in rural areas.

The program is operating at a projected negative subsidy rate of 4.79 for FY 2019 which represents a 117 basis points difference from the negative subsidy rate of 3.62 for FY 2018.

The section 538 GRRHP has been operating on a negative subsidy since 2012 and is projected to continue to operate on a negative subsidy rate.                                                          

Due to the negative subsidy combined with the overall health of the section 538 GRRHP portfolio and the need to remain competitive with other federal financing products, the Agency would like to have the flexibility in its regulation to reduce the annual guarantee due on the outstanding principal amount of the loan that will be charged each year or portion of a year that the guarantee is in effect. For example, if a loan closes on any date between January 1 and December 31, 2018, the fee will be due effective December 31, 2018, and will be collected on February 28, 2019, and each calendar year going forward that the guarantee remains in effect.

If changes do occur in the fee amounts, the Agency will release those changes through a notice in the Federal Register.