#### APPENDIX A. BACKGROUND FOR LIABILITY ISSUES

**a.** **[LOAN TYPES]{.underline}:**

+-------------------+--------------------------------------------------+
| # Loan Type "2"   | 1\. VA-guaranteed Loans made prior to January 1, |
|                   | 1990.                                            |
+-------------------+--------------------------------------------------+
|                   | 2\. All VA-guaranteed Manufactured Home Loans.   |
+-------------------+--------------------------------------------------+
| # Loan Type "6"   | VA-guaranteed Loans made on or after January 1,  |
|                   | 1990, known as GIF (Guaranty and Indemnity Fund) |
|                   | loans.                                           |
+-------------------+--------------------------------------------------+

**b. [DATE OF LOAN]{.underline}:**

+-----------------------------+----------------------------------------+
| **VA-guaranteed Loans made  | Usually do not require VA or servicer  |
| prior to March 1, 1988.**   | approval before the property is        |
|                             | transferred. Veterans may sell their   |
| 38 USC 3713 (a) and (b)     | home and allow the purchaser to "take  |
|                             | over" the payments on the loan even if |
|                             | the purchaser does not specifically    |
|                             | assume the mortgage obligation or      |
|                             | agree to indemnify VA to the extent of |
|                             | any claim paid under the guaranty. The |
|                             | original veteran remains liable to VA  |
|                             | for any loss to the government caused  |
|                             | by the transferee's default and        |
|                             | subsequent termination of the loan.    |
|                             | These loans are commonly known as      |
|                             | non-qualifying loans.                  |
+-----------------------------+----------------------------------------+
| **VA-guaranteed Loans made  | These loans are not freely assumable.  |
| on or after March 1,        | All assumptions must be approved in    |
| 1988.**                     | advance. In most cases the prior       |
|                             | approval will release the selling      |
| 38 USC 3714                 | veteran from further liability on the  |
|                             | loan. The exception to this rule       |
|                             | occurs when the approval is granted    |
|                             | only because the seller is unable to   |
|                             | make further payments and the          |
|                             | assumption is intended to prevent      |
|                             | foreclosure.                           |
+-----------------------------+----------------------------------------+
| **VA-guaranteed Loans       | These loans are known as **GIF**       |
| closed on or after January  | (Guaranty and Indemnity Fund) loans.   |
| 1, 1990, with the exception | **GIF** loans generally eliminate the  |
| of manufactured home        | veteran's liability to repay VA for    |
| loans.**                    | claims paid under guaranty. Original   |
|                             | veteran-borrowers remain liable only   |
| 38 USC 3703(e)              | in cases involving fraud,              |
|                             | misrepresentation or bad faith. In     |
|                             | these cases, the burden of proof is on |
|                             | VA. **Transferee owners remain         |
|                             | liable**, unless granted               |
|                             | pre-foreclosure debt waivers.          |
+-----------------------------+----------------------------------------+

**c.** **[TYPES OF LIABILITY REVIEWS]{.underline}:**

  ---------------------------------- ------------------------------------
  **Pre-Foreclosure Debt Waivers**   This is an early decision on the
                                     collectability of a debt to the
                                     Government. The decision to release
                                     all or a portion of the estimated
                                     debt should depend on the
                                     feasibility of collecting the
                                     indebtedness and the borrower's
                                     cooperation with VA servicing
                                     efforts. Pre-foreclosure debt
                                     waivers can be granted to original
                                     veteran borrowers and all transferee
                                     borrowers. These should encompass
                                     the majority of terminated loans and
                                     compromise sales.

  **Released under 38 USC 3713(a)**  Loans made prior to March 1, 1988,
                                     in which a release of liability was
                                     approved by VA prior to or after the
                                     transfer, but prior to loan
                                     termination. The original veteran is
                                     not liable to VA for any loss
                                     incurred as a result of the
                                     termination or compromise sale.

  **Released under 38 USC 3713(b)**  Loans made prior to March 1, 1988,
                                     in which the original veteran did
                                     not obtain a release of liability
                                     from VA prior to loan termination.
                                     This is known as retroactive release
                                     of liability review and is conducted
                                     after the loan termination if VA
                                     suffered a loss. If pre-foreclosure
                                     debt waivers are granted, this
                                     procedure is not necessary.

  **Released under 38 USC 3714**     Release completed on VA loans made
                                     on or after March 1, 1988. These
                                     loans are not freely assumable and
                                     all assumptions must be approved
                                     prior to transfer.

  **GIF (Guaranty and Indemnity      If there is no finding of fraud,
  Fund) Loans**                      misrepresentation or bad faith, the
                                     original veteran is released from
                                     liability for the loss incurred, but
                                     entitlement cannot be used again
                                     unless VA loss is repaid.

  **Bankruptcy Cases**               Cases in which the obligors were
                                     released as a result of bankruptcy.
  ---------------------------------- ------------------------------------

**d. [GENERAL GUIDELINES]{.underline}**

**Type "2" loan closed prior to March 1, 1988**

**Obligor at Termination/**

**Compromise Sale:**

+------------------+---------------------------------------------------+
| **Original       | The original veteran remains liable to VA for any |
| Veteran Owner**  | loss incurred; therefore, an **early decision**   |
|                  | on the collectability of a debt to the Government |
|                  | should have been made. A **pre-foreclosure debt   |
|                  | waiver** decision to release all or a portion of  |
|                  | the estimated debt should depend on the           |
|                  | feasibility of collecting the indebtedness and    |
|                  | the borrower's cooperation with VA servicing      |
|                  | efforts.                                          |
+------------------+---------------------------------------------------+
| **Transferee     | a\. If a release of liability was approved by VA  |
| Owner**          | prior to or after the transfer, the original      |
|                  | veteran is not liable to VA for any loss incurred |
|                  | as a result of the termination or compromise      |
|                  | sale. The transferee borrower is liable to VA. An |
|                  | **early decision** on the collectability of a     |
|                  | debt to the Government should have been made. A   |
|                  | **pre-foreclosure debt waiver** decision to       |
|                  | release all or a portion of the estimated debt    |
|                  | should depend on the feasibility of collecting    |
|                  | the indebtedness and the borrower's cooperation   |
|                  | with VA servicing efforts.                        |
|                  |                                                   |
|                  | b\. If a release of liability was not approved by |
|                  | VA prior to or after the transfer, the original   |
|                  | veteran remains liable to VA for any loss         |
|                  | incurred. Assuming that default and subsequent    |
|                  | termination was beyond the original veteran's     |
|                  | control, a pre-foreclosure waiver should be       |
|                  | granted. In addition, an **early decision** of    |
|                  | the transferee's prospects for repaying the       |
|                  | indebtedness to the Government should have been   |
|                  | made. Again, a **pre-foreclosure debt waiver**    |
|                  | decision to release all or a portion of the       |
|                  | estimated debt should depend on the feasibility   |
|                  | of collecting the indebtedness and the            |
|                  | transferee's cooperation with VA servicing        |
|                  | efforts.                                          |
+------------------+---------------------------------------------------+

**Type "2" loan closed on or after March 1, 1988**

**Obligor at Termination/**

**Compromise Sale:**

  ------------------- ---------------------------------------------------
  **Original Veteran  The original veteran remains liable to VA for any
  Owner**             loss incurred; therefore, an **early decision** on
                      the collectability of a debt to the Government
                      should have been made. A **pre-foreclosure debt
                      waiver** decision to release all or a portion of
                      the estimated debt should depend on the feasibility
                      of collecting the indebtedness and the borrower's
                      cooperation with VA servicing efforts.

  **Transferee        These loans are not freely assumable. Therefore, a
  Owner**             release of liability should have been approved by
                      the servicer or VA prior to the transfer and the
                      original veteran is not liable to VA for any loss
                      incurred as a result of the termination or
                      compromise sale. If the veteran did not seek prior
                      approval, he or she has demonstrated bad faith and
                      will be liable. The transferee borrower is liable
                      to VA. An **early decision** on the collectability
                      of a debt to the Government should have been made.
                      A **pre-foreclosure debt waiver** decision to
                      release all or a portion of the estimated debt
                      should depend on the feasibility of collecting the
                      indebtedness and the transferee's cooperation with
                      VA servicing efforts.
  ------------------- ---------------------------------------------------

**Type "6" loan closed on or after January 1, 1990, GIF loans.**

**Obligor at Termination/**

**Compromise Sale:**

+--------------------+-------------------------------------------------+
| **Original Veteran | If there is no finding of fraud,                |
| Owner**            | misrepresentation or bad faith, the original    |
|                    | veteran is released from liability for the loss |
|                    | incurred.                                       |
|                    |                                                 |
|                    | If fraud, misrepresentation or bad faith        |
|                    | demonstrated by VA, the folder must be          |
|                    | documented to explain the nature of VA's        |
|                    | findings.                                       |
+--------------------+-------------------------------------------------+
| **Transferee       | These loans are not freely assumable.           |
| Owner**            | Therefore, a release of liability for the       |
|                    | original veteran should have been approved by   |
|                    | the servicer or VA prior to the transfer. If    |
|                    | the veteran did not seek prior approval, he or  |
|                    | she has demonstrated bad faith and will be      |
|                    | liable. **The transferee borrower is liable to  |
|                    | VA**. An **early decision** on the              |
|                    | collectability of a debt to the Government      |
|                    | should have been made. A **pre-foreclosure debt |
|                    | waiver** decision to release all or a portion   |
|                    | of the estimated debt should depend on the      |
|                    | feasibility of collecting the indebtedness and  |
|                    | the transferee's cooperation with VA servicing  |
|                    | efforts.                                        |
+--------------------+-------------------------------------------------+