Surety Requirements

The Rural Housing Service is amending its regulations to change the threshold for surety requirements guaranteeing payment and performance from a $100,000 contract amount to the maximum Rural Development Single Family Housing area lending limit. This limit will vary by locality. This will liberalize the requirement for surety and take into account the increased construction cost of single family homes in Rural Development's Single Family Housing Program. This will ease the burden on small contractors for whom obtaining surety is difficult and expensive, thereby reducing costs to our single family housing borrowers. On August 26, 2005 (70 FR 50222), the Rural Housing Service proposed to change the surety requirements for Single Family Housing loans under Section 502 of the Housing Act of 1949 (42 U.S.C. 1472). The rule, open for comment for a period of 60 days, received two comments regarding its implementation in Rural Housing procedure. The first comment is in favor of this final rule, thus reinforcing the idea that reducing costs for the contractor by raising the threshold at which surety is required, ultimately benefits the borrower through greater cost savings. The second comment does not favor the proposed rule. The essence of this argument is based upon protecting federal funds, by providing surety (performance and payment bonds). The cost of surety places a greater financial burden on the borrower, as well as making it more difficult for small contractors in rural areas to service RHS borrowers. RHS oversees the construction process until the project is complete, insuring that Federal funds are properly disbursed for the adequate amount of completed construction demonstrated by the contractor. In addition, surety requirements are not entirely eliminated in Single Family Housing. If the borrower requests surety or the loan official feels that additional security is needed for a specific project, then surety will be provided.