Rural Rental Housing:

Impact of Section 515 Loan Prepayments on Tenants and Housing Availability

RCED-88-15BR: Published: Feb 11, 1988. Publicly Released: Feb 11, 1988.

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Pursuant to a congressional request, GAO provided information on the possible impact of prepaid Farmers Home Administration (FmHA) Rural Rental Housing Program loans on low-income tenant displacement and housing availability, focusing on the: (1) legality of FmHA acceptance of voluntary prepayment of loans originated before 1980; and (2) characteristics of prepaid loans as opposed to outstanding loans.

GAO found that: (1) the Housing Act of 1949 prohibits FmHA from accepting prepayment of loans approved after December 21, 1979; and (2) there was no legal basis to dispute FmHA acceptance of prepayments of loans made prior to that date. GAO also found that, after prepayment: (1) housing projects in California, Minnesota, and South Carolina increased their rents by 91 percent, 64 percent, and 14 percent, respectively, with these increases causing rent burdens for 25 to 35 percent of the tenants; and (2) most of the displaced tenants in California found alternative assisted housing, but few in Minnesota did. In addition, GAO found that: (1) many project owners prepaid their loans and left the program when their loans became eligible for prepayment; (2) borrowers who were full- or limited-profit proprietorships or partnerships frequently prepaid their loans to avoid FmHA regulatory restrictions and to increase returns by raising rents above program limits; (3) prepaid projects typically were closer to major cities than other projects; and (4) at least 6,600 projects with about 125,000 units are currently eligible for prepayment, and another 6,000 projects with over 161,000 units will become eligible for prepayment between 1995 and 2006.

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