[Federal Register Volume 62, Number 135 (Tuesday, July 15, 1997)]
[Proposed Rules]
[Pages 37824-37832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18496]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AH23
Loan Guaranty: VA Guaranteed Loans on the Automatic Basis,
Withdrawal of Automatic Processing Authority, Record Retention
Requirements, and Elimination of Late Reporting Waivers
AGENCY: Department of Veterans Affairs.
ACTION: Proposed rule.
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SUMMARY: VA is proposing to amend its loan guaranty regulations in the
areas of automatic-processing authority, loan reporting, and record-
retention requirements. It is proposed that if a lender does not report
the loan within 60 days following full disbursement, the lender no
longer would have to provide a request for a waiver; but, as a
condition of receiving an evidence of guaranty the lender must continue
to provide the required explanation of why the lender was late in
reporting the loan. This will have no impact on whether or not VA
guarantees the loan but would help VA determine whether action should
be taken against a lender.
VA also is proposing to amend its lender record-retention
requirements. Currently, lenders are required to retain loan
origination records for at least one year from the date of loan
closing. VA is proposing to extend this to two years from the date of
loan closing. This would improve VA's ability to monitor lender
performance and conduct underwriting reviews.
Further, VA is proposing to amend its loan guaranty regulations
regarding criteria used to approve non-supervised lenders to process VA
guaranteed loans on the automatic basis. These changes would reduce the
experience requirements for lenders and their underwriters, thereby
making it easier for them to qualify for automatic-processing
authority. High underwriting standards would be maintained by requiring
that all VA-approved underwriters receive training in VA credit
underwriting procedures. This document also requests Paperwork
Reduction Act comments concerning the collections of information
contained in this document.
DATES: Comments must be received on or before September 15, 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-AH23.'' All
written comments will be available for public inspection at the above
address in the Office of Regulations Management, 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, Washington, DC 20420,
(202) 273-7368.
SUPPLEMENTARY INFORMATION: 38 CFR 36.4335 provides that, whenever a
loan is not reported to VA for issuance of evidence of guaranty within
60 days of full disbursement, evidence of guaranty will be issued only
if the timeliness requirement for reporting is formally waived by VA
field station personnel. This waiver is essentially a formality and is
routinely granted where the lender is able to certify that the loan is
current and can provide VA with a valid explanation for the late
reporting. The issuance of these waivers is a time-consuming process
that appears to be no longer warranted. In order to improve efficiency,
VA is proposing to insert a new paragraph (f) in 38 CFR 36.4303 to
state that, upon receipt of a statement of the reasons for late
reporting, evidence of guaranty will be issued. It is proposed that the
statement of the reasons for late reporting continue to be submitted to
VA so that these reasons could be considered in deciding if the
lenders' personnel might need additional training or whether automatic
lending authority should be withdrawn. Since the waiver procedure would
be eliminated, 38 CFR 36.4335 (a) and (b), which provide for delegation
of waiver authority to field stations, would also be eliminated as
unnecessary.
38 CFR 36.4330 requires that lenders maintain loan origination
records on VA-guaranteed home loans for a period of at least one year
from the date of loan closing. This one-year retention requirement has
not been long enough to enable VA monitoring unit audit teams to review
loan records for as many lenders as necessary to properly administer
the VA loan guaranty program. Moreover, industry standards, including
Federal Housing Administration (FHA) regulations and the Equal Credit
Opportunity Act (ECOA), require that lenders keep loan origination
records for at least 24 months. This proposal would amend VA's record-
retention requirement to require that lenders maintain loan origination
records for at least 2 years from the date of loan closing. This not
only would conform with industry standards but it also appears that it
would improve VA's ability to monitor loan performance and to identify
lenders who may be having particular trouble underwriting loans.
VA has completed a study of the criteria and process used to
approve lenders to process VA loans on the automatic basis. In the
course of conducting this review, VA reviewed procedures used by the
FHA, the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA), and the Federal Home Loan
Mortgage Corporation (FHLMC). Based on this review it is proposed to
amend the loan guaranty regulations. As explained
[[Page 37825]]
below, we are proposing changes in the following requirements for
lender participation in the automatic lender program: Lender
experience, working capital, lines of credit, and VA-approved
underwriter eligibility and training. Also, as explained below, we
propose to add a requirement for annual recertification of lenders and
provide for withdrawal of automatic authority from lenders who fail to
meet the recertification criteria. These changes would (1) streamline
VA's approval process; (2) update the standards employed in granting
automatic authority to reflect changes in the mortgage banking
industry; and (3) simplify lender submissions by adopting requirements
used by other Government agencies.
VA defines an ``agent'' as any party performing loan-related
functions on behalf of, or in the name of, a sponsoring lender. The
extent of the relationship between lender and agent is at their
discretion. VA does not restrict who may act as agent. Any individual,
including a real estate agent or broker, may be authorized by a lender
to act as its agent, provided the lender accepts full responsibility
for the acts, errors, or omissions of the agent in processing and/or
closing loans.
The Department is proposing changes in requirements for lender and
agent experience. Currently, VA requires that in order for a lender to
close VA loans on the automatic basis the lender must either (1) be a
supervised lender or a wholly owned subsidiary or affiliate of a
supervised lender, i.e., subject to examination and supervision by a
Federal or State agency, or (2) meet certain minimum requirements.
These requirements are: (a) Maintenance of a minimum of $50,000 of
working capital; (b) the firm's active engagement in originating VA
mortgages for at least 3 recent years, or 3 recent years of experience
of each principal officer of the firm who is actively involved in
managing origination functions with VA mortgages in managerial
functions in either the present company or other companies; (c) the
approval, by VA, of a full-time qualified underwriter who will
personally review and make underwriting decisions on VA loans to be
closed on the automatic basis; (d) one or more lines of credit totaling
at least $1 million: (e) if the lender customarily sells loans it
originates, a minimum of two permanent investors; (f) all prospective
VA loans must be reviewed and approved or rejected by a VA-approved
underwriter at the lender's home or main office or a VA-approved
regional underwriting office prior to closing; (g) a designated
liaison, plus an alternate, to deal with VA, other than the
underwriter, if possible; and (h) a written quality control plan
ensuring compliance with VA requirements.
Instead of these current requirements, VA is proposing several
changes to 38 CFR Sec. 36.4348. First, regarding experience
requirements, lenders would be required to have 2 recent years of VA
experience and have closed a minimum of 10 loans within the past 24
months. In the alternative, if the firm has been making VA loans for
less than 2 years, they must have closed at least 25 loans without
repeated deficiencies in underwriting or a high rate of rejection by
VA. As another alternative, each of the operating officers responsible
for loan origination activities must have two recent years of VA loan
experience in that capacity. Also, firms may meet the experience
requirement if they have functioned for at least 2 recent years as an
agent for lender(s) making VA loans, and they provide letters of
recommendation from the sponsoring lender(s). VA offers these
alternative experience requirements to make it easier for more mortgage
lenders to participate in the VA loan guaranty program. This proposed
regulatory change eases these requirements by reducing the number of
years' of experience from 3 to 2. However, to ensure that a potential
program participant has sufficient recent experience, VA proposes to
require that lenders have closed a minimum of 10 loans within the past
24 months.
VA is also proposing to amend this section's requirements
concerning working capital and lines of credit. VA currently requires
that a lender have a minimum of $50,000 working capital. This proposal
would ease VA requirements by accepting, as an alternative, a
demonstrated net worth of $250,000, as defined by the Department of
Housing and Urban Development (HUD) and reported to VA in the lender's
annual financial statements, prepared by a certified public accountant
(CPA). The alternative net worth requirement is the standard currently
in use by HUD. Since most VA program participants are also HUD lenders,
with this regulatory amendment, it will be less burdensome for these
lenders to comply with VA requirements and would still provide adequate
protection for VA loans. In addition, VA's proposed change concerning
lines of credit clarifies that by an ``unrestricted'' line of credit VA
means that the funds must be available based upon the loan meeting VA
requirements and not restricted to those VA loans that the investor
wants to fund.
Finally, VA is proposing changes to its requirements for approved
underwriter eligibility and training. Currently, VA requires that an
underwriter must have a minimum of 3 years' experience in mortgage
lending in reviewing credit and making underwriting decisions, with at
least 2 recent years in connection with loans submitted to VA for
guaranty. This experience must have been with an institutional investor
originating for its own portfolio or purchasing VA loans, or with an
originator selling this type of loan to investors. VA is proposing to
amend 38 CFR 36.4348 to provide that these experience requirements will
be satisfied if the nominee has 3 years of combined experience in
processing, pre-underwriting, and underwriting, at least 1 recent year
of which must be related to underwriting. Alternatively, the nominee
must be designated as an Accredited Residential Underwriter (ARU) by
the Mortgage Bankers Association (MBA) within the last 3 years. This
change is proposed because VA has determined that recognition as an ARU
by the MBA demonstrates proficiency in mortgage underwriting. This
change will make it easier for more qualified lenders to become program
participants than before. In addition, an applicant must be employed on
a full-time basis by the lender and he or she must attend training
sponsored by the VA Regional Office within 90 days of approval as a VA
underwriter. This is in order to make sure that the underwriter
receives up-to-date training in VA program requirements and to enable
him or her to become familiar with the local VA Regional Office.
VA also proposes to stop requiring that the underwriter be located
in the lender's home office or in an approved regional underwriting
office, provided the lender certifies that the underwriter is not
supervised by a branch manager or other person with production
responsibilities. The reason for this is that VA recognizes that
changes in the lending industry may dictate more flexible corporate
structures. Since the lender is responsible to VA for the quality of
the underwriting performed by its employees, VA can be flexible about
the location of the lender's underwriters.
It also is proposed to amend Sec. 36.4349 to clarify the current
practice regarding withdrawal of automatic-processing authority for
non-supervised lenders during their probationary period. In this
regard, it is proposed that automatic authority may be withdrawn for
any of the reasons applicable to non-probationary automatic lenders
regardless of whether deficiencies
[[Page 37826]]
previously have been brought to the attention of the probationary
lender.
Minor changes are proposed to Sec. 36.4349 to conform the language
to proposed changes in Sec. 36.4348 regarding the alternate financial
criteria of adjusted net worth and the provision that automatic-
processing authority may be withdrawn at any time for failure to meet
basic qualifying and/or annual recertification requirements. Also,
other nonsubstantitive changes would be made for purposes of
clarification.
Paperwork Reduction Act of 1995
Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520),
proposed 38 CFR 36.4303(a), (c), (d), (e), (f), (g), (i), and (l);
36.4330(a) and (b); and 36.4348(b), (c), and (d), which are set forth
in full in the text portion of this document, contain collections of
information. These provisions, which include republished provisions,
prescribe the information to be submitted by lenders in order to
qualify for participation in the VA Loan Guaranty Program as
``automatic'' lenders, i.e., lenders who VA has approved as qualified
to close loans to veterans without submitting the paperwork to VA for
prior approval (38 CFR 36.4348-36.4349). These sections contain
material that explains what information is necessary and the quality of
the information needed for lenders to qualify as ``automatic'' lenders
(Sec. 36.4348(b), (c), and (d)). These sections also include a
requirement for explanations of delays in reporting loans
(Sec. 36.4303); and maintenance of records requirements
(Sec. 36.4330(a) and (b)). Also, 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-AH23.''
Title: VA-Guaranteed Loans on the Automatic Basis, Withdrawal of
Automatic-processing Authority, Record-retention Requirements, and
Elimination of Late Reporting Waivers.
Summary of collection of information: Pursuant to 38 U.S.C.
3702(d), mortgage lenders can be authorized to participate in the VA
Loan Guaranty Program as ``automatic'' lenders, i.e., lenders qualified
to close loans to veterans without submitting the paperwork to VA for
prior approval. The proposed regulatory amendments would require that
prospective ``automatic'' lenders provide VA with a certification (38
CFR 36.4348(b)(2)) and other limited information (Sec. 36.4348((b),
(c), and (d)) in order to be approved as qualified to close loans to
veterans without submitting the loan to VA for prior approval.
Description of the need for information and proposed use of
information: If a lender is going to obligate VA to guarantee loans
without VA's prior approval, VA must be able to determine that such a
lender is sufficiently qualified to do so. At the same time, VA needs
to stay current with industry standards with regard to underwriter
qualifications, methods of obtaining information, and other Government
agency lending practices.
Description of likely respondents: Mortgage lenders who make VA-
guaranteed home loans.
Estimated number of respondents: Approximately 4,630 per year.
Estimated frequency of responses: Most of this information is
collected on a ``one-time'' basis or on an annual basis.
Estimated average burden per collection: The information collected
for submission to VA is, in large part, already being prepared for
participation in other government lending programs. Most lenders who
participate in the VA Loan Guaranty Program also participate in other
Government lending programs. The remaining information collections will
have an estimated annual burden of about 1 hour per respondent.
Estimated total annual reporting and recordkeeping burden: The
information collected for submission to VA is prepared, for the most
part, as a customary business practice. These information collections
are elements of a package of information prepared by lenders who
participate in any Government lending program. The remaining
information collections are usually already being provided to VA
lenders who are or who wish to be automatic VA lenders. These
regulatory changes merely make minor adjustments in the manner of
collection to conform VA requirements to industry norms. The result,
for the most part, is that lenders will be able to provide to VA
information they have already prepared for use in other Government
lending programs.
The volume of cases is estimated to be about 4,630. Not all this
information will be required in all cases, depending on the
circumstances of each lender. Information collection per case is
approximately 1 hour. Most of this information is already being
collected by lenders who have Direct Endorsement authority from HUD.
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.
Regulatory Flexibility Act
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. Industry norms for other
lending programs already require lenders to comply with most of the
proposed standards set forth in this regulatory package. Further,
activities concerning loans subject to the VA Loan Guaranty Program do
not constitute a significant portion of activities of small businesses.
[[Page 37827]]
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.
Approved: July 3, 1997.
Hershel W. Gober,
Acting 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, Secs. 36.4300 through
36.4375 continues to read as follows:
Authority: Sections 36.4300 through 36.4374 issued under 38
U.S.C. Secs. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3729, 3732,
unless otherwise noted.
2. Section 36.4303 is revised to read follows:
Sec. 36.4303 Reporting requirements.
(a) With respect to loans automatically guaranteed under 38 U.S.C.
3703(a)(1), evidence of the guaranty will be issuable to a lender of a
class described under 38 U.S.C. 3702(d) if the loan is reported to the
Secretary within 60 days following full disbursement and upon the
certification of the lender that:
(1) No default exists thereunder which has continued for more than
30 days;
(2) Except for acquisition and improvement loans as defined in
Sec. 36.4301, any construction, repairs. alterations, or improvements
effected subsequent to the appraisal of reasonable value, and paid for
out of the proceeds of the loan, which have not been inspected and
approved upon completion by a compliance inspector designated by the
Secretary, have been completed properly in full accordance with the
plans and specifications upon which the original appraisal was based;
and any deviations or changes of identity in said property have been
approved as required in Sec. 36.4304 concerning guaranty or insurance
of loans to veterans;
(3) The loan conforms otherwise with the applicable provisions of
38 U.S.C. Chapter 37 and of the regulations concerning guaranty or
insurance of loans to veterans.
(Authority: 38 U.S.C. 3703(c)(1))
(b) Loans made pursuant to 38 U.S.C. 3703(a), although not entitled
to automatic insurance thereunder, may, when made by a lender of a
class described in 38 U.S.C. 3702(d)(1), be reported for issuance of an
insurance credit.
(Authority: 38 U.S.C. 3702(d), 3703(a)(2))
(c) Each loan proposed to be made to an eligible veteran by a
lender not within a class described in 38 U.S.C. 3702(d) shall be
submitted to the Secretary for approval prior to closing. Lenders
described in 38 U.S.C. 3702(d) shall have the optional right to submit
any loan for such prior approval. The Secretary, upon determining any
loan so submitted to be eligible for a guaranty, or for insurance, will
issue a certificate of commitment with respect thereto.
(d) A certificate of commitment shall entitle the holder to the
issuance of the evidence of guaranty or insurance upon the ultimate
actual payment of the full proceeds of the loan for the purposes
described in the original report and upon the submission within 60 days
thereafter of a supplemental report showing that fact and:
(1) The identity of any property purchased therewith,
(2) That all property purchased or acquired with the proceeds of
the loan has been encumbered as required by the regulations concerning
guaranty or insurance of loans to veterans,
(3) Except for acquisition and improvement loans as defined in
Sec. 36.4301(c), any construction, repairs, alterations, or
improvements paid for out of the proceeds of the loan, which have not
been inspected and approved subsequent to completion by a compliance
inspector designated by the Secretary, have been completed properly in
full accordance with the plans and specifications upon which the
original appraisal was based; and that any deviations or changes of
identity in said property have been approved as required by
Sec. 36.4304, and
(4) That the loan conforms otherwise with the applicable provisions
of 38 U.S.C. Chapter 37 and the regulations concerning guaranty or
insurance of loans to veterans.
(Authority: 38 U.S.C. 3703(c)(1))
(e) Upon the failure of the lender to report in accordance with the
provisions of paragraph (d) of this section, the certificate of
commitment shall have no further effect, or the amount of guaranty or
insurance shall be reduced pro rata, as may be appropriate under the
facts of the case: Provided, nevertheless, that if the loan otherwise
meets the requirements of this section, said certificate of commitment
may be given effect by the Secretary, notwithstanding the report is
received after the date otherwise required.
(f) For loans not reported within 60 days, evidence of guaranty
will be issued only if the loan report is accompanied by a statement
signed by a corporate officer of the lending institution which explains
why the loan was reported late. The statement must identify the case or
cases in issue and must set forth the specific reason or reasons why
the loan was not submitted on time. Upon receipt of such a statement
evidence of guaranty will be issued. A pattern of late reporting and
the reasons therefore will be considered by VA in taking action under
Sec. 36.4349.
(g) Evidence of a guaranty will be issued by the Secretary by
appropriate endorsement on the note or other instrument evidencing the
obligation, or by a separate certificate at the option of the lender.
Notice of credit to an insurance account will be given to the lender.
Unused certificates of eligibility issued prior to March 1, 1946, are
void. No certificate of commitment shall be issued and no loan shall be
guaranteed or insured unless the lender, the veteran, and the loan are
shown to be eligible. Evidence of guaranty or insurance will not be
issued on any loan for the purchase or construction of residential
property unless the veteran, or the veteran's spouse in the case of a
veteran who cannot occupy the property because of active duty status
with the Armed Forces, certifies in such form as the Secretary shall
prescribe, that the veteran, or spouse of the active duty veteran,
intends to occupy the property as his or her home. Guaranty or
insurance evidence will not be issued on any loan for the alteration,
improvement, or repair of any residential property or on a refinancing
loan unless the veteran, or spouse of an active duty service member,
certifies that he or she presently occupies the property as his or her
home. An exception to this is if the home improvement or refinancing
loan is for extensive changes to the property which will prevent the
veteran or the spouse of the active duty veteran from occupying the
property while the work is being completed. In such a case the veteran
or spouse of the active duty veteran must certify that he or she
intends to occupy or reoccupy the property as his or her home upon
completion of the substantial improvements or repairs. All of the
mentioned certifications must take place at the time of loan
application and closing except in the case of loans automatically
guaranteed, in which case veterans or in the case of an active duty
veteran, the veteran's spouse shall make
[[Page 37828]]
the required certification only at the time the loan is closed.
(Authority: 38 U.S.C. 3704(c))
(h) Subject to compliance with the regulations concerning guaranty
or insurance of loans to veterans, the certificate of guaranty or the
evidence of insurance credit will be issuable within the available
entitlement of the veteran on the basis of the loan stated in the final
loan report or certification of loan disbursement, except for
refinancing loans for interest rate reductions. The available
entitlement of a veteran will be determined by the Secretary as of the
date of receipt of an application for guaranty or insurance of a loan
or of a loan report. Such date of receipt shall be the date the
application or loan report is date-stamped into VA. Eligibility derived
from the most recent period of service.
(1) Shall cancel any unused entitlement derived from any earlier
period of service, and
(2) Shall be reduced by the amount by which entitlement from
service during any earlier period has been used to obtain a direct,
guaranteed, or insured loan.
(i) On property which the veteran owns at the time of application,
or
(ii) As to which the Secretary has incurred actual liability or
loss, unless in the event of loss or the incurrence and payment of such
liability by the Secretary, the resulting indebtedness of the veteran
to the United States has been paid in full. Provided, That if the
Secretary issues or has issued a certificate of commitment covering the
loan described in the application for guaranty or insurance or in the
loan report, the amount and percentage of guaranty or the amount of the
insurance credit contemplated by the certificate of commitment shall
not be subject to reduction if the loan has been or is closed on a date
which is not later than the expiration date of the certificate of
commitment, notwithstanding that the Secretary in the meantime and
prior to the issuance of the evidence of guaranty or insurance shall
have incurred actual liability or loss on a direct, guaranteed, or
insured loan previously obtained by the borrower. For the purposes of
this paragraph, the Secretary will be deemed to have incurred actual
loss on a guaranteed or insured loan if the Secretary has paid a
guaranty or insurance claim thereon and the veteran's resultant
indebtedness to the Government has not been paid in full, and to have
incurred actual liability on a guaranteed or insured loan if the
Secretary is in receipt of a claim on the guaranty or insurance or is
in receipt of a notice of default. In the case of a direct loan, the
Secretary will be deemed to have incurred an actual loss if the loan is
in default. A loan, the proceeds of which are to be disbursed
progressively or at intervals, will be deemed to have been closed for
the purposes of this paragraph if the loan has been completed in all
respects excepting the actual ``payout'' of the entire loan proceeds.
(Authority: 38 U.S.C. 3702(a), 3710(c))
(i) Any amounts that are disbursed for an ineligible purpose shall
be excluded in computing the amount of guaranty or insurance credit.
(j) Notwithstanding the lender has erroneously, but without intent
to misrepresent, made certification with respect to paragraph (a)(1) of
this section, the guaranty or insurance will become effective upon the
curing of such default and its continuing current for a period of not
less than 60 days thereafter. For the purpose of this paragraph a loan
will be deemed current so long as the installment is received within 30
days after its due date.
(k) No guaranty or insurance commitment or evidence of guaranty or
insurance will be issuable in respect to any loan to finance a contract
which:
(1) Is for the purchase, construction, repair, alteration, or
improvement of a dwelling or farm residence;
(2) Is dated on or after June 4, 1969;
(3) Provides for a purchase price or cost to the veteran in excess
of the reasonable value established by the Secretary; and
(4) Was signed by the veteran prior to the veteran's receipt of
notice of such reasonable value; unless such contract includes, or is
amended to include, a provision substantially as follows:
It is expressly agreed that, notwithstanding any other
provisions of this contract, the purchaser shall not incur any
penalty by forfeiture of earnest money or otherwise or be obligated
to complete the purchase of the property described herein, if the
contract purchase price or cost exceeds the reasonable value of the
property established by the Department of Veterans Affairs. The
purchaser shall, however, have the privilege and option of
proceeding with the consummation of this contract without regard to
the amount of the reasonable value established by the Department of
Veterans Affairs.
(Authority: 38 U.S.C. 501, 3703(c)(1))
(l) With respect to any loan for which a commitment was made on or
after March 1, 1988, the Secretary must be notified whenever the holder
receives knowledge of disposition of the residential property securing
a VA guaranteed loan.
(1) If the seller applies for prior approval of the assumption of
the loan, then:
(i) A holder (or its authorized servicing agent) who is an
automatic lender must examine the creditworthiness of the purchaser and
determine compliance with the provisions of 38 U.S.C. 3714. The
creditworthiness review must be performed by the party that has
automatic authority. If both the holder and its servicing agent are
automatic lenders, then they must decide between themselves which one
will make the determination of creditworthiness, whether the loan is
current and whether there is a contractual obligation to assume the
loan, as required by 38 U.S.C. 3714. If the actual loan holder does not
have automatic authority and its servicing agent is an automatic
lender, then the servicing agent must make the determinations required
by 38 U.S.C. 3714 on behalf of the holder. The actual holder will
remain ultimately responsible for any failure of its servicing agent to
comply with the applicable law and VA. regulations.
(A) If the assumption is approved and the transfer of the security
is completed, then the notice required by this paragraph shall consist
of the credit package (unless previously provided in accordance with
paragraph (k)(1)(i)(B) of this section) and a copy of the executed deed
and/or assumption agreement as required by VA office of jurisdiction.
The notice shall be submitted to the Department with VA receipt for the
funding fee provided for in Sec. 36.4312(e)(3) of this part.
(B) If the application for assumption is disapproved, the holder
shall notify the seller and the purchaser that the decision may be
appealed to VA office of jurisdiction within 30 days. The holder shall
make available to that VA office all items used by the holder in making
the holder's decision in case the decision is appealed to VA. If the
application remains disapproved after 60 days (to allow time for appeal
to and review by VA), then the holder must refund $50 of any fee
previously collected under the provisions of Sec. 36.4312(d)(8) of this
part. If the application is subsequently approved and the sale is
completed, then the holder (or its authorized servicing agent) shall
provide the notice described in paragraph (k)(1)(i)(A) of this section.
(C) In performing the requirements of paragraph (k)(1)(i)(A) or
(k)(1)(i)(B) of this section, the holder must complete its examination
of the creditworthiness of the prospective purchaser and advise the
seller no later than 45 days after the date of receipt by the holder of
a
[[Page 37829]]
complete application package for the approval of the assumption. The
45-day period may be extended by an interval not to exceed the time
caused by delays in processing of the application that are documented
as beyond the control of the holder, such as employers or depositories
not responding to requests for verifications, which were timely
forwarded, or follow-ups on those requests.
(ii) If neither the holder nor its authorized servicing agent is an
automatic lender, the notice to VA shall include:
(A) Advice regarding whether the loan is current or in default;
(B) A copy of the purchase contract; and
(C) A complete credit package developed by the holder which the
Secretary may use for determining the creditworthiness of the
purchaser.
(D) The notice and documents required by this section must be
submitted to VA office of jurisdiction no later than 35 days after the
date of receipt by the holder of a complete application package for the
approval of the assumption, subject to the same extensions as provided
in paragraph (k)(1)(i) of this section. If the assumption is not
automatically approved by the holder or its authorized agent, pursuant
to the automatic authority provisions, $50 of any fee collected in
accordance with Sec. 36.4312(d)(8) of this part must be refunded. If
the Department of Veterans Affairs does not approve the assumption, the
holder will be notified and an additional $50 of any fee collected
under Sec. 36.4312(d)(8) must be refunded following the expiration of
the 30-day appeal period set out in paragraph (k)(1)(i)(B) of this
section. If such an appeal is made to the Department of Veterans
Affairs, then the review will be conducted at the Department of
Veterans Affairs office of jurisdiction by an individual who was not
involved in the original disapproval decision. If the application for
assumption is approved and the transfer of security is completed, then
the holder (or its authorized servicing agent) shall provide the notice
required in paragraph (k)(1)(i)(A) of this section.
(2) If the seller fails to notify the holder before disposing of
property securing the loan, the holder shall notify the Secretary
within 60 days after learning of the transfer. Such notice shall advise
whether or not the holder intends to exercise its option to immediately
accelerate the loan and whether or not an opportunity will be extended
to the transferor and transferee to apply for retroactive approval of
the assumption under the terms of this paragraph.
(Authority: 38 U.S.C. 3714)
(Approved by the Office of Management and Budget (OMB) under control
number 2900-0516)
3. Section 36.4330 is revised to read as follows:
Sec. 36.4330 Maintenance of records.
(a) The holder shall maintain a record of the amounts of payments
received on the obligation and disbursements chargeable thereto and the
dates thereof. This record shall be maintained until the Secretary
ceases to be liable as guarantor or insurer of the loan. For the
purpose of any accounting with the Secretary or computation of a claim,
any holder who fails to maintain such record shall be presumed to have
received on the dates due all sums which by the terms of the contract
are payable prior to date of claim for default, and the burden of going
forward with evidence and of ultimate proof of the contrary shall be on
such holder.
(b) The lender shall retain copies of all loan origination records
on a VA guaranteed loan for at least two years from the date of loan
closing. Loan origination records include the loan application,
including any preliminary application, verifications of employment and
deposit, all credit reports, including preliminary credit reports,
copies of each sales contract and addendums, letters of explanation for
adverse credit items, discrepancies and the like, direct references
from creditors, correspondence with employers, appraisal and compliance
inspection reports, reports on termite and other inspections of the
property, builder change orders, and all closing papers and documents.
(Authority: 38 U.S.C. 501, 3703(c)(1))
(c) The Secretary has the right to inspect, examine, or audit, at a
reasonable time and place, the records or accounts of a lender or
holder pertaining to loans guaranteed or insured by the Secretary.
(Approved by OMB under control number 2900-0515)
Sec. 36.4335 [Amended]
4. In Sec. 36.4335, paragraphs (a) and (b) are removed; and
paragraphs (c), (d), (e), (f), (g), and (h) are redesignated as
paragraphs (a), (b), (c), (d), (e), and (f), respectively. In addition,
the authority citation after the newly redesignated paragraph (e) is
removed.
5. In Sec. 36.4348, paragraphs (d), (e), and (f) are redesignated
as paragraphs (e), (f), and (g), respectively; paragraphs (b), (c), and
newly redesignated (e) are revised and a new paragraph (d) is added to
read as follows:
Sec. 36.4348 Authority to close loans on the automatic basis.
* * * * *
(b) Non-supervised lenders of the class described in 38 U.S.C.
3702(d)(3) must apply to the Secretary for authority to process loans
on the automatic basis. Each of the minimum requirements listed below
must be met by applicant lenders.
(1) Experience. The firm must meet one of the following experience
requirements:
(i) The firm must have been actively engaged in originating VA
loans for at least two years, have a VA Lender ID number and have
originated and closed a minimum of ten VA loans within the past two
years, excluding interest rate reduction refinance loans (IRRRLs), that
have been properly documented and submitted in compliance with VA
requirements and procedures; or
(ii) The firm must have a VA ID number and, if active for less than
two years, have originated and closed at least 25 VA loans, excluding
IRRRLs, that have been properly documented and submitted in compliance
with VA requirements and procedures; or
(iii) Each principal officer of the firm, who is actively involved
in managing origination functions, must have a minimum of two recent
years' management experience in the origination of VA loans. This
experience may be with the current or prior employer. For the purposes
of this requirement, principal officer is defined as president or vice
president; or
(iv) If the firm has been operating as an agent for a non-
supervised automatic lender (sponsoring lender), the firm must submit
documentation confirming that it has a VA Lender ID number and has
originated a minimum of ten VA loans, excluding IRRRLs, over the past
two years. If active for less than two years, the agent must have
originated at least 25 VA loans. The required documentation is a copy
of the VA letter approving the firm as an agent for the sponsoring
lender; a copy of the corporate resolution, describing the functions
the agent was to perform, submitted to VA by the sponsoring lender; and
a letter from a senior officer of the sponsoring lender indicating the
number of VA loans submitted by the agent each year and that the loans
have been properly documented and submitted in compliance with VA
requirements and procedures.
(2) Underwriter. A senior officer of the firm must nominate a full-
time qualified employee(s) to act in the firm's behalf as
[[Page 37830]]
underwriter(s) to personally review and make underwriting decisions on
VA loans to be closed on the automatic basis.
(i) Nominees for underwriter must have a minimum of three years
experience in processing, pre-underwriting or underwriting mortgage
loans. At least one recent year of this experience must have included
making underwriting decisions on VA loans. (Recent is defined as within
the past three years.) A VA nomination and current resume, outlining
the underwriter's specific experience with VA loans, must be submitted
for each underwriter nominee.
(ii) Alternatively, if an underwriter does not have the experience
outlined above, the underwriter must submit documentation verifying
that he or she is a current Accredited Residential Underwriter (ARU) as
designated by the Mortgage Bankers Association (MBA).
(iii) If an underwriter is not located in the lender's corporate
office, then a senior officer must certify that the underwriter reports
to and is supervised by an individual who is not a branch manager or
other person with production responsibilities.
(iv) All VA approved underwriters must attend a 1-day (eight-hour)
training course on underwriter responsibilities, VA underwriting
requirements, and VA administrative requirements, including the usage
of VA forms, within 90 days of approval (if VA is unable to make such
training available within 90 days, the underwriter must attend the
first available training). Immediately upon approval of a VA
underwriter, the office of jurisdiction will contact the underwriter to
schedule this training at a VA regional office (VARO) of the
underwriter's choice. This training is required for all newly approved
VA underwriters, including those who qualified for approval based on an
ARU designation, as well as VA approved underwriters who have not
underwritten VA guaranteed loans in the past 24 months. Furthermore,
and at the discretion of any VARO in whose jurisdiction the lender is
originating VA loans, VA approved underwriters who consistently approve
loans that do not meet VA credit standards may be required to retake
this training.
(3) Underwriter Certification. The lender must certify that all
underwriting decisions as to whether to accept or reject a VA loan will
be made by a VA approved underwriter. In addition each VA approved
underwriter will be required to certify on each VA loan that he or she
approves that the loan has been personally reviewed and approved by the
underwriter.
(4) Financial Requirements. Each application must include the most
recent annual financial statement audited and certified by a certified
public accountant (CPA). If the date of the annual financial statement
precedes that of the application by more than six months, the lender
must also attach a copy of its latest internal financial statement.
Lenders are required to meet either the working capital or the minimum
net worth financial requirement as defined below.
(i) Working Capital. A minimum of $50,000 in working capital must
be demonstrated.
(A) Working capital is a measure of a firm's liquidity, or the
ability to pay its short-term debts. Working capital is defined as the
excess of current assets over current liabilities. Current assets are
defined as cash or other liquid assets convertible into cash within a
1-year period. Current liabilities are defined as debts that must be
paid within the same 1-year time frame.
(B) The VA determination of whether a lender has the required
minimum working capital is based on the balance sheet of the lender's
annual audited financial statement. Therefore, either the balance sheet
must be classified to distinguish between current and fixed assets and
between current and long-term liabilities or the information must be
provided in a footnote to the statement.
(ii) Net Worth. Lenders must show evidence of a minimum of $250,000
in adjusted net worth. Net worth is a measure of a firm's solvency, or
its ability to exist in the long run, quantified by the payment of
long-term debts. Net worth as defined by generally accepted accounting
principles (GAAP) is total assets minus total liabilities. Adjusted net
worth for VA purposes is the same as the adjusted net worth required by
the Department of Housing and Urban Development (HUD), net worth less
certain unacceptable assets including:
(A) Any assets of the lender pledged to secure obligations of
another person or entity.
(B) Any asset due from either officers or stockholders of the
lender or related entities, in which the lender's officers or
stockholders have a personal interest, unrelated to their position as
an officer or stockholder.
(C) Any investment in related entities in which the lender's
officers or stockholders have a personal interest unrelated to their
position as an officer or stockholder.
(D) That portion of an investment in joint ventures, subsidiaries,
affiliates and/or other related entities which is carried at a value
greater than equity, as adjusted. ``Equity as adjusted'' means the book
value of the related entity reduced by the amount of unacceptable
assets carried by the related entity.
(E) All intangibles, such as goodwill, covenants not to compete,
franchisee fees, organization costs, etc., except unamortized servicing
costs carried at a value established by an arm's-length transaction and
presented in accordance with generally accepted accounting principles.
(F) That portion of an asset not readily marketable and for which
appraised values are very subjective, carried at a value in excess of a
substantially discounted appraised value. Assets such as antiques, art
work and gemstones are subject to this provision and should be carried
at the lower of cost or market.
(G) Any asset that is principally used for the personal enjoyment
of an officer or stockholder and not for normal business purposes.
Adjusted net worth must be calculated by a CPA using an audited and
certified balance sheet from the lender's latest financial statements.
``Personal interest'' as used in this section indicates a relationship
between the lender and a person or entity in which that specified
person (e.g., spouse, parent, grandparent, child, brother, sister,
aunt, uncle or in-law) has a financial interest in or is employed in a
management position by the lender.
(5) Lines of credit. The lender applicant must have one or more
lines of credit aggregating at least $l million. The identity of the
source(s) of warehouse lines of credit must be submitted to VA and the
applicant must agree that VA may contact the named source(s) for the
purpose of verifying the information. A line of credit must be
unrestricted, that is, funds are available upon demand to close loans
and are not dependent on prior investor approval. A letter from the
company(ies) verifying the unrestricted line(s) of credit must be
submitted with the application for automatic authority.
(6) Permanent investors. If the lender customarily sells loans it
originates, it must have a minimum of two permanent investors. The
names, addresses and telephone numbers of the permanent investors must
be submitted with the application.
(7) Liaison. The lender applicant must designate an employee and an
alternate to be the primary liaison with VA. The liaison officers
should be thoroughly familiar with the lender's entire operation and be
able to respond to any query from VA concerning a particular VA loan or
the firm's automatic authority.
[[Page 37831]]
(8) Other considerations. All applications will also be reviewed in
light of the following considerations:
(i) There must be no factors which indicate that the firm would not
exercise the care and diligence required of a lender originating and
closing VA loans on the automatic basis; and
(ii) In the event the firm, any member of the board of directors,
or any principal officer has ever been debarred or suspended by any
Federal agency or department, or any of its directors or officers has
been a director or officer of any other lender or corporation that was
so debarred or suspended, or if the lender applicant ever had a
servicing contract with an investor terminated for cause, a statement
of the facts must be submitted with the application for automatic
authority.
(9) Quality Control System. In order to be approved as a non-
supervised lender for automatic-processing authority, the lender must
implement a written quality control system which ensures compliance
with VA requirements. The lender must agree to furnish findings under
its systems to VA on demand. The elements of the quality control system
must include the following:
(i) Underwriting policies. Each office of the lender shall maintain
copies of VA credit standards and all available VA underwriting
guidelines.
(ii) Corrective measures. The system should ensure that effective
corrective measures are taken promptly when deficiencies in loan
originations are identified by either the lender or VA. Any cases
involving major discrepancies which are discovered under the system
must be reported to VA.
(iii) System integrity. The quality control system should be
independent of the mortgage loan production function.
(iv) Scope. The review of underwriting decisions and certifications
must include compliance with VA underwriting requirements, sufficiency
of documentation and soundness of underwriting judgments.
(v) Appraisal quality. For lenders approved for the Lender
Appraisal Processing Program (LAPP), the quality control system must
specifically contain provisions concerning the adequacy and quality of
real property appraisals. While the lender's quality control personnel
need not be appraisers, they should have basic familiarity with
appraisal theory and techniques so that they can select appropriate
cases for review if discretionary sampling is used, and prescribe
appropriate corrective action(s) in the appraisal review process when
discrepancies or problems are identified. Copies of the lender's
quality control plan or self-policing system evidencing appraisal
related matters must be provided to the VA office of jurisdiction.
(10) Courtesy closing. The lender-applicant must certify to VA that
it will not close loans on an automatic basis as a courtesy or
accommodation for other mortgage lenders, whether or not such lenders
are themselves approved to close on an automatic basis without the
express approval of VA. However, a lender with automatic authority may
close loans for which information and supporting credit data have been
developed on its behalf by a duly authorized agent.
(11) Probation. Lenders meeting these requirements will be approved
to close VA loans on an automatic basis for a 1-year period. At the end
of this period, the lender's quality of underwriting, the completeness
of loan submissions, compliance with VA requirements and procedures,
and the delinquency and foreclosure rates will be reviewed.
(12) Extensions of Automatic Authority. When a lender wants its
automatic authority extended to another State, the request must be
submitted, with the fee designated in paragraph (e)(5) of this section,
to the VA regional office having jurisdiction in the State where the
lender's corporate office is located.
(i) When a lender wants its automatic authority to include loans
involving a real estate brokerage and/or a residential builder or
developer in which it has a financial interest, owns, is owned by, or
with which it is affiliated, the following documentation must be
submitted:
(A) A corporate resolution from the lender and each affiliate
indicating that they are separate entities operating independently of
each other. The lender's corporate resolution must indicate that it
will not give more favorable underwriting consideration to its
affiliate's loans, and the affiliate's corporate resolution must
indicate that it will not seek to influence the lender to give their
loans more favorable underwriting consideration.
(B) Letters from permanent investors indicating the percentage of
all VA loans based on the affiliate's production originated by the
lender over a 1-year period that are past due 90 days or more. This
delinquency ratio must be no higher than the national average for the
same period for all mortgage loans.
(ii) When a lender wants its automatic authority extended to
additional States, the lender must indicate how it plans to originate
VA loans in those States. Unless a lender proposes a telemarketing
plan, VA requires that a lender have a presence in the State, that is,
a branch office, an agent relationship, or that it is a reasonable
distance from one of its offices in an adjacent State, i.e., 50 miles.
If the request is based on an agency relationship, the documentation
outlined in paragraph (b)(13) of this section must be submitted with
the request for extension.
(13) Use of Agents. A lender using an agent to perform a portion of
the work involved in originating and closing a VA guaranteed loan on an
automatic basis must take full responsibility by certification for all
acts, errors and omissions of the agent or other entity and its
employees for the work performed. Any such acts, errors or omissions
will be treated as those of the lender and appropriate sanctions may be
imposed against the lender and its agent. Lenders requesting an agent
must submit the following documentation to the VA regional office
having jurisdiction for the lender's corporate office:
(i) A corporate resolution certifying that the lender takes full
responsibility for all acts, errors and omissions of the agent that it
is requesting. The corporate resolution must also identify the agent's
name and address, the geographic area in which the agent will be
originating and/or closing VA loans; whether the agent is authorized to
issue interest rate lock-in agreements on behalf of the lender; and
outline the functions the agent is to perform. Alternatively, the
lender may submit a blanket corporate resolution which sets forth the
functions of any and all agents and identifies individual agents by
name, address, and geographic area in separate letters which refer to
the blanket resolution.
(ii) When the VA regional office having jurisdiction for the
lender's corporate office acknowledges receipt of the lender's request
in writing, the agent is thereby authorized to originate VA loans on
the lender's behalf.
(Authority: 38 U.S.C. 501(a), 3702(d))
(c) A lender approved to close loans on the automatic basis who
subsequently fails to meet the requirements of this section must report
to VA the circumstances surrounding the deficiency and the remedial
action to be taken to cure it. Failure to advise VA in a timely manner
could result in a lender's loss of its approval to close VA loans on
the automatic basis.
(Authority: 38 U.S.C. 501(a), 3702(d))
(d) Annual recertification. Non-supervised lenders of the class
described in 38 U.S.C. 3702(d)(3) must be recertified annually for
authority to process loans on the automatic basis.
[[Page 37832]]
The following minimum annual recertification requirements must be met
by each lender approved for automatic authority:
(1) Financial requirements. A lender must submit, within 120 days
following the end of its fiscal year, an audited and certified
financial statement with a classified balance sheet or a separate
footnote for adjusted net worth to VA Central Office (264) for review.
The same minimum financial requirements described in Sec. 36.4348(b)(5)
must be maintained and verified annually in order to be recertified for
automatic authority.
(2) Processing annual lender data. The VA regional office having
jurisdiction for the lender's corporate office will mail an annual
notice to the lender requesting current information on the lender's
personnel and operation. The lender is required to complete the form
and return it with the appropriate annual renewal fees to the VA
regional office.
(Authority: 38 U.S.C. 501(a), 3702(d))
(e) Lender fees. To participate as a VA automatic lender, non-
supervised lenders of the class described in 38 U.S.C. 3702(d)(3) shall
pay fees as follows:
(1) $500 for new applications;
(2) $200 for reinstatement of lapsed or terminated automatic
authority;
(3) $100 for each underwriter approval;
(4) $100 for each agent approval;
(5) A minimum fee of $100 for any other VA administrative action
pertaining to a lender's status as an automatic lender;
(6) $200 annually for certification of home offices; and
(7) $100 annually for each agent renewal.
* * * * *
5. In Sec. 36.4349, paragraph (a)(2) is revised to read as follows:
Sec. 36.4349 Withdrawal of authority to close loans on the automatic
basis.
(a)(1) * * *
(2) Automatic processing authority may be withdrawn at any time for
failure to meet basic qualifying and/or annual recertification
criteria.
(i) Non-supervised lenders. (A) Automatic authority may be
withdrawn for lack of a VA approved underwriter, failure to maintain
$50,000 in working capital or $250,000 in adjusted net worth, or
failure to file required financial information.
(B) During the 1-year probationary period for newly approved
lenders, automatic authority may be temporarily or permanently
withdrawn for any of the reasons set forth in this section regardless
of whether deficiencies previously have been brought to the attention
of the probationary lender.
(ii) Supervised lenders. Automatic authority will be withdrawn for
loss of status as an entity subject to examination and supervision by a
Federal or State supervisory agency as required by 38 U.S.C. 3702(d).
(Authority: 38 U.S.C. 501(a), 3702(d))
* * * * *
[FR Doc. 97-18496 Filed 7-14-97; 8:45 am]
BILLING CODE 8320-01-P
