Custom Federal Regulations Service™

**This is supplemental material**

**for Book H of your set of**

**Federal Regulations**

Title 38, Part 36

*Loan Guaranty*

**Veterans Benefits Administration**

Supplement No. 29

Covering period of *Federal Register* issues

through May 22, 2005

Copyright © 2005 Jonathan Publishing

**Need Assistance?**

Printing for all supplements is performed by the United States
Government

Printing Office. Distribution is the responsibility of the

VA Forms and Publications Depot. Accordingly:

Questions concerning **[missing supplements]{.smallcaps}**, need for
**[additional books]{.smallcaps}**, and other **[distribution
list]{.smallcaps}** issues for this loose-leaf service should be
directed to:

Department of Veterans Affairs

Veterans Benefits Administration

Directives, Forms and Records Staff

Mail Code: 20S5

810 Vermont Avenue, N.W.

Washington DC 20420

Telephone: 202/273-7080

Fax: 202/275-5947

Questions concerning the **[filing instructions]{.smallcaps}** for this
loose-leaf service,

or the reporting of **[substantive errors]{.smallcaps}** in the text,

may be directed to:

Jonathan Publishing

855 Yorks Crossing

Driftwood TX 78619

Telephone: 512/858-1225

Fax: 512/858-1230

E-mail: garyknight@ev1.net

**Internet: http://www.jonpub.com**

Copyright © 2005 Jonathan Publishing

> **GENERAL INSTRUCTIONS**

Custom Federal Regulations Service™

**Supplemental Materials for *Book H***

**Code of Federal Regulations**

**Title 38, Part 36**

***Loan Guaranty***

**Veterans Benefits Administration**

**Supplement No. 29**

25 May 2005

Covering the period of Federal Register issues

through May 22, 2005

When **Book H** was originally prepared, it was current through final
regulations published in the *Federal Register* of 5 March 1992. These
supple­mental materials are designed to keep your regulations up to date.
You should file the attached pages immediately, and record the fact that
you did so on the *Supplement Filing Record* which is at page H-8 of
Book H, *Loan Guaranty*.

> **To ensure accuracy and timeliness of your materials,**
>
> **it is important that you follow these simple procedures:**
>
> 1\. Always file your supplemental materials immediately upon receipt.
>
> 2\. Before filing, always check the Supplement Filing Record (page
> H-8) to be sure that all prior supplements have been filed. If you are
> missing any supple­ments, contact the Veterans Benefits Administration
> at the address listed on page H-2.
>
> 3\. After filing, enter the relevant information on the Supplement
> Filing Record sheet (page H-8)---the date filed, name/initials of
> filer, and date through which the *Federal Register* is covered.
>
> 4\. If as a result of a failure to file, or an undelivered supplement,
> you have more than one supplement to file at a time, be certain to
> file them in chronological order, lower number first.
>
> 5\. Always retain the filing instructions (simply insert them at the
> back of the book) as a backup record of filing and for reference in
> case of a filing error.
>
> 6\. Be certain that you *permanently discard* any pages indicated for
> removal in the filing instructions in order to avoid confusion later.

To execute the filing instructions, simply remove *and throw away* the
pages listed under *Remove These Old Pages,* and replace them in each
case with the corres­pond­ing pages from this supplement listed under *Add
These New Pages*. Occasionally new pages will be added without removal
of any old material (reflecting new regulations), and occasionally old
pages will be removed with­out addition of any new material (reflecting
rescinded regulations)---in these cases the word *None* will appear in
the appropriate column.

> **FILING INSTRUCTIONS**

**Book H, Supplement No. 29**

**May 25, 2005**

*Remove these Add these Section(s)*

*[old pages]{.underline} [new pages]{.underline} [Affected]{.underline}*

36.4311-1 to 36.4312-1 36.4311-1 to 36.4312-1 §36.4311

**Do not file this supplement until you confirm that**

**all prior supplements have been filed**

**Be sure to complete the**

***Supplement Filing Record* (page H-8)**

**when you have finished filing this material.**

> **HIGHLIGHTS**

**Book H, Supplement No. 29**

**May 25, 2005**

***Supplement* Highlights *references***: Where substantive changes are
made in the text of regulations, the paragraphs of *Highlights* sections
are cited at the end of the relevant section of text. Thus, if you are
reading §3.263, you will see a note at the end of that section which
reads: "Supplement *Highlights* references---6(2)." This means that
paragraph 2 of the *Highlights* section in Supplement No. 6 contains
information about the changes made in §3.263. By keeping and filing the
*Highlights* sections, you will have a reference source explaining all
substantive changes in the text of the regulations.

***Supplement frequency***: This Book H (*Loan Guaranty*) was originally
supplemented four times a year, in January, April, July and October.
Beginning 1 August 1995, supplements will be issued *every month* during
which a final rule addition or modification is made to the parts of
Title 38 covered by this book. Supplements will be numbered
consecutively as issued.

**Modifications in this supplement include the following:**

1\. On 2 May 2005, the VA published a final rule, effective that same
date, to affirm as final an amendment to its loan guaranty regulations
implementing section 303 of the Veterans Benefits Act of 2002 which
incorporates into the regulations a new authority for hybrid adjustable
rate mortgages allowing VA to guarantee loans with interest rates that
remain fixed for a period of not less than the first three years of the
loan, after which the rate can be adjusted annually. Changes:

• In §36.4311, revised paragraph (d) introductory text, paragraph
(d)(2), paragraph (d)(4) introductory text, and paragraph (d)(5)
introductory text.

**§36.4311 Interest rates.**

\(a\) In guaranteeing or insuring loans under 38 U.S.C. chapter 37, the
Secretary may elect to require that such loans either bear interest at a
rate that is agreed upon by the veteran and the lender, or bear interest
at a rate not in excess of a rate established by the Secretary. The
Secretary may, from time to time, change that election by publishing a
notice in the *Federal Register*. However, the interest rate of a loan
for the purpose of an interest rate reduction under 38 U.S.C.
3710(a)(8), (a)(9)(B)(i), or (a)(11) must be less than the interest rate
of the VA loan being refinanced. This paragraph does not apply in the
case of an adjustable rate mortgage being refinanced under 38 U.S.C.
3710(a)(8), (a)(9)(B)(i), or (a)(11) with a fixed rate loan. (Authority:
38 U.S.C. 3703, 3710)

\(b\) For loans bearing an interest rate agreed upon by the veteran and
the lender, the veteran may pay reasonable discount points in connection
with the loan. The discount points may not be included in the loan
amount, except for interest rate reduction refinancing loans under 38
U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11). For loans bearing an
interest rate agreed upon by the veteran and the lender, the provisions
of §36.4312(d)(6) and (d)(7) do not apply. (Authority: 38 U.S.C. 3703,
3710)

\(c\) Interest in excess of the rate reported by the lender when
requesting evidence of guaranty or insurance shall not be payable on any
advance, or in the event of any delinquency or default: Provided, that a
late charge not in excess of an amount equal to 4 percent on any
installment paid more than 15 days after due date shall not be
considered a violation of this limitation. (Authority: 38 U.S.C. 3710)

\(d\) Effective October 1, 2003, adjustable rate mortgage loans which
comply with the requirements of this paragraph (d) are eligible for
guaranty.

\(1\) *Interest rate index*. Changes in the interest rate charged on an
adjustable rate mortgage must correspond to changes in the weekly
average yield on one year (52 weeks) Treasury bills adjusted to a
constant maturity. Yields on one year Treasury bills at "constant
maturity" are interpolated by the United States Treasury from the daily
yield curve. This curve, which relates the yield on the security to its
time to maturity, is based on the closing market bid yields on actively
traded one year Treasury bills in the over-the-counter market. The
weekly average one year constant maturity Treasury bill yields are
published by the Federal Reserve Board of the Federal Reserve System.
The Federal Reserve Statistical Release Report H. 15 (519) is released
each Monday. These one year constant maturity Treasury bill yields are
also published monthly in the Federal Reserve Bulletin, published by the
Federal Reserve Board of the Federal Reserve System, as well as
quarterly in the Treasury Bulletin, published by the Department of the
Treasury.

\(2\) *Frequency of interest rate changes*. Interest rate adjustments
must occur on an annual basis, except that the first adjustment may
occur no sooner than 36 months from the date of the borrower's first
mortgage payment. The adjusted rate will become effective the first day
of the month following the adjustment date; the first monthly payment at
the new rate will be due on the first day of the following month. To set
the new interest rate, the lender will determine the change between the
initial (i.e., base) index figure and the current index figure. The
initial index figure shall be the most recent figure available before
the date of mortgage loan origination. The current index figure shall be
the most recent index figure available 30 days before the date of each
interest rate adjustment.

\(3\) *Method of rate changes*. Interest rate changes may only be
implemented through adjustments to the borrower's monthly payments.

\(4\) *Initial rate and magnitude of changes*. The initial contract
interest rate of an adjustable rate mortgage shall be agreed upon by the
lender and the veteran. Annual adjustments in the interest rate shall
correspond to annual changes in the interest rate index, subject to the
following conditions and limitations:

\(i\) No single adjustment to the interest rate may result in a change
in either direction of more than one percentage point from the interest
rate in effect for the period immediately preceding that adjustment.
Index changes in excess of one percentage point may not be carried over
for inclusion in an adjustment in a subsequent year. Adjustments in the
effective rate of interest over the entire term of the mortgage may not
result in a change in either direction of more than five percentage
points from the initial contract interest rate.

\(ii\) At each adjustment date, changes in the index interest rate,
whether increases or decreases, must be translated into the adjusted
mortgage interest rate, rounded to the nearest one-eighth of one
percent, up or down. For example, if the margin is 2 percent and the new
index figure is 6.06 percent, the adjusted mortgage interest rate will
be 8 percent. If the margin is 2 percent and the new index figure is
6.07 percent, the adjusted mortgage interest rate will be 8-1/8 percent.

\(5\) *Pre-loan disclosure*. The lender shall explain fully and in
writing to the borrower, at the time of loan application, the nature of
the obligation taken. The borrower shall certify in writing that he or
she fully understands the obligation and a copy of the signed
certification shall be placed in the loan folder and furnished to VA
upon request.

\(i\) The fact that the mortgage interest rate may change, and an
explanation of how changes correspond to changes in the interest rate
index;

\(ii\) Identification of the interest rate index, its source of
publication and availability;

\(iii\) The frequency (i.e., annually) with which interest rate levels
and monthly payments will be adjusted, and the length of the interval
that will precede the initial adjustment; and

\(iv\) A hypothetical monthly payment schedule that displays the maximum
potential increases in monthly payments to the borrower over the first
five years of the mortgage, subject to the provisions of the mortgage
instrument.

\(6\) *Annual disclosure*. At least 25 days before any adjustment to a
borrower's monthly payment may occur, the lender must provide a notice
to the borrower which sets forth the date of the notice, the effective
date of the change, the old interest rate, the new interest rate, the
new monthly payment amount, the current index and the date it was
published, and a description of how the payment adjustment was
calculated. A copy of the annual disclosure shall be made a part of the
lender's permanent record on the loan. (Authority: 38 U.S.C. 3707A)

\[48 FR 22294, May 18, 1983, as amended at 50 FR 3335, Jan. 24, 1985; 52
FR 18356, May 15, 1987; 53 FR 18983, May 26, 1988; 53 FR 44401, Nov. 3,
1988; 53 FR 51551, Dec. 22, 1988; 54 FR 1690, Jan. 17, 1989; 54 FR
24557, June 8, 1989; 54 FR 30383, July 20, 1989; 55 FR 6983, Feb. 28,
1990; 56 FR 5951, Feb. 14, 1991; 56 FR 29900, July 1, 1991; 56 FR 40792,
Aug. 16, 1991; 56 FR 48736, Sept. 28, 1991; 56 FR 67196, Dec. 30, 1991;
57 FR 7656, Mar. 4, 1992; 57 FR 31324, July 15, 1992; 57 FR 37713, Aug.
20, 1992; 60 FR 38260, July 26, 1995; 70 FR 22597, May 2, 2005\]

**Supplement *Highlights* references**: 13(1), 29(1).

**§36.4312 Charges and fees.**

\(a\) No charge shall be made against, or paid by, the borrower incident
to the making of a guaranteed or insured loan other than those expressly
permitted under paragraph (d) or (e) of this section, and no loan shall
be guaranteed or insured unless the lender certifies to the Secretary
that it has not imposed and will not impose any charges or fees against
the borrower in excess of those permissible under paragraph (d) or (e)
of this section. Any charge which is proper to make against the borrower
under the provisions of this paragraph may be paid out of the proceeds
of the loan: *Provided,* That if the purpose of the loan is to finance
the purchase or construction of residential property the costs of
closing the loan including the pro rata portion of the ground rents,
hazard insurance premiums, current year's taxes, and other prepaid items
normally involved in financing such transaction may not be included in
the loan.

\(b\) Except as provided in the regulations concerning the guaranty or
insurance of loans to veterans, no brokerage or service charge or their
equivalent may be charged against the debtor or the proceeds of the loan
either initially, periodically, or otherwise.

\(c\) Brokerage or other charges shall not be made against the veteran
for obtaining any guaranty or insurance under 38 U.S.C. chapter 37, nor
shall any premiums for insurance on the life of the borrower be paid out
of the proceeds of a loan.

\(d\) The following schedule of permissible fees and charges shall be
applicable to all Department of Veterans Affairs guaranteed or insured
loans.

\(1\) The veteran may pay reasonable and customary amounts for any of
the following items:

\(i\) Fees of Department of Veterans Affairs appraiser and of compliance
inspectors designated by the Department of Veterans Affairs except
appraisal fees incurred for the predetermination of reasonable value
requested by others than veteran or lender.

\(ii\) Recording fees and recording taxes or other charges incident to
recordation.

\(iii\) Credit report.

\(iv\) That portion of taxes, assessments, and other similar items for
the current year chargeable to the borrower and an initial deposit
(lump-sum payment) for the tax and insurance account.

\(v\) Hazard insurance required by §36.4326.

\(vi\) Survey, if required by lender or veteran; except that any charge
for a survey in connection with a loan under §§36.4356 through 36.4360a
(Condominium Loans) must have the prior approval of the Secretary.

\(vii\) Title examination and title insurance, if any.