[Federal Register Volume 61, Number 40 (Wednesday, February 28, 1996)]
[Rules and Regulations]
[Pages 7414-7415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4498]
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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: Department of Veterans Affairs.
ACTION: Interim final rule.
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SUMMARY: This document amends VA's loan guaranty regulations concerning
points allowed to be included in VA-guaranteed Interest Rate Reduction
Refinancing Loans by limiting to two the amount of points that may be
included in the loan. This action is necessary to help ensure that
veterans are not overcharged with excessive points and to protect the
interest of the Government against overinflated loans.
DATES: This rule is effective February 28, 1996. Comments must be
received on or before April 29, 1996.
ADDRESSES: Mail written comments to: Director, Office of Regulations
Management (02D), Department of Veterans Affairs, 810 Vermont Avenue,
NW., Washington, DC 20420; or hand deliver written comments to: Office
of Regulations Management, Room 1176, 801 Eye Street, NW., Washington,
DC 20001. Comments should indicate that they are submitted in response
to ``RIN 2900-AH90.'' All written comments received will be available
for public inspection in the Office of Regulations Management, Room
1176, 801 Eye Street, NW., Washington, DC 20001 between the hours of 8
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, Washington, DC 20420,
(202) 273-7368.
SUPPLEMENTARY INFORMATION: Under 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
[[Page 7415]]
veteran under 38 U.S.C. 101 and 3701 for the purpose of housing loans).
This document amends VA's loan guaranty regulations concerning points
allowed to be included in VA-guaranteed Interest Rate Reduction
Refinancing Loans (IRRRLs) by limiting to two the amount of points that
may be included in the loan.
The provisions of 38 U.S.C. 3703(c)(3) and 3710(e)(1)(C) allow for
IRRRLs to include ``reasonable'' points as may be authorized by the
Secretary by regulation. One point equals one percent of the amount of
the loan. Lenders allow a borrower to pay points and thereby reduce the
interest rate.
The regulations in effect prior to the effective date of this
document allowed IRRRLs to include any amount of points negotiated
between the veteran and the lender. This was based on the assumption
that market forces would act to assure that veterans were not charged
excessive points. While this generally has been true, recently a few
lenders have not been constrained by market rates and have been able to
convince veterans to agree to IRRRLs with excessive points. There have
been cases in which IRRRLs include 5 or more points with the lender
representing the loan as having ``at market'' terms even though a true
``at market'' interest rate for such a loan generally would have called
for no more than two points (because of excessive points there have
even been some IRRRLs where the monthly payment increased even though
the interest rate decreased).
In addition to overcharging the veteran, excessive points often
cause other negative impacts. IRRRLs sometime result in loans in excess
of the value of the property. Accordingly, any additional increase in
the amount by which the loan balance exceeds the market value of the
property would 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 may cause a veteran to be unable to sell the home for
an amount sufficient to pay off the loan balance.
We believe that limiting to two the amount of points that may be
included in an IRRRL is appropriate. We believe that this will
reasonably protect the veteran and the Government against overinflated
IRRRLs and at the same time avoid unduly hampering veterans' ability to
obtain IRRRLs at favorable terms. The inclusion of two points in
refinanced loans has gained general market acceptance as the typical
number of points included in loans obtained ``at market.'' In our view,
limiting to two the amount of points that may be included in an IRRRL
would not have much of an effect on IRRRLs other than to protect
against the few lenders who are overcharging veterans and increasing
VA's risk with above-market combinations of rates and points.
This change in the regulations only concerns the amount of points
that may be included in an IRRRL. A veteran could pay in excess of two
points if the excess points were paid in cash.
We considered amending the regulations to include a formula
designed to restrict the amount of the loan in comparison with the
value of the property and to ensure that veterans would not get
overcharged. However, we believe such a formula would be too complex
and difficult to enforce. Instead, we believe that we can best help to
ensure that excessive points are not included in IRRRLs by limiting to
two points the amount of points that may be included in the loan.
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 not overcharged with
excessive points and to protect the interests of the Government against
overinflated loans. Comments are being solicited for 60 days after
publication of this document. VA may modify this rule in response to
comments, if appropriate.
Regulatory Flexibility Act
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
et seq.).
The Catalog of Federal Domestic Assistance Program numbers are
64.114 and 64.119.
List of Subjects in 38 CFR Part 36
Condominiums, Housing, Individuals with disabilities, Loan
programs--housing and community development, Manufactured homes,
Veterans.
Approved: February 13, 1996.
Jesse Brown,
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, Secs. 36.4201 through
36.4287 continues to read as follows:
Authority: Sections 36.4201 through 36.4287 issued under 38
U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719, 3720, 3729, unless
otherwise noted.
2. Section 36.4223 is amended by revising paragraph (a)(3) to read
as follows:
Sec. 36.4223 Interest rate reduction refinancing loan.
(a) * * *
(3) The amount of the refinancing loan may not exceed an amount
equal to the sum of the balance of the loan being refinanced and such
closing costs as authorized in Sec. 36.4232 or Sec. 36.4254, as
appropriate, and a discount not to exceed 2 percent of the loan amount;
(Authority: 38 U.S.C. 3703, 3712)
* * * * *
3. The authority citation for part 36, Secs. 36.4300 through
36.4375 continues to read as follows:
Authority: Sections 36.4300 through 36.4375 issued under 38
U.S.C. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3279, 3732,
unless otherwise noted.
4. Section 36.4306a is amended by revising paragraph (a)(3)(i) to
read as follows:
Sec. 36.4306a Interest rate reduction refinancing loan.
(a) * * *
(3) * * *
(i) An amount equal to the balance of the loan being refinanced and
such closing costs as authorized by Sec. 36.4312(d) and a discount not
to exceed 2 percent of the loan amount; or
* * * * *
(Authority: 38 U.S.C. 3703, 3710)
[FR Doc. 96-4498 Filed 2-27-96; 8:45 am]
BILLING CODE 8320-01-P
