RHS Modernizes Insurance Requirements for Section 515, Section 514/516, and Section 521 Multifamily Housing Programs

Effective May 20, 2026

On April 20, 2026, the Rural Housing Service (RHS) issued a Final Rule in the Federal Register (91 FR 20863) updating the insurance requirements for properties financed through the Multi-Family Housing (MFH) Direct Loan and Grant programs. The rule, codified at 7 CFR Part 3560, becomes effective on May 20, 2026, and represents the first significant update to these requirements since the interim Final rule was published in 2004.

The changes impact borrowers and management agents operating Section 515 Rural Rental Housing properties, Section 514/516 Farm Labor Housing properties, and properties receiving Section 521 Rental Assistance. Owners, management agents, and compliance professionals should review existing insurance policies well in advance of renewal to ensure they meet the updated standards.

Why RHS Updated the Rule

The coverage amounts and deductible limits from the 2004 era had become increasingly misaligned with current property values and standard practices in the affordable housing industry. RHS noted that the existing low-deductible setup was increasing premium costs at a time when insurance markets are already strained by catastrophic weather events, carrier insolvencies, and withdrawals from certain state markets.

The Agency also identified a more concerning pattern: when properties experienced catastrophic losses, the regulatory coverage minimums were sometimes too low to fully rebuild. RHS gave an example of an 85-unit property that was a total loss after a federally declared disaster. Insurance proceeds were enough to pay off the Agency loan but not to rebuild the project, permanently removing 85 affordable units from the community. The Final Rule's shift toward replacement-cost-based coverage standards aims to prevent this.

Key Changes Under the Final Rule

New Required Insurance Coverages

Two coverages that were previously absent from the regulatory text are now affirmatively required:

Business Income (Rent Loss) Insurance. New § 3560.105(f)(1)(v) requires borrowers to carry coverage for the loss of rental income resulting from a property loss, calculated on a 12-month basis. Under the parallel change to § 3560.62(d), this coverage must be in place upon completion of construction or rehabilitation, or any portion thereof that allows for occupancy. Despite a commenter's request that this be made optional, RHS retained it as a mandatory coverage because it provides essential financial protection to owners during recovery periods.

Worker's Compensation (Employer's Liability) Insurance. New § 3560.105(i) formalizes what was previously Agency policy. Workers' Compensation is required for permanent and part-time staff assigned directly to the project. Under § 3560.62(d)(3), this coverage must be secured before interim financing funds are disbursed or prior to loan or grant closing, whichever occurs first.

Property Insurance Coverage Amount

Section 3560.105(f)(3) is revised to require that property insurance coverage be at least 80 percent of the insurable replacement cost value, unless the Agency determines that such coverage is financially impractical for the project. The coverage amount must match the "Total Estimated Reproduction Cost of New Improvements" as shown in the project's most recent appraisal. This replaces the previous depreciated-replacement-value or unpaid-loan-balance method and aligns RHS with HUD, Freddie Mac, and broader industry standards.

Flood Insurance

Revised § 3560.105(f)(3)(ii) requires flood insurance coverage of at least 80 percent of the insurable replacement cost value or the maximum amount of insurance available under the National Flood Insurance Act, whichever is less.

Hazard/Property Insurance Deductibles

The most significant operational change for many borrowers is the new deductible structure at § 3560.105(f)(9)(i), which replaces the previous calculation formula with simple "not to exceed" tiers based on coverage amount.

• Coverage of $1,000,000 or less: deductible may not exceed $10,000 per occurrence
• Coverage of more than $1,000,000 up to $2,000,000: deductible may not exceed $25,000 per occurrence
• Coverage of more than $2,000,000: deductible may not exceed $50,000 per occurrence

Importantly, RHS clarified in response to public comment that these are ceilings, not requirements. A property may have a lower deductible if this makes economic sense for the project. The goal is to give borrowers flexibility to choose higher deductibles when appropriate to reduce premium costs.

Windstorm Coverage

Windstorm is now explicitly listed among the general types of hazard insurance at § 3560.105(f)(1)(i), and § 3560.105(f)(2)(i) confirms that windstorm coverage is a required "other" type of insurance when it is specifically excluded from an All-Risk policy. Notably, the existing 5 percent of total insured value cap on windstorm deductibles at § 3560.105(f)(9)(iii) remains unchanged. RHS declined to allow owners to opt out of windstorm coverage, despite comments raising concerns about premium costs, citing the volume of windstorm events nationwide and the need to protect the Agency's security interest.

Earthquake Deductibles

Section 3560.105(f)(9)(iv) now allows earthquake coverage deductibles of up to 20 percent of the coverage amount, an increase designed to match industry standards. When earthquake coverage is purchased, the Agency must be named as a loss payee.

Fidelity Coverage

Section 3560.105(h)(2)(ii) removes the previous fidelity deductible chart and replaces both the coverage and deductible calculations with more straightforward standards.

• Coverage amount: at least 25 percent of operational cash sources per the project's proposed annual budget, or $50,000, whichever is greater. When operational cash sources are significantly below the $50,000 threshold, the bond may be reduced, with Agency approval, to an amount sufficient to cover at least 25 percent of those sources.
• Deductible: not exceeding $15,000 per occurrence.

Disposition of Insurance Proceeds Following Total Loss

In response to comments about the difficulty of obtaining insurance in catastrophe-prone markets, RHS added new language at § 3560.105(f)(7)(iii), authorizing the Agency to apply insurance proceeds directly toward the Agency debt when all of the following conditions are met.

1. The Agency is in the first lien position.
2. The insurance company has deemed the property a total loss due to a catastrophic event beyond the borrower's control.
3. All units are vacant and non-habitable; and
4. Tenants have been relocated under the Agency's disaster procedure process.

This marks a significant change. Under the previous framework, proceeds typically flowed back into the project. The new provision acknowledges that, in certain situations, attempting to rebuild might not be in the Agency's or the community's best interest, given current insurance market conditions.

Loss Payee and Policy Form Requirements

New § 3560.105(f)(11) consolidates several policy-form requirements that should already be familiar to most owners but are now explicitly stated in regulation.

• Policies must give the Agency at least 30 days' written notice before canceling or changing them, and the notice clause cannot use "endeavor" language or include language disclaiming insurer liability for not sending notice.
• Policies must include a clause that loss is payable regardless of any act or negligence of the borrower that could otherwise lead to forfeiture.
• Policies must list the Owner as the Insured and include a standard Non-Contribution Mortgage Clause showing loss or damage payable to the Owner and "United States of America acting through the Rural Housing Service or its successor agency," as its interest may appear.

Additionally, § 3560.105(b)(4) specifies that the Agency must be listed as loss co-payee or mortgagee on all property insurance policies, regardless of lien position, ensuring consistency with Agency subordination agreements.

Timing of Insurance Documentation

Sections 3560.105(b)(1) and (c)(4) now require documentary evidence of insurance on or before the loan or grant closing date, not prior to loan approval. The rule also clarifies that builder's risk insurance (which under § 3560.105(f)(1)(iii) must insure 100 percent of the estimated cost value, or applicable State-required limits if more stringent) is required before construction or rehabilitation begins when interim financing or multiple Agency advances are used.

Scope Limitation: Direct Programs Only

One commenter asked for the updated requirements to apply to all RHS programs, including the guaranteed loan programs. The Agency declined, confirming that the Final Rule applies only to the MFH direct loan and grant programs governed by 7 CFR Part 3560. Owners and lenders involved in Section 538 guaranteed properties should not assume these provisions apply to that portfolio.

Practical Considerations for Owners and Management Agents

The May 20, 2026, effective date provides owners with a limited runway, but most insurance policies renew annually. The following steps are worth taking now:

Owners should review current declaration pages and compare them with the new coverage requirements, paying close attention to whether business income loss coverage is included, if property coverage is at least 80 percent of the insurable replacement cost, and whether existing deductibles are within the new limits. Management agents managing multiple Section 515 properties might find it efficient to perform a portfolio-wide review.

Coverage gaps identified in advance can usually be fixed during renewal without requiring mid-term endorsements, which often add extra cost. When higher deductibles make financial sense at the property level, owners now have important flexibility to save on premiums, but these choices should be weighed against the project's reserve account balances and operating cushion.

Workers' Compensation should be verified for any property with on-site staff. Properties that have historically operated without dedicated maintenance or management personnel may not have this coverage and should review their staffing arrangements.

Finally, owners in markets prone to disasters should understand the new framework under § 3560.105(f)(7)(iii). The fact that the Agency might use insurance proceeds to pay off debt rather than rebuild after a total loss is an important change to the post-disaster landscape and should be discussed with both insurance brokers and owners.

A.J. Johnson Consulting Services, Inc. helps owners, management agents, syndicators, and housing finance agencies ensure compliance with Section 515, Section 514/516, Section 521, and other affordable housing programs. For help interpreting the Final Rule's application to specific properties or portfolios, contact our office.