[Federal Register Volume 62, Number 195 (Wednesday, October 8, 1997)]
[Rules and Regulations]
[Pages 52503-52505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26614]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AI92
Loan Guaranty: Requirements for Interest Rate Reduction
Refinancing Loans
AGENCY: Department of Veterans Affairs.
ACTION: Interim final rule.
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SUMMARY: This document amends the Department of Veterans Affairs (VA)
loan guaranty regulations concerning the requirements for Interest Rate
Reduction Refinancing Loans (IRRRLs) by generally limiting these loans
to instances where the veteran's monthly mortgage payment will
decrease, and by generally requiring that the loans being refinanced be
current in their payments. This action is necessary to ensure that
these loans are made only when they provide a real benefit to the
veteran, and to protect the financial interest of the Government.
DATES: Effective Date: This rule is effective October 8, 1997. Comments
must be received on or before December 8, 1997.
ADDRESSES: Mail or hand deliver written comments to: Director, Office
of Regulations Management (02D), Department of Veterans Affairs, 810
Vermont Avenue, NW, Room 1154, Washington, DC 20420. Comments should
indicate that they are submitted in response to ``RIN 2900-AI92.'' All
written comments received will be available for public inspection at
the above address, Room 1158, between the hours of 8:00 a.m. and 4:30
p.m., Monday through Friday (except holidays).
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, NW,
Washington, DC 20420, (202) 273-7368.
SUPPLEMENTARY INFORMATION: Under the authority of 38 U.S.C. Chapter 37,
VA guarantees loans made by lenders to eligible veterans to purchase,
construct, improve, or refinance their homes (the term veteran as used
in this document includes any individual defined as a veteran under 38
U.S.C. 101 and 3701 for the purpose of housing loans). This document
amends VA's loan guaranty regulations by revising the requirements for
VA-guaranteed Interest Rate Reduction Refinancing Loans (IRRRLs).
IRRRLs are designed to assist veterans by allowing them to
refinance an outstanding VA-guaranteed loan with a new loan at a lower
rate. The provisions of 38 U.S.C. 3703(c)(3) and 3710(e)(1)(C) allow
the veteran to do so without having to pay any out-of-pocket expenses.
The veteran may include in the new loan the outstanding balance of the
old loan plus reasonable closing costs, including up to two discount
points. Over the years, IRRRLs have provided nearly one million
veterans an opportunity to reduce the interest rates and, thus, the
monthly payments on their home mortgages.
We have recently learned that a small number of lenders have been
urging veterans to apply for loans under conditions that increase the
risk of loss to both the veteran and the Government, and do not provide
the benefit that IRRRLs were enacted to give. In some cases, these
loans involve exorbitant costs in relation to the small reduction in
the interest rate. Thus, veterans actually experience an increase in
their monthly payment notwithstanding the lower rate. In other cases,
lenders are urging veterans to default on their current loan, then
refinance the delinquent loan with a new loan including the past due
interest and late charges.
In one case, a veteran obtained a 30-year loan for a new home in
Florida in October 1991. The fixed-rate mortgage was for $95,800
(including funding fee) at the State bond program interest rate of 7.99
percent with a principal and interest payment of $702.28. In March 1995
he obtained an adjustable rate mortgage (ARM) IRRRL with an initial
interest rate of 7.5 percent. This loan was for $103,950 and had an
initial payment amount of $726.83. It included $8,912.54 in closing
costs, including 5.5 discount points. In January 1997, the ARM interest
rate had been adjusted to 8.25 percent, and he obtained another IRRRL
for $111,090 at a fixed interest rate of 8.00 percent and a monthly
payment of $815.14. Thus, in a little
[[Page 52504]]
over 5 years he increased his mortgage by $15,190 and his payment by
$112.84 `` both increased by approximately 16 percent `` and he still
has 30 years to pay.
In order to assist veterans who were delinquent on their original
loan to refinance to a lower rate, VA permitted them to include their
past due payments in the new loan. Because loan instruments normally
provide that any past due interest and late charges are capitalized and
added to the loan balance, VA considered such past-due charges to be
part of ``the balance of the loan being refinanced'', and, therefore,
eligible to be refinanced under the provisions of 38 U.S.C. 3710(e)(1).
Some lenders have abused this interpretation by actually encouraging
veterans to skip a few payments on the old loan and use the cash saved
by not making a timely payment for other purposes. One lender went so
far as to suggest to prospective borrowers that they skip a few
payments and use the money for a summer vacation.
These types of abusive loan practices do not serve the best
interests of the veterans involved. They also have an adverse effect on
the financial interests of the Government. Since IRRRLs can already
result in loans in excess of the value of the property, additional
unwarranted increases in the amount by which the loan balance exceeds
the market value of the property could further increase VA's loss in
the event of default and payment of a claim under the guaranty. Also,
an excessive increase in the loan amount could cause a veteran to be
unable to sell the home for an amount sufficient to pay off the loan
balance.
In order to insure that IRRRLs continue to provide a true benefit
to the veteran, and to protect the financial interest of the
Government, we are making the following changes to the IRRRL program by
revising the provisions of 38 CFR 36.4306a and 36.4337(a).
Monthly Payment Reduction
We generally will require that the monthly payment (principal and
interest) on the new loan must be lower than the monthly payment on the
loan being refinanced. This will prevent cases in which the veteran's
monthly payment actually increases, even though the interest rate is
lowered slightly, because extensive closing costs are included in the
loan. This requirement does not apply to four situations where VA
believes that other factors offset the risk of loss from an increase in
monthly payment. These four situations are cases in which an ARM is
being refinanced with a fixed-rate loan; cases in which the term of the
new loan is shorter than the term of the loan being refinanced; cases
in which the increase in monthly payment is attributable to the
inclusion of energy efficient improvements, as provided in
Sec. 36.4336(a)(4); and cases in which the Secretary approves the new
loan, on a case-by-case basis, in order to prevent an imminent
foreclosure. With regard to ARMs, there is already a possibility that
the monthly payment will increase in future years. The certainty that
the payment on the new loan will not increase in future years offsets
the increased risk associated with the immediate increase over the
veteran's current payment. VA may establish limits on the amount of
such increase in future rule making. Although the monthly payments on
shorter term loans are higher, they amortize faster, thus reducing the
risk of loss to both the veteran and the Government. In future rule
making, VA may address minimum term reduction. Current law allows
veterans to include additional costs of energy efficient improvements
in IRRRLs; thus, this exception merely continues current law. Finally,
with regard to imminent foreclosure, the risk of loss to the Government
and veteran from such foreclosure could be greater than permitting a
new loan at a higher monthly payment. VA would have to approve each
such loan on a case-by-case basis under existing credit underwriting
standards set forth at 38 CFR 36.4337 to ensure that it is in the best
interest of the Government and that the veteran is able to afford the
new payment.
The Loan Must Be Current
To prevent the lender from encouraging borrowers to ``skip''
mortgage payments and include them in the new loan, we are requiring
that in any case where the loan being refinanced is delinquent, the new
loan must be submitted to VA for prior approval. VA must determine that
the veteran qualifies for the new loan under existing credit standards
contained in 38 CFR 36.4337. Under these standards, a veteran must,
among other things, demonstrate a proper regard for obligations. If it
is found that the veteran purposely failed to make timely payment on
the loan in order to use the cash for a vacation or similar
discretionary spending, the new loan is unlikely to be approved.
We are clarifying existing VA interpretation that delinquent
interest and late charges are considered part of the balance of the
loan being refinanced.
Credit Underwriting Standards
We are also making a conforming amendment to 38 CFR 36.4337. That
section contains the current credit underwriting standards. Currently,
paragraph (a) of that section provides that the standards do not apply
to IRRRLs. We are amending this to state the standards do not apply to
IRRRLs unless under 38 CFR 36.4306a the loan must be submitted to VA
for prior approval. As discussed above, loans to prevent imminent
foreclosure where the monthly payment on the new loan exceeds the
payments on the loan being refinanced, and cases where the loan being
refinanced is delinquent, will now be required to be approved in
advance.
Administrative Procedure Act
Pursuant to 5 U.S.C. 553, we have found good cause to dispense with
notice and comment on this interim final rule and to dispense with a
30-day delay of its effective date. These findings are based on the
critical need to help ensure that veterans are treated fairly by
lenders and to protect the financial interests of the Government as
guarantor of these loans. Comments are being solicited for 60 days
after publication of this document. VA may modify this rule in response
to comments if appropriate.
Executive Order 12866
This proposed rule has been reviewed by OMB under Executive Order
12866.
Regulatory Flexibility Act
Because no notice of proposed rule making 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 et seq.).
(The Catalog of Federal Domestic Assistance Program number is
64.114)
List of Subjects in 38 CFR Part 36
Condominiums, Handicapped, Housing, Indians, Individuals with
disabilities, Loan programs--housing and community development, Loan
programs-Indians, Loan programs--veterans, Manufactured homes, Mortgage
insurance, Reporting and recordkeeping requirements, Veterans.
Approved: August 25, 1997.
Hershel W. Gober,
Acting Secretary of Veterans Affairs.
For the reasons set out in the preamble, 38 CFR part 36 is amended
as set forth below.
PART 36--LOAN GUARANTY
1. The authority citation for part 36 continues to read as follows:
[[Page 52505]]
Authority: 38 U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719,
3720, 3729, 3762, unless otherwise noted.
2. In Sec. 36.4306a, paragraphs (a)(3) through (a)(5) are revised
and paragraphs (a)(6) and (a)(7) are added, to read as follows:
Sec. 36.4306a Interest rate reduction refinancing loan.
(a) * * *
(3) The monthly principal and interest payment on the new loan must
be lower than the payment on the loan being refinanced, except when the
term of the new loan is shorter than the term of the loan being
refinanced; or the new loan is a fixed-rate loan that refinances a VA-
guaranteed adjustable rate mortgage; or the increase in the monthly
payments on the loan results from the inclusion of energy efficient
improvements, as provided by Sec. 36.4336(a)(4); or the loan is
approved by the Secretary in advance after determining that the new
loan is necessary to prevent imminent foreclosure and the veteran
qualifies for the new loan under the credit standards contained in
Sec. 36.4337.
(4) The amount of the refinancing loan may not exceed:
(i) An amount equal to the balance of the loan being refinanced,
which must be current, except in cases described in paragraph (a)(5) of
this section, and such closing costs as authorized by Sec. 36.4312(d)
and a discount not to exceed 2 percent of the loan amount; or
(ii) In the case of a loan to refinance an existing VA-guaranteed
or direct loan and to improve the dwelling securing such loan through
energy efficient improvements, the amount referred to with respect to
the loan under paragraph (a)(4)(i) of this section, plus the amount
authorized by Sec. 36.4336(a)(4).
(Authority: 38 U.S.C. 3703, 3710)
(5) In any case where the loan being refinanced is delinquent, the
new loan will be guaranteed only if it is approved by the Secretary in
advance after determining that the veteran qualifies for the loan under
the credit standards contained in Sec. 36.4337. In such cases, the term
``balance of the loan being refinanced'' shall include any past due
installments, plus allowable late charges.
(6) The dollar amount of guaranty on the 38 U.S.C. 3710(a)(8) or
(a)(9)(B)(i) loan may not exceed the original dollar amount of guaranty
applicable to the loan being refinanced, less any dollar amount of
guaranty previously paid as a claim on the loan being refinanced; and
(7) The term of the refinancing loan (38 U.S.C. 3710(a)(8)) may not
exceed the original term of the loan being refinanced plus ten years,
or the maximum loan term allowed under 38 U.S.C. 3703(d)(1), whichever
is less. For manufactured home loans that were previously guaranteed
under 38 U.S.C. 3712, the loan term, if being refinanced under 38
U.S.C. 3710(a)(9)(B)(i), may exceed the original term of the loan but
may not exceed the maximum loan term allowed under 38 U.S.C.
3703(d)(1).
(Authority: 38 U.S.C. 3703(c)(1), 3710(e)(1))
* * * * *
3. In Sec. 36.4337, paragraph (a) is revised to read as follows:
Sec. 36.4337 Underwriting standards, processing procedures, lender
responsibility and lender certification.
(a) Use of standards. The standards contained in paragraphs (c)
through (j) of this section will be used to determine that the
veteran's present and anticipated income and expenses, and credit
history are satisfactory. These standards do not apply to loans
guaranteed pursuant to 38 U.S.C. 3710(a)(8) except for cases where the
Secretary is required to approve the loan in advance under
Sec. 36.4306a.
(Authority: 38 U.S.C. 3703, 3710)
* * * * *
[FR Doc. 97-26614 Filed 10-7-97; 8:45 am]
BILLING CODE 8320-01-P
