[Federal Register Volume 59, Number 41 (Wednesday, March 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4667]
[[Page Unknown]]
[Federal Register: March 2, 1994]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AE60
Loan Guaranty: Acceptance of Partial Payments; Indemnification of
Default
AGENCY: Department of Veterans Affairs.
ACTION: Proposed regulatory amendments.
-----------------------------------------------------------------------
SUMMARY: The Department of Veterans Affairs (VA) is proposing to amend
its loan guaranty regulations to comply with certain provisions of the
Veterans Home Loan Indemnity and Restructuring Act of 1989. Changes
made by this law which VA proposes to incorporate into the regulations
by these amendments are: The addition of a requirement that the holder
provide notice to the Secretary when refusing to accept partial payment
on a loan in default; and a clarification of when a veteran has
liability to the Secretary for a loss due to a loan default. These
changes will ensure that no veteran loses a home because a loan holder
returned partial payments in violation of VA requirements and will aid
VA in obtaining the cooperation of veterans in reducing loan guaranty
losses by pursuing alternatives to foreclosure.
DATES: Comments must be received on or before May 2, 1994. VA proposes
to make these regulations effective 30 days after publication of the
final regulations.
ADDRESSES: Interested persons are invited to submit written comments,
suggestions or objections regarding this proposal to the Secretary of
Veterans Affairs, 810 Vermont Avenue NW., Washington, DC 20420. All
written comments will be available for public inspection in room 170,
Veterans Service Unit, at the above address between the hours of 8 a.m.
and 4:30 p.m., Monday through Friday (except holidays) until May 11,
1994.
FOR FURTHER INFORMATION CONTACT: Mr. Leonard A. Levy, Assistant
Director for Loan Management (261), Loan Guaranty Service, Veterans
Benefits Administration, Department of Veterans Affairs, Washington, DC
20420, (202) 233-3668.
SUPPLEMENTARY INFORMATION: VA is proposing to incorporate into its
regulations two changes to comply with provisions of Public Law 101-
237, the Veterans Home Loan Indemnity and Restructuring Act of 1989.
Sections 36.4275(f) and 36.4315(b) of 38 CFR part 36 provide that
except under certain conditions described in the regulations the holder
must accept from the borrower partial payment on a loan in default.
Public Law 101-237 requires the holder to notify the Secretary when
refusing to accept partial payment and provides that the Secretary may
require certain specific information in the notice. VA proposes to
amend Secs. 36.4275(f) and 36.4315(b) to incorporate the requirement
that the holder notify the Secretary within 10 days after refusing a
partial payment. These sections will also be amended to require that
the notice include the date of the tender, the amount tendered, the
date the payment was returned, and the reason for the holder's refusal.
This information will enable VA to verify that the lender's reason for
refusal is in compliance with the regulations. Section 36.4323(e)
provides that the veteran owes a debt to the United States equal to any
amount paid by the Secretary on account of the veteran's liability for
the loan. Public Law 101-237 provides that an individual obtaining a
guaranteed or insured loan closed after December 31, 1989, shall have
no liability to the Secretary for loss resulting from a default on the
loan, except: (1) In the case of fraud, misrepresentation, or bad faith
by the individual in obtaining the loan or in connection with the loan
default; or (2) where under 38 U.S.C. 3729(b) an individual pays a fee
or is exempt from paying a fee to assume a loan; or, (3) where an
individual obtains a loan for any purpose specified in 38 U.S.C. 3712,
which pertains to manufactured homes. VA proposes to amend 38 CFR
36.4323 to reflect this change and to add a definition of bad faith to
the loan guaranty regulations.
The proposed definition of bad faith is largely consistent with
that promulgated at 58 FR 3841 on January 12, 1993 (38 CFR 1.965).
There are, however, some differences. Reasons for the differences
include:
1. The 38 CFR 1.965 definition is strictly for use by the Committee
on Waivers and Compromises (COWC). The COWC has jurisdiction over
waiver and compromise of all benefit overpayments, including Loan
Guaranty debts, but within its jurisdiction the COWC only applies the
definition of ``bad faith'' to define a condition which will bar waiver
of an indebtedness which has been found to be valid. The COWC is not
involved in determining whether a debt is valid.
2. The examples included with the proposed definition in 38 CFR
36.4202 and 4301 definition are strictly for use by Loan Guaranty and
apply only to home loans. In Loan Guaranty ``bad faith'' is used in a
number of contexts which are quite different from the way in which it
is used by the COWC. For example: A Loan Guaranty finding of bad faith
is a basis for establishing a valid debt against a veteran on a GI loan
originated after December 31, 1989; it is also the standard for
deciding a veteran's appeal of such a finding.
Note: Appeal of the validity of a Loan Guaranty debt is
processed by Loan Guaranty--the veteran has the right to file a
subsequent Notice of Disagreement with the Board of Veterans
Appeals.
For another example: A finding of bad faith on a real estate loan
originated before January 1, 1990, prevents Loan Guaranty from granting
a pre-foreclosure waiver of VA's right to establish and collect a
veteran's liability account under 38 CFR 36.4323(e)(1).
3. Loan Guaranty debts differ from other overpayments in that the
veteran often bears no direct role in their creation (i.e., foreclosure
often occurs as a result of circumstances outside the veteran's
control), in that the veteran has not profited personally by receiving
a benefit (i.e., an overpayment) to which he or she was not entitled,
and in that the amount of the debt which would ultimately be
established can often be greatly reduced by the veteran cooperating
with VA. Accordingly, for Loan Guaranty purposes ``bad faith'' must
take into account the element of cooperation.
As the examples illustrate, the definition will permit a finding of
lack of ``bad faith'' when the veteran is willing to cooperate with VA
but prevented from doing so by circumstances beyond his or her control
(e.g., the veteran is willing to offer a deed in lieu of foreclosure,
but his or her spouse refuses to sign).
Many Loan Guaranty debts are established after foreclosure in cases
where less costly alternatives could not be considered because the
veteran did not respond to VA outreach efforts. This proposed
regulation permits such a failure to respond to be deemed a ``failure
to cooperate with VA representatives in resolving an insoluble default
in a manner which will minimize the amount of claim payable.''
``Compelling reasons'' which would justify such failure would be heard
by VA Loan Guaranty if offered after foreclosure inconnection with a
veteran's dispute of the validity of an indebtedness. For example:
Assume a debt is established against a veteran on a loan originated
after December 31, 1989, because he or she did not respond to VA
outreach efforts. After foreclosure, the veteran explains and documents
that he or she did not contact VA and pursue alternatives to
foreclosure because, at the time, there was insufficient family income
available to obtain any other housing. The veteran therefore
intentionally took advantage of the time required to complete
foreclosure to provide shelter for his or her family.
If the veteran questioned the validity of the debt by asserting
that, under the circumstances, he or she did not show bad faith, the
case would be reviewed by Loan Guaranty. (It could not be reviewed by
the COWC because the COWC lacks jurisdiction over cases where the
validity of debt is at issue.) Loan Guaranty could determine there were
compelling reasons for the veteran's action, which would permit
recission of the finding of bad faith, thereby invalidating the debt.
The examples included with the definition are considered
appropriate because Loan Guaranty debts arise from substantially
different circumstances than other VA liability accounts. The proposed
regulation is intended to clarify the types of conduct which would be
considered ``bad faith'' with respect to Loan Guaranty debts. Comments
are specifically invited on these points.
Other changes required by Public Law 101-237 are being incorporated
into the regulations through separate amendments. In addition, an
amendment has been made to Sec. 36.4275 to conform to the requirements
of the Fair Housing Act of 1988, 42 U.S.C. 3601 et seq. which make it
unlawful to discriminate in residential housing transactions against
any person because of familial status or handicap.
Paperwork Reduction Act
Sections 36.4275 and 36.4315 of these regulations contain
information collection requirements which will result in a reporting
burden. The reporting burden is estimated to average 10 minutes per
response for a total of 16,667 hours.
The average estimated time per response includes the time for
reviewing instructions, gathering and maintaining the data needed, and
completing and reviewing the collection of information.
As required by section 3504(h) of the Paperwork Reduction Act, the
Department of Veterans Affairs is submitting to the Office of
Management and Budget (OMB) a request that it approve this information
collection requirement. Organizations and individuals desiring to
submit comments for consideration by OMB on these proposed information
collection requirements should address them to the Office of
Information and Regulatory Affairs, OMB, room 3002, New Executive
Office Building, Washington, DC 20503; Attention: Joseph F. Lackey.
The Secretary hereby certifies that these proposed regulatory
amendments will not, if promulgated, have a significant economic impact
on a substantial number of small entities as they are defined in the
Regulatory Flexibility Act, 5 U.S.C. 601-612. The proposed amendments
update VA regulations to implement the changes made by Public Law 101-
237. The clarification of when a veteran has liability due to a loan
default directly affects individual veterans, not small entities.
Therefore, pursuant to 5 U.S.C. 605(b), these regulations are exempt
from the initial and final regulatory analysis requirements of sections
603 and 604.
The Catalog of Federal Domestic Assistance Program numbers are
64.114 and 64.119.
List of Subjects in 38 CFR Part 36
Condominiums, Handicapped, Housing loan programs--housing and
community development, Manufactured homes, Veterans.
These amendments are proposed under Public Law 101-237 and the
authority granted the Secretary by section 501(a) of title 38, United
States Code.
Approved: November 23, 1993.
Jesse Brown,
Secretary of Veterans Affairs.
For the reasons set out in the preamble 38 CFR part 36, is proposed
to be amended as set forth below.
PART 36--LOAN GUARANTY
1. The authority citation for part 36, sections 36.4201 through
36.4287 continues to read as follows:
Authority: Sections 36.4201 through 36.4287 issued under 38
U.S.C. 501(a), 3712.
2. Section 36.4202 is amended by adding the term Bad faith to read
as follows:
Sec. 36.4202 Definitions.
* * * * *
Bad faith. Unfair or deceptive dealing by one who seeks to gain
thereby at another's expense. Conduct in connection with an obligation
arising from participation in the Loan Guaranty program exhibits bad
faith if such conduct, although not undertaken with actual fraudulent
intent, is undertaken with intent to seek an unfair advantage, with
knowledge of the likely consequences, and results in a loss to the
Government. Examples of bad faith include, but are not limited to, the
following:
(1) Property abandonment;
(2) Failure to make payments on a VA-guaranteed loan, despite
having the financial ability to make such payments; and,
(3) Failure to cooperate with VA representatives in resolving an
insoluble default in a manner which will minimize the amount of claim
payable by the Government, absent compelling reasons which would
justify such failure.
* * * * *
3. Section 36.4275 is amended by removing the word ``mobile'' in
the first sentence of paragraph (a)(1), and adding, in its place, the
word ``manufactured''; by adding in paragraph (c) the words ``sex,
handicap, familial status,'' after the word ``religion,''; by
redesignating paragraph (f)(3) as paragraph (f)(4); and by adding a
newly designated paragraph (f)(3) to read as follows:
Sec. 36.4275 Events constituting default and acceptability of partial
payments.
* * * * *
(f) * * *
(3) The holder shall give notice to the Secretary within ten days
after a partial payment has been returned to the obligor. The notice
shall include the date of the tender, the amount tendered, the date the
payment was returned, and the reason for the holder's refusal.
* * * * *
4. The authority citation for part 36, sections 36.4300 through
36.4375 continues to read as follows:
Authority: Sections 36.4300 through 36.4375 issued under 38
U.S.C. 501(a).
5. Section 36.4301 is amended by adding the term Bad faith to read
as follows:
Sec. 36.4301 Definitions.
* * * * *
Bad faith. Unfair or deceptive dealing by one who seeks to gain
thereby at another's expense. Conduct in connection with an obligation
arising from participation in the Loan Guaranty program exhibits bad
faith if such conduct, although not undertaken with actual fraudulent
intent, is undertaken with intent to seek an unfair advantage, with
knowledge of the likely consequences, and results in a loss to the
Government. Examples of bad faith include, but are not limited to, the
following:
(1) Property abandonment;
(2) Failure to make payments on a VA-guaranteed loan, despite
having the financial ability to make such payments; and,
(3) Failure to cooperate with VA representatives in resolving an
insoluble default in a manner which will minimize the amount of claim
payable by the Government, absent compelling reasons which would
justify such failure.
6. In Sec. 36.4315, paragraph (b)(3) is redesignated paragraph
(b)(4) and a newly designated paragraph (b)(3) is added to read as
follows:
Sec. 36.4315 Notice of default and acceptability of partial payments.
* * * * *
(b) * * *
(3) The holder shall give notice to the Secretary within ten days
after a partial payment has been returned to the obligor. The notice
shall include the date of the tender, the amount tendered, the date the
payment was returned, and the reason for the holder's refusal.
* * * * *
7. In Sec. 36.4323, paragraphs (e)(1), (e)(2), (e)(3), and (e)(4)
are redesignated paragraphs (e)(3), (e)(4), (e)(5), and (e)(6),
respectively; the introductory text in paragraph (e) is revised and
newly designated paragraphs (e)(1) and (e)(2) are added to read as
follows:
Sec. 36.4323 Subrogation and indemnity.
* * * * *
(e) Any amounts paid by the Secretary on account of a loan
guaranteed for any purpose specified in section 3710 of title 38,
United States Code, shall constitute a debt owing to the United States:
(1) By the veteran if:
(i) The loan closed on or before December 31, 1989; or
(ii) The loan closed after December 31, 1989, and there has been
fraud, misrepresentation, or bad faith by such veteran in obtaining the
loan or in connection with the loan default; or
(2) By any person who was approved to assume the loan pursuant to
sections 3713 and 3714 of title 38, United States Code.
* * * * *
[FR Doc. 94-4667 Filed 3-1-94; 8:45 am]
BILLING CODE 8320-01-P
