Court Backs Section 515 Loan Prepayment Rules

Facts: The owner of a small multifamily housing development in Oregon went to court in 2006 to force the USDA's Rural Housing Service (RHS) to accept prepayment of her site's Section 515 loan. The owner wanted to be free of the rent restrictions under Section 515 and operate at market rents.

Under the RHS-run Section 515 loan program, site owners agree to rent their housing units only to qualified elderly and low-income residents at affordable rents until the owners fully repay their RHS loans. In return, the site owners accept reduced interest rates on their loans and other subsidies. Program rules initially allowed Section 515 borrowers to repay their loans at any time. However, in 1987, to maintain the supply of affordable rural housing, Congress enacted the Emergency Low Income Housing Preservation Act (ELIHPA). ELIHPA allows RHS to accept Section 515 prepayments only under certain conditions:

• The owner must give RHS notice of her intent to prepay;

• Upon notice, RHS must offer the owner a financial incentive to remain in the program;

• If the owner still wants to prepay, she must offer to sell the property to a qualified nonprofit organization or public agency at fair market value; and

• If the housing is not sold in 180 days, RHS may accept the prepayment from the owner.

In 2006, the owner in Oregon tried to pay off her site's Section 515 loans in full, but RHS refused to accept the prepayment. RHS said she had not followed ELIHPA's requirements. The owner argued in court that ELIHPA did not apply to her site. The owner said that she should be free of the Section 515 program because the deed of trust from 1984 obligated her site to follow Section 515 rules for just 20 years.

Decision: The U.S. Court of Appeals for the Ninth Circuit rejected the site owner's arguments.

Reasoning: The court ruled that while the deed of trust did create a 20-year restricted-use period, the site was also bound by the Section 515 loan agreement, which the owner also signed in 1984. That agreement clearly required the owner to use her property as low-income housing “so long as the [Section 515] loan obligation remains unsatisfied.” In the court's view, the loan obligation will remain unsatisfied until the owner follows the prepayment procedures in ELIHPA or the loan period expires in 2034.

• Emergency Low Income Housing Preservation Act of 1987 (ELIHPA): 42 U.S.C. §1472
• Schroeder v. United States, June 2009

LESSIONS LEARNED: “This decision makes clear that owners of Section 515 sites must comply with the prepayment restrictions enacted by ELIHPA before they may prepay their Rural Development (RD) loan,” says Gideon Anders, executive director of the National Housing Law Project in Oakland, Calif., who filed a friend-of-the-court brief in the case. “Together with the Ninth Circuit's decision in Goldammer v. United States, it puts to rest a suggestion made by another panel of the Ninth Circuit in Kimberly v. United States that owners can circumvent those restrictions by simply tendering the balance of their RD loan and then suing RD to quiet title to the property,” he says.