September 16, 1996 M26-1, Revised

Chapter 10 Loans Requiring Special Underwriting, Guaranty and Other
Considerations

**CONTENTS**

  ------------- -------------------------------------------------------- ----------
  **Section**   **Title**                                                **Page**

                How to Use This Chapter                                  10-ii

  10.01         Joint Loans                                              10-1

  10.02         Other Types of Loans Requiring Special Consideration     10-9

  Exhibit 10-A  Memorandum of Understanding with BIA                     10-16

  Exhibit 10-B  BIA Form 5-1495, Residential Lease                       10-19
  ------------- -------------------------------------------------------- ----------

10-i

M26-1, Revised September 16, 1996

How to Use this Chapter

+------------+---------------------------------------------------------+
| In         | > This chapter provides internal procedures and policy  |
| troduction | > for certain types of VA-guaranteed loans requiring    |
|            | > special consideration. Use this chapter in            |
|            | > conjunction with related information in chapters 3    |
|            | > and 5 of the Lender\'s Handbook. Some types of loans  |
|            | > requiring special consideration are not mentioned in  |
|            | > this chapter because the Lender\'s Handbook provides  |
|            | > complete information.                                 |
+------------+---------------------------------------------------------+

+------------+---------------------+-----------------------------------+
|            | **Section**         | **Heading**                       |
+------------+---------------------+-----------------------------------+
| **Subjects | **10.01** Joint     | • What is a VA Joint Loan?        |
| in this    | Loans               |                                   |
| Chapter**  |                     | • Terminology Used in this        |
|            |                     | Section                           |
|            |                     |                                   |
|            |                     | • Which Joint Loans Require Prior |
|            |                     | Approval?                         |
|            |                     |                                   |
|            |                     | • How to Underwrite a Joint Loan  |
|            |                     |                                   |
|            |                     | • How to Calculate Guaranty and   |
|            |                     | Entitlement Use on                |
|            |                     | Veteran/Nonveteran Joint Loans    |
|            |                     |                                   |
|            |                     | • How to Calculate Guaranty and   |
|            |                     | Entitlement Use on 2 Veteran      |
|            |                     | Joint Loans                       |
|            |                     |                                   |
|            |                     | • Calculation of the Funding Fee  |
|            |                     |                                   |
|            |                     | • Occupancy                       |
|            |                     |                                   |
|            |                     | • Certificate of Commitment       |
|            |                     |                                   |
|            |                     | • Loan Guaranty Certificate       |
+------------+---------------------+-----------------------------------+
|            | **10.02** Other     | • Construction Loans              |
|            | Types of Loans      |                                   |
|            | Requiring Special   | • Energy Efficient Mortgages      |
|            | Consideration       |                                   |
|            |                     | • Graduated Payment Mortgages     |
|            |                     |                                   |
|            |                     | • Cooperative Home Loans          |
|            |                     |                                   |
|            |                     | • Supplemental Loans              |
|            |                     |                                   |
|            |                     | • Loans for Permanently Affixed   |
|            |                     | Manufactured Homes that are       |
|            |                     | Considered Real Estate            |
|            |                     |                                   |
|            |                     | • VA Guaranteed Loans to Native   |
|            |                     | American Veterans on Trust Lands  |
+------------+---------------------+-----------------------------------+

10-ii

Number range chapter September 16, 1996 M26-1, Revised

10.01 Joint Loans

+------------+---------------------------------------------------------+
| What is a  | > \"Joint loan\" generally refers to a loan for which:  |
| VA Joint   | >                                                       |
| Loan?      | > • A veteran and another person(s) are liable          |
|            | >                                                       |
|            | > • The security is owned by the veteran and the other  |
|            | > obligor(s).                                           |
|            | >                                                       |
|            | > A loan involving a veteran and his or her spouse will |
|            | > not be treated as a \"joint loan\" if the spouse:     |
|            | >                                                       |
|            | > • Is not a veteran                                    |
|            | >                                                       |
|            | > OR                                                    |
|            | >                                                       |
|            | > • Is a veteran who will not be using his or her       |
|            | > entitlement on the loan.                              |
|            | >                                                       |
|            | > A loan to a veteran and fiance/fiancee who intend to  |
|            | > marry prior to loan closing and take title as veteran |
|            | > and spouse will be treated as a loan to a veteran and |
|            | > spouse (conditioned upon their marriage), and not a   |
|            | > joint loan.                                           |
|            | >                                                       |
|            | > [A joint loan is made to]{.underline}:                |
|            | >                                                       |
|            | > • The veteran and one or more nonveterans (not        |
|            | > spouse)                                               |
|            | >                                                       |
|            | > • The veteran and one or more veterans (not spouse)   |
|            | > who will not be using their entitlement               |
|            | >                                                       |
|            | > • The veteran and the veteran\'s spouse who is also a |
|            | > veteran, and both entitlements will be used           |
|            | >                                                       |
|            | > • The veteran and one or more other veterans (not     |
|            | > spouse), all of whom will use their entitlement.      |
|            | >                                                       |
|            | > See the regulations at 38 CFR 36.4307 for more detail |
|            | > on what constitutes a joint loan.                     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| T          | > To avoid confusion, the terms \"veteran/nonveteran    |
| erminology | > joint loan\" and \"2 veteran joint loan\" will be     |
| Used in    | > used throughout this section to include the various   |
| this       | > types of joint loans.                                 |
| Section    |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

10-1

M26-1, Revised September 16, 1996

10.01 Joint Loans, Continued

  -----------------------------------------------------------------------
  Terminology Used in this Section (continued)

  -----------------------------------------------------------------------

+------------+---------------------------------------------------------+
|            | > **[Veteran/nonveteran joint loan]{.underline}**       |
|            | > Common meaning: A loan involving one veteran and one  |
|            | > nonveteran (not spouse).                              |
|            | >                                                       |
|            | > For purposes of applying the principles explained in  |
|            | > this section, this term will also be used to          |
|            | > represent any other type of joint loan involving at   |
|            | > least one veteran using his or her entitlement and at |
|            | > least one other person not using entitlement (can be  |
|            | > a veteran or nonveteran, but not a spouse).           |
|            | >                                                       |
|            | > Examples:                                             |
|            | >                                                       |
|            | > • Three veterans using entitlement and one nonveteran |
|            | >                                                       |
|            | > • One veteran using entitlement and 4 nonveterans     |
|            | >                                                       |
|            | > • Two veterans using entitlement and 2 veterans not   |
|            | > using entitlement                                     |
|            | >                                                       |
|            | > **[2 veteran joint loan]{.underline}** Common         |
|            | > meaning: A loan involving 2 veterans who are not      |
|            | > married to each other, both using their entitlement.  |
|            | >                                                       |
|            | > For purposes of applying the principles explained in  |
|            | > this section, this term will also be used to          |
|            | > represent any other type of joint loan involving only |
|            | > veterans, each of whom uses his or her entitlement.   |
|            | >                                                       |
|            | > • It can include loans to the veteran and the         |
|            | > veteran\'s spouse who is also a veteran, if both      |
|            | > entitlements will be used.                            |
|            | >                                                       |
|            | > • It can include loans to three, four, or more        |
|            | > veterans, all of whom will use their entitlement.     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Which      | > Any joint loan for which title to the property will   |
| Joint      | > be held by the veteran and **[any]{.underline}        |
| Loans      | > [person]{.underline} [other]{.underline}              |
| Require    | > [than]{.underline} [the]{.underline}                  |
| Prior      | > [veteran\'s]{.underline} [spouse]{.underline}** must  |
| Approval?  | > be submitted for prior approval.                      |
|            | >                                                       |
|            | > (Any loan for which title to the property will be     |
|            | > held by the veteran and the veteran\'s spouse,        |
|            | > whether or not the spouse also uses entitlement, may  |
|            | > be closed automatically by a lender with automatic    |
|            | > authority.)                                           |
+------------+---------------------------------------------------------+

Continued on next page

10-2

September 16, 1996 M26-1, Revised

10.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| How to     | > The following underwriting considerations apply:      |
| Underwrite |                                                         |
| a Joint    |                                                         |
| Loan       |                                                         |
+------------+---------------------------------------------------------+

+-----------------------------+----------------------------------------+
| **Type of Joint Loan**      | **Underwriting Considerations**        |
+-----------------------------+----------------------------------------+
| **Veteran/nonveteran joint  | Veteran\'s credit must be satisfactory |
| loan**                      | and veteran\'s income must be          |
|                             | sufficient to repay that portion of    |
|                             | the loan allocable to the veteran\'s   |
|                             | interest in the property.              |
|                             |                                        |
|                             | A different analysis applies to the    |
|                             | portion of the loan allocable to the   |
|                             | nonveteran. The credit of the          |
|                             | nonveteran must be satisfactory.       |
|                             | However, the combined income of both   |
|                             | borrowers can be considered in         |
|                             | evaluating repayment ability.          |
|                             |                                        |
|                             | In other words:                        |
|                             |                                        |
|                             | • Income strength of the veteran may   |
|                             | compensate for income weakness of the  |
|                             | nonveteran                             |
|                             |                                        |
|                             | BUT                                    |
|                             |                                        |
|                             | • Income strength of the nonveteran    |
|                             | cannot compensate for income weakness  |
|                             | of the veteran in analyzing the        |
|                             | veteran\'s ability to repay his or her |
|                             | allocable portion of the loan.         |
+-----------------------------+----------------------------------------+
| **2 veteran joint loan**    | Consider the credit and combined       |
|                             | income and assets of both parties.     |
|                             | Strengths of one veteran related to    |
|                             | income and/or assets may compensate    |
|                             | for income/asset weaknesses of the     |
|                             | other. However, satisfactory credit of |
|                             | one veteran cannot compensate for the  |
|                             | other\'s poor credit.                  |
+-----------------------------+----------------------------------------+

Continued on next page

10-3

M26-1, Revised September 16, 1996

10.01 Joint Loans, Continued

+-------------+--------------------------------------------------------+
| How to      | > Guaranty is limited to that portion of the loan      |
| Calculate   | > allocable to the veteran\'s interest in the          |
| Guaranty    | > property.                                            |
| and         | >                                                      |
| Entitlement | > Calculate the guaranty as follows:                   |
| Use on      |                                                        |
| Veteran/    |                                                        |
| Nonveteran  |                                                        |
| Joint Loans |                                                        |
+-------------+--------------------------------------------------------+

+-------+--------------------------------------------------------------+
| **S   | **Action**                                                   |
| tep** |                                                              |
+-------+--------------------------------------------------------------+
| 1     | Divide the total loan amount by the number of borrowers.     |
|       |                                                              |
|       | • There are usually two borrowers.                           |
+-------+--------------------------------------------------------------+
| 2     | Multiply the result by the number of veteran borrowers who   |
|       | will be using entitlement on the loan.                       |
|       |                                                              |
|       | • There is usually one veteran borrower, in which case the   |
|       | result of this step is the same as the result of step 1.     |
+-------+--------------------------------------------------------------+
| 3     | Calculate the maximum potential guaranty on the portion of   |
|       | the loan arrived at in step 2 (as if that portion was the    |
|       | total loan).                                                 |
|       |                                                              |
|       | • Use the maximum guaranty chart in section 3.01 of this     |
|       | manual.                                                      |
+-------+--------------------------------------------------------------+
| 4     | Make a charge to available entitlement up to the amount      |
|       | arrived at in step 3.                                        |
|       |                                                              |
|       | • If more than one veteran is involved, divide the           |
|       | entitlement charge equally between them if possible, or, if  |
|       | only unequal entitlement is available, unequal charges may   |
|       | be made with the written agreement of the veterans.          |
|       |                                                              |
|       | • If the result of step 2 is greater than \$144,000,         |
|       | additional entitlement of up to \$14,750 may be added to     |
|       | [each]{.underline} veteran\'s entitlement for use on the     |
|       | loan, if needed.                                             |
+-------+--------------------------------------------------------------+
| 5     | In some cases, the guaranty may not be sufficient to meet    |
|       | the lender\'s needs based on secondary market requirements.  |
|       |                                                              |
|       | • This occurs most often when the total loan amount is       |
|       | greater than \$90,000.                                       |
|       |                                                              |
|       | • The downpayment needed in most cases can be calculated by  |
|       | subtracting the total entitlement charged in step 4 from 25% |
|       | of the proposed total loan amount. (This assumes loan amount |
|       | = property value = purchase price.)                          |
|       |                                                              |
|       | • The formula for calculating the downpayment may vary for   |
|       | different lender and secondary market requirements.          |
|       |                                                              |
|       | ♦ See section 4.01 of this manual for details.               |
+-------+--------------------------------------------------------------+

Continued on next page

10-4

September 16, 1996 M26-1, Revised

10.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| EXAMPLES   | > **Veteran/Nonveteran Loans**                          |
+------------+---------------------------------------------------------+

+------------+--------+--------+---------+---------+--------+-------+
| *          | *      | **     | **      | **Entit | **Seco | **    |
| *Borrowers | *Total | Vet\'s | Maximum | le-ment | n-dary | Down- |
| and**      | Loan   | Por    | Po      | C       | Market | Pay-m |
|            | Am     | tion** | tential | harge** | Need   | ent** |
| *          | ount** |        | G       |         | (      |       |
| *Available |        |        | uaranty | **\-\-  | 25%)** | **N   |
| Ent        |        |        | on      | \-\-\-\ |        | eed** |
| itlement** |        |        | Vet\'s  | -\-\-\- |        |       |
|            |        |        | Po      | \-\--T= |        |       |
|            |        |        | rtion** | Total** |        |       |
+------------+--------+--------+---------+---------+--------+-------+
| Vet        | \$1    | \$     | \       | \       | \$     | \$    |
| \$36,000   | 00,000 | 50,000 | $22,500 | $22,500 | 25,000 | 2,500 |
| Nonvet \$0 |        |        |         |         |        |       |
+------------+--------+--------+---------+---------+--------+-------+
| Vet        | \$     | \$     | \       | \       | \$     | None  |
| \$36,000   | 60,000 | 30,000 | $15,000 | $15,000 | 15,000 |       |
|            |        |        |         |         |        |       |
| Nonvet \$0 |        |        |         |         |        |       |
+------------+--------+--------+---------+---------+--------+-------+
| Vet        | \$1    | \$     | \       | \       | \$     | \$    |
| \$36,000   | 20,000 | 60,000 | $24,000 | $24,000 | 30,000 | 6,000 |
|            |        |        |         |         |        |       |
| Nonvet \$0 |        |        |         |         |        |       |
+------------+--------+--------+---------+---------+--------+-------+
| Vet        | \$1    | \$     | \       | \       | \$     | \$    |
| \$18,000   | 08,000 | 36,000 | $18,000 | $18,000 | 27,000 | 9,000 |
|            |        |        |         |         |        |       |
| Nonvet \$0 |        |        |         |         |        |       |
|            |        |        |         |         |        |       |
| Nonvet \$0 |        |        |         |         |        |       |
+------------+--------+--------+---------+---------+--------+-------+
| Vet        | \$1    | Total  | Total   | \       | \$     | None  |
| \$27,500   | 08,000 | for    | for     | $14,400 | 27,000 |       |
|            |        | both   | both    | \       |        |       |
| Vet        |        | vets   | vets    | $14,400 |        |       |
| \$36,000   |        |        |         |         |        |       |
|            |        | \$     | \       | T\      |        |       |
| Nonvet \$0 |        | 72,000 | $28,800 | $28,800 |        |       |
+------------+--------+--------+---------+---------+--------+-------+
| Vet        | \$2    | Total  | \       | \       | \$     | \$1   |
| \$25,000   | 01,000 | for    | $36,000 | $25,000 | 50,250 | 4,250 |
|            |        | both   |         |         |        |       |
| Vet        |        | vets   |         | \       |        |       |
| \$11,000   |        | \$1    |         | $11,000 |        |       |
|            |        | 34,000 |         |         |        |       |
| Nonvet \$0 |        |        |         | T\      |        |       |
|            |        |        |         | $36,000 |        |       |
+------------+--------+--------+---------+---------+--------+-------+

+----+-----------------------------------------------------------------+
|    | **QUICK REFERENCE FOR CALCULATION USED**                        |
+----+-----------------------------------------------------------------+
| ** | **Action**                                                      |
| St |                                                                 |
| ep |                                                                 |
| ** |                                                                 |
+----+-----------------------------------------------------------------+
| 1  | Divide the total loan amount by the number of borrowers.        |
+----+-----------------------------------------------------------------+
| 2  | Multiply the result by the number of veterans using             |
|    | entitlement.                                                    |
+----+-----------------------------------------------------------------+
| 3  | > Calculate the maximum potential guaranty on the portion of    |
|    | > the loan arrived at in step 2, using the maximum guaranty     |
|    | > chart in section 3.01.                                        |
+----+-----------------------------------------------------------------+
| 4  | Make a charge to entitlement up to the amount arrived at in     |
|    | step 3.                                                         |
|    |                                                                 |
|    | • Divide charge equally between multiple veterans if possible.  |
|    |                                                                 |
|    | • Add up to \$14,750 per veteran if step 2 is greater than      |
|    | \$144,000.                                                      |
+----+-----------------------------------------------------------------+
| 5  | > Calculate the downpayment by subtracting the total            |
|    | > entitlement charged in step 4 from 25% of the total loan      |
|    | > amount. (This assumes loan amount = property value = purchase |
|    | > price.)                                                       |
+----+-----------------------------------------------------------------+

+------------+---------------------------------------------------------+
|            | > NOTE: The last example on the example chart would     |
|            | > require a written agreement from the veterans to make |
|            | > unequal charges to their entitlement.                 |
+------------+---------------------------------------------------------+

Continued on next page

10-5

M26-1, Revised September 16, 1996

10.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| How to     | > As with a non-joint loan, the potential maximum       |
| Calculate  | > guaranty on a joint loan is calculated based on the   |
| Guaranty   | > total loan amount and cannot exceed \$50,750, even if |
| and        | > the available entitlement of the veterans involved    |
| E          | > adds up to a greater amount.                          |
| ntitlement | >                                                       |
| Use on 2   | > Calculate the guaranty as follows:                    |
| Veteran    |                                                         |
| Joint      |                                                         |
| Loans      |                                                         |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| **S   | **Action**                                                   |
| tep** |                                                              |
+-------+--------------------------------------------------------------+
| 1     | Calculate the maximum potential guaranty on the total loan   |
|       | amount.                                                      |
|       |                                                              |
|       | • Use the maximum guaranty chart in section 3.01 of this     |
|       | manual.                                                      |
+-------+--------------------------------------------------------------+
| 2     | Make charges to the veterans\' available entitlement which   |
|       | total the maximum guaranty arrived at in step 1, or the      |
|       | total of their available entitlement if less that the        |
|       | maximum potential guaranty.                                  |
|       |                                                              |
|       | > • Divide the entitlement charge equally between the        |
|       | > veterans if possible, or, if only unequal entitlement is   |
|       | > available, unequal charges may be made with the veterans\' |
|       | > written agreement.                                         |
|       | >                                                            |
|       | > EXCEPTION: Make charge for husband and wife veterans       |
|       | > according to their preference; usually charged to one      |
|       | > entitlement, taking it out of the realm of a \"joint       |
|       | > loan.\"                                                    |
|       | >                                                            |
|       | > • If the loan is greater than \$144,000, additional        |
|       | > entitlement of up to \$14,750 may be added to              |
|       | > [each]{.underline} veteran\'s entitlement for use on the   |
|       | > loan, if needed.                                           |
|       |                                                              |
|       | ♦ If possible, use this additional entitlement to arrive at  |
|       | equal entitlement charges for the veterans involved.         |
|       |                                                              |
|       | **TOTAL CHARGES TO ENTITLEMENT CAN NEVER EXCEED THE MAXIMUM  |
|       | GUARANTY FROM STEP 1 AND CAN NEVER EXCEED \$50,750.**        |
+-------+--------------------------------------------------------------+
| 3     | In some cases involving unrestored prior use of entitlement, |
|       | the guaranty may not be sufficient to meet the lender\'s     |
|       | needs based on secondary market requirements.                |
|       |                                                              |
|       | > • The downpayment needed in most cases can be calculated   |
|       | > by subtracting the total entitlement charged in step 4     |
|       | > from 25% of the proposed total loan amount. (This assumes  |
|       | > loan                                                       |
|       | >                                                            |
|       | > amount = property value = purchase price.)                 |
|       |                                                              |
|       | • The formula for calculating the downpayment may vary for   |
|       | different lender and secondary market requirements.          |
+-------+--------------------------------------------------------------+

Continued on next page

10-6

September 16, 1996 M26-1, Revised

10.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| EXAMPLES   | > **2 veteran loans**                                   |
+------------+---------------------------------------------------------+

+-------------+--------+---------+--------+-------+---------+-------+
| **Veterans  | *      | **      | *      | **    | **Total | **    |
| and**       | *Total | Maximum | *Addi- | Total | G       | Down- |
|             | Loan   | Poten   | tional | En    | uaranty | Pay-m |
| **Available | Am     | tialGua | Entitl | title | on      | ent** |
| En          | ount** | ranty** | e-ment | -ment | Loan**  |       |
| titlement** |        |         | Use    | C     |         | **N   |
|             |        |         | Per    | harge |         | eed** |
|             |        |         | Vet**  | Per   |         |       |
|             |        |         |        | Vet** |         |       |
+-------------+--------+---------+--------+-------+---------+-------+
| Vet 1       | \$1    | \       | \$0    | \$1   | \       | None  |
| \$36,000    | 00,000 | $36,000 |        | 8,000 | $36,000 |       |
|             |        |         | \$0    |       |         |       |
| Vet 2       |        |         |        | \$1   |         |       |
| \$36,000    |        |         |        | 8,000 |         |       |
+-------------+--------+---------+--------+-------+---------+-------+
| Vet 1       | \$2    | \       | \$     | \$2   | \       | None  |
| \$15,000    | 03,000 | $50,750 | 10,375 | 5,375 | $50,750 |       |
|             |        |         |        |       |         |       |
| Vet 2       |        |         | \      | \$2   |         |       |
| \$20,000    |        |         | $5,375 | 5,375 |         |       |
+-------------+--------+---------+--------+-------+---------+-------+
| Vet 1       | \$3    | \       | \$0    | \$2   | \       | \$2   |
| \$36,000    | 00,000 | $50,750 |        | 5,375 | $50,750 | 4,250 |
|             |        |         | \$0    |       |         |       |
| Vet 2       |        |         |        | \$2   |         |       |
| \$36,000    |        |         |        | 5,375 |         |       |
+-------------+--------+---------+--------+-------+---------+-------+
| Vet 1       | \$     | \       | \$0    | \$2   | \       | None  |
| \$23,500    | 80,000 | $32,000 |        | 3,500 | $32,000 |       |
|             |        |         | \$0    |       |         |       |
| Vet 2       |        |         |        | \$    |         |       |
| \$8,500     |        |         |        | 8,500 |         |       |
+-------------+--------+---------+--------+-------+---------+-------+
| Vet 1 \$0   | \$3    | \       | \$     | \$1   | \       | \$2   |
|             | 00,000 | $50,750 | 14,750 | 4,750 | $50,750 | 4,250 |
| Vet 2 \$0   |        |         |        |       |         |       |
|             |        |         | \$     | \$1   |         |       |
| Vet 3       |        |         | 14,750 | 4,750 |         |       |
| \$6,500     |        |         |        |       |         |       |
|             |        |         | \$     | \$2   |         |       |
|             |        |         | 14,750 | 1,250 |         |       |
+-------------+--------+---------+--------+-------+---------+-------+

+----+-----------------------------------------------------------------+
|    | **QUICK REFERENCE FOR CALCULATION USED**                        |
+----+-----------------------------------------------------------------+
| ** | **Action**                                                      |
| St |                                                                 |
| ep |                                                                 |
| ** |                                                                 |
+----+-----------------------------------------------------------------+
| 1  | > Calculate the maximum potential guaranty on the total loan    |
|    | > amount, using the maximum guaranty chart in section 3.01.     |
+----+-----------------------------------------------------------------+
| 2  | Make a charge to entitlement up to the amount arrived at in     |
|    | step 1.                                                         |
|    |                                                                 |
|    | • Divide charge equally between all veterans if possible.       |
|    |                                                                 |
|    | • Add up to \$14,750 per veteran if the loan is greater than    |
|    | \$144,000.                                                      |
+----+-----------------------------------------------------------------+
| 3  | > Calculate the downpayment by subtracting the total            |
|    | > entitlement charged in step 2 from 25% of the total loan      |
|    | > amount. (This assumes loan amount = property value = purchase |
|    | > price.)                                                       |
+----+-----------------------------------------------------------------+

+------------+---------------------------------------------------------+
|            | > NOTE: The last 2 examples on the example chart would  |
|            | > require a written agreement from the veterans to make |
|            | > unequal charges to their entitlement.                 |
+------------+---------------------------------------------------------+

Continued on next page

10-7

M26-1, Revised September 16, 1996

10.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| C          | > [Apply the appropriate funding fee percentage to any  |
| alculation | > portion of the loan allocable to a veteran using his  |
| of the     | > or her entitlement]{.underline} who is not exempt     |
| Funding    | > from the funding fee. Determine the appropriate       |
| Fee        | > percentage for the type of veteran involved from the  |
|            | > funding fee tables in section 8.02 of this manual.    |
|            | >                                                       |
|            | > **[EXAMPLE]{.underline}**: On a no-downpayment loan   |
|            | > to 3 veterans; one a subsequent user, one a           |
|            | > first-time reservist, and one a first-time            |
|            | > nonreservist; funding fee percentages of 3.0 percent, |
|            | > 2.75 percent, and 2.0 percent, respectively, would    |
|            | > each be applied to one-third of the loan amount.      |
|            | >                                                       |
|            | > No funding fee will be assessed on any portion of a   |
|            | > joint loan allocable to:                              |
|            | >                                                       |
|            | > • A nonveteran                                        |
|            | >                                                       |
|            | > • A veteran who did not use his or her entitlement    |
|            | >                                                       |
|            | > • A veteran who used his or her entitlement, but is   |
|            | > exempt from the funding fee.                          |
|            | >                                                       |
|            | > [Downpayment]{.underline}: The actual loan amount is  |
|            | > allocated equally between the borrowers for purposes  |
|            | > of calculating the funding fee, whether or not a      |
|            | > downpayment is made, and regardless of where the      |
|            | > funds for such a downpayment come from.               |
|            | >                                                       |
|            | > **[EXAMPLE]{.underline}**: On a veteran/nonveteran    |
|            | > loan, the nonveteran makes a \$5,000 (5%) downpayment |
|            | > out of his cash resources, to purchase a \$100,000    |
|            | > property, resulting in a \$95,000 loan amount. The    |
|            | > veteran is a first-time homebuyer. The veteran must   |
|            | > pay a funding fee of \$712.50, based on 1.5% of her   |
|            | > \$47,500 portion.                                     |
|            | >                                                       |
|            | > If situations arise which are not addressed here,     |
|            | > call Central Office (264) for assistance.             |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Occupancy  | > Any person who uses entitlement on a joint loan must  |
|            | > certify intent to personally occupy the property as   |
|            | > his or her home.                                      |
|            | >                                                       |
|            | > Any borrower on a joint loan who does not use         |
|            | > entitlement for the loan (such as a nonveteran), does |
|            | > not have to intend to occupy the property.            |
+------------+---------------------------------------------------------+

Continued on next page

10-8

September 16, 1996 M26-1, Revised

10.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| C          | > See the note on joint loans under the \"Issue         |
| ertificate | > Certificate of Commitment\" heading in section 6.03   |
| of         | > of this manual.                                       |
| Commitment |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Loan       | > Enter (or key LP to enter) the amount of the          |
| Guaranty   | > veteran\'s portion of the loan under \"Amount of      |
| C          | > Loan.\"                                               |
| ertificate | >                                                       |
|            | > • If more than one veteran used entitlement on the    |
|            | > loan, enter the total of all portions allocable to    |
|            | > those veterans.                                       |
|            | >                                                       |
|            | > For veteran/nonveteran joint loans:                   |
|            | >                                                       |
|            | > Annotate (or key LP to annotate) the Loan Guaranty    |
|            | > Certificate as follows:                               |
|            | >                                                       |
|            | > • In the large block under \"Full Name(s) of          |
|            | > Veterans,\" write \"The amount of guaranty on this    |
|            | > loan is limited to the veteran\'s portion of the      |
|            | > loan.\"                                               |
|            | >                                                       |
|            | > Remember that the **whole** loan amount will appear   |
|            | > on the mortgage security documents; i.e., mortgage    |
|            | > note or deed of trust, instead of just the veteran\'s |
|            | > portion shown on the Certificate of Commitment and    |
|            | > the Loan Guaranty Certificate.                        |
+------------+---------------------------------------------------------+

10.02 Other Types of Loans Requiring Special Consideration

+------------+---------------------------------------------------------+
| Co         | > See paragraph 3.02 of the Lender\'s Handbook          |
| nstruction | >                                                       |
| Loans      | > A clear final compliance inspection report is         |
|            | > required for guaranty.                                |
|            | >                                                       |
|            | > If construction is not fully completed, guaranty will |
|            | > apply only to the proper pro rata part of the loan.   |
|            | > To calculate the proper pro rata part of the loan:    |
|            | >                                                       |
|            | > • Take loan proceeds disbursed for construction       |
|            | > purposes                                              |
|            | >                                                       |
|            | > **ADD**                                               |
|            | >                                                       |
|            | > • Any other payments made to the builder by or on     |
|            | > behalf of the veteran.                                |
|            | >                                                       |
|            | > **THEN**                                              |
|            | >                                                       |
|            | > • Take the lesser of the above total or 80 percent of |
|            | > the value of that portion of the construction         |
|            | > actually completed                                    |
|            | >                                                       |
|            | > **ADD**                                               |
|            | >                                                       |
|            | > • Any loan disbursements made for the purchase of the |
|            | > land on which the construction is situated.           |
+------------+---------------------------------------------------------+

Continued on next page

10-9

M26-1, Revised September 16, 1996

10.02 Other Types of Loans Requiring Special Consideration, Continued

+------------+---------------------------------------------------------+
| Energy     | > See paragraph 3.17 of the Lender\'s Handbook.         |
| Efficient  | >                                                       |
| Mortgages  | > Information about an [increase of up to               |
|            | > \$6,000]{.underline} need be provided by the lender   |
|            | > only when reporting a closed loan.                    |
|            | >                                                       |
|            | > • Base evidence of guaranty on the higher loan amount |
|            | > even if a Certificate of Commitment was issued for a  |
|            | > lesser amount.                                        |
|            | >                                                       |
|            | > • For a loan increase of more than \$3,000 up to      |
|            | > \$6,000, accept the lender\'s determination that the  |
|            | > increase in monthly mortgage payments does not exceed |
|            | > the likely reduction in monthly utility costs.        |
|            | >                                                       |
|            | > • Costs of the energy efficiency improvements must be |
|            | > documented.                                           |
|            | >                                                       |
|            | > For an [increase greater than \$6,000]{.underline}:   |
|            | >                                                       |
|            | > • The increase must be supported by a VA              |
|            | > determination of value.                               |
|            | >                                                       |
|            | > • If a Certificate of Commitment was issued prior to  |
|            | > the increase, determine whether the applicant still   |
|            | > qualifies and issue a new Certificate of Commitment.  |
|            |                                                         |
|            | Calculate guaranty on an energy efficient mortgage as   |
|            | follows:                                                |
|            |                                                         |
|            | **1.** Calculate guaranty on the loan                   |
|            | [without]{.underline} the portion attributable to the   |
|            | energy efficiency improvements                          |
|            |                                                         |
|            | **2.** Calculate guaranty on the energy efficiency      |
|            | improvements portion by applying the same percentage    |
|            | used in step 1.                                         |
|            |                                                         |
|            | **3.** Add the results of steps 1 and 2 to arrive at    |
|            | guaranty on the entire loan.                            |
|            |                                                         |
|            | > **HOWEVER**                                           |
|            | >                                                       |
|            | > Only charge the veteran\'s entitlement the amount     |
|            | > arrived at in step 1; i.e., based upon the loan       |
|            | > amount before adding the cost of the energy efficient |
|            | > improvements.                                         |
|            | >                                                       |
|            | > • [Example]{.underline}: If a veteran has full        |
|            | > entitlement and applies for a loan of \$80,000, plus  |
|            | > \$6,000 in energy efficiency improvements, VA will    |
|            | > guarantee 40 percent of the full loan amount of       |
|            | > \$86,000. Thus, the dollar amount of the guaranty     |
|            | > will be \$34,400, even though the charge to the       |
|            | > veteran\'s entitlement is only \$32,000.              |
|            | >                                                       |
|            | > • [Example]{.underline}: If a veteran with full       |
|            | > entitlement applies for a \$144,000 loan to purchase  |
|            | > a home, and adds \$6,000 in energy efficiency         |
|            | > improve-ments, the 25 percent guaranty on the loan    |
|            | > will only require the use of \$36,000 entitlement,    |
|            | > but the dollar amount of guaranty will be \$37,500.   |
+------------+---------------------------------------------------------+

Continued on next page

10-10

September 16, 1996 M26-1, Revised

10.02 Other Types of Loans Requiring Special Consideration, Continued

  -----------------------------------------------------------------------
  Energy Efficient Mortgages (continued)

  -----------------------------------------------------------------------

+------------+---------------------------------------------------------+
|            | > Calculate the funding fee based on the full loan      |
|            | > amount [including]{.underline} the cost of energy     |
|            | > efficient improvements.                               |
|            | >                                                       |
|            | > If the energy efficiency improvements are not         |
|            | > completed, the lender may establish an escrow or      |
|            | > earmarked account and close the loan.                 |
|            | >                                                       |
|            | > • Issue evidence of guaranty upon receipt of VA Form  |
|            | > 26-1820, Report and Certification of Loan             |
|            | > Disbursement, indicating such an arrangement.         |
|            |                                                         |
|            | ♦ Attach a notice reminding the lender it must notify   |
|            | VA when the improvements are completed and the funds    |
|            | disbursed.                                              |
|            |                                                         |
|            | > • Establish a 6-month follow-up system for such       |
|            | > cases.                                                |
|            |                                                         |
|            | ♦ If notification is not received from the lender       |
|            | within 6 months, contact the lender.                    |
|            |                                                         |
|            | ♦ If improvements are not yet completed, advise the     |
|            | lender to apply the escrowed/earmarked funds to the     |
|            | loan balance or provide assurance that the work will be |
|            | completed shortly.                                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Graduated  | > See paragraph 5.07 of the Lender\'s Handbook.         |
| Payment    | >                                                       |
| Mortgages  | > If a lender submits a closed graduated payment        |
|            | > mortgage (GPM) loan which exceeds the maximum         |
|            | > permissible amount due to lender error:               |
|            | >                                                       |
|            | > • Request that the lender take corrective action.     |
|            | >                                                       |
|            | > • If not correctable, issue evidence of guaranty      |
|            | > based only on the eligible portion of the loan.       |
|            | >                                                       |
|            | > If a release of liability or substitution of          |
|            | > entitlement case involves a GPM and the assumption    |
|            | > will take place during the graduation period:         |
|            | >                                                       |
|            | > • Obtain from the assumer the signed statement        |
|            | > described in paragraph 5.07c(5) of the Lender\'s      |
|            | > Handbook modified to reflect the payment information  |
|            | > as of the year of assumption.                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| C          | > Refer questions on loans involving properties with a  |
| ooperative | > cooperative plan of ownership to Central Office       |
| Home Loans | > (264).                                                |
+------------+---------------------------------------------------------+

Continued on next page

10-11

M26-1, Revised September 16, 1996

10.02 Other Types of Loans Requiring Special Consideration, Continued

+------------+---------------------------------------------------------+
| Su         | > See paragraph 3.11 of the Lender\'s Handbook.         |
| pplemental | >                                                       |
| Loans      | > [If the supplemental loan will not be consolidated    |
|            | > with a related outstanding guaranteed                 |
|            | > loan]{.underline}                                     |
|            | >                                                       |
|            | > • The veteran must have sufficient entitlement for    |
|            | > the new loan.                                         |
|            | >                                                       |
|            | > • Issue a new Certificate of Guaranty solely for the  |
|            | > supplemental loan.                                    |
|            | >                                                       |
|            | > [If the supplemental loan will be consolidated with a |
|            | > related outstanding guaranteed loan]{.underline}      |
|            | >                                                       |
|            | > Issue a new modified guaranty certificate. To         |
|            | > calculate the percentage of guaranty applicable to    |
|            | > the combined indebtedness:                            |
|            | >                                                       |
|            | > **1.** Take the balance of the existing loan at the   |
|            | > time of closing of the supplemental loan              |
|            | >                                                       |
|            | > **MULTIPLY BY**                                       |
|            | >                                                       |
|            | > • The percentage of guaranty for the existing loan,   |
|            | > as shown on the guaranty certificate.                 |
|            | >                                                       |
|            | > **THEN**                                              |
|            | >                                                       |
|            | > **2.** Calculate the amount of guaranty that would be |
|            | > issued on the supplemental loan as an independent     |
|            | > loan (do not exceed the amount of entitlement         |
|            | > available to the veteran).                            |
|            | >                                                       |
|            | > **THEN**                                              |
|            | >                                                       |
|            | > **3.** Take the balance of the existing loan          |
|            | >                                                       |
|            | > **ADD**                                               |
|            | >                                                       |
|            | > • The amount of the supplemental loan.                |
|            | >                                                       |
|            | > **THEN**                                              |
|            | >                                                       |
|            | > **4.** Take the result of step 1 above                |
|            | >                                                       |
|            | > **ADD**                                               |
|            | >                                                       |
|            | > • The result of step 2 above                          |
|            | >                                                       |
|            | > **THEN DIVIDE BY**                                    |
|            | >                                                       |
|            | > • The result of step 3 above.                         |
|            | >                                                       |
|            | > If the veteran has no available entitlement           |
|            | >                                                       |
|            | > VA can still guarantee the supplemental loan provided |
|            | > the lender is the holder of the veteran\'s existing   |
|            | > loan and the loans are to be consolidated.            |
|            | >                                                       |
|            | > The amount of the modified guaranty will be the       |
|            | > maximum guaranty effective on the existing loan at    |
|            | > the time the supplemental loan is closed.             |
+------------+---------------------------------------------------------+

Continued on next page

10-12

September 16, 1996 M26-1, Revised

10.02 Other Types of Loans Requiring Special Consideration, Continued

  -----------------------------------------------------------------------
  Supplemental Loans (continued)

  -----------------------------------------------------------------------

+------------+---------------------------------------------------------+
|            | > To calculate the percentage of guaranty applicable to |
|            | > the combined indebtedness:                            |
|            | >                                                       |
|            | > • Take the result of step 1 above                     |
|            | >                                                       |
|            | > **THEN DIVIDE BY**                                    |
|            | >                                                       |
|            | > • The result of step 3 above.                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Loans for  | > VA can guarantee a loan secured by a manufactured     |
| P          | > home under 38 U.S.C. 3710 **[ONLY]{.underline}** if   |
| ermanently | > the manufactured home is permanently affixed to a lot |
| Affixed    | > **[AND]{.underline}** the property is considered real |
| Ma         | > estate under state law. All other loans involving a   |
| nufactured | > manufactured home must be guaranteed under 38 U.S.C.  |
| Homes that | > 3712. Manufactured home loans guaranteed under 38     |
| are        | > U.S.C. 3712 are **[not]{.underline}** addressed in    |
| Considered | > this manual.                                          |
| Real       | >                                                       |
| Estate     | > Permanently affixed manufactured home loans can be    |
|            | > made for any of the allowable loan purposes listed in |
|            | > the table below. Loan specifications and treatment of |
|            | > these loans are virtually the same as for any other   |
|            | > home loans guaranteed under 38 U.S.C 3710 from a loan |
|            | > processing standpoint, except for calculation of the  |
|            | > maximum loan amount. The following table provides the |
|            | > methods for calculating maximum loan amount.          |
+------------+---------------------------------------------------------+

+--------------------+-------------------------------------------------+
| **Allowable Loan   | **[Maximum Loan]{.underline}**                  |
| Purpose**          |                                                 |
|                    | **The loan amount is limited to the funding fee |
|                    | plus:**                                         |
+--------------------+-------------------------------------------------+
| To purchase a      | The **[lesser]{.underline}** of:                |
| manufactured home  |                                                 |
| to be affixed to a | • The sum of the purchase price                 |
| lot already owned  | [plus]{.underline} the cost of all other real   |
| by the veteran     | property improvements                           |
|                    |                                                 |
|                    | **OR**                                          |
|                    |                                                 |
|                    | • The total reasonable value of the unit, lot,  |
|                    | and real property improvements.                 |
+--------------------+-------------------------------------------------+

Continued on next page

10-13

M26-1, Revised September 16, 1996

10.02 Other Types of Loans Requiring Special Consideration, Continued

  -----------------------------------------------------------------------
  Loans for Permanently Affixed Manufactured Homes that are Considered
  Real Estate (continued)

  -----------------------------------------------------------------------

+--------------------+-------------------------------------------------+
| **Allowable Loan   | **[Maximum Loan]{.underline}**                  |
| Purpose**          |                                                 |
|                    | **The loan amount is limited to the funding fee |
|                    | plus:**                                         |
+--------------------+-------------------------------------------------+
| To purchase a      | The **[lesser]{.underline}** of:                |
| manufactured home  |                                                 |
| and a lot to which | • The total purchase price of the manufactured  |
| it will be affixed | home unit and the lot [plus]{.underline} the    |
|                    | cost of all other real property improvements    |
|                    |                                                 |
|                    | **OR**                                          |
|                    |                                                 |
|                    | • The purchase price of the manufactured home   |
|                    | unit [plus]{.underline} the cost of all other   |
|                    | real property improvements [plus]{.underline}   |
|                    | the balance owed by the veteran on a deferred   |
|                    | purchase money mortgage or contract given for   |
|                    | the purchase of the lot                         |
|                    |                                                 |
|                    | **OR**                                          |
|                    |                                                 |
|                    | • The total reasonable value of the unit, lot,  |
|                    | and property improvements.                      |
+--------------------+-------------------------------------------------+
| To refinance an    | The **[lesser]{.underline}** of:                |
| existing loan on a |                                                 |
| manufactured home  | • The sum of the balance of the loan being      |
| and purchase the   | refinanced [plus]{.underline} the purchase      |
| lot to which the   | price of the lot, not to exceed its reasonable  |
| home will be       | value [plus]{.underline} the costs of the       |
| affixed            | necessary site preparation as determined by VA  |
|                    | [plus]{.underline} a reasonable discount on     |
|                    | that portion of the loan used to refinance the  |
|                    | existing loan on the manufactured home          |
|                    | [plus]{.underline} authorized closing costs     |
|                    |                                                 |
|                    | **OR**                                          |
|                    |                                                 |
|                    | • The total reasonable value of the unit, lot,  |
|                    | and real property improvements.                 |
+--------------------+-------------------------------------------------+
| > An IRRRL to      | The **[sum]{.underline}** of:                   |
| > refinance an     |                                                 |
| > existing         | • The balance of the VA loan being refinanced   |
| >                  |                                                 |
| > VA loan on a     | [plus]{.underline}                              |
| > permanently      |                                                 |
| > affixed          | • Allowable closing costs                       |
| > manufactured     |                                                 |
| > home and lot     | [plus]{.underline}                              |
|                    |                                                 |
|                    | • Up to 2 discount points.                      |
|                    |                                                 |
|                    | > **[NOTE]{.underline}**: This is the **only**  |
|                    | > type of permanently affixed manufactured home |
|                    | > loan that does not require full underwriting  |
|                    | > and an appraisal.                             |
+--------------------+-------------------------------------------------+

Continued on next page

10-14

September 16, 1996 M26-1, Revised

10.02 Other Types of Loans Requiring Special Consideration, Continued

+------------+---------------------------------------------------------+
| VA         | VA can guarantee loans to Native American veterans on   |
| Guaranteed | trust land. A Memorandum of Understanding between the   |
| Loans to   | Commissioner of Indian Affairs and the Administrator of |
| Native     | Veterans Affairs signed on May 7, 1965, can be found in |
| American   | exhibit 10-A. Lenders have shown little interest in     |
| Veterans   | making these loans because of difficulties obtaining    |
| on Trust   | title to properties on trust land in the event of       |
| Lands      | foreclosure.                                            |
|            |                                                         |
|            | It is the responsibility of the lender to ascertain     |
|            | whether the veteran holds the land on a fee basis, in a |
|            | trust or on a restricted basis.                         |
|            |                                                         |
|            | • Where the veteran owns land in [fee                   |
|            | simple]{.underline} as an individual, processing of     |
|            | applications will continue to be handled in the same    |
|            | manner as any other application.                        |
|            |                                                         |
|            | • For loans secured by a [leasehold                     |
|            | interest]{.underline}, BIA Form 5-1495, Residential     |
|            | Lease (for tribally owned land), found in exhibit 10-B, |
|            | meets the approval of the FHA, the Federal National     |
|            | Mortgage Association and VA.                            |
|            |                                                         |
|            | ♦ The provisions of 38 CFR 36.4350 and 36.4515          |
|            | pertaining to leases being freely assignable and        |
|            | transferable are waived with respect to leasehold       |
|            | estates acquired through the use of the approved form.  |
|            |                                                         |
|            | ♦ Since leaseholds involving tribal lands are generally |
|            | outside the jurisdiction of state courts, the majority  |
|            | of legal actions involving such leaseholds must be      |
|            | brought in Federal Courts.                              |
|            |                                                         |
|            | > Loans to Native Americans on trust land must meet all |
|            | > of the requirements of Chapter 37, Title 38, U.S.     |
|            | > Code, relating to income, expenses, occupancy,        |
|            | > satisfactory credit risk and reasonable value         |
|            | > requirements.                                         |
|            | >                                                       |
|            | > Stations receiving inquiries concerning guaranteed    |
|            | > loans on Reservation lands should consult with field  |
|            | > offices of the Bureau of Indian Affairs (BIA) for     |
|            | > assistance as needed.                                 |
|            | >                                                       |
|            | > • BIA has agreed to provide VA with any credit        |
|            | > information it has on a veteran.                      |
|            | >                                                       |
|            | > See M26-6 for information on VA direct loans to       |
|            | > Native Americans, and M26-2 for information on the    |
|            | > appraisal of leasehold estates on trust land.         |
+------------+---------------------------------------------------------+

10-15

M26-1, Revised September 16, 1996

Exhibit 10-A Memorandum of Understanding with BIA

+---+--------------------------------------------------------------------+
|   | > MEMORANDUM OF UNDERSTANDING BETWEEN THE COMMISSIONER OF INDIAN   |
|   | > AFFAIRS AND THE ADMINISTRATOR OF VETERANS AFFAIRS                |
|   | >                                                                  |
|   | > (signed May 7, 1965, by these parties)                           |
|   | >                                                                  |
|   | > SUBJECT: Veterans\' Administration Guaranteed, Insured or Direct |
|   | > Loans to Indian Lessees of Trust or Restricted Land              |
|   | >                                                                  |
|   | > I. Purpose.                                                      |
|   | >                                                                  |
|   | > This memorandum of understanding sets forth the policies that    |
|   | > will be followed by the Bureau of Indian Affairs (BIA) and the   |
|   | > Veterans\' Administration (VA) with respect to applications from |
|   | > Indians for VA guaranteed, insured or direct loans for which     |
|   | > leasehold interests in trust or restricted land are proffered as |
|   | > security                                                         |
|   | >                                                                  |
|   | > II\. Lease Requirements.                                         |
|   | >                                                                  |
|   | > Where leasehold interests in trust or restricted land are        |
|   | > offered as security for direct VA loans or for loans to be       |
|   | > guaranteed or insured by the VA, leases shall meet the following |
|   | > requirements:                                                    |
|   | >                                                                  |
|   | > 1\. Each lease must have an unexpired term of at least 50 years  |
|   | > from the date of the execution of the mortgage. The conditions   |
|   | > of this requirement will be considered as having been met in     |
|   | > those cases where, as a result of Federal restriction on Indian  |
|   | > leasehold limits, a lease is executed as of the date of the      |
|   | > execution of the mortgage for a term of 25 years with provision  |
|   | > for renewal thereof automatically and without notice on the same |
|   | > terms and conditions for an additional term of 25 years.         |
|   | >                                                                  |
|   | > 2\. Each lease shall be in a form which has been approved by the |
|   | > Veterans\' Administration, the Bureau of Indian Affairs and the  |
|   | > Federal National Mortgage Association.                           |
+---+--------------------------------------------------------------------+

Continued on next page

10-16

September 16, 1996 M26-1, Revised

Exhibit 10-A Memorandum of Understanding with BIA, Continued

+---+--------------------------------------------------------------------+
|   | > III\. BIA Mortgage Approval Commitment and Certificate.          |
|   | >                                                                  |
|   | > 1\. Upon approval of the proposed loan transaction the BIA will  |
|   | > issue a commitment stating that the mortgage will be approved    |
|   | > upon issuance of a commitment by the VA. The BIA commitment will |
|   | > be in the following form:                                        |
|   | >                                                                  |
|   | > [Mortgage Approval Commitment]{.underline}                       |
|   | >                                                                  |
|   | > The undersigned agrees, on behalf of the Secretary of the        |
|   | > Interior, to approve a mortgage of leasehold interests in trust  |
|   | > or restricted land as security for a direct VA loan (or a loan   |
|   | > guaranteed or insured by VA) to                                  |
|   | > \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.            |
|   | >                                                                  |
|   | > \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_         |
|   | >                                                                  |
|   | > (Signature of approving officer)                                 |
|   | >                                                                  |
|   | > \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_         |
|   | >                                                                  |
|   | > Title                                                            |
|   | >                                                                  |
|   | > 2\. The following certification to be executed by the authorized |
|   | > representative of the Secretary will be inserted after the jurat |
|   | > at the end of the mortgage:                                      |
|   | >                                                                  |
|   | > [Certificate of Approval]{.underline}                            |
|   | >                                                                  |
|   | > Pursuant to the Act of March 19, 1956 (70 Stat. 62, 25 U.S.C.    |
|   | > 483a) and authority delegated to the Commissioner of Indian      |
|   | > Affairs by the Secretary of the Interior (25 CFR 121.61, 23 FR   |
|   | > 6493-6495, August 22, 1958) and to Area Directors by section 132 |
|   | > of Order 551, as amended April 27, 1963 (28 FR 4206), the        |
|   | > foregoing mortgage is hereby approved on behalf of the Secretary |
|   | > of the Interior.                                                 |
|   | >                                                                  |
|   | > \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_         |
|   | >                                                                  |
|   | > Area Director                                                    |
|   | >                                                                  |
|   | > (Note: In the event the approving official is other than the     |
|   | > Area Director, the authorities above cited should be             |
|   | > appropriately changed.)                                          |
+---+--------------------------------------------------------------------+

Continued on next page

10-17

M26-1, Revised September 16, 1996

Exhibit 10-A Memorandum of Understanding with BIA, Continued

+---+--------------------------------------------------------------------+
|   | > IV\. Credit Information.                                         |
|   | >                                                                  |
|   | > Upon request of either the mortgagee or the VA, and with the     |
|   | > consent of the Indian applicant, the BIA will furnish            |
|   | > information relative to its credit experience, if any, with the  |
|   | > Indian applicant. Included in this information will be a         |
|   | > statement as to whether the applicant has exclusive control of   |
|   | > his own funds or whether any of his funds are subject to control |
|   | > by the BIA. Verification will also be supplied as to the amount  |
|   | > of the applicant\'s income received through the BIA. Where the   |
|   | > applicant\'s funds are subject to control by the BIA, a complete |
|   | > report on such funds will be supplied, together with a statement |
|   | > as to whether the funds may be released and used by the          |
|   | > applicant for payment of the proposed mortgage loan.             |
|   | >                                                                  |
|   | > V. Servicing VA Guaranteed, Insured or Direct Mortgage Loans.    |
|   | >                                                                  |
|   | > While the servicing of a VA guaranteed, insured or direct loan   |
|   | > is the responsibility of the lender or holder of the mortgage as |
|   | > required by VA regulations, upon request of the VA, the          |
|   | > mortgagee or the borrower, the BIA will assist to the extent     |
|   | > possible in correcting difficulties that arise in connection     |
|   | > with the obligation under the mortgage. This shall not be        |
|   | > construed, however, as involving monetary assistance from the    |
|   | > BIA. The BIA further agrees to cooperate within its authority in |
|   | > any remedial action that may be necessary or desirable.          |
+---+--------------------------------------------------------------------+

10-18

September 16, 1996 M26-1, Revised

Exhibit 10-B BIA Form 5-1495, Residential Lease

+--------------+------------------------------+------------------------+
| Form 5-1495  | UNITED STATES                | LEASE NO.              |
|              |                              | \_\_\_                 |
|              |                              | \_\_\_\_\_\_\_\_\_\_\_ |
+--------------+------------------------------+------------------------+
| Aug. 1964    | DEPARTMENT OF THE INTERIOR   |                        |
+--------------+------------------------------+------------------------+
|              | Bureau of Indian Affairs     | CONTRACT NO.           |
|              |                              |                        |
|              |                              | \_\_                   |
|              |                              | \_\_\_\_\_\_\_\_\_\_\_ |
|              |                              | \_\_\_\_\_\_\_\_\_\_\_ |
+--------------+------------------------------+------------------------+

+---+--------------------------------------------------------------------+
|   | RESIDENTIAL LEASE                                                  |
|   |                                                                    |
|   | THIS LEASE, made and entered into between                          |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_         |
|   |                                                                    |
|   | \_\_\                                                              |
|   | _\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\ |
|   | _\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, |
|   | hereinafter designated as \"LESSOR\", and                          |
|   | \_\_\_\_\                                                          |
|   | _\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, |
|   | member(s) of the                                                   |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ residing    |
|   | upon the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_                            |
|   | \_\_\_\_\_\_\_\_                                                   |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_Indian |
|   | Reservation, \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_                      |
|   |                                                                    |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, hereinafter  |
|   | designated as \"LESSEE(S)\".                                       |
|   |                                                                    |
|   | WITNESSETH:                                                        |
|   |                                                                    |
|   | 1\. SECRETARIAL APPROVAL. As used in this Lease, the term          |
|   | \"SECRETARY\" means the Secretary of the Interior of his duly      |
|   | authorized representative. This Lease is subject to the approval   |
|   | of the Secretary pursuant to the Act of August 9, 1955, 69 Stat.   |
|   | 539, as amended; 25 U.S.C. 415.                                    |
|   |                                                                    |
|   | 2\. PREMISES. Lessor, as authorized by law and in accordance with  |
|   | a resolution adopted by                                            |
|   | the\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ on                     |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, hereby leases to the       |
|   | Lessee(s) all that tract or parcel of land situated on the         |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_             |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_Indian     |
|   | Reservation, County of\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,        |
|   |                                                                    |
|   | State of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, and       |
|   | described as follows:                                              |
|   |                                                                    |
|   | > 3\. USE OF PREMISES. The object of this Lease is to enable the   |
|   | > Lessee(s) to construct, improve and/or maintain a dwelling and   |
|   | > related structures on the premises, and otherwise to use or      |
|   | > occupy said premises for residential purposes.                   |
+---+--------------------------------------------------------------------+

Continued on next page

10-19

M26-1, Revised September 16, 1996

Exhibit 10-B BIA Form 5-1495, Residential Lease, Continued

+---+--------------------------------------------------------------------+
|   | 4\. TERM. Lessee(s) shall have and hold the premises for a term of |
|   | twenty-five (25) years beginning on the effective date of this     |
|   | Lease. This Lease shall automatically and without notice renew for |
|   | an additional term of twenty-five (25) years on the same terms and |
|   | conditions contained herein. This Lease may not be terminated by   |
|   | either or both parties during it\'s initial or renewal term if,    |
|   | and as long as, the Lease and/or any improvements on the premises, |
|   | of any interest therein, are mortgaged or otherwise pledged as     |
|   | security for any loan in accordance with the provisions hereof,    |
|   | unless consent in writing to such termination is given by the      |
|   | lender and, when FHA insurance or VA guaranty of insurance is in   |
|   | force, by the Federal Housing Administration or the Veterans       |
|   | Administration, as the case may be. This lease shall not be        |
|   | subject to any forfeiture or reversion and shall not be otherwise  |
|   | terminable, if such event would adversely affect any interest in   |
|   | the premises, including improvements thereon, acquired in          |
|   | accordance with the provisions hereof by the holder of any         |
|   | mortgage of other lien, or of any purchaser at a foreclosure sale  |
|   | under such mortgage (or lien) or under any conveyance given in     |
|   | lieu of foreclosure, or of any holder subsequent to such purchase. |
|   |                                                                    |
|   | 5\. RENT. The improvement of housing for \_\_\_\_\_\_\_\_\_\_\_    |
|   | families is a public purpose of the Lessor. The consideration for  |
|   | this lease is (1) the said purpose, (2) the promise, hereby given, |
|   | of Lessee(s) to pay the Lessor rent at the rate of One Dollar      |
|   | (\$1.00) for each twenty-five (25) year term, payment to be made   |
|   | each term in advance, (3) the extinguishment, hereby agreed to by  |
|   | Lessee(s), of any and all use rights heretofore held by Lessee(s)  |
|   | in the premises, so that Lessee(s) shall hereafter hold rights     |
|   | only by virtue of this lease, and (4) other good and valuable      |
|   | considerations, the receipt of which is hereby acknowledged by     |
|   | Lessor. It is agreed that there shall be no adjustment of the rent |
|   | if the Lease is terminated before its term otherwise would expire  |
|   | or in the event that any part of the premises is taken by          |
|   | condemnation for highway or other public purposes.                 |
|   |                                                                    |
|   | 6\. IMPROVEMENTS. All buildings or other improvements now existing |
|   | or hereafter constructed on the premises shall be the leasehold    |
|   | property of the Lessee(s) during the term of this Lease, including |
|   | any extension of renewal thereof.                                  |
|   |                                                                    |
|   | > 7\. USE RIGHTS. Upon expiration of this Lease, or upon its       |
|   | > termination in accordance with the terms hereof, unless such     |
|   | > termination is due to default upon the part of Lessee(s),        |
|   | > Lessee(s) or any successors in interest shall be entitled to use |
|   | > rights in the premises if qualified under the laws and customs   |
|   | > of the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. If not so   |
|   | > eligible, Lessee(s) and any successors in interest shall, upon   |
|   | > demand, surrender to Lessor upon expiration of other termination |
|   | > of this Lease complete and peaceable possession of the premises  |
|   | > and all improvements thereon, which shall be the property of the |
|   | > \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.                      |
+---+--------------------------------------------------------------------+

Continued on next page

10-20

September 16, 1996 M26-1, Revised

Exhibit 10-B BIA Form 5-1495, Residential Lease, Continued

+---+--------------------------------------------------------------------+
|   | 8\. FEDERAL SUPERVISION. (a) Nothing contained in this Lease shall |
|   | operate to delay or prevent a termination of Federal               |
|   | responsibilities with respect to the premises by the issuance of a |
|   | fee patent, the lifting of restrictions on alienation, of          |
|   | otherwise during the term of the Lease; such termination, however, |
|   | shall not serve to abrogate the Lease.                             |
|   |                                                                    |
|   | \(b\) No member of Congress or any delegate thereto or any         |
|   | Resident Commissioner shall be admitted to any share of part of    |
|   | this Lease or to any benefit that may arise herefrom.              |
|   |                                                                    |
|   | \(c\) The Lessee(s) agree(s) not to use or cause to be used any    |
|   | part of said premises for any unlawful conduct or purpose.         |
|   |                                                                    |
|   | 9\. QUIET ENJOYMENT. Lessor agrees to defend the title to the      |
|   | premises and also agrees that Lessee(s) and any successors in      |
|   | interest shall peaceably and quietly hold, enjoy and occupy the    |
|   | premises for the duration of this Lease without any hindrance,     |
|   | interruption, ejection or molestation by Lessor or by any other    |
|   | person or persons whomsoever,                                      |
|   |                                                                    |
|   | 10\. INHERITANCE. This Lease may be transferred by will or by      |
|   | intestate inheritance in accordance with the laws and customs of   |
|   | the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.                |
|   |                                                                    |
|   | > 11\. ASSIGNMENT. Except as otherwise provided herein, Lessee(s)  |
|   | > shall not assign this Lease without the prior written consent of |
|   | > the Lessor and, if this Lease and/or any improvements on the     |
|   | > premises are mortgaged or pledged as security for a loan,        |
|   | > without the written approval of the lender and, when FHA         |
|   | > insurance or VA guarantee or insurance is in force, of the       |
|   | > Federal Housing Administration or Veterans Administration, as    |
|   | > the case may be, Lessee(s) may assign this Lease or deliver      |
|   | > possession of the premises, including any improvements thereon,  |
|   | > to the lender, its successors in interest, or the FHA or VA, as  |
|   | > the case may be, if Lessee(s) default(s) in any mortgage or      |
|   | > other loan agreement for which the Lease and/or improvements on  |
|   | > the premises are pledged as security, and, in such event, the    |
|   | > lender, its successors in interest, or the FHA or VA, in turn    |
|   | > may transfer this Lease or possession of the premises to a       |
|   | > successor lessee. Nothing in this Lease shall prevent the        |
|   | > Lessee(s) from executing and recording a mortgage, declaration   |
|   | > of trust and/or other security instrument as may be necessary to |
|   | > obtain financing for the construction and/or improvement of a    |
|   | > dwelling and related structures, or shall prevent the mortgagee  |
|   | > or other lender from foreclosing or instituting other            |
|   | > appropriate proceedings under law in the event of default of any |
|   | > mortgage or other loan agreement by the Lessee(s). Except in     |
|   | > cases involving loans for home construction or home improvement  |
|   | > by a bank or other recognized lending institution or the VA,     |
|   | > where no such consent or approval of Lessor shall be required,   |
|   | > lessee(s) may not execute a mortgage, declaration of trust or    |
|   | > other security instrument pledging their interest in this Lease  |
|   | > or any improvements on the premises without the prior consent of |
|   | > Lessor and the approval of the Secretary.                        |
+---+--------------------------------------------------------------------+

Continued on next page

10-21

M26-1, Revised September 16, 1996

Exhibit 10-B BIA Form 5-1495, Residential Lease, Continued

+---+--------------------------------------------------------------------+
|   | 12\. OPTION. In the event of default by the Lessees(s) on any      |
|   | mortgage or other loan agreement for which this Lease or any       |
|   | improvements on the premises are pledged as security, Lessor shall |
|   | have the right of first refusal to acquire the Lessee\'s interest  |
|   | in the premises (subject to all valid liens and encumbrances) upon |
|   | (a) payment of all sums then in arrears, and (b) either payment of |
|   | the balance of the loan or assumption of the mortgage. Said right  |
|   | of first refusal may be exercised at any time within thirty (30)   |
|   | days after notice in writing from the lender of the Lessee\'s      |
|   | default, which notice shall be given before the lender invokes any |
|   | other remedies provided under the mortgage or by law, and shall be |
|   | exercised by notice in writing from the Lessor to the Lessee(s)    |
|   | and the lender; provided, however, that the Lessee(s) shall have   |
|   | fifteen (15) days from the date of the latter notice to cure the   |
|   | default. The estate acquired by the Lessor through exercise of     |
|   | said right of first refusal shall not merge with any other estate  |
|   | or title held by the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_  |
|   | as long as this Lease and/or any improvements on the premises, or  |
|   | any interest therein, are mortgaged or otherwise pledged as        |
|   | security for any loan, and said estate shall remain subordinate to |
|   | any valid and subsisting mortgage of other security instrument.    |
|   |                                                                    |
|   | 13\. EFFECTIVE DATE. This Lease and all its terms and provisions   |
|   | shall be binding upon the heirs, successors, executors,            |
|   | administrators and assigns of the Lessee(s) and any successor in   |
|   | interest to the Lessor, and shall take effect on the               |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_ day of                                |
|   | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, 19\_\_.                          |
|   |                                                                    |
|   | > 14\. OBLIGATIONS TO THE UNITED STATES. It is understood and      |
|   | > agreed that while the leased premises are in trust or restricted |
|   | > status, all of the Lessee\'s obligations under this lease, and   |
|   | > the obligation of his sureties, are to the United States as well |
|   | > as to the owner of the land.                                     |
+---+--------------------------------------------------------------------+

+--------------------------------+-------------------------------------+
|                                | \_\_\_\_\_\_\_\_                    |
|                                | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, |
|                                | LESSOR                              |
+--------------------------------+-------------------------------------+
| ATTEST:                        | By\_\_\_\_\_\_\_\                   |
|                                | _\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |
| \_\_                           | (Authorized Official)               |
| \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |                                     |
| \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |                                     |
+--------------------------------+-------------------------------------+
| WITNESS:                       | \_\_\_\_\_\_\_\_                    |
|                                | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, |
| \_\_                           | LESSEE                              |
| \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |                                     |
| \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ | \_\_\_\_\_\_\_\_                    |
|                                | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, |
|                                | LESSEE                              |
+--------------------------------+-------------------------------------+
| APPROVED:                      | DATE:                               |
|                                |                                     |
| \_\_                           | \_\_\_\_\_\_\_\_\                   |
| \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ | _\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |
| \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |                                     |
|                                |                                     |
| Secretary of the Interior      |                                     |
+--------------------------------+-------------------------------------+

10-22