The Federal Register posted a notice on December 19 that establishes new Section 538 Guaranteed Rural Rental Housing program (Section 538) priority scoring criteria for Low Income Housing Tax Credit (LIHTC) developments that agree to waive their right to use the Qualified Contract (QC) process. The change went into effect on December 20.
The U.S. Department of Agriculture’s (USDA) Section 538 program is a loan guarantee program for multifamily developments in rural communities. Section 538 is not a direct loan program; rather, loans are provided by qualified private-sector lenders and guaranteed by the federal government. The loans are typically paired with other subsidies, including LIHTC, USDA Section 515, and HUD Section 8 subsidies, to develop affordable housing in rural communities. Together, these programs are essential to efforts to increase the stock of affordable, available homes in rural areas.
LIHTC properties are required to be affordable for at least 30 years; however, under the QC process, LIHTC owners may discontinue federal and state affordability restrictions after just 15 years. This “QC loophole” has led to a substantial loss of affordable rental homes, harming low-income residents and wasting scarce federal investments. The new scoring criteria outlined in the Federal Register notice prioritize Section 538 loans for developers who use LIHTC but agree to waive their rights under the QC process.
NLIHC and other advocacy organizations have pushed to close the QC loophole for many years, and many federal programs have taken measures to disincentivize its use. Closing the QC loophole is an important step in ensuring the long-term affordability of LIHTC properties.
With major tax reform coming in 2025, NLIHC will continue to push for LIHTC reforms that focus on households with the greatest needs, including those in rural communities.