Community Developments Investments (September 2016)
Title VI Loan Guarantee Program
Office of Loan Guarantee, HUDA home under construction in Pueblo de San Ildefonso
Robert Lamp, Loan Guarantee Specialist, U.S. Department of Housing and Urban Development
The Title VI Loan Guarantee (Title VI) Program and the Indian Housing Block Grant (IHBG) Program1 were authorized by the Native American Housing Assistance and Self Determination Act (NAHASDA) of 1996, as amended.2 The Title VI program provides loan guarantees to lenders financing housing development projects by IHBG recipients, typically Indian tribes and tribally designated housing entities (TDHE). The goal of the program is to promote the development of private capital markets to support affordable housing in Indian Country.3
Lenders benefit from the Title VI program because it provides them with limited risk exposure, reduced costs, increased loan marketability, and improved opportunities to market financial services. Loans guaranteed by this program may also count towards meeting the lenders’ community reinvestment goals. Tribes benefit because they can build more housing at current costs and use loans to leverage additional funds from other sources. Improved financial services from lenders permit flexible financing terms.
Additionally, the pledge and guarantee eliminate the need to use land as collateral for loans. Lenders avoid trust land issues in loan closing, and tribes allay their concerns of risking Native lands in obtaining financing.
Title VI Background
Over the years, the Title VI program has evolved and adapted to meet the needs of borrowers and lenders. Since its inception, the program has proven to be a useful tool in helping tribes and TDHEs secure affordable housing for their members with little cost to the government.
The first Title VI loan guarantee was issued in 2000 for $1.7 million to First National Bank Alaska. From 2000 through June 2016, the Title VI program processed 90 loans for $229 million in guarantees. The Title VI program has helped finance 3,148 housing units through rehabilitation, new construction, or creation of infrastructure. There have been no defaults, and 43 loans have been paid off in full.
The Title VI program is overseen by the Office of Native American Programs (ONAP) at the U.S. Department of Housing and Urban Development (HUD). The Office of Loan Guarantee (OLG) within ONAP administers the Title VI program. OLG staff is located at HUD headquarters in Washington, D.C.
The Title VI program works in conjunction with HUD’s IHBG program, which is a formula4 grant that provides a range of affordable housing activities on Indian reservations and on Indian areas. Under the federal budget for fiscal year (FY) 2016, HUD was allotted $648 million for the IHBG and $2 million for the Title VI program to be used as a credit subsidy for $17.5 million in guarantee authority.
How Title VI Works
A tribe or TDHE may pledge a portion of its annual IHBG program grant and the housing development project’s income as security to HUD in exchange for a Title VI loan guarantee. In turn, HUD provides a 95 percent guarantee of outstanding principal, plus accrued and unpaid interest as collateral to the lender. The lender then provides the financing to the tribe.
The maximum guarantee amount that a tribe or TDHE can borrow is approximately five times the need portion of its annual IHBG. The tribe or TDHE may have one or more Title VI loans, but the combined total of the loans may not exceed the maximum guarantee amount. The pledged funds from the IHBG annual grant are only pledged to HUD, and may be expended for the completion of the project, debt payments, or other affordable housing activities.
Once issued, the guarantee coverage is not affected by changes to the annual grant levels. The guarantee protects the lender from affordable housing projects that do not have a positive cash flow. Without land as collateral, the guarantee permits flexible loan structures and construction-permanent terms up to 20 years. It also limits default costs, since there are no foreclosures.
A guarantee has no minimum, which permits tribes to use the program for small projects or gap financing. Loan sizes have ranged from $170,000 to $50 million. The guaranteed loans have been used for acquisition, single and multifamily housing, transitional housing, gap financing for tax credit projects, infrastructure, community centers, housing offices and related warehouses, and recreation facilities. Generally, one tribe pledges its IHBG program grant to HUD, but in some instances, several tribes have combined their resources to maximize development.
Title VI Process
The Title VI program uses a team approach with regular conference calls to help ensure project success by providing technical assistance, answering questions, and coordinating the various parties to keep the project on schedule. The main participants may include the tribe, the TDHE, the lender, the ONAP Area Office and OLG, and the HUD loan guarantee and development specialists.
The Title VI program has a two-step application process. First, the tribe or TDHE requests a preliminary letter of acceptance (PLA) from HUD. Second, the selected lender for the tribe or TDHE requests a firm commitment for a guarantee from HUD.
Up to six months may elapse between the PLA request and the request for a firm commitment. During this time, significant changes to the scope of the project and costs may occur. Project data must, however, be similar in both the preliminary request for acceptance and the request for a firm commitment.
Figure 1 illustrates the Title VI program’s typical two-step process, from application by the tribe, to the review and firm commitment by HUD, and finally, the granting of the guarantee and closure of the transaction.
Figure 1: Title VI Application and Loan Guarantee Process
If the tribe or TDHE is submitting project information to other funding sources, that information may be sufficient for documenting the Title VI loan request. If not, the OLG will request additional information from the borrower or lender.
The PLA is the OLG’s preliminary approval of a guarantee to a tribe or TDHE. Although this step is not required, it is highly recommended because it
The PLA stage is also a good opportunity for the lender to provide its financial expertise to assist the borrower with not only general financing terms, but also with knowledge on how to leverage and structure a project and pull together standard types of documentation, all of which help in building a solid relationship between the lender and the borrower.
Once the project planning is complete, the selected lender of the tribe or TDHE makes the application for the firm commitment with new and updated material following a general checklist. If the lender’s application for the firm commitment is approved, the lender and borrower must meet the conditions of the commitment and close the transaction in 90 days.
Title VI Flexibility
The entire Title VI process - from the request for the PLA to the issuance of a guarantee - is designed to be flexible to meet the needs of the project, tribe, borrower, and lender. The OLG ensures flexibility in the program by employing several strategies, including using
It has been said that the Title VI program is the hidden gem of NAHASDA. Through HUD’s 95 percent payment guarantee, lenders gain access to underserved markets, reduce default risks, and reduce costs. Tribes/TDHEs obtain access to much needed capital while using pledged grant funds for the project, payment of debt service, or other eligible grant activities. Lender and borrower partnerships are built, which is reflected in the lack of any defaults during the 16-year history of the program.
For more information, visit the Title VI program web page or contact Robert Lamp at firstname.lastname@example.org.
1 The IHBG program is a formula grant that provides a range of affordable housing activities on Indian reservations and other tribal lands. The U.S. Department of the Interior’s Bureau of Indian Affairs (BIA) defines a federal Indian reservation as “an area of land reserved for a tribe or tribes under treaty or other agreement with the United States, executive order, or federal statute or administrative action as permanent tribal homelands, and where the federal government holds title to the land in trust on behalf of the tribe” (see BIA’s FAQs).
3 “Indian Country” is a legally defined term in 18 USC 1151 that generally refers to Indian reservations and other Indian areas. The U.S. Department of the Interior’s Bureau of Indian Affairs (BIA) defines a federal Indian reservation as “an area of land reserved for a tribe or tribes under treaty or other agreement with the United States, executive order, or federal statute or administrative action as permanent tribal homelands, and where the federal government holds title to the land in trust on behalf of the tribe” (see BIA’s FAQs). Section IV of NAHASDA, as amended, defines Indian area as “the area within which an Indian tribe or a tribally designated housing entity, as authorized by 1 or more Indian tribes, to provides assistance under this Act for affordable housing.”
4 The IHBG program formula has two components: need and formula current assisted stock. The need component considers population, income, and housing conditions. The formula current assisted stock component reflects housing developed under the United States Housing Act of 1937 that is owned and or operated by the IHBG recipient and provides funds for ongoing operation of the housing. For more information, see the IHBG program’s website.