Rural Housing:

Changing the Definition of Rural Could Improve Eligibility Determinations

GAO-05-110: Published: Dec 3, 2004. Publicly Released: Jan 3, 2005.

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Rural America has become more diverse: technology and the spread of suburbia have linked rural areas to urban areas, resulting in diminished distinctions between the two. The Rural Housing Service (RHS) applies statutory requirements for eligibility that may not reflect changes in rural areas or best determine which areas qualify for its housing programs. GAO's objectives included assessments of how eligibility is defined for RHS programs and how changes in the current eligibility requirements might impact the RHS mission of meeting rural housing needs.

RHS determines which areas will be eligible (that is, defined as rural) for its programs by applying requirements in the Housing Act of 1949, as amended. While the definition largely focuses on population--generally up to 20,000--certain communities must also be "rural in character," not part of metropolitan statistical areas (MSA--which is defined as a county or counties associated with a city or urbanized area that has a population of at least 50,000), or demonstrate a serious lack of mortgage credit for lower- and moderate-income families. Also, a "grandfather" clause allows communities with populations over 10,000 to retain eligibility if they become part of an MSA--and still meet the "rural in character" criterion and not exceed 25,000 in population. These eligibility requirements resulted in dissimilar determinations for what appeared to be similar areas. For example, in visits to five states GAO found that applying the grandfather clause enabled certain communities within MSAs to retain eligibility while other communities within the same MSAs remained ineligible even though they met current "rural" and population criteria. In addition, GAO analysis of nationwide data found that RHS made more than 1,300 communities with populations of 10,000 or below eligible that were within or contiguous to areas that had populations of 50,000 or more. GAO identified alternatives to retaining the MSA, grandfather, and credit requirements in the Housing Act of 1949. Because MSAs contain both urban and rural areas and have increased substantially in both size and number in recent decades, they may not be good determinants of urban-rural distinctions. According to the 2000 census, about half the nation's rural population lives in MSAs. An alternative measure would be to use the Census Bureau's urbanized areas and urban clusters, which are density-based measures that provide finer-scale information and could help RHS better and more consistently make eligibility determinations for areas with similar population and characteristics. By dropping the MSA requirement, "grandfathering" also could be phased out, allowing RHS to make determinations that focused on current conditions rather than prior eligibility. In addition, a 1997 USDA report found that lack of credit in rural areas was no longer a serious problem; rather, a lack of income and ability to pay the mortgage were greater issues. Therefore, the requirement to demonstrate a lack of credit no longer appears to be relevant to meeting housing needs in rural America.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: To better ensure that the definition of rural results in more consistent application of eligibility for Rural Housing Service (RHS) housing programs, in our December 2004 report we suggested that Congress may want to consider eliminating the metropolitan statistical area criterion and that it be replaced with RHS using density-based measures for its eligibility decisions. In a March 2005 oversight hearing in which we presented the findings of our report, the Chairman of the House Committee on Financial Services' opening statement said that he was "concerned by recent GAO reports that show an uneven RHS definition of rural," and that the Committee needs "to take a look at how RHS determines eligibility requirements to ensure that those families living in rural communities have access to the resources of RHS." During the hearing, the RHS Administrator said that he agreed with GAO that out-of date boundaries serve no purpose and that RHS had been working closely with GAO and the Department's Economic Research Service to find a good way of ensuring RHS is covering all the rural areas. During the hearing discussion on eligibility, the RHS Administrator added that RHS would obviously implement the will of Congress in this matter and could write or comment on legislation if so requested. The House version of the 2008 Farm Bill called for the Secretary of Agriculture to study the rural definition issue, including describing what effects varying definitions of "rural" have on USDA programs. The Senate version established a density-based criterion in the standard definition of "rural" for agricultural credit (not rural housing) programs and, similar to the House version, required the Secretary of Agriculture to assess, and report on, the various definitions of rural used in UDSA programs. The Conference committee compromise adopted the Senate amendment with several changes. It struck the housing density criterion from the standard definition of rural for agricultural credit programs. However, it directed USDA to conduct a rulemaking for those programs that allows USDA to employ the housing density criterion. The Conference committee retained the requirement that the Secretary of Agriculture report to the Congress on the various USDA program definitions of rural. The report is due in two years.

    Matter: To better ensure that the definition of rural results in more consistent application of eligibility for RHS housing programs, Congress may wish to consider eliminating the MSA criterion and recommending that RHS use density-based measures as a basis for its eligibility decisions.

  2. Status: Closed - Implemented

    Comments: To better ensure that the definition of rural results in more consistent application of eligibility for Rural Housing Service (RHS) housing programs, in our December 2004 report we suggested that Congress may want to consider phasing out the practice of "grandfathering" communities that experienced changes in eligibility because of inclusion in a metropolitan statistical area. In a March 2005 oversight hearing where we presented the findings of our report, the Chairman of the House Committee on Financial Services' opening statement said that he was "concerned by recent GAO reports that show an uneven RHS definition of rural," and that the Congress needs "to take a look at how RHS determines eligibility requirements to ensure that those families living in rural communities have access to the resources of RHS." During the hearing, the RHS Administrator said that he agreed with GAO that out-of-date boundaries serve no purpose and that RHS had been working closely with GAO and the Department's Economic Research Service to find a good way of ensuring RHS is covering all the rural areas. During the hearing discussion on eligibility, the RHS Administrator added that RHS would obviously implement the will of Congress in this matter and could write or comment on legislation if so requested. In a followup question for the record, Congressman Pearce asked RHS if it would grandfather in a new definition of rural. RHS responded that it believed that there is merit in considering whether communities currently defined as "rural" should be grandfathered if statutory changes were made, and that Rural Development would be working closely with Congress in determining any potential changes to the statute.

    Matter: To better ensure that the definition of rural results in more consistent application of eligibility for RHS housing programs, Congress may wish to consider phasing out the practice of "grandfathering" communities that experienced changes in eligibility because of inclusion in an MSA.

  3. Status: Closed - Implemented

    Comments: In its official agency comments, the Acting Under Secretary for Rural Development wrote that he agreed the statutory lack of credit requirement could be removed with no detriment to the housing programs. He wrote that USDA Rural Development interprets the provision to apply to the customers served, and not the areas served. During a March 2005 hearing on Rural Housing Service (RHS) oversight, the Chairman said that he found the reference to a lack of mortgage credit requirement to be of particular interest. He asked the GAO witness to comment on the language in the GAO testimony about demonstrating a serious lack of mortgage credit being of marginal utility. The GAO witness responded that (1) the Rural Housing Service basically says, all rural areas have a lack of mortgage credit so it is not a distinguishing factor and (2) research by a number of parties, including USDA's Economic Research Service, show that the problems with lack of mortgage credit is more income-driven, rather than being geographically driven. So what makes sense to us, and is consistent with RHS's policies, is that you would want to take into account the incomes of the potential recipients, rather than making the rural definition take into account lack of mortgage credit.

    Matter: To better ensure that the definition of rural results in more consistent application of eligibility for RHS housing programs, Congress may wish to consider eliminating the "lack of credit" requirement.

 

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