[Federal Register Volume 63, Number 106 (Wednesday, June 3, 1998)]
[Proposed Rules]
[Pages 30162-30166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14644]
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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: Proposed rule.
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SUMMARY: This document proposes to amend 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 requiring that the loans being refinanced
either be current in their payments or meet certain credit standard
provisions. This appears to be 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: Comments must be received on or before August 3, 1998.
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 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
proposes to amend VA's loan guaranty regulations by revising the
requirements for VA-guaranteed Interest Rate Reduction Refinancing
Loans (IRRRLs).
This proposed rule addresses the same issues that were addressed in
an interim final rule which was established in a document published in
the Federal Register on October 8, 1997 (62 FR 52503) and rescinded in
a document published in the Federal Register on December 1, 1997 (62 FR
63454). The interim final rule requested comments. The comments
submitted in response to the interim final rule, in addition to those
comments received in response to this proposed rule, will be considered
and will be discussed in the final rule document. Also, we note that
every lender that participates in the VA home loan guarantee program
was sent a copy of the provisions of the interim final
[[Page 30163]]
rule and information about the rescission. Further, information about
this proposed rule is also included on the VA Home Loan Guaranty Home
Page on the Internet (http://www.va.gov/vas/loan/lenders.htm).
Background
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
Georgia in August of 1994. The fixed-rate mortgage was for $90,270
(including funding fee) at an interest rate of 9.00 percent with a
principal and interest payment of $726.33. In May of 1997 he obtained
an IRRRL with an interest rate of 8.50 percent. This loan was for
$97,800 and has a principal and interest payment amount of $752.00. The
loan included $3676.41 in allowable closing costs, 2.0 discount points
totaling $1956.00 and the VA funding fee of $486.00. The remaining
amount of the new loan, $91,681.59, exceeds the original loan amount by
$1411.59 and means that at least that amount in delinquent payments and
late charges were also rolled in, further increasing both the new loan
and the new loan payment. Thus, 2 years and 9 months after buying the
house the veteran again has a full 30 years to pay, has a home loan
that has increased by $7530.00, and has a monthly payment approximately
$26.00 greater than the original payment.
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. VA has become aware of
a number of lenders publishing advertisements telling veterans to skip
two or three house payments. Ads VA has viewed contain statements such
as: ``Need Holiday Cash? Skip two mortgage payments on VA loans when
you refinance.'' ``[I]f you simply wish to skip making one or two
payments to utilize the cash for other purposes.'' ``SKIP TWO HOUSE
PAYMENTS!!'' ``SKIP UP TO THREE PAYMENTS * * * on all applications
received prior to May 31, 1997 * * * your next payment will not be due
until July, freeing up cash for the upcoming summer vacations.''
``Furthermore, you can skip up to three months payments * * *. This
will represent a substantial amount of money you can put in your
pocket.''
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 proposing to make the changes discussed below to the
IRRRL program by revising the provisions of 38 CFR 36.4306a and
36.4337(a).
Monthly Payment Reduction
Under the proposal, we generally would require that the monthly
payment (principal and interest) on the new loan be lower than the
monthly payment on the loan being refinanced. This would prevent cases
in which the veteran's monthly payment actually increases because of
extensive costs added to the loan (including closing costs), even
though the interest rate is lowered slightly. However, this proposed
requirement would 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 rulemaking. 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 rulemaking, VA may
address minimum term reduction. Current law allows veterans to include
additional costs of energy efficient improvements in IRRRLs; thus, this
exception would merely continue 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.
Delinquent Loans
We are proposing, with respect to delinquent loans, that 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 has provided reasons for the loan
deficiency, has provided information to establish that the cause of the
delinquency has been corrected, and qualifies for the loan under the
credit standards contained in 38 CFR 36.4337. We are also proposing,
consistent with industry standards, to state that a loan is delinquent
if the scheduled monthly payment of principal and interest is more than
30 days past due.
Regardless of other factors affecting loan-to-value ratio, any
addition of missed payments and delinquent interest and late charges to
a loan would increase the loan-to-value ratio and, consequently, would
raise the Government's potential liability on a VA-guaranteed loan.
Further, missed payments raise questions regarding the ability of the
borrower to make future payments. Under these circumstances, the
proposed process appears to be
[[Page 30164]]
necessary to protect the interest of the Government.
Also, the proposed rule would clarify the regulations to make clear
the existing VA interpretation that delinquent interest and late
charges are considered part of the balance of the loan being
refinanced.
Credit Underwriting Standards
In addition, we propose to make 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 proposing to amend 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, under the proposal, 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, would be required to be approved in advance.
Executive Order 12866
This proposed rule has been reviewed by OMB under Executive Order
12866.
Initial Regulatory Flexibility Analysis
This initial regulatory flexibility analysis is provided to meet
the requirements of the Regulatory Flexibility Act. (5 U.S.C. 601 et.
seq.)
a. A description of the reasons why action by VA is being
considered.
Response: These reasons are set forth and discussed above.
b. A succinct statement of the objectives of, and legal basis for,
the proposed rule.
Response: The objectives of this proposed rule are to insure that
IRRRLs continue to provide a real benefit to veterans and to protect
the financial interest of the Government.
The legal basis of the proposed rule is contained in 38 U.S.C.
3703(c)(1), which provides that ``Loans guaranteed (by VA) * * * shall
be payable upon such terms and conditions as may be agreed upon by the
parties thereto, subject to the provisions of this chapter and
regulations of the Secretary issued pursuant to this chapter * * *.''
The provisions of 38 U.S.C. 3710(a)(8) authorize VA to guarantee loans
to veterans to refinance existing guaranteed mortgage loans which are
secured by a dwelling or farm residence and still owned by the veteran.
Furthermore, 38 U.S.C. 3710(e)(1)(C) provides, with respect to IRRRLs,
that the loan balance may include such closing costs (including
discounts) ``as may be authorized by the Secretary (under regulations
which the Secretary shall prescribe).''
The intent of Congress in amending 38 U.S.C. chapter 37 to permit
veterans to refinance outstanding loans previously guaranteed by VA is
spelled out in a House Veterans Affairs Committee Report (Report 96-
1165 which accompanied H.R. 7458). This Report at page 3 stated that
the IRRRL program is ``solely intended to assist veterans by allowing
their monthly payments to be reduced'' and that ``a veteran would not
be permitted under th[is legislation] to obtain cash from the proceeds
of the refinancing loan for other purposes.''
c. A description of and, where feasible, an estimate of the number
of small entities to which the proposed rule will apply.
Response: The proposed rule would apply to all lenders who make VA
IRRRLs. In Fiscal Year 1997, 1476 lenders made at least one IRRRL. We
believe a number of these lenders are small entities; however, we are
unable to make an informed estimate of the number because we do not
know how much of the total business each of the lenders would be
affected by the adoption of this proposed rule.
d. A description of the projected reporting, recordkeeping, and
other compliance requirements of the proposed rule, including an
estimate of the classes of small entities which would be subject to the
requirement and the type of professional skills necessary for
preparation of the report or record.
Response: Any reporting or recordkeeping requirements are discussed
in the Paperwork Reduction Act portion of this document. The
requirements of the proposed rule are set forth above. As noted above,
we are unable to make an informed estimate of the number of small
entities that would be affected by the adoption of the proposed rule.
To comply with the provisions of the proposed rule, employees of
lenders would not need any professional skills that would be additional
to those skills already needed to process IRRRLs.
e. An identification, to the extent practicable, of all relevant
Federal rules which may duplicate, overlap or conflict with the
proposed rule.
Response: We are unaware of any Federal rules which may duplicate,
overlap or conflict with the proposed rule.
f. A description of any significant alternatives to the proposed
rule which accomplish the stated objectives of applicable statutes and
which minimize any significant economic impact of the proposed rule on
small entities.
Response: Generally, limiting IRRRLs to instances where the
veteran's monthly mortgage payment will decrease and requiring that the
loans being refinanced either be current in their payments or meet
certain credit standard provisions is intended to ensure that IRRRLs
are made only when they provide a real benefit to the veteran and to
protect the financial interest of the Government. One alternative would
be to allow IRRRLs to be made only when the veteran's monthly mortgage
payment would decrease. However, as explained above, this document
proposes to establish exceptions in those cases when it appears that
the objectives could still be met. Another alternative would be to
require that all IRRRLs meet the credit standard provisions. However,
as explained above, we believe this is necessary only when the loan is
delinquent. We are aware of no alternatives which could be considered
that would allow the objectives to be met and provide less stringent
rules for small businesses.
The adoption of the proposed rule would not have a significant
impact on the resources available to small entities. The type of
actions that would be required are the same or similar to types of
actions already being handled by employees of small entities.
We are unaware of any alternatives that would accomplish the
intended purposes. Further, we are unaware of any changes we could
consider regarding clarification, consolidation, or simplification that
could be made for small entities and still protect veterans and the
interests of the Government. The proposed rule does not include
performance standards because we believe there is no means to ensure
compliance without design standards. Further, we believe there is no
good reason for any lender to act contrary to the proposed rule.
Paperwork Reduction Act of 1995
Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), a
collection of information is set forth in the provisions of the
proposed Sec. 36.4306a(a)(3) and (a)(5). In this regard, these
provisions require the submission of information concerning IRRRLs to
refinance delinquent loans and require the submission of information to
establish that they meet credit standards set forth in 38 CFR 36.4337.
The credit standards in Sec. 36.4337 prescribe the information to be
submitted for approval of a VA loan guaranty and contains material
which further explains the quality of the
[[Page 30165]]
information needed for approval. As required under section 3507(d) of
the Act, VA has submitted a copy of this proposed rulemaking action to
the Office of Management and Budget (OMB) for its review of the
collection of information.
OMB assigns control numbers to collections of information it
approves. VA may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number.
Comments on the collections of information should be submitted to
the Office of Management and Budget, Attention: Desk Officer for the
Department of Veterans Affairs, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Director, Office of
Regulations Management (02D), Department of Veterans Affairs, 810
Vermont Avenue, NW, Washington, DC 20420. Comments should indicate that
they are submitted in response to ``RIN 2900-AI92.''
Title: Requirements for Certain Interest Rate Reduction Refinancing
Loans.
Summary of collection of information: Pursuant to 38 U.S.C. 3710,
VA may guarantee loans to veterans to refinance existing mortgage loans
previously guaranteed by VA provided the veteran still owns the
property used as security for the loan. Lenders must collect certain
information concerning the veteran and the veteran's credit history
(and spouse or other co-borrower, as applicable), in order to properly
underwrite the IRRRL. Collection of this type of information is normal
business practice for mortgage lenders.
Description of need for information and proposed use of
information: VA requires the lender to provide the Department with the
credit information to assure itself that IRRRLs to refinance loans that
are delinquent are underwritten in a reasonable and prudent manner.
Description of likely respondents: Mortgage lenders who make
IRRRLs.
Estimated number of respondents: 350 in FY 1998; 350 in FY 1999.
Estimated frequency of responses: This is a ``one-time'' request
for each application for an IRRRL.
Estimated average burden per collection: 30 minutes.
Estimated total annual reporting and recordkeeping burden: 175
hours in FY 1998 and 175 hours in FY 1999.
The Department considers comments by the public on proposed
collections of information in--
Evaluating whether the proposed collections of information
are necessary for the proper performance of the functions of the
Department, including whether the information will have practical
utility;
Evaluating the accuracy of the Department's estimate of
the burden of the proposed collections of information, including the
validity of the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of the collections of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
OMB is required to make a decision concerning the proposed
collection of information contained in this proposed rule between 30
and 60 days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment on the proposed regulations.
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: May 19, 1998.
Togo D. West, Jr.,
Secretary.
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 continues to read as follows:
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 not be delinquent, 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
(delinquent means that the scheduled monthly payment of principal and
interest is more than 30 days past due), the new loan will be
guaranteed only if it is approved by the Secretary in advance after
determining that the borrower, through the lender, has provided reasons
for the loan deficiency, has provided information to establish that the
cause of the delinquency has been corrected, and 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
[[Page 30166]]
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. 98-14644 Filed 6-2-98; 8:45 am]
BILLING CODE 8320-01-P
