[Federal Register Volume 62, Number 16 (Friday, January 24, 1997)]
[Rules and Regulations]
[Pages 3610-3611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1656]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AH90
Loan Guaranty: Limitation on Discount Points Financed in
Connection With Interest Rate Reduction Refinancing Loans
AGENCY: Veterans Benefits Administration, Department of Veterans
Affairs.
ACTION: Final rule.
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SUMMARY: This document adopts as a final rule, without change, an
interim final rule that amends VA's loan guaranty regulations
concerning points allowed to be included in Interest Rate Reduction
Refinancing Loans. This rule limits to two the amount of discount
points that may be included in the loan. This rule is necessary to help
ensure that veterans are not overcharged with excessive points and to
protect the Government against the danger of overinflated loans.
EFFECTIVE DATE: January 24, 1997.
FOR FURTHER INFORMATION CONTACT: Ms. Judith Caden, Assistant Director
for Loan Policy (264), Loan Guaranty Service, Veterans Benefits
Administration, Department of Veterans Affairs, 810 Vermont Avenue,
Washington, DC 20420, (202) 273-7368.
SUPPLEMENTARY INFORMATION: On February 28, 1996, VA published in the
Federal Register (61 FR 7414) an interim final rule with request for
comments. The rule amended VA's loan guaranty regulations by limiting
to two the amount of points that may be included in VA-guaranteed
Interest Rate Reduction Refinancing Loans (IRRRLs). We requested that
comments on the interim final rule be submitted on or before April 29,
1996. We received 5 comments: from lenders, lender employees, and
associations representing both veterans and lenders.
The first commenter, a lender trade organization, observed that
while VA had appropriately responded to an abusive practice, the
establishment of a point ceiling still introduced an artificial
limitation in the marketplace. This commenter asserted that lenders
must be able to react quickly to swings in mortgage interest rates. The
commenter further asserted that one mechanism used to accomplish this
is the use of points, especially in a scenario where interest rates are
changing rapidly. The commenter suggested that VA establish a mechanism
to increase the two-point ceiling in times of significant changes in
the mortgage marketplace.
The second commenter, also a lender trade organization, noted that
the rule would prohibit certain transactions that are beneficial to
veterans, i.e., the practice of permitting a veteran to ``buy down''
the interest rate. The commenter further asserted that often the number
of points charged in these cases is more than two and that allowing the
veteran to take advantage of this option affords the veteran the
fullest flexibility in the trade-off between interest rate and points.
The commenter suggested that instead of limiting the number of points
that can be financed, VA adopt an approach that limits the loan-to-
value ratio (LTV) of the loan, noting that lenders routinely determine
and consider LTVs as part of the underwriting process. The commenter
suggested VA combine an LTV limit with a prohibition on increasing the
monthly payment, and thereby limit the Government's risk in a less
restrictive fashion.
The third commenter also thought that the rule was too restrictive,
and suggested that VA allow lenders who set points in a responsible and
competitive manner be allowed to continue to finance more than two
points. The commenter asserted that VA should stop doing business with
lenders found to be charging excessive discount points. This commenter
also argued that lenders and borrowers need the availability of several
pricing options, and that otherwise, when rates begin rising, lenders
could be forced to charge a rate that was unacceptably high to the
veteran and higher than it needed to be.
The fourth commenter, a lender employee, argued that a case could
be made for a limit of one point financed in the loan. The fifth
comment was from an organization representing veterans. The commenter
asserted that many veterans needing to refinance their mortgages lack
the cash that would be needed to pay excess points, and, therefore, by
limiting their ability to finance points, we are effectively forcing
them to take a higher rate than they would otherwise be able to obtain
if they were permitted to finance a greater amount of points.
The suggestion that VA base its decision on how many points may be
[[Page 3611]]
added into the loan on the Loan to Value Ratio (LTV) does address the
question of risk. However, in order to determine LTV an appraisal must
be performed. One of the cornerstones of the IRRRL program is that an
appraisal is not needed. If appraisals were required on IRRRLs the cost
to veterans would increase, on average, by more than $300 per
transaction (added into the loan) and the time needed to close the loan
would be increased by up to three weeks. In light of the fact that we
believe IRRRLs were intended to ``streamline'' refinances, we do not
believe that the requirement of an appraisal is desirable or
appropriate.
When the legislation which authorized the IRRRL program was
considered by the Congress in 1980, interest rates had recently been as
high as 14 percent. Prior to April 1979, interest rates on VA home
loans had never reached 10 percent. The purpose of the IRRRL was, and
is, to allow veterans to make better use of their home loan benefit by
taking advantage of reduced market interest rates. The program was not
designed to allow veterans to artificially buy down the interest rate
by including increased points in the loan. Instead it was to assist
veterans who obtained VA loans during periods of high interest rates to
lower those rates, and consequently their monthly mortgage payments,
when market rates returned to more reasonable levels. It has also been
suggested that VA allow lenders who set points in a ``responsible and
competitive manner'' to continue financing more than two points and
stop doing business with lenders found to be charging excessive
discount points. We do not believe it is feasible to attempt to
administer such an imprecise standard, both for individual loans and
for determining which lenders would be permitted to continue
participating in the VA program.
Obviously, the fullest flexibility would allow for veterans to
include any amount of points in the loan. However, the provisions of 38
U.S.C. 3710(e)(1)(C)(i) which allow VA to limit the points included in
a loan indicate that other factors may be more important. We believe
that a limit of two points in the loan amount provides the appropriate
balance needed to provide flexibility with respect to amounts of
points, to protect veterans against overcharging with excessive points,
and to protect the Government against overinflated loans.
We understand and have considered the concerns of the commenters.
However, we are not persuaded that any of the alternate approaches
would be a satisfactory solution to the problem. None of the proposed
alternatives offers a simpler alternative which affords the same degree
of protection to veterans and the Government. The suggested alternative
approaches would introduce new complications in the form of adjustable
point ceilings, LTV ceilings, and new prohibitions on the size of the
monthly payment. We prefer to retain the streamlined approach for these
loans that made them so popular in the first place.
We would also like to clarify a point of possible confusion. A
number of lenders contacted VA by telephone in response to this action
to inquire whether the two-point limit included the origination fee as
one of the two allowable points. The answer is no. Under 38 CFR
36.4312, a lender making a VA guaranteed loan is authorized to collect
an ``origination fee'' of up to one percent of the loan amount as
compensation for the miscellaneous cost of originating a loan. This fee
is separate and apart from the charging of discount points, and can be
included in the loan amount on an IRRRL as an allowable charge.
VA appreciates the interest of the commenters and thanks them for
their thoughtful remarks.
Because no notice of proposed rulemaking was required in connection
with the adoption of this interim final rule, no regulatory flexibility
analysis is required under the Regulatory Flexibility Act (5 U.S.C.
601-612).
Based on the rationale set forth in the interim rule document
amending 38 CFR part 36 which was published at 61 FR 7414 on February
28, 1996, we are adopting the provisions of the interim rule as a final
rule without change.
Approved: October 9, 1996.
Jesse Brown,
Secretary of Veterans Affairs.
[FR Doc. 97-1656 Filed 1-23-97; 8:45 am]
BILLING CODE 8320-01-P
