\<I\<ADVANCED,26H94101.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Cover for
VA Servicing Guide, H26-94-1\</D\>

VA Handbook H26-94-1 Veterans Benefits Administration

February 1994 Washington, D.C.

**FOREWORD**

a\. This publication is a guide for program participants who hold and/or
service VA-guaranteed home loans. It contains the servicing, claims, and
conveyance policies and procedures applicable to VA loans, as well as a
copy of the part of the Code of Federal Regulations dealing with VA
loans.

b\. The issuance of a VA guaranty on a loan is in part predicated upon
the understanding that adequate loan servicing will be performed by the
holder. This requirement is implied in the law and expressed in the
regulations. Failure to comply with VA regulations regarding servicing,
claims, and conveyance may result in a reduction of the amount of claim
payable by VA. A pattern of failure may result in suspension from
program participation.

c\. Lending institutions and servicers are generally anxious to avoid a
foreclosure and strive to maintain a low delinquency record. While many
loan holders designate an agent to collect loan installments and/or
perform other functions to protect the interests of the holder, it is
the holder that remains responsible for compliance with the law and
regulations governing VA-guaranteed loans.

d\. The procedures and policies outlined in this handbook are intended
to guide holders and servicers in servicing loans under the provisions
of chapter 37, title 38, United States Code. Nothing contained in this
handbook should be construed as modifying or otherwise altering any of
the regulations affecting the Loan Guaranty Program in part 36 of title
38, Code of Federal Regulations or in title 38 of the United States
Code. If there appears to be a discrepancy between the procedures and
policies in this handbook and the related regulations or governing law,
the latter will govern. Where possible, the number of the regulation
related to VA policies and procedures is given in parenthesis.

**VA Regional Office Structure**

a\. The Veterans Benefits Administration operates a network of 58
decentralized field offices. Forty-six of these offices have Loan
Guaranty operations. See appendix A for a list of VAROs (VA Regional
Offices). Any correspondence regarding a specific loan, including the
required notices of default and intention to foreclose, should be sent
to the VARO with a Loan Guaranty operation that has jurisdiction over
the county where the property securing the loan is located.

b\. VA attempts to uniformly implement its major policies and
procedures. However, regional offices are given some discretion in
structuring their operations, which may result in variances on certain
policies and procedures between regional offices. In addition, State
laws regarding mortgages and foreclosures vary considerably. This also
results in differences between VAROs, especially regarding the type of
documents required and steps to be taken in foreclosure, in conveying
title to acquired property to VA, and in pursuing alternatives to
foreclosure. Each VARO issues Loan Guaranty Bulletins on the policies or
procedures that may be different in their jurisdiction. Holders should
be on the mailing list of each VARO that has jurisdiction over an area
where they hold loans. VA expects holders to be aware of the
requirements of each local office .

**Definitions** (38 CFR 36.4301)

a\. An **automatic lender** is one that may process a loan or assumption
without submitting the credit package to VA for review, pursuant to 38
U.S.C. 3702(d)

b\. A **credit package** consists of any information, reports, or
verifications used by a lender, holder, or authorized servicing agent to
determine the creditworthiness of an applicant for a VA-guaranteed loan
or the assumer of such a loan. This includes the prospective
purchaser\'s application.

c\. A **holder** is any institution that owns a loan guaranteed by VA.
The holder is ultimately responsible for ensuring that all applicable VA
policies, procedures, and regulations are followed. In this handbook,
the word \"holder\" refers to both the actual loan holder and any
designated servicing agent. When loans have been pooled through the GNMA
(Government National Mortgage Association), whoever services the loan
and has the right to file and receive payment of a claim under guaranty
is considered the holder.

d\. A **servicing agent** is an agent designated by the loan holder to
collect installments on the loan and/or perform other functions to
protect the interests of the holder. The servicing agent may perform any
of the actions discussed in this handbook on behalf of the holder,
including loan assumptions if the servicing agent is also an automatic
lender.

e\. A **default** is any failure of a borrower to comply with the terms
of a loan agreement. If a payment due on the first of the month has not
been received on the second, VA considers the loan to be in default on
the second. If the payment has still not been received 30 days later, VA
considers the loan to have been in default for 30 days.

f\. The VA LIN (**VA Loan Identification Number**) is a 12 position
unique identifier for each loan guaranteed by VA. The VA LIN consists of
a two-position numeric code for the regional office which has
jurisdiction over the loan (OJ), a two-position numeric code for the
regional office which originated the loan (OO), a one-position code for
the type of loan, and a seven position serial number or loan number.
Appendix B, Circular 26-93-14, VA Loan Identification Numbers, provides
a description of the VA LIN.

R. J. Vogel

Under Secretary for Benefits

**Contents**

**CHAPTER PAGE**

1 CURRENT SERVICING 1-i

2 DELINQUENT SERVICING 2-i

3 ALTERNATIVES TO FORECLOSURE 3-i

4 TERMINATION BY FORECLOSURE 4-i

5 CONVEYING REAL PROPERTY TO VA 5-i

6 CLAIMS PROCEDURES 6-i

APPENDIXES App. -i

**Contents**

**CHAPTER 1. CURRENT SERVICING**

**PARAGRAPH PAGE**

1.01 General 1-1

1.02 Accounting Records 1-1

1.03 Servicing Organization 1-1

1.04 Statement for Income Tax Purposes 1-2

1.05 Advances 1-2

1.06 Extensions and Reamortizations 1-3

1.07 Prepayments 1-4

1.08 Servicing Fees 1-4

1.09 Taxes and Insurance 1-5

1.10 Escrow/Impound Account Maintenance 1-7

1.11 Servicing Transfers 1-8

1.12 Release of Security 1-8

1.13 Loan Assumptions and Release of Liability- Loans

Made Prior to March 1, 1988 1-9

1.14 Loan Assumptions and Release of Liability- Loans

Committed On or After March 1, 1988 1-11

1.15 Soldiers and Sailors Civil Relief Act 1-17

1.16 Loans Paid in Full 1-17

**Figure**

1-1 VA Form 26-8986, Loan Guaranty Funding Fee Transmittal 1-18

**CHAPTER 1. CURRENT SERVICING**

**1.01 General**

Holders are expected to service VA loans in conformity with procedures
customarily used by prudent lenders in servicing portfolios of similar
conventional loans. Loan holders\' performance is also measured by their
compliance with applicable Federal statutes, such as the RESPA (Real
Estate Settlement Procedures Act), as amended, and laws and regulations
governing the VA loan program.

**1.02 Accounting Records** (38 CFR 36.4330)

A record must be maintained of loan payments received and disbursements
made and the dates of all transactions for each account. Since these
records must accompany any claim filed under the guaranty, holders are
encouraged to obtain and retain them for loans acquired through purchase
or servicing transfers. If a claim is filed without complete accounting
records, VA will assume that all payments were received and applied as
scheduled during the period for which no records are provided.

**1.03 Servicing Organization**

a**. Servicing Operations** (38 CFR 36.4346(b))

\(1\) Loan holders are allowed wide latitude in organizing their
servicing operations, but there are some VA requirements. All borrowers
must be informed of the procedures and systems available for obtaining
answers to inquiries. Holders will be reminded of these systems at least
annually.

\(2\) Holders must either:

\(a\) Locate their servicing operations within a 200 mile radius of
their loan accounts; or,

\(b\) Provide toll-free or collect calling services at an office capable
of responding to requests for information.

b**. Quality Control Procedures.** (38 CFR 36.4346(l)) Loan holders must
have internal controls which periodically assess the quality of
servicing of VA loans and to assure that VA\'s servicing standards are
met. An internal assessment of the holder\'s servicing activity must be
conducted at least annually. The holder should:

\(1\) Collect and maintain appropriate data on delinquency and
foreclosure rates to enable it to evaluate the effectiveness of its
collection efforts;

\(2\) Determine how its VA delinquency and foreclosure rates compare
with rates in reports published by the industry, investors and others;
and,

\(3\) Analyze significant variances between its foreclosure and
delinquency rates and those found in reports and publications and take
appropriate corrective action.

This data and analysis must be provided to VA upon request. Requests may
be made by VA\'s Central Office, lender/servicer monitoring units or
VAROs.

c**. Duty to Respond to Written Borrower Inquiries.** RESPA, which was
amended in 1990, requires the following strict deadlines for response to
written borrower inquiries.

\(1\) **Twenty Business Days to Acknowledge**. A qualified written
request from a borrower, or agent of the borrower, relating to the
servicing of his/her loan must be acknowledged in writing within 20
business days of receipt, unless the action requested is taken within 20
business days. A qualified written request must enable a servicer to
identify the name and account of the borrower, and provide sufficient
detail as to why the account is in error or other information requested
by the borrower.

\(2\) **Sixty Business Days to Resolve**. Within 60 business days of
receipt of a qualified written request (as defined in subpar. (1) above)
from a borrower or agent of the borrower about to the servicing of
his/her loan, the servicer must complete an investigation and notify the
homeowner of its results. The findings from this investigation should be
used to determine which of the following three courses of action should
be taken: correct the borrower\'s account and notify the borrower in
writing of the correction; provide written explanation to the borrower
if the account is correct; or, write the borrower with an explanation if
the requested information is unavailable. The name and telephone number
of the servicer to contact must be provided to the borrower in the
notification.

\(3\) **Prohibition Against Reporting to Credit Agencies**. During the
60 day investigation period (as defined in subpar. (2) above),
information indicating a late mortgage payment on the account under
investigation may not be reported to credit agencies.

**1.04 Statement for Income Tax Purposes** (38 CFR 36.4346(c))

VA requires that within 60 days after the end of each calendar year, the
holder must furnish to the borrower a statement of the interest paid and
the taxes disbursed from the escrow account during the preceding year.
Since RESPA requires that this statement be furnished within 30 days
after the end of the calendar year, holders must satisfy the RESPA
requirement. At the borrower\'s request, the holder must furnish a
statement of the escrow account that will enable the borrower to
reconcile the account.

**1.05 Advances** (38 CFR 36.4313)

a\. A holder may advance any amount reasonably necessary and proper for:

\(1\) Maintenance or repair of the security;

\(2\) Payment of accrued taxes, special assessments, ground or water
rents;

\(3\) Premiums on fire, flood, or other casualty insurance against loss
or damage to the property; and,

\(4\) If the commitment for the loan was made on or after March 1, 1988,
one-half of one percent of the funding fee due on a transfer if it is
not paid at the time of transfer.

b\. The advance may be added to the guaranteed indebtedness. VA does not
regulate the amount of advances that are allowable on a national basis,
either as charges to the borrower or for purposes of claim computation,
but VA regional offices set limits on amounts they consider reasonable.
See paragraph 4.17, Acceptable Expenses, for more information.

c\. Advances for payment of condominium or PUD homeowners association
assessments may not be included in any accounting between a holder and
VA without prior approval by VA.

**1.06 Extensions and Reamortizations** (38 CFR 36.4314)

a\. **Conditions.** A loan may be extended or reamortized provided:

\(1\) The loan is in default or default is imminent; and,

\(2\) The borrower is a reasonable credit risk, based on a review by the
holder of the borrower\'s creditworthiness, including a current credit
report; and,

\(3\) At least 80 percent of the loan balance extended will amortize
over the remaining term of the loan (or, for loans with a term of less
than 30 years, the lesser of the economic life of the security or 30
years from the date of origination); and,

\(4\) No obligor is released from personal liability.

Otherwise, prior approval must be obtained from VA.

b**. Terms.** Any agreement to extend or reamortize the loan must be in
writing and signed by the holder and the borrower. Accrued unpaid
interest may be included in the loan indebtedness extended or
reamortized. A deficit in the tax and insurance account may also be
included in the indebtedness to bring the account up to the level it
would have been had the borrower paid the required installments timely.

c**. Notification to VA.** Notify VA of the terms of the agreement
(preferably a copy of the extension or reamortization agreement) after
the agreement has been executed, along with a copy of the credit report.

**1.07 Prepayments** (38 CFR 36.4310)

a**. Requirements.** The borrower has the right to prepay at any time,
without premium or fee, the entire indebtedness or any amount not less
than the next monthly principal installment or \$100, whichever is less.
The holder retains the option to accept prepayment amounts which are
smaller than the minimum required by regulation. Any prepayment less
than payment in full which is made on a day other than an installment
due date need not be credited until the following installment due date,
or 30 days after the prepayment, whichever is earlier. Payment in full
must be accepted and credited to the loan account when tendered, and no
interest may be charged thereafter.

b**. Reapplication.** The holder and the borrower may agree at any time
to re-apply prepayments to cure or prevent a default.

**1.08 Servicing Fees**

a**. Late Charges.** (38 CFR 36.4311(d)) A late charge may be collected
on any installment received more than 15 days after its due date,
provided the loan instruments contain a provision for a late charge.

\(1\) For example, a late charge may [not]{.underline} be collected on
an installment due on the first of the month if it is paid on or before
the 16th of the month, but may be collected if the installment is paid
on or after the 17th of the month.

\(2\) The late installment must be paid before the late charge is
collected.

\(3\) The late charge may [not]{.underline} be:

\(a\) More than 4 percent of any installment (principal, interest, and
escrow for taxes and insurance);

\(b\) Based on an amount greater than the past due amount;

\(c\) Collected from the escrow account or from an escrow surplus
without prior approval of the borrower;

\(d\) Deducted from regular payments; or,

\(e\) Included in a claim under the guaranty or in any accounting to VA.

\(4\) Late charges discourage late payments only if the borrower is able
to pay on time but does not do so. If a borrower is cooperative but
unable to pay, or if collection of late charges could prevent a borrower
from reinstating a delinquent account, consideration should be given to
waiving the late charge.

b**. Other Fees.** Fees for services outside the scope of the usual
mortgage transaction depend on the terms of the loan agreement and
should be determined by the parties involved. However, such charges must
be reasonable, considering the work involved and the amount customarily
charged in the locality. The charges listed below, while not approved by
VA, are not considered improper when they are customary, agreed to by
the parties, permissible under the loan agreement and are reasonable in
amount:

\(1\) Loan assumption fees. (See pars. 1.13 and 1.14);

\(2\) Processing and reprocessing checks which are returned to the
holder for insufficient funds;

\(3\) Substitution of hazard insurance policies during the life of a
previously furnished policy, when substitution is made at the request of
the mortgagor;

\(4\) Processing partial releases of the mortgaged property;

\(5\) Processing subordination agreements;

\(6\) Modification of the mortgage by a formal written extension or
reamortization agreement; or,

\(7\) Marking the mortgage satisfied if authorized or not prohibited by
local law.

**1.09 Taxes and Insurance**

a**. Payment of Taxes.** Security instruments uniformly require the
obligor to pay taxes timely to prevent a lien with priority over the
mortgage. Failure to pay taxes timely must be reported to VA if it
continues for 180 days (38 CFR 36.4315(a)(2)). Most security instruments
require maintenance of an escrow account by the holder to ensure
payments are timely. Since VA requires the holder to maintain the
priority status of the mortgage lien (38 CFR 36.4325(b)(1)), internal
controls should be in place to confirm payment of taxes by the holder or
the borrower.

b**. Maintenance of Hazard Insurance.** (38 CFR 36.4326) It is the
holder\'s responsibility to assure that insurance policies are
maintained in an amount sufficient to protect the security against risks
or hazards and to the extent customary in the locality. Questions about
the insurance coverage should be referred to the VA regional office of
jurisdiction. Subject to reasonable requirements of mortgagees,
borrowers may choose their insurance carrier.

c**. Prohibitively High Premiums**

\(1\) Holders should not pay prohibitively high insurance premiums for
force-placed coverage without prior approval of VA. If the hazard
insurance is canceled (other than for nonpayment of premium) or renewal
is refused, holders should attempt to obtain coverage through a State
pool or otherwise. If coverage cannot be obtained except at prohibitive
cost, the holder should promptly send VA the following information:

\(a\) The reason for cancellation or for the refusal to renew the
coverage;

\(b\) The evidence of efforts made to obtain coverage and if obtainable,
the lowest cost for such coverage;

\(c\) The amount and type of coverage of the policy being canceled or
not renewed;

\(d\) The condition and current estimated value of the property
improvements and the cost of any repairs required to obtain coverage;

\(e\) The current estimated value of the land; and,

\(f\) The current unpaid principal balance of the loan.

\(2\) Upon receipt of notification, VA will determine whether or not it
is in VA\'s interest to give the holder assurance that a future claim
under guaranty will not be adjusted for failure to maintain hazard
insurance and advise the holder of the determination.

d**. Insurance During Loan Termination.** When a loan is being
terminated and existing coverage has been canceled or renewal refused
and the holder is unable to obtain hazard insurance except at high cost,
the holder should advise VA. At the same time, the holder may request
that VA not make a claim adjustment for failure to maintain hazard
insurance in the event of an uninsured loss. Alternatively, the holder
may choose to obtain high risk insurance rather than rely on receiving
VA\'s assurance that a future claim would not be adjusted for failure to
obtain hazard insurance. In such cases VA will partially reimburse the
cost of high risk insurance in the claim. Reimbursement is based upon
the portion of the premium attributable to coverage to the date of loan
termination or to the date termination should have occurred (i.e., the
cut-off date), whichever is earlier. The percentage of guaranty is then
applied to this portion of the premium. The resulting amount is payable
in the claim.

e**. Amount Required.** The amount of hazard insurance required is
limited to the insurable value of the property or the current loan
balance, whichever is less. The borrower may take out a larger policy if
desired.

f**. Flood Insurance.** (38 CFR 36.4326) Flood insurance is required on
loans closed on and after March 2, 1974, located in a special flood
hazard area designated by HUD (Department of Housing and Urban
Development) where flood insurance is available under the National Flood
Insurance Program. The amount of insurance should be the outstanding
balance of the loan or the maximum limit of coverage available,
whichever is less.

g**. Application of Loss Payments** (38 CFR 36.4326)

\(1\) All payments for insured losses must be applied to the restoration
of the security or to the loan balance. (See par. 6.06d(2).) Any other
disposition must be approved in advance by VA, unless there is a balance
remaining after the security has been fully restored.

\(2\) Settlement of a total or near total loss case should be sufficient
to restore the security. When it appears that settlement proceeds will
not be sufficient to pay off the loan balance or to restore the
security, holders should consult VA before consenting to an insurance
settlement. The holder should send VA a copy of the claim adjuster\'s
report giving a detailed breakdown of the damage sustained. VA will also
inspect the property before any loss settlement and estimate the cost of
repairs.

\(3\) If the settlement proceeds are not to be applied to the loan
balance, VA can assist holders in obtaining the services of compliance
inspectors, at the holder\'s or borrower\'s expense, to assure
satisfactory restoration of the security.

\(4\) To minimize the possibility that a claim may be adjusted for
failure to obtain an adequate loss settlement, holders are encouraged to
advise VA as soon as a major loss has occurred and obtain VA\'s estimate
of the cost of restoration before accepting a loss settlement. Holders
should also be cautious about completing foreclosure while a loss is
pending settlement because sale proceeds may affect settlement. In some
jurisdictions, it may be possible to have a disputed settlement
adjudicated as part of the foreclosure proceedings, but holders should
keep VA advised of their efforts to settle a disputed loss claim.

**1.10 Escrow/Impound Account Maintenance** (38 CFR 36.4346(e))

a\. **Escrow/Impound Accounts.** Holders are not required to collect
periodic deposits for tax and insurance or maintain a tax and insurance
account but may do so if authorized under the terms of the security
instruments. Holders must comply with the provisions of RESPA as
administered by HUD.

b**. Disposition of Excess Balances.** An excess balance in the tax and
insurance account should be disposed of as provided in the loan
agreement and required by RESPA. With the consent of the borrower, VA
will not object to applying the excess balance to delinquent
installments. Similarly, and with the consent of the borrower,
application of the excess to the principal balance or refunding it to
the borrower would be acceptable provided that no obligor is released
from liability on the loan. On current accounts, if the borrower does
not provide specific instructions for disposition of a surplus, it may
be remitted directly to the borrower.

**1.11 Servicing Transfers** (38 CFR 36.4346(d))

Lenders or holders are not required to notify VA of, or obtain VA
approval for, servicing transfers or sub-servicing transfers. It is
recommended, however, that VA be given notice on active delinquencies
(cases on which a notice of default has been filed) so that follow-up on
these cases is maintained. In servicing transfer cases, the transferee
will be held responsible for any failure of the transferor to comply
with VA requirements (other than those discussed in par. 6.06 which are
not applicable to a holder in due course) which would subject the claim
to adjustment. Both the releasing and acquiring holder/servicer must
comply with the disclosure and notification requirements of RESPA as
administered by HUD.

**1.12 Release of Security** (38 CFR 36.4324)

a**. General.** VA will be released from all liability as guarantor if
(1) a holder releases a portion of the security from the lien without
VA\'s prior approval, [and]{.underline} (2) the obligor is released from
personal liability on the entire indebtedness. Even if an obligor is not
released from liability, a claim may be reduced if a portion of the
security was released without following the guidelines below.

b**. Prior VA Approval Not Required.** Holders may approve partial
releases of security without VA\'s prior approval if all of the
following conditions are met:

\(1\) The release did not involve a decrease in value of the security in
excess of \$2,500;

\(2\) The consideration received for the release is commensurate with
the fair market value of the property released;

\(3\) The entire consideration is applied to the indebtedness;

\(4\) The aggregate amount of the release does not exceed \$2,500; and,

\(5\) Any release or substitution of security is reported to the
appropriate VA regional office within 30 days after completion of the
transaction.

c**. Other Releases**

\(1\) All other releases must have the prior approval of VA. The request
for approval should be submitted to the appropriate VA regional office
and should contain:

\(a\) A letter of request from the current owner signed by all
interested or obligated parties to the loan, such as the original
veteran and secondary lienholders. An explanation must be provided if
any person liable on the loan does not sign the request.

\(b\) A survey or sketch of the entire parcel showing clearly the
portion to be released, the dimensions of the parcels, and the locations
of all improvements.

\(c\) The status of loan, including the current unpaid principal balance
and whether the loan payments are current.

\(d\) The consideration, if any, to be received for the property.

\(e\) The details of the intended disposition of funds, if consideration
is not going to be applied to the indebtedness.

\(f\) Any available indication of the value of the property being
released.

\(g\) A statement from the borrower agreeing to pay for the cost of an
appraisal or survey if VA determines one is necessary.

\(2\) In general, the consideration received for the release must be at
least equal to the reasonable value of the security released. If the
entire consideration is not used to reduce the indebtedness, the ratio
of loan balance to the remaining security must be adequate to protect VA
against possible future loss in case of liquidation of the remaining
security. VA will generally consider a loan-to-value ratio of 75 percent
or lower to be adequate.

\(3\) Depending on the factual situation, VA may order a land survey of
the property and/or an appraisal showing the reasonable value before and
after the partial release to be made. The persons requesting the release
will be required to pay the expense of the appraisal and/or land survey
whether or not VA approves the request.

\(4\) VA will advise the holder by letter of the decision and give
notice of any conditions required for approval of the request for
release.

**1.13 Loan Assumptions and Release of Liability\--Loans Made Prior to**

**March 1, 1988**

a**. Right to Sell**

\(1\) The owner of property that is security for a VA loan for which a
commitment was made prior to March 1, 1988, has the right to sell the
property on any terms. No restriction, charge or fee may be imposed by a
holder or its servicing agent that would limit or nullify this right.

\(2\) An exception applies when the loan was made by a State,
territorial, or local governmental agency and the law requires
acceleration of maturity of the loan upon sale or conveyance of the
security property to a person ineligible for assistance. VA has approved
due-on-sale clauses to allow veterans to participate in certain programs
that require them to allow veterans to take advantage of below-market
interest rates or other benefits.

b**. Fees.** VA does not approve fee charges for recording change of
ownership of the mortgaged property. However, holders may charge up to
\$50 for amending their records to reflect a change in ownership, if the
parties involved agree and it is permissible under the loan agreement.

c**. Liability of the Veteran.** The original mortgagor remains liable
on the mortgage indebtedness unless he or she is released from personal
liability. Under Federal law and VA regulations, the original
veteran-borrower is obligated to indemnify the Government for any amount
VA is required to pay the holder under the contract of guaranty. (For
loans closed after December 31, 1989, however, veterans will not be
required to reimburse the Government for claim payments except when
evidence of fraud, misrepresentation or bad faith in connection with the
loan origination or default is found.) This indemnity obligation is in
addition to any rights VA may acquire by subrogation from the holder. VA
encourages holders to include language on pay-off statements which
reminds veterans of their liability and recommends that they obtain a
release of liability from VA before permitting a loan assumption.

d**. Requirements for Release of Liability**

\(1\) Upon application made by a veteran and the transferee, VA will
release the veteran from liability to the Government on the loan if the
following three conditions are met:

\(a\) The loan is current;

\(b\) The purchaser qualifies as an acceptable credit risk; and,

\(c\) The purchaser assumes the veteran\'s loan obligations and
liability (including the veteran\'s indemnity obligation), as evidenced
by a written agreement in the form required by the VA office of
jurisdiction or one that is found to have the same legal effect.

\(2\) The party assuming the loan need not be a veteran. A veteran may
take advantage of this procedure regardless of whether the house was
sold at a profit. The veteran\'s release also applies to the spouse.

e**. Effects on Holder.** A holder is not required to release the
veteran from liability to it. The veteran\'s release from liability to
VA will not affect the holder\'s rights to proceed against the veteran
or affect the holder\'s contract of guaranty.

f**. Processing of Applications.** A release of liability must be
processed by the VA office having jurisdiction over the loan. Holders
will be requested to supply certain information, such as the current
status of the loan, during the processing.

g**. Notice to Holders.** Generally, the loan holder will not be
notified that a release had been granted unless notice was specifically
requested. VA began to provide holders with copies of the obligor\'s
release notification letter in mid-1993.

**1.14 Loan Assumptions and Release of Liability\--Loans Committed On**

**or After March 1, 1988**

a**. Limited Assumability.** Assumptions of loans for which loan
commitments were made on or after March 1, 1988, must have the prior
approval of VA or a VA automatic lender. With the exception of
assumptions processed under the \"special approval by VA\" procedure
described in subparagraph f below, approval of an assumption of a loan
releases the veteran from liability to VA. The security instruments are
required to carry a statement, in large type, that the loan may not be
assumed without VA\'s prior approval. Failure to secure approval could
lead to the acceleration of the loan after the transfer. Assumptions and
releases of liability are generally processed by holders and include a
funding fee and processing charge.

b**.** **Funding Fee** (38 CFR 36.4312(e))

\(1\) Funding fee equal to one-half of 1 percent of the loan balance as
of the date of transfer must be paid by the transferee to the loan
holder or its agent, at the time of transfer. The following are exempt
from paying the funding fee as an assumer:

\(a\) A veteran receiving VA compensation for a service-connected
disability;

\(b\) A veteran who, but for receipt of military retirement pay, would
be entitled to receive compensation; and,

\(c\) A surviving spouse of a veteran who died in service or from a
service-connected disability.

\(2\) See VA Pamphlet 26-7, Lender\'s Handbook, chapter 6, section II,
for more information on exemptions from the funding fee and acceptable
documentation.

\(3\) The holder should list the funding fee amount in every assumption
statement provided and include a notice that the fee must be paid to the
holder immediately following loan settlement.

\(4\) The holder must send the fee to the Secretary of Veterans Affairs
within 15 days of the receipt by the holder of the notice of transfer.
Transmittal of the funding fee to VA must be completed in accordance
with VA Pamphlet 26-7, Lender\'s Handbook, chapter 6, section II. The
loan amount (item 10) on the transmittal form (VA Form 26-8986, Loan
Guaranty Funding Fee Transmittal, see fig. 1-1) will be the balance of
the loan assumed by the new owner rather than the original loan balance.
However, the date of loan closing (item 9) will be the date the loan
originally closed, not the transfer date.

c**. Processing Charge.** (38 CFR 36.4312(d)(8)) The maximum charge for
processing an assumption application and changing the loan records is
the lesser of:

\(1\) \$300 plus the actual cost of any credit report required; or,

\(2\) Any maximum prescribed by applicable State law.

A holder may collect this charge in advance, including a reasonable
estimate for the cost of the credit report, and then refund the portion
allocable to a records change (\$50) if the transfer is not completed. A
charge of \$50 is for underwriting the assumption. If VA is
underwriting, the \$50 charge cannot be assessed or must be refunded. VA
does not specifically regulate when the \$300 charge may be assessed;
however, since borrowers or brokers may request an assumption package
before a sales contract has been signed, it is recommended that holders
require that the fee accompany the completed package rather than
requiring it as a condition for mailing the forms to a requester.

d**. Processing of Assumptions - Automatic Lenders** (38 CFR
36.4303(k)(1))

\(1\) **Responsibility.** If both the holder and its servicing agent are
automatic VA lenders, they must decide which one will make the
determinations described below. If the actual loan holder does not have
automatic authority and its servicing agent is an automatic lender, the
servicing agent must make the determinations for the holder. The holder
will remain responsible for any failure of its servicing agent to comply
with the applicable law and VA regulations.

\(2\) **Processing and Underwriting.** If the seller applies for
approval of the assumption prior to completing the sale, a holder or its
authorized servicing agent who is an automatic lender must examine the
application to determine compliance with the following provisions of 38
U.S.C. 3714:

\(a\) The loan is current (or will be brought current at the closing of
the sales transaction).

\(b\) The prospective purchaser of the property is creditworthy. The
creditworthiness review must be performed by the party that has
automatic authority and must be conducted in accordance with 38 CFR
36.4337 and VA Pamphlet 26-7, Lender\'s Handbook, Chapter 5, Section II.

\(c\) The prospective purchaser has agreed to assume all of the loan
obligations, including the obligation to indemnify VA if a claim is
paid.

\(3\) **Timeliness Requirements.** The holder must complete its
examination and advise the seller of its decision no later than 45 days
after the holder receives a complete application package for approval of
an assumption. The 45-day period may be extended by the amount of time
lost to delays documented as beyond the control of the holder, such as
employers or depositories not responding to requests for verifications
or follow-ups on requests.

\(4\) **Approval Notices.** When advising the seller that the assumption
has been approved, the holder should include instructions for the
assumption of liability (see subpar. b below) and the amount of funding
fee which will be payable. After the transfer is completed, the holder
must send VA:

\(a\) The credit package containing an application, loan analysis,
credit report, verifications of income and deposits, and other pertinent
information used to support the income and credit determination. If this
information was previously submitted in connection with an appeal, it
will not be necessary to send duplicate copies.

\(b\) A copy of the executed deed and/or assumption agreement as
required by the VA office of jurisdiction. Requirements for assumption
of liability to a loan holder and to VA will vary according to local
law. Each VA regional office has prepared for each State under its
jurisdiction an information package describing the usual requirements
for assumption of liability, as well as procedures to follow for unusual
cases. Holders should obtain a package for each State in which they do
business.

\(c\) A certification by the holder\'s or servicer\'s VA-approved
underwriter that the assumption complies with the applicable law and
regulations.

\(d\) A copy of the VA receipt for the assumption funding fee.

\(5\) **Disapproval Notices.** If the application for assumption is
disapproved, the holder must notify the seller and the purchaser that
the decision may be appealed to VA within 30 days. When a case is
appealed to VA, the holder must provide VA all items it used in making
its decision. If the application remains disapproved after 60 days (to
allow time for appeal and review by VA) the holder must refund \$50 if
it previously collected any processing charge, because there will be no
need for a records change.

\(6\) **Appeal to VA.** If the assumption is approved on appeal, VA will
notify the seller and loan holder. If it is not approved, VA will notify
the seller and holder and advise the seller of the right to request
\"special approval\" within 15 days of receipt of the disapproval
notice.

e**. Processing of Assumptions - Holders and Servicers Without Automatic
Authority** (38 CFR 36.4303(k)(1)(ii))

\(1\) **Usual Processing.** If neither the holder nor its authorized
servicing agent is an automatic lender, and the seller applies for
approval of the assumption prior to completing the sale, the holder or
its agent must develop a complete credit package for VA to determine the
creditworthiness of the purchaser. This package must be sent to VA along
with a copy of the purchase contract and information as to whether the
loan account is current or in default.

\(2\) **Timeliness Requirements.** Documents must be submitted to the VA
regional office of jurisdiction no later than 35 days after the date the
holder receives a complete application package, subject to the same
extensions for documented delays previously described for automatic
lenders in subparagraph d(3) above. If VA advises that a proposed
assumer is creditworthy and the transfer is completed, the holder will
be required to timely submit the appropriate documentation to VA (see
subpar. d(4) above), although the certification will not require the
signature of an underwriter, and will state only that the application
for assumption approval was processed in accordance with the applicable
law and regulations.

\(3\) **Processing Charge and Refunds.** If the maximum processing
charge of \$300 was collected with an application for assumption
approval (based on the possibility that a firm may be servicing loans
for holders with and without automatic authority) and the credit package
must be referred to VA for the underwriting decision, then \$50 of the
maximum charge must be refunded. If VA does not approve the application
or if the appeal is denied, the holder will be notified and an
additional \$50 of the processing charge must be refunded following the
expiration of the 30-day appeal period because this amount will not be
needed to complete a records change.

f**. Special Approval by VA.** Within 15 days of receipt of the
disapproval notice, the seller may request \"special approval\" from VA.
VA may determine \"special approval\" is in the best interest of the
Government if:

\(1\) The transferor agrees to remain secondarily liable on the loan
following assumption,

\(2\) The transferor is unable to otherwise continue payments on the
loan, and

\(3\) Reasonable efforts have been made to find a creditworthy buyer for
the property.

If approved, VA will provide notice to the transferor and the loan
holder that the assumption has been approved and that he or she will
[not]{.underline} be released from liability to VA. The \"special
approval\" by VA does [not]{.underline} include approval for the loan
holder to release any obligor from liability. If an obligor is released
by the loan holder without VA\'s prior approval, VA may be released from
further liability on the guaranty.

g\. **Transfer Without Prior Approval.** (38 CFR 36.4303(k)(2)) The
holder must notify VA within 60 days after learning of a transfer that
did not receive prior approval of VA or an automatic lender. The notice
must advise VA whether the holder intends to exercise its option to
immediately accelerate the loan or whether the transferor and transferee
will be given the opportunity to apply for \"retroactive approval\" of
the assumption. In this context, the phrase \"acceleration of the loan\"
means referral to an attorney to initiate foreclosure.

\(1\) **Review of Purchaser\'s Liability.** Upon learning of an
unapproved transfer, a holder may decide to demand immediate payment of
the one-half of one percent VA funding fee and request a copy of the
instrument of transfer to determine the liability of the purchaser.

\(a\) **Liability Assumed.** If the purchaser pays the funding fee and
has assumed all of the seller\'s obligations in the transfer deed (and
if the assumption language is legally binding), then it would appear
that the purchaser intends to satisfy those obligations and an
opportunity for retroactive approval of the transfer probably should be
afforded.

\(b\) **Liability Not Assumed**. If prior approval of a transfer was not
obtained and the title transferred \"subject to\" the mortgage or deed
of trust, then the purchaser usually has no liability on the loan. Such
a purchaser may have no incentive and little intention of maintaining
the payments. It may still be advisable to extend the opportunity to
apply for retroactive approval of the transfer, with the expectation
that the purchaser will assume liability for repayment of the loan.

\(2\) **Retroactive Approval Processing.** If an opportunity to apply
for retroactive approval is granted, processing will be completed in the
same manner as if the application had been received prior to the
transfer, including the right of appeal to VA.

\(3\) **Consideration of Loan Acceleration.** Should a purchaser fail to
cooperate in the retroactive approval process, then acceleration of the
loan may or may not be advisable, depending upon the implications under
State law of delaying acceleration, as compared to the prospect of
accelerating a current loan which has the potential for future timely
payments.

h\. **Release of Liability.** (38 CFR 36.4323(h)) When an application
for assumption is approved (either by VA or the loan holder or servicer)
and the transfer is completed with the purchaser assuming all of the
seller\'s liability on the loan and to VA, the holder must release the
seller of further liability to VA. This may be done in letter form if
not a part of an assumption agreement, or if an agreement is not
required. If it desires to do so, the holder is also authorized to
release the seller from liability to the holder on the loan without
separate approval from VA. This does not apply if the seller has agreed
to remain liable and has obtained \"special approval\" for the
assumption from VA.

i**. Unrestricted Transfers.** (38 CFR 36.4308(c)(1)) Certain transfers
of ownership otherwise subject to 38 U.S.C. 3714 do not require prior
approval of the holder, as described below. A loan may not be
accelerated due to these types of transfers, and a release of liability
will not be processed by the holder. Application for release of
liability on unrestricted transfer cases must be processed by VA. The
processing charge and funding fee may not be collected. However, a
reasonable fee up to \$75 may be charged for changing the holder\'s
account records, provided it is agreed to by the parties or is
permissible under the loan agreement.

\(1\) The creation of a lien or other encumbrance subordinate to the
lender\'s security instrument which does not relate to a transfer of
rights of occupancy in the property;

\(2\) The creation of a purchase money security interest for household
appliances;

\(3\) A transfer by devise, descent, or operation of law on the death of
a joint tenant or tenant by the entirety;

\(4\) The granting of a leasehold interest of 3 years or less not
containing an option to purchase;

\(5\) A transfer to a relative resulting from the death of a borrower;

\(6\) A transfer when the spouse or child of the borrower becomes a
joint owner of the property with the borrower;

\(7\) A transfer resulting from a decree of a dissolution of marriage,
legal separation agreement, or from an incidental property settlement
agreement by which the spouse of the borrower becomes the sole owner of
the property. In such a case, the borrower has the option of applying
directly to the VA regional office of jurisdiction for a release of
liability under 38 U.S.C. 3713(a); or

\(8\) A transfer into an inter vivos trust in which the borrower is and
remains a beneficiary and which does not relate to a transfer of rights
of occupancy in the property.

j**. Sale Agreements Not Subject to 38 U.S.C. 3714.** A sale on an
installment contract, contract for deed, or similar arrangement in which
title is not transferred from the seller to the buyer is not considered
a \"disposition\" of property and therefore does not require prior
approval by VA or the loan holder. However, the holder should caution
any borrower considering a sale in this manner that he or she remains
liable for repayment of the loan under such an arrangement.

\(1\) **Loan Records**. Even if the agreement calls for the contract
purchaser to make payments directly to the loan holder, the holder is
not required by VA to change its records, and the contract seller is
responsible for forwarding payment coupons and other information to the
contract purchaser. Depending on the circumstances of a case, a holder
may agree to change the account address to read in care of the contract
purchaser, although the contract seller must promptly advise the holder
of any change in his or her address.

\(2\) **Eventual Title Transfer on Contract Sales**. Sales by
installment contracts typically call for transfer of title after a
certain period of time. If the contract calls for title to transfer
prior to payment in full of the VA loan, assumption approval will be
required, and processing charges and VA funding fees will be applicable
upon transfer. The borrower should be advised to include as one of the
conditions of the contract that application for assumption approval be
made, and approval secured, prior to the completion of title transfer.
The contract should then address the options of both parties if the
request for assumption approval is disapproved. Among the options could
be voiding the contract with forfeiture of all payments previously made,
or an extension of the contract period to allow the purchaser to correct
any credit deficiencies and apply for approval at a later date.

k**. Substitution of Entitlement.** VA will continue to process the
substitution of entitlement on assumption cases, although this will
usually be done only after a holder has provided notice of an approved
transfer. If a review of the sales contract indicates it is contingent
upon restoration of VA benefits, or if a question about the possibility
of substitution of entitlement arises, the seller should be referred to
the VA office of jurisdiction. To complete a substitution, the buyer
must have sufficient entitlement to substitute for that of the seller,
and this information can usually be obtained only from VA. In addition,
the veteran-buyer must certify that the property securing the loan will
be occupied as his or her home using VA Form 26-8106, Statement of
Veteran Assuming GI Loan (Substitution of Entitlement). In some cases,
VA Form 26-8320, Certificate of Eligibility for Loan Guaranty Benefits,
may be valid only if the veteran provides a certification that he or she
has not been released from active duty at the time a loan is obtained or
assumed.

l**. Transmittals to VA.** Appendix C provides detailed instructions on
origination loan file setup for prior-approval applications and
closings, and for automatic loans. The same order is appropriate in
providing items required by the various types of notices which will be
submitted on assumption approvals and releases of liability. Processing
at VA will be expedited if holders include a cover letter identifying it
as a completed transfer, a request for approval by VA, or information on
an appealed case. The cover letter should also identify the VA loan
number, original veteran, and the name and telephone number of a contact
person at the holder/servicer. Any indication of a request for
substitution of entitlement should also be noted.

**1.15 Soldiers and Sailors Civil Relief Act**

a\. The Soldiers and Sailors Civil Relief Act of 1940, as amended (50
USC App. sections 501-590) provides for a loan interest rate cap of 6
percent and other relief for veteran-borrowers called to active military
service on loan obligations incurred prior to their current period of
service. Foreclosures must be approved by the court. If a claim is
filed, VA will not include interest on the obligation in excess of 6
percent for the period of time the veteran was eligible for the rate
reduction provisions of the Act.

b\. Appendix D, Circular 26-90-32, provides more information about the
Act. Holders are advised to consult counsel to ensure compliance with
all provisions of the Act as well as any local statutes that may require
the extension of forbearance. VA does not administer the Act.

**1.16 Loans Paid in Full** (38 CFR 36.4333)

Upon full satisfaction of a guaranteed loan by payment or otherwise, the
holder must return the certificate of guaranty to VA marked canceled. If
the certificate is not available, the holder must still inform VA in
writing that the loan has been paid in full.

\<I\<ADVANCED,26H94102.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
1-1. VA Form 26-8986, Loan Guaranty Funding Fee Transmittal\</D\>

**CONTENTS**

**CHAPTER 2. DELINQUENT SERVICING**

**PARAGRAPH PAGE**

2.01 System for Servicing Delinquent Loans 2-1

2.02 Collection Actions 2-2

2.03 Conducting Interviews with Delinquent Borrowers 2-3

2.04 Property Inspections 2-3

2.05 Collection Records 2-4

2.06 When and How to Report the Default 2-4

2.07 VA Form 26-6850, Notice of Default . 2-5

2.08 Interim Loan Status Reports to VA 2-6

2.09 Partial Payments 2-7

2.10 Bankruptcy and Other Legal Proceedings 2-8

2.11 VA Supplemental Servicing 2-8

**Figure**

2-1 VA Form 26-6850, Notice of Default 2-10

2-2 VA Form 26-8778, Request to Lender for Status of Loan Account - LCS
2-11

2-3 VA Form 26-8761, Notification to Borrower of Default 2-12

2-4 VA Form 26-8762, Notice to Borrower Regarding

Foreclosure of Mortgage 2-14

**CHAPTER 2. DELINQUENT SERVICING**

**2.01 System for Servicing Delinquent Loans** (38 CFR 36.4346(f))

VA has a keen interest in delinquent loan servicing both because of the
Government\'s financial obligation as guarantor and because of the
responsibility to provide assistance to veterans. Holders must have a
system for servicing delinquent loans which ensures that prompt action
is taken to collect amounts due from borrowers and minimizes the number
of loans in default. The holder\'s servicing system must include the
following:

a\. An accounting system that promptly alerts servicing personnel when a
loan becomes delinquent.

b\. A collection staff trained in the techniques of loan servicing and
counseling delinquent borrowers about:

\(1\) How to cure delinquencies;

\(2\) Protecting their equity and credit rating; and,

\(3\) Alternatives to foreclosure.

c\. Procedural guidelines for the individual analysis of each
delinquency.

d\. Instructions and controls for:

\(1\) Sending delinquent notices;

\(2\) Assessing late charges;

\(3\) Handling partial payments;

\(4\) Maintaining servicing histories; and,

\(5\) Evaluating repayment proposals.

e\. Management review of collection efforts and borrower response prior
to a decision to start liquidation.

f\. Procedures for reporting delinquencies of 90 days or more and loan
terminations to major credit bureaus and for informing borrowers that
such action will be taken. (VA does not object to reporting
delinquencies earlier or to full file reporting.)

g\. Controls to ensure that required notices are sent to VA on time and
in the proper form.

**2.02 Collection Actions** (38 CFR 36.4346(g))

Holders should employ collection techniques which are flexible enough to
adapt to the individual needs and circumstances of each borrower. A
variety of collection techniques may be used, although the holder\'s
collection procedures must at least include the following:

a**. Delinquent 17 Days.** If a loan installment has not been received
within 17 days after it is due, the borrower must be sent a written
delinquency notice requesting immediate payment. The notice must be
mailed no later than the 20th day of the delinquency and must state the
amount of the payment and of any late charges that are due.

b**. Telephone Contact.** Concurrent with the delinquency notice (in any
event, no later than the 30th day of the delinquency), an attempt should
be made to contact the borrower by telephone to determine why payment
was not made and to emphasize the importance of remitting loan
installments as they come due.

c**. Delinquent 30 Days.** If telephone contact has not been made, a
second letter, preferably personally worded, must be sent to the
borrower. The letter should:

\(1\) State that the loan is in default.

\(2\) Emphasize the seriousness of the delinquency and the importance of
taking prompt action to resolve the default.

\(3\) Report the total amount due.

\(4\) Advise the borrower how to contact the holder to make arrangements
for curing the default.

d**. Face-to-Face Interview.** A reasonable effort to arrange a
face-to-face meeting must be made if the holder has not established
contact with the borrower and has not determined the borrower\'s
financial circumstances or established a reason for the default or
obtained the borrower\'s agreement to a repayment plan before the
default is reportable to VA. Services of a third party, such as a
property inspection contractor, may be obtained for this purpose.
Holders have the option of authorizing a third party contractor to
perform all, or some, of the servicing actions outlined in paragraph
2.03 or restricting them to referring the borrower to the holder\'s
office for completion of a servicing interview.

**e. Failure to Perform.** The holder must explain any failure to
perform these collection actions when reporting loan defaults to VA.

**2.03 Conducting Interviews with Delinquent Borrowers** (38 CFR
36.4346(h))

When personal contact with the borrower is established, the holder
should solicit enough information to evaluate the prospects for curing
the default and to decide whether forbearance or other relief assistance
would be appropriate. At a minimum, the holder must make a reasonable
effort to establish the following:

a\. The reason for the default and whether the reason constitutes a
temporary or permanent condition;

b\. The borrower\'s present income and employment;

c\. The current monthly expenses of the borrower, including all
household and debt obligations;

d\. The borrower\'s current mailing address and telephone number; and,

e\. A realistic and mutually satisfactory arrangement for curing the
default.

**2.04 Property Inspections** (38 CFR 36.4346(i))

a**. When to Inspect.** The holder should make an inspection of the
mortgaged property whenever it becomes aware that its physical condition
may be in jeopardy. Unless a repayment agreement is in effect, a
property inspection must also be made at the following times:

\(1\) Before the 60th day of delinquency or before initiating action to
liquidate a loan (i.e., referring the case to an attorney to begin
foreclosure), whichever is earlier;

\(2\) At least once each month after liquidation proceedings have been
started, unless servicing information shows the property remains
owner-occupied.

A reasonable fee for property inspections required by VA may be charged
to the borrower if permitted by the loan instruments and included in a
claim filed with VA if the account is not reinstated. VA should be
notified in writing if any damage to the property is found (the notice
of default may be used for this purpose if one has not yet been filed
when the damage is found; otherwise, a letter or memorandum should be
sent).

b**. Abandonment.** When a holder obtains information that a mortgaged
property is abandoned, it should make appropriate arrangements to
protect the property from vandalism and the elements. Thereafter,
inspections should be scheduled at least monthly to prevent unnecessary
deterioration due to vandalism or neglect. For any loan more than 30
days delinquent, a property abandonment must be reported to VA and
appropriate action (i.e., referral to counsel to initiate foreclosure)
initiated within 15 days after the holder confirms the property is
vacant. See paragraph 4.06 for instructions on filing VA Form 26-6850a,
Notice of Default and Intention to Foreclose. VA can waive this
requirement if there is reason to believe the account will be
reinstated. Reasonable judgment should be exercised in considering all
circumstances\--property condition, for sale signs, date of last payment
received, presence of personal property or vehicles, yard condition,
owner\'s mailing address, etc.\--and arriving at a conclusion as to
whether a property is abandoned or temporarily vacant.

**2.05 Collection Records** (38 CFR 36.4346(j))

Individual file records of collection action on delinquent loans must be
maintained and made available to VA for inspection on request. Paper
files, database records, or any combination are acceptable, as are
designations used to identify standardized form letters and notices. The
collection records must contain:

a\. The dates and content of letters and notices which were mailed to
the borrower(s);

b\. Dated summaries of each personal servicing contact and the results;

c\. The indicated reason for default; and,

d\. The date and result of each property inspection.

This information must be reported on the notice of default and the
notice of intention to foreclose forms.

**2.06 When and How to Report the Default** (38 CFR 36.4315(a))

a**. General**. The holder must notify the VA office of jurisdiction
within 45 days after a borrower is in default:

\(1\) By reason of nonpayment of any installment for 60 days from the
date of first uncured default; or,

\(2\) By failing to comply with any other covenant or obligation of the
loan for a continuing period of 90 days after demand for compliance has
been made. Nonpayment of real estate taxes do not need to be reported
until the failure to pay when due has persisted for 180 days.

The NOD (VA Form 26-6850, Notice of Default), should be used to report
the default.

For nonpayment default, VA must be in receipt of the NOD within 105 days
of the date of the first uncured default. Failure to report timely could
lead to an adjustment of any claim under guaranty. (38 CFR 36.4325(b))

**b. Assumptions**

\(1\) For loans closed based on commitments issued after March 1,1988
(which cannot be assumed without prior approval), VA must be notified on
VA Form 26-6850 within 60 days after the holder learns of an unapproved
change of ownership.

\(2\) For older loans which can be assumed without prior approval, an
NOD should be filed within 15 days after two installments are due and
unpaid, if an assumption took place less than 12 months before the date
of first uncured default. (Early reporting in these cases is not
mandatory, but is strongly recommended because it can reduce losses
caused by transfer of property to equity skimmers or unqualified
buyers.)

c**. Abandonments.** VA Form 26-6850a should be used if the property is
abandoned or if it is determined that the default is insoluble before
the NOD has been filed. Abandonments, as well as cases when the default
is determined to be insoluble before 60 days have elapsed from the date
of first uncured default, should be reported promptly. NOTE: 38 CFR
36.4346(i) requires holders to begin action under 38 CFR 36.4317(a)
within 15 days after confirming a property is abandoned. If the loan is
in default, VA will construe \"appropriate action\" under the regulation
as referral of the case to counsel for initiation of foreclosure. While
the regulations do not specifically require that a notice of default be
filed under these circumstances, VA asks holders to do so, using VA Form
26-6850a.

d**. Cures.** If the loan was previously in default but has been
reported cured, a new NOD must be filed. If there is any question as to
whether a cure was reported, a new NOD should be filed to avoid the risk
that a subsequent claim will be adjusted for failure to report the
default timely. VA will treat the NOD as a status update if no cure has
been processed.

**2.07 VA Form 26-6850, Notice of Default**

An example of a properly completed NOD appears in figure 2-1. In filling
out the NOD, holders should pay special attention to the following:

a\. **VA LIN (VA Loan Identification Number)**. The VA LIN must be
numeric and 12 digits in length. Many VA loan numbers in holders\'
records have less than twelve digits because of the way they were
assigned by the VA regional office of jurisdiction. They should be
converted to the correct VA LIN in accordance with the instructions in
appendix B.

b\. **Holder\'s and Servicing Agent\'s Phone Number**. A specific,
direct line, telephone number enables VA loan service representatives to
contact the proper specialist in the holder\'s servicing department when
discussion of a case is necessary.

c\. **Date of First Uncured Default (Item 2)**. This is the due date of
the first or earliest partially or fully unpaid installment.

d\. **Present Owner\'s Social Security Number (Item 3A)**

e\. **Present Owner\'s Telephone Number (Items 17E and 17F)**. A
diligent effort should be made to obtain the telephone numbers for both
the property owner\'s place of employment and home. If numbers are not
available, note in the servicing summary what efforts have been made to
obtain them. This will prevent duplication of effort when VA begins
supplemental servicing.

f\. **Original Veteran\'s Name and Present Address (Item 8)**. If
someone other than the original veteran is the present owner, the name
and current address of the original veteran should be provided. For
purposes of the NOD, the original veteran\'s name is required by 38 CFR
36.4332; his or her current address should be the most recent available
in the holder\'s system of records (after a notice of intention to
foreclose is filed, holders [must]{.underline} make an effort to
determine the original veteran\'s current address\--see par. 4.07).
Because veterans may be held liable to reimburse the Government for
claims paid due to transferee defaults, VA requires this information to
try to provide veterans with notice of transferee defaults. In some
areas, generally those in which foreclosure cannot be completed quickly,
it is not essential that VA have this information at the time the NOD is
filed. Since many holders do not retain data on prior obligors in their
automated servicing records, each VA office of jurisdiction has issued a
release informing holders whether or not they must strictly adhere to
this regulatory requirement.

g\. **Reason for Default (Item 19)**. Usually there are reasons other
than for default besides \"improper regard.\" Check for curtailment of
income, marital difficulties, illness or injury, extensive obligations,
etc. Use item 19 if no contact has been made with the borrower and the
reason for default is unknown.

h\. **Summary of Loan Servicing (Item 20)**. It is very important that
VA have complete information about the default and the prospects for
resolution. Use the back of the NOD or separate sheet of paper if more
space is needed. A narrative summary of any contacts made with the
borrowers is helpful in evaluating the prospects of a loan reinstatement
and for VA supplemental servicing. A copy of the in-house servicing
record is acceptable as long as the VARO has been provided with
instructions on how to read it and explanations of any abbreviations it
contains.

i\. **Signature (Item 22)**. The form must be signed by a corporate
officer or other authorized full-time employee of the holder or its
servicing agent. If the proper signature is omitted, the form will be
returned for signature. The individual signing the notice should review
the form to see that the information provided is accurate.

j\. The NOD must include certification that the default has been
reported to the credit bureaus.

**2.08 Interim Loan Status Reports to VA**

a\. On loans reported in default, VA regularly produces a
computer-generated VA Form

26-8778, Request to Lender for Status of Loan Account-LCS. This form
should be completed and returned without delay. The information provided
updates VA\'s records and assists in determining the viability of the
loan. Failure to provide updates timely may result in the establishment
of premature cut-off dates under 38 CFR 36.4319(f) and unnecessary
telephone requests from VA for current information.

b\. In completing the status update, use the servicing update/remarks
section to advise VA of servicing efforts, contacts made, arrangements
made with the borrower, or special occurrences such as bankruptcy. If
additional space is required, use the reverse side of the form or an
additional sheet of paper. As with an NOD, a copy of the in-house
servicing record is acceptable as long as it can be understood by VA.
Figure 2-2 is an example of a properly completed VA Form 26-8778.

c\. Holders should notify VA as soon as possible when a default is cured
or a repayment plan is arranged. It is not necessary to wait for a
status request from VA or to use a specific VA form.

**2.09 Partial Payments** (38 CFR 36.4315(b))

A partial payment is a remittance on a loan in default of any amount
less than the full amount due under the terms of the loan which are in
effect when the payment is tendered.

a**. Acceptance of Partial Payments**

\(1\) The holder must accept any partial payment except as provided in
subparagraph b below. The holder must either apply it to the borrower\'s
account or identify it with the borrower\'s account number and hold it
in suspense pending disposition. When partial payments held for
disposition add up to the full monthly installment, including escrow,
they must be applied to the borrower\'s loan.

\(2\) Partial payments should not be processed routinely unless they are
remitted under the terms of a forbearance/reinstatement plan. When one
is received, even if it must be accepted pursuant to the regulation, the
holder should contact the borrower to find out why only a partial
payment was remitted and arrange for payment of the balance due to cure
the default.

b\. **Return of Partial Payments.** A partial payment may be returned to
the borrower only if one of the following conditions exists:

\(1\) The property is wholly or partially tenant-occupied and rental
payments are not being remitted to the holder for application to the
loan account;

\(2\) The payment is less than one full monthly installment, including
escrow and late charge, if applicable, unless a lesser amount has been
agreed to under a written repayment plan;

\(3\) The payment is less than 50 percent of the total amount then due,
unless a lesser payment amount has been agreed to under a written
repayment plan;

\(4\) The payment is less than the amount agreed to in a written
repayment plan;

\(5\) The amount tendered is in the form of a personal check and the
borrower has been previously notified in writing that only cash or
certified remittances are acceptable;

\(6\) A delinquency of any amount has continued for at least 6 months
since the account first became delinquent and no written repayment plan
has been arranged;

\(7\) Foreclosure has been commenced with the first action required for
foreclosure under local law;

\(8\) The holder\'s lien position would be jeopardized by acceptance of
partial payment; or,

\(9\) The VA office of jurisdiction has given prior approval to return
partial payments received on the account.

The payment must be returned within 10 calendar days from the date of
its receipt, accompanied by a letter of explanation.

**2.10 Bankruptcy and Other Legal Proceedings** (38 CFR 36.4319)

When a holder initiates suit or otherwise becomes a party in any legal
or equitable proceeding in connection with a guaranteed loan, copies of
all procedural papers must be provided to the VARO of jurisdiction.
Failure to do so may result in partial or total loss of guaranty. This
includes bankruptcy, partition suits, foreclosure by second lien
holders, condemnation notices, etc. VA must receive the notice in time
to respond to the proceeding as if VA were a direct party to the action.
Timely submission of bankruptcy notices is especially important because
failure to do so may result in establishment of a premature cut-off date
(under 38 CFR 36.4319(f)) by VA. Bankruptcy notices should include a
copy of the schedule of creditors, when available, because this
information is useful for evaluating prospects for reinstatement of the
loan and may provide an insight into the accuracy of the loan or
assumption application, especially in a loan default within the first 2
years of origination or an approved assumption, .

**2.11 VA Supplemental Servicing**

a\. **Purpose.** The primary responsibility for servicing delinquent
loans rests with the loan holder. However, an aggressive program of
personal supplemental servicing is conducted by VA to ensure that each
veteran-borrower is afforded the maximum opportunity to continue as a
homeowner during periods of temporary financial distress. VA also
attempts, through supplemental servicing, to minimize losses to the
Government as a result of foreclosure.

b\. **Servicing Process**

\(1\) Upon receipt of an NOD, VA automatically sends the borrower a
letter describing the various options for reinstating the loan or
otherwise avoiding foreclosure. A similar letter is sent after VA
receives an NOI or NOD&I. Copies of these letters appear in figures 2-3
and 2-4.

\(2\) VA personnel will attempt to contact the veteran-borrower by
telephone in most cases to reinforce the seriousness of the default and
determine if there is any way to resolve it other than foreclosure. In
many cases, VA will recommend a specific repayment plan for the borrower
to propose to the holder. Occasionally, VA will contact the holder
directly to request forbearance or acceptance of a repayment plan. The
VA loan service representatives involved in supplemental servicing are
experienced in loan servicing and will base proposals for forbearance,
repayment plans or alternatives to foreclosure on a detailed analysis of
the borrower\'s financial situation and motivation.

\<I\<ADVANCED,26H94103.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
2-1. VA Form 26-6850, Notice of Default\</D\>

\<I\<ADVANCED,26H94104.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
2-2. VA Form 26-8778, Request to Lender for Status of Loan
Account-LCS\</D\>

\<I\<ADVANCED,26H94105.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
2-3. VA Form 26-8761, Notification to Borrower of Default\</D\>

\<I\<ADVANCED,26H94106.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
2-3\--Continued. VA Form 26-8761, Notification to Borrower of Default
(Reverse)\</D\>

\<I\<ADVANCED,26H94107.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
2-4. VA Form 26-8762, Notice to Borrower Regarding Foreclosure of
Mortgage\</D\>

\<I\<ADVANCED,26H94108.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
2-4\--Continued. VA Form 26-8762, Notice to Borrower Regarding
Foreclosure of Mortgage (Reverse)\</D\>

**CONTENTS**

**CHAPTER 3. ALTERNATIVES TO FORECLOSURE**

**PARAGRAPH PAGE**

3.01 Delinquent Loan Servicing Policy 3-1

3.02 Forbearance 3-1

3.03 Modifications-Extensions and Reamortizations 3-2

3.04 Sale of Property and Compromise Agreement 3-2

3.05 Deed in Lieu of Foreclosure (Voluntary Conveyance) 3-4

3.06 Refunding 3-6

**CHAPTER 3. ALTERNATIVES TO FORECLOSURE**

**3.01 Delinquent Loan Servicing Policy**

VA, through personal supplemental servicing and guidance to loan
holders, expects every realistic alternative to foreclosure which may be
appropriate in light of the facts in each case to be explored before a
loan is terminated by foreclosure. VA loan holders should expect to be
contacted at various times during the course of a default by VA loan
service representatives to discuss the case and will frequently be
requested to assist in pursuing a specific alternative. Since
alternatives to foreclosure generally result in either reinstatement of
the account or a faster termination than would be obtained through
foreclosure, they also benefit loan holders by reducing the possibility
that interest accrual and foreclosure costs will create a \"no-bid.\"
Alternatives to foreclosure should be discussed with borrowers by the
holder as soon as possible in the course of the default, preferably
before legal action is initiated, to obtain the borrower\'s cooperation
and minimize the chances that resolution of the default will be delayed
by bankruptcy.

**3.02 Forbearance**

a\. **Encouragement of Forbearance**

\(1\) It is VA\'s policy to encourage holders to extend reasonable
forbearance in the event a worthy borrower is unable to begin an
immediate plan to liquidate the delinquency.

\(2\) Forbearance is granted by allowing payments to remain delinquent
for a reasonable time (usually not more than 12 months), to be followed
by reinstatement of the loan through payment of a lump sum or a schedule
of increased payments. For the typical default, a certain amount of
forbearance is built into VA\'s default reporting requirements because
the default may not be reported until 60 days after the date of first
uncured default and foreclosure may not be initiated for 30 days after
an NOI is received by VA. At any time in the servicing process, and
especially once an NOD has been filed, holders should, as a matter of
prudent servicing, obtain a written agreement with the veteran regarding
the payment of the delinquency before granting forbearance beyond that
which is built into VA\'s reporting requirements. The lack of a written
agreement does not, however, prevent the holder from extending
forbearance when it appears appropriate. The holder should inform VA of
the forbearance and the reasons for it in the NOD and status updates.
This information assists VA\'s supplemental servicing activity and can
prevent the establishment of an inappropriate cutoff date.

b\. **Predetermination of Net Value.** The holder may request an
assurance from VA that should foreclosure become necessary VA will
specify an amount at the foreclosure sale despite any decrease in value
or increase in indebtedness that occurs during the period of
forbearance. This predetermination of net value can only occur if:

\(1\) Foreclosure is imminent; and,

\(2\) The holder is willing to extend forbearance for a fixed period of
time but is concerned that in the event of foreclosure VA may not
specify an amount, which would expose the holder to a loss that would
have been avoided by a prompt foreclosure.

Under these circumstances VA will make a net value determination, taking
into account the period of forbearance, and advise the holder whether VA
would specify an amount in the event of foreclosure.

**3.03 Modifications-Extensions and Reamortizations** (38 CFR 36.4314)

a\. Modification involves a change of any of the terms of the original
security instrument. Modification should be considered when the
borrower\'s income has been curtailed and the borrower is financially
unable to either maintain the payment at the current amount or to make
up the delinquent payments, but will be able to keep the loan current
after modification. Paragraph 1.06 discusses policies and procedures for
extending or reamortizing a loan.

b\. If the holder finds that modification is appropriate, but for some
reason is unable to extend or reamortize the loan itself, it should
notify VA so that refunding of the loan can be considered promptly (see
par. 3.06). Refinancing a higher interest rate loan at a current, lower
rate under VA\'s interest rate reduction refinancing program is also
recommended in such cases. If the loan is current, no underwriting is
necessary; if the loan is delinquent, VA can expedite prior approval of
an application.

**3.04 Sale of Property and Compromise Agreement**

a\. **Encouraging Sale of Property.** When borrowers are unable to
maintain their mortgage payments, they should be encouraged to sell
their homes at realistic prices to avoid foreclosure and salvage any
equity they may have. Early counseling with borrowers about private sale
can often help avoid loan terminations and reduce or eliminate losses to
all interested parties. When the borrower has equity in the home, the
holder should grant the borrower forbearance of reasonable duration to
permit a sale.

b\. **Proceeds Not Sufficient to Pay Indebtedness.** In some cases,
because the property has declined in value or has not appreciated enough
to cover repayment of a delinquency and the costs of sale, a private
sale cannot take place without additional funding. VA will consider
providing a \"compromise claim\" payment if an offer to purchase the
property is received but the proceeds will not be sufficient to pay off
the loan or to pay the delinquency in the case of an assumption. The
sales price of the property should be the fair market value. In some
assumption cases, where the fair market value is less than the unpaid
principal balance of the loan, VA\'s compromise claim payment will also
include funds to be applied as a prepayment to principal to reduce the
loan balance to the amount the purchaser has agreed to assume. Any
purchaser assuming a VA loan involving a compromise claim must be found
by VA to be an acceptable credit risk and must agree to assume full
legal liability for repayment of the loan and to indemnify VA against
loss in the event of a future default. If the sale is approved, VA will
pay the holder a compromise claim for the difference between the net
sales proceeds and the mortgage balance.

c\. **VA Approval**

\(1\) VA must approve each compromise sale in advance. VAROs will
generally require the following information prior to considering a
compromise sale:

\(a\) A copy of the signed offer to purchase. The offer should include a
contingency clause which reads, \"This offer is contingent on VA
approval of a compromise agreement.\"

\(b\) Estimated closing date.

\(c\) Statement of projected settlement costs.

\(d\) VA Form Letter 26-567, Status of Loan Account - Foreclosure or
Other Liquidation.

\(e\) An appraisal or broker\'s estimate of value.

\(f\) If the loan is being assumed, a release of liability package must
be completed by the seller and purchaser and submitted to the VA office
of jurisdiction. Only VA, on a prior approval basis, can process an
assumption and release of liability in cases involving compromise claim
payments.

\(2\) VAROs will notify the holder and borrower when a compromise offer
is tentatively approved and list the conditions of final approval.
Generally, tentative approval is granted when the purchaser is
determined to be acceptable from a credit standpoint and final approval
is contingent upon execution of proper documents by the purchaser which
evidence his or her legal liability to VA and for repayment of the loan.
The notice will contain any necessary instructions regarding
documentation and claim payment procedures.

d\. **Compromise Claim**

\(1\) After the sale of the property has closed, the holder may claim
payment from VA for the shortage as agreed. The following documentation
is generally required to obtain payment. The VA regional office of
jurisdiction will provide specific instructions.

\(a\) A certified statement of account (in effect, a certified copy of
the ledger sheets or equivalent showing the amounts and dates of all
debits and credits to the account).

\(b\) VA Form 26-1874, Claim Under Loan Guaranty, if required by the
VARO. See paragraph 6.02 for more information on completing the form.

\(c\) Invoices for attorney fees and property preservation expenses.

\(d\) A copy of the settlement statement (HUD-1).

\(e\) A signed promissory note if the veteran is being required to repay
VA for all or part of the compromise claim. (Some VAROs will obtain this
independently; others require the holder to obtain it.).

\(2\) If the loan is being assumed, the following are also required:

\(a\) A copy of the recorded transfer deed and/or assumption agreement
as required by the VA office of jurisdiction.

\(b\) The original guaranty certificate, which will be changed to
reflect the claim payment and returned to the holder. (If the guaranty
certificate is not available, or cannot be obtained from the document
custodian, notify the VARO before proceeding with the sale so that
alternative arrangements can be made.)

**3.05 Deed in Lieu of Foreclosure (Voluntary Conveyance)**

a\. **General**

\(1\) When it is concluded that there is no alternative to terminating
the loan, and a voluntary conveyance can be accomplished more quickly
than a foreclosure, holders are strongly encouraged to explore the
possibility of a deed in lieu of foreclosure.

\(2\) A voluntary conveyance may not be accepted without VA prior
approval.

\(3\) Obtaining the deed must be legally feasible and the borrower must
be willing to cooperate. A deed in lieu will usually not be accepted if
there are any junior liens on the property. If the value of the property
is substantially in excess of the debt, the borrower should be
encouraged to sell the property rather than offer a deed. If the net
value of the property does not exceed the unguaranteed portion of the
indebtedness (which would result in a no-bid in the event of
foreclosure, see par. 4.13), a voluntary conveyance will normally not be
approved. In such cases, however, VA may approve a voluntary conveyance
after the holder completes a partial debt waiver or reduction. If the
holder does not intend to complete a partial debt waiver or reduction,
VA may authorize the holder to accept a voluntary conveyance with no
right to reconvey the property to VA. Such authorization is limited to
cases when the borrower either will not be legally liable to reimburse
VA for the claim paid or lacks the financial resources to do so.

b\. **Consideration**

\(1\) The consideration for a deed in lieu of foreclosure is often a
full and complete release of the mortgagor\'s personal liability. This
should provide sufficient incentive for the borrower to execute the deed
and also preclude any title questions.

\(2\) For legal purposes, avoidance of a recorded foreclosure and
reduction of the liability amount may be a sufficient consideration. In
some instances, where a complete release of liability is not required by
law or necessary to remove any potential cloud on title, the borrower
may be required to agree to repay VA for all or part of the claim paid.

c\. **VA Approval**

\(1\) The acceptance of a voluntary conveyance requires VA\'s prior
approval. The holder should notify borrowers in writing that a deed in
lieu of foreclosure is not acceptable until approved by VA. Borrowers
should be advised to provide the loan holder with:

\(a\) A signed financial statement showing their assets, liabilities,
income and expenses. (VA Form 26-6807 may be used.)

\(b\) A written statement requesting a deed in lieu of foreclosure and
advising the reason for default, explaining why it is necessary to give
up the security property and what efforts have been made to dispose of
it, and an agreement to vacate the property when the deed is recorded or
to give possession of the property to VA immediately upon notification
to do so.

\(2\) Upon receipt of the borrower\'s financial and written statements,
the holder should forward them and the following documentation to the
VARO of jurisdiction.

\(a\) VA Form 26-6851, Notice of Intention to Foreclose, if not
previously filed, indicating that a deed in lieu is obtainable.

\(b\) A statement of account (VA Form Letter 26-567).

\(c\) Occupancy status. If occupied, the name and telephone number of
the occupant. If vacant, the keys properly identified with the VA LIN
and property address.

\(d\) Title status. If information about any liens on the property which
could affect the decision to accept a voluntary conveyance is available,
it should be sent to VA.

\(3\) An appraisal must be ordered through VA. See paragraph 4.11.

\(4\) Upon receipt of advice that a deed is obtainable, the VARO will
determine whether it is in VA\'s best interest to accept it. If
acceptance is not approved by VA, the holder will be advised to proceed
with foreclosure.

d\. **Processing the Deed**

\(1\) If VA approves the deed, the holder and borrowers will be notified
and provided further instructions. A cutoff date may be established to
ensure the timely processing of the deed. If a cutoff date is
established, it will usually be between 45 and 60 days after VA agrees
to accept the deed. It may be extended if there are delays in obtaining
the deed and related documents from the borrower(s), but extensive delay
may cause VA to rescind the offer.

\(2\) An amount will normally be specified to be used as a credit to the
indebtedness for the property. The holder will be paid the specified
amount upon acceptance of the conveyance by VA. A claim will be paid for
the balance of the eligible indebtedness and costs on the loan remaining
after the specified amount has been credited. The following
documentation is generally required to obtain payment.

\(a\) VA Form 26-8903, Notice of Election to Convey and/or Invoice for
Transfer of Property, in triplicate, within 15 days after the deed is
executed. See chapter 5.

\(b\) Original recorded deed from the borrower(s) to the holder and
recorded deed from the holder to the Secretary of Veterans Affairs, or
recorded deed from the borrower to VA.

\(c\) Estoppel affidavit in States where executing one eliminates or
minimizes title questions. The VARO\'s instructions will indicate
whether it is required.

\(d\) The executed promissory note from the obligor to VA (if required
by the VARO as a condition for accepting the deed).

\(e\) Original mortgage documents and all recorded assignments.

\(f\) Title evidence in accordance with the VARO\'s instructions.

\(g\) VA Form 26-1874, Claim Under Loan Guaranty, signed by an
appropriate official. See paragraph 6.02.

**3.06 Refunding** (38 CFR 36.4318)

a\. **General**

\(1\) VA has discretionary authority to buy a loan in default from a
holder and take over the servicing. Refunding is an optional action on
the part of VA and does not provide borrowers with a right to refund
their loans. Refunding is considered for each loan before foreclosure is
completed, but there is no formal application process for use by
borrowers or loan holders.

\(2\) The objective of refunding is to avoid foreclosure when it is
determined by VA that the default can be cured through various relief
measures and the holder is unable or unwilling to grant further relief.

b\. **Procedure**

\(1\) **Information Needed.** When VA believes refunding might be in
order, it will notify the holder and request that it:

\(a\) Send VA a statement of account (VA Form Letter 26-567).

\(b\) Order an appraisal of the property, if one has not already been
ordered. See paragraph 4.11.

\(2\) **Notification.** If VA decides to refund a loan, the holder will
be immediately notified and given further instructions. A notice will
also be sent to the borrower.

\(3\) **Settlement.** VA will set the date of settlement, which
generally will not exceed 60 days from the date of VA\'s formal notice
of intent to refund. The VARO of jurisdiction will provide instructions
to obtain payment on the loan. Generally the following documents will be
required:

\(a\) VA Form 26-1874 signed by an appropriate official. In item 4, Date
of Loan Termination, enter the settlement date and indicate that the
loan is to be refunded. See paragraph 6.02.

\(b\) Certified copy of the loan ledger or history.

\(c\) Unrecorded assignment of mortgage.

\(d\) Original note, endorsed to the Secretary of Veterans Affairs.

\(e\) Hazard insurance policy with a copy of the endorsement request.

\(f\) Original mortgagee\'s title policy, naming the Secretary of
Veterans Affairs as a

co-insured.

\(g\) Original survey of the property.

\(h\) Current tax receipts.

\(i\) Other documents specifically required in instructions issued by
the VARO.

**CONTENTS**

**CHAPTER 4. TERMINATION BY FORECLOSURE**

**PARAGRAPH PAGE**

4.01 Preforeclosure Analysis 4-1

4.02 Foreclosure Recommendation 4-1

4.03 Cutoff Date-Application of 38 CFR 36.4319(f) 4-1

4.04 Guaranty Computation and Cutoff Date-Application of 38 CFR 36.4321
4-3

4.05 Filing VA Form 26-6851, Notice of Intention to Foreclose 4-4

4.06 Filing VA Form 26-6850a, Notice of Default and Intention to
Foreclose 4-6

4.07 Notice to Original Veteran-Borrower and Other Liable Obligors 4-7

4.08 Starting Liquidation Proceedings 4-8

4.09 Other Notices to VA 4-9

4.10 Reinstatement of Defaulted Loans 4-9

4.11 Liquidation Appraisal 4-9

4.12 Notice of Sale 4-10

4.13 Bidding Instructions 4-10

4.14 Overbids at Foreclosure Sales 4-12

4.15 Property Preservation 4-12

4.16 Deficiency Judgment 4-13

4.17 Acceptable Expenses 4-13

**Figure**

4-1 VA Form 26-6851, Notice of Intention to Foreclose 4-15

4-2 VA Form 26-6850a, Notice of Default and Intention to Foreclose 4-16

4-3 Form Letter 26-567, Status of Loan Account - Foreclosure

or Other Liquidation 4-17

4-4 Form Letter 26-639, Specified Amount Letter 4-19

4-5 Form Letter 26-639, Specified Amount Letter 4-21

**CHAPTER 4. TERMINATION BY FORECLOSURE**

**4.01 Preforeclosure Analysis**

a\. A decision to foreclose must be based on an analysis of the
individual loan with full knowledge of the alternatives and consequences
to all parties to the loan. Foreclosure should not be automatic. The
purpose of the preforeclosure analysis is to gain a thorough
understanding of the nature and reasons for the default and the
prospects for curing it, and to determine what action might avoid
foreclosure.

b\. The analysis should include a careful search for alternatives,
including the determination whether some other party might act to avoid
foreclosure. The possibilities include relatives, co-makers, Government
welfare agencies, secondary lien holders, previous owners not released
from personal liability, or the borrower\'s employer.

c\. A preforeclosure review should be carefully documented. Holders
should be sure the following was done:

\(1\) VA regulations pertaining to accepting partial payments were
followed.

\(2\) A face-to-face interview was conducted or meaningful telephone
contact made. Only with adequate information about the borrower can a
proper foreclosure decision be made. If no contact was made, the efforts
to contact the borrower should be well documented.

\(3\) VA servicing and reporting requirements were satisfied.

\(4\) Relief measures were considered and offered as applicable.

\(5\) Notice of a transferee owner\'s default was sent to the original
veteran-borrower\'s last known address.

**4.02 Foreclosure Recommendation**

The recommendation of foreclosure should be made by the loan counselor
handling the account, and be carefully reviewed by supervisory or
management personnel.

**4.03 Cutoff Date-Application of 38 CFR 36.4319(f)**

a\. **Minimizing the Loss to the Government.** VA encourages holders to
extend every reasonable indulgence to worthy borrowers who are in
temporary difficulty. However, when it is evident that the default is
insoluble, every effort should be made to see that the security is
liquidated promptly to minimize the loss to the Government.

b\. **An Insoluble Default.** VA will consider any loan with 6 or more
installments due and unpaid to be an insoluble default unless the holder
has informed VA that a repayment plan is in effect or that forbearance
is being granted for some other reason. VA may also learn through its
supplemental servicing efforts that the borrower cannot or will not be
able to cure the default in the foreseeable future.

c\. **Establishment of a Cutoff Date**

\(1\) Once VA determines that a defaulted loan is insoluble, it will
protect its interest by establishing a cutoff date for the computation
of a claim under the guaranty, as provided by 38 CFR 36.4319(f). A claim
paid under Loan Guaranty will exclude interest and most charges, other
than liquidation costs, which accrue or are incurred after the cutoff
date. The holder will be advised by registered mail of the establishment
of a cutoff date.

\(2\) The cutoff date will be the date liquidation should be completed
if the holder initiates appropriate action within 30 days of the date of
the cutoff letter. VA considers referral to counsel to initiate public
legal action to terminate the loan to be appropriate legal action for
purposes of establishing a cutoff date. If a bankruptcy court has stayed
the termination, appropriate action is referral to counsel to obtain
relief from the automatic stay, to be followed by prompt legal action to
terminate the loan. In bankruptcy cases, the cutoff date will include
additional time for the holder to have the stay removed; the amount of
time allowed will vary between VA offices based on their experience with
the local bankruptcy courts, but generally will be 3 months after the
filing date for Chapter 7 cases and 5 months for Chapter 13 cases in
which no payments are received from the borrower or the trustee.

\(3\) A cutoff date will also be established if the holder initiates
termination action timely but fails to prosecute the action with
reasonable diligence. It will be based on the time normally required to
complete termination from the date the initial referral to counsel was
made by the holder.

\(4\) Appendix E contains the cutoff timeframes used by VA regional
offices as of the date of publication of this handbook. These timeframes
cover the period from referral to counsel until foreclosure is completed
through either the sale or confirmation of sale, depending on the
jurisdiction. They are for routine, uncontested, foreclosures. VA
regional offices may change these timeframes based on changes in local
foreclosure procedures or practices.

d\. **Adjustment of a Cutoff Date.** The cutoff date can be adjusted if
the holder shows that further forbearance was justified or that delay in
liquidation was beyond its control. Errors or delays by the holder\'s
counsel are considered to be within the holder\'s control since counsel
acts as the agent of the holder. The cutoff date will be automatically
adjusted if any payments are received and accepted by the holder after
the cutoff date was established. Holders may request reconsideration and
adjustment of a cutoff date at any time prior to payment of a claim by
VA. However, once a cutoff date has been established, VA will usually
review and (if appropriate) adjust it only at the time bidding
instructions are prepared or at the time the claim is being paid. The
current cutoff date will be shown on any specified amount letter issued
by VA.

**4.04 Guaranty Computation and Cutoff Dates-Application of**

**38 CFR 36.4321**

a\. **General**

\(1\) This regulation has two primary purposes. The first is to define
the maximum amount payable under VA\'s guaranty. The second is to
prevent cases in which VA is unable to specify an amount solely because
the loan indebtedness increased during a period of undue delay in loan
termination caused by VA or the borrower.

\(2\) For each GI loan, the Loan Guaranty Certificate states both a
percentage and a dollar amount of guaranty. The dollar amount of
guaranty is equal to the percentage of guaranty as applied to the
original loan amount. When a claim is payable, VA\'s maximum guaranty
liability is the lesser of:

\(a\) The dollar amount of guaranty; or,

\(b\) The percentage of guaranty applied to the eligible indebtedness as
of the liquidation sale date or a cutoff date established under 38 CFR
36.4319(f) or 36.4321(b), whichever is earliest.

\(3\) The eligible indebtedness is defined in 38 CFR 36.4301 as the
unpaid principal plus accrued interest plus any advances or charges,
allowable under the terms of the loan and actually incurred, which are
authorized by statute and consistent with VA regulations. Late charges
are excluded and funds applicable to the account, such as a positive
escrow or suspense balance, are credited in the computation of the
indebtedness.

\(4\) If a liquidation sale is delayed by more than 30 days as a result
of a voluntary bankruptcy filed by the borrower, or forbearance
requested by VA and granted by the holder, and:

\(a\) As of the revised liquidation sale date or the revised 38 CFR
36.4319(f) cutoff date (whichever is earlier) VA would be unable to
specify an amount for credit to the indebtedness because the
indebtedness increased during the interval; and,

\(b\) As of a date 30 days after the date VA determines the liquidation
sale would have taken place, if there had been no delay due to
bankruptcy or VA-requested forbearance, the unguaranteed portion of the
eligible indebtedness is less than the net value of the property (i.e.,
VA would be required to provide the holder with a specified amount for
credit to the indebtedness); then,

An adjusted cutoff date will be established under 38 CFR 36.4321(b)(1)
(if the delay is due to forbearance) or 36.4321(b)(3) (if the delay is
due to bankruptcy), and VA will advise the holder of the specified
amount. The adjusted cutoff date will be 30 days after the date that the
liquidation sale would have been held if there had been no delay.

\(5\) In other cases in which the liquidation sale is delayed by VA
(generally those in which VA does not provide the holder with net value
advice within 2 working days prior to a scheduled liquidation sale) and
the delay would change a specified amount to a no-bid, VA will avoid the
no-bid by using the date the sale should have been held for purposes of
computing the eligible indebtedness. However, for purposes of claim
computation, the actual liquidation sale date will be used. In such
cases, the claim payable may not exceed the maximum guaranty plus the
cost of the liquidation appraisal.

b\. **Eligible Forbearance**. Generally, the terms of a repayment plan
provide for liquidation of the arrears and payment of the regular
monthly installment in accordance with a fixed schedule. Forbearance
refers to cases in which the holder agrees to accept no payments or
payments which are less than a monthly installment for a fixed period of
time based on the probability that the borrower will be able to cure the
default or begin a repayment plan at the end of that period. When a
holder agrees to grant forbearance at VA\'s request, the holder should
document the terms of the forbearance by letter. If the loan is not
reinstated, and no amount is specified by VA in connection with a
subsequent foreclosure sale, provisions of 38 CFR 36.4321(b) may be
accurately applied. VA expects holders will generally provide borrowers
with written notice of forbearance. A copy of this notice is adequate
documentation.

c\. **Effect on Claim Analysis.** Cutoff dates established as a result
of bankruptcy or VA-requested forbearance will generally also apply in
the computation of the holder\'s claim under guaranty. However, for
purposes of VA\'s claim analysis, the account must be credited with any
payments received after the cutoff date. The date of first uncured
default and the cutoff date will be adjusted to account in the claim
analysis. For example: Assume VA specified an amount in connection with
a sale scheduled for January 1, but the sale was delayed until November
1 due to a Chapter 13 bankruptcy and, as of November 1, no amount would
be specified. If an amount is specified based on the indebtedness as of
January 31, VA would establish January 31 as the cutoff date and issue
net value advice. If three installment payments were received under the
bankruptcy, VA would credit them to the account and move the cutoff date
forward to May 1 for purposes of claim computation.

**4.05 Filing VA Form 26-6851, Notice of Intention to Foreclose**

(38 CFR 36.4317)

a\. **When to File.** The holder should first exhaust all reasonable
efforts to effect a cure of the default. The notice should be filed
after:

\(1\) The loan is delinquent for 3 months (38 CFR 36.4316), and

\(2\) The default is determined insoluble.

In exceptional circumstances, such as a hazard to the security or
material prejudice to the holder\'s rights or to VA, the notice may be
filed earlier. When a loan is more than 30 days delinquent, a property
abandonment must be reported to VA and liquidation action initiated
within 15 days after the holder confirms the property is vacant.
Referral to an attorney to begin foreclosure constitutes initiation of
liquidation action.

b\. **Filling Out the NOI**

\(1\) The NOI must be sent by registered or certified mail with return
receipt requested. Figure 4-1 is an example of a properly completed NOI.

\(2\) In filling out the NOI, holders should pay special attention to
the following:

\(a\) **VA LIN (VA Loan Identification Number)**. The VA LIN must be
numeric and 12 digits in length. See appendix B for instructions.

\(b\) **Holder\'s Name, Address, and Telephone Number (Item 1A)**.
Provide a telephone number so VA loan service representatives can
contact the holder\'s personnel directly.

\(c\) **Original Veteran\'s Name and Present Address (Item 2)**. If
someone other than the original veteran is the present owner, the name
and current address of the original veteran should be provided. For
purposes of the NOI, the original veteran\'s name is required by 38 CFR
36.4332. His or her current address should be the most recent available
in the holder\'s system of records. (After a notice of intention to
foreclose is filed, holders must make an effort to determine the
original veteran\'s current address (see par. 4.07)). Because veterans
may be held liable to reimburse the Government for claims paid due to
transferee defaults, VA requires this information to try to provide
veterans with notice of transferee defaults. In some areas, generally
those in which foreclosure cannot be completed quickly, it is not
essential that VA have this information at the time the NOI is filed.
Since many holders do not retain data on prior obligors in their
automated servicing records, each VA office of jurisdiction has issued a
release informing holders whether or not they must strictly adhere to
this regulatory requirement.

\(d\) **Other Transferee Data (Item 7)**. If item 6 is checked \"yes,\"
provide the names of those who held title to the property other than the
original veteran and the current property owner. If the transferee\'s
address, name of employer and address of employer are not on record,
type \"unknown\" in the appropriate blocks.

\(e\) **Voluntary Conveyance Data (Item 11)**. Holders often neglect to
check the appropriate block to indicate whether or not a voluntary
conveyance is obtainable. Usually, through personal contact, the holder
can determine whether there are any secondary liens which encumber the
property that would preclude a voluntary conveyance. Check whether such
a deed is feasible.

\(f\) **Holder\'s Loan Servicing (Item 12)**. It is important that VA
have complete information about the reasons for the default and decision
to foreclose. This space also provides the holder with the opportunity
to document the quality of its servicing by showing that it has
discussed alternatives to foreclosure with the borrower and to indicate
the borrower\'s responsiveness. Use the back of the NOI or a separate
sheet of paper if more space is needed. A narrative summary of any
contacts made with the borrower since filing the NOD is also useful. If
no contact was made, give a history of the attempts made. What
alternatives to foreclosure were suggested? Which appear feasible? Why
are some not feasible? A copy of the in-house servicing record is
acceptable as long as the VARO has been provided with instructions on
how to read it and explanations of any abbreviations it contains.

\(g\) **Occupancy Data (Item 13)**. Report who is occupying the
property, or if it is vacant, where the keys may be obtained and whether
the property has been secured.

\(h\) **Signature (Item 15)**. The form must be signed by a corporate
officer or other authorized full-time employee of the holder or its
servicing agent. If the proper signature is omitted, the form will be
returned.

**4.06 Filing VA Form 26-6850a, Notice of Default and Intention to**

**Foreclose** (38 CFR 36.4317)

a\. **When to Use the NOD&I.** The NOD&I allows the holder to
simultaneously notify VA that a loan is in default, the default is
insoluble, and that it intends to proceed with foreclosure. This form
may be used if:

\(1\) The property is abandoned.

\(2\) It is determined that the loan is insoluble before the NOD is
filed.

\(3\) Delay in termination action may expose the security to waste or
hazard or may cause material prejudice to the rights of the holder or
VA.

b\. **Waiver Request.** If appropriate, the holder should request a
waiver of the 30-day waiting period before initiation of legal action
(38 CFR 36.4317).

c\. **Completing and Sending the NOD&I.** The NOD&I must be sent by
registered or certified mail with return receipt requested. Figure 4-2
contains an example of a properly completed NOD&I. In filling out the
NOD&I, holders should pay special attention to the following:

\(1\) **VA LIN (VA Loan Identification Number) (Item 3)**. The VA LIN
must be numeric and 12 digits long. See appendix B for instructions on
constructing the VA LIN.

\(2\) **Holder\'s and Servicing Agent\'s Phone Number (Item 6)**.
Provide a telephone number so VA loan service representatives can
contact the holder\'s personnel directly.

\(3\) **Date of First Uncured Default (Item 9)**. This is the due date
of the first or earliest partially or fully unpaid installment.

\(4\) **Present Owner\'s Social Security Number (Item 10)**

\(5\) **Original Veteran\'s Name and Present Address (Item 16)**. If the
default occurs when someone other than the original veteran is the
present owner, the name and current address of the original veteran
should be provided. See paragraph 4.05b(2)(b).

\(6\) **Occupancy Data (Item 20)**. Report who is occupying the
property, or if it is vacant, where the keys may be obtained and whether
the property has been secured.

\(7\) **Other Transferee Data (Item 21)**. Provide the names of anyone
who held title to the property after the original veteran and before the
current property owner. If the transferee\'s address, name of employer
and address of employer are not on record, type \"unknown\" in the
appropriate blocks.

\(8\) **Voluntary Conveyance Data (Item 23)**. Holders often neglect to
check the appropriate block to indicate whether or not a voluntary
conveyance is obtainable. Usually through personal contact the holder
can determine whether there are any secondary liens which encumber the
property that would preclude a voluntary conveyance. Check whether a
deed is feasible.

\(9\) **Present Owner\'s Telephone Number (Items 27E and 27F)**. A
diligent effort should be made to obtain the telephone number of both
the property owner\'s place of employment and home. If a number is not
available, note in the servicing summary what efforts have been made to
obtain the number. This will prevent the duplication of effort when VA
begins supplemental servicing.

\(10\) **Reason for Default and Summary of Loan Servicing (Item 28)**.
It is important that VA have complete information about the default and
the prospects for resolution. Use the back of the NOD&I or separate
sheet of paper if more space is needed. Provide a summary of contacts
made with the borrowers or the attempts made if there was no contact and
the reasons for filing a combined NOD and NOI. A copy of the in-house
servicing record is acceptable as long as the VA regional office has
been provided with instructions on how to read it and explanations of
any abbreviations it contains.

\(11\) **Signature (Item 30)**. The form must be signed by a corporate
officer or other authorized full-time employee of the holder or its
servicing agent. If the proper signature is omitted, the form will be
returned. The individual signing the notice should review the form to
see that the information provided is accurate.

**4.07 Notice to Original Veteran-Borrower and Other Liable Obligors**

(38 CFR 36.4317)

a\. A notice of intention to foreclose must also be sent to the original
veteran-borrower, if still a liable obligor, and any other liable
obligors when the current owner of the property is not the original
veteran-borrower. The notice must be sent by registered mail within 30
days after such notice is provided to VA. A failure by the holder to
make a good faith effort to comply with these requirements may result in
a partial or total loss of guaranty. A good faith effort will include,
but is not limited to:

\(1\) A search of the holder\'s automated and physical loan record
systems to identify the name and current or last known address of the
original veteran and any other liable obligors;

\(2\) A search of the holder\'s automated and physical loan record
systems to identify sufficient information (e.g., Social Security
Number) to perform a routine trace inquiry through a major consumer
credit bureau;

\(3\) Conducting the trace inquiry using an in-house credit reporting
terminal;

\(4\) Obtaining the results of the inquiry;

\(5\) Mailing the required notices and concurrently providing VA with
the names and addresses of all obligors who have been identified and
notified; and,

\(6\) Documentation of the holder\'s records.

b\. VA will reimburse the holder \$10 in its claim under guaranty, as a
liquidation expense, for each obligor subject to this procedure.

**4.08 Starting Liquidation Proceedings**

a\. **30 Day Delay Before Starting Foreclosure** (38 CFR 36.4317)

\(1\) The NOI or NOD&I must be filed at least 30 days prior to starting
any action to liquidate the security for the loan. Failure to give
proper notice of foreclosure may result in an adjustment in the amount
of the claim payable if it increased VA\'s liability.

\(2\) If the circumstances warrant immediate action to protect the
interest of the holder and VA (such as abandonment of property), the
holder may take action without advance notice. In such instances the
holder must promptly notify VA of the action taken. Except in cases of
abandonment, VA would prefer that when warranted, the holder file a NOI
or NOD&I in advance of initiating foreclosure action and request waiver
of the 30-day waiting period. If waiver is warranted, VA will
immediately respond by giving approval to begin foreclosure action.

b\. **Election of Liquidation Procedure.** (38 CFR 36.4324(f)) VA will
notify the holder within 15 days of receipt of the NOI if it requires
the holder to act to preserve the personal liabilities of the obligors.
Otherwise, the holder may elect any available liquidation procedure.

c\. **Persons in Possession of Property.** The holder should make
persons in possession under a claim of title parties to any judicial
foreclosure proceedings and cause them to be properly served. In
nonjudicial foreclosure the holder should take any feasible legal steps
available under local law, by notice or otherwise, to prevent the rights
of any such persons from surviving the foreclosure to ensure VA will be
provided with acceptable title after foreclosure.

**4.09 Other Notices to VA** (38 CFR 36.4319)

Holders must notify the appropriate VARO of any steps contemplated or
action taken in connection with the liquidation of the security. A copy
of every procedural paper filed on behalf of the holder and of each
pleading served on the holder must be sent to VA.

**4.10 Reinstatement of Defaulted Loans** (38 CFR 36.4308(h))

a\. **Acceptance of Funds.** If sufficient funds are tendered to bring a
defaulted loan current at any time prior to a sale to liquidate the
security for a guaranteed loan, the holder must accept the funds in
payment of the delinquency unless:

\(1\) The prior approval of VA is obtained to do otherwise, or

\(2\) Reinstatement of the loan would adversely affect the dignity of
the lien or is otherwise precluded by law.

b\. **Definition of the Delinquency.** The delinquency will include:

\(1\) All installment payments (principal, interest, taxes, insurance,
advances, etc.) due and unpaid.

\(2\) Any accumulated late charges.

\(3\) Any reasonable expenses incurred and paid by the holder if
termination proceedings have begun (e.g., advertising costs, foreclosure
costs, attorney or trustee fees, recording fees, appraisal costs).

**4.11 Liquidation Appraisal**

a\. **Ordering the Appraisal.** At least 30 days before the foreclosure
sale date (sooner, if the VARO has issued instructions requiring or
permitting it to be ordered earlier), the holder must request from the
appropriate VARO the assignment of an appraiser to determine the fair
market value of the security. Holders should fill out VA Form 26-1805,
VA Request for Determination of Reasonable Value/HUD Application for
Property Appraisal and Commitment, and forward all copies except 1 and 2
to the assigned appraiser.

b\. **Assisting the Appraiser.** Holders must assist the appraiser in
gaining interior access to the property unless prohibited by local law.
If the property is occupied, the appraisal request must include the name
and number of current or last known occupants. If the property is
vacant, keys should be given to the appraiser or other arrangements made
for access. If the holder fails to assist the appraiser to obtain access
and the foreclosure sale has to be postponed, 38 CFR 36.4319(f) may be
invoked and a cutoff date established to limit the liability of VA.

c\. **The Appraisal Fee.** The holder will pay the appraisal fee, which
may be included as a liquidation cost in the claim. Each VARO sets the
amount of the liquidation appraisal fee for its jurisdiction. After the
appraisal has been ordered, the fee should be included in the amount of
the delinquency if the borrower wishes to bring the loan current.

**4.12 Notice of Sale** (38 CFR 36.4319(b))

A copy of a notice of liquidation sale must be delivered to VA at least
30 days prior to the scheduled foreclosure sale or within 5 days of the
first publication date, whichever is later. The notice must be
accompanied by a copy of the liquidation appraisal request, VA Form
26-1805 and a statement of account, VA Form Letter 26-567, if these
documents have not previously been delivered. See figure 4-3 for an
example of a properly completed VA FL 26-567, Status of Loan Account -
Foreclosure or Other Liquidation.

**4.13 Bidding Instructions** (38 CFR 36.4320)

a\. **General.** A foreclosure sale should not be held unless the holder
has received instructions from VA. Normally, a letter of instruction
will be sent in time to be received by the holder at least two working
days prior to the date of the scheduled foreclosure sale. When time does
not permit mailing instructions, VA will give instructions by telephone
or electronic media, and confirm by letter. If the holder does not
receive notification, it should contact the VARO in advance of the
scheduled foreclosure sale.

b\. **Total Indebtedness**

\(1\) When the net value of the loan security exceeds the total
indebtedness (debt plus costs), the holder will be instructed by VA Form
Letter 26-639, Specified Amount Letter (fig. 4-4) that the credit to the
indebtedness on account of the sale must be the total indebtedness.

\(2\) When total indebtedness is specified, the holder should calculate
the indebtedness to the foreclosure sale date or the cutoff date
established under 38 CFR 36.4319(f), including allowable foreclosure
costs and expenses (see par. 4.17), and bid that amount at the sale.
When instructions are received verbally, the holder should make certain
they are accompanied by any revision to the cutoff date. There will be
no claim payable by VA when total indebtedness is specified and the
property is bought by a third party or retained by the holder. If the
property is conveyed to VA, the unpaid principal balance will be paid
for transfer of the property. A final accounting with VA after title is
accepted, using VA Form 26-1874, Claim Under Loan Guaranty, must be
received and analyzed before the balance of the indebtedness is paid.

c\. **VA Specified Amount**

\(1\) When the net value of the loan security is greater than the
unguaranteed portion of the indebtedness but is less than the total
indebtedness, VA will advise the holder to credit to the indebtedness on
account of the sale a specific dollar amount. This amount will be equal
to the net value of the security to VA.

\(2\) If an amount is specified, advice to the holder will be given by
VA Form Letter 26-639 (fig. 4-5). The holder should not bid more than
the specified amount at the foreclosure sale unless the holder desires
to keep the property. If the holder bids in excess of the specified
amount, the accounting with VA will be based on the bid, and the holder
will not have the option of conveying the property to VA (see par.
4.14). If the holder allows a third party to acquire the property with a
bid of less than the specified amount, it will lose the difference
between the successful third party bid and the specified amount.

d\. **No Specified Amounts (No-Bids)**

\(1\) When the net value of the loan security is less than the
unguaranteed portion of the indebtedness, VA will not specify an amount
for the holder to credit to the indebtedness on account of the sale and
will not accept conveyance of the property.

\(2\) If no amount is specified by VA, a bid in excess of the
indebtedness (including allowable foreclosure expenses) less the amount
payable under the guaranty may reduce the amount of claim payable by VA.
The net value of the property is stated by VA in the no-bid advice
letter. Holders should be cautious about bidding in excess of the net
value, unless they wish to ensure they acquire the property, because
such a bid may exceed the unguaranteed portion of the indebtedness and
reduce the amount of claim payable by VA.

e\. **Partial Waiver of Indebtedness to Obtain a Specified Bid (No-Bid
Buydown)**

\(1\) **Procedure**

\(a\) Upon receipt of advice that no amount will be specified for credit
to the indebtedness, the holder may waive or satisfy a portion of the
indebtedness to reduce it to an amount which would require VA to provide
a specified amount and acquire property under 38 CFR 36.4320. The waiver
may take the form of a reduction of the principal balance, credit to
escrow or the unapplied funds account, forgiveness of unpaid accrued
interest or a combination of these credits.

\(b\) VA has two legal concerns about partial debt waivers or
reductions. The holder\'s action must not affect the validity of the
foreclosure or the validity of the indebtedness which may be established
against the obligors and must be binding on all parties to the loan
agreement and documented by appropriate entries to the account ledgers.
It cannot be rescinded without the approval of all parties to the loan
agreement. Subject to these concerns, VAROs will determine the debt
reduction procedure(s) acceptable in their jurisdiction and will make
this information available upon request.

\(2\) **Adjustment of Cutoff Dates.** VA regulations require that the
indebtedness as of the cutoff date be used for determining VA\'s
guaranty liability and for determining whether or not an amount will be
specified for credit to the indebtedness on account of a foreclosure
sale. There will be occasions when the holder is not advised that no
amount will be specified until after a cutoff date has passed. In such
cases, the holder would be effectively denied the opportunity to reduce
the indebtedness to obtain a specified amount from VA. To give the
holder the opportunity to reduce the indebtedness, any advice to a
holder that no amount will be specified by VA will be accompanied by a
statement to the effect that the existing cutoff date will be rescinded
and replaced by a revised cutoff date, which will be 30 days from the
date of the advice. Consideration will be given to extending the 30 day
limit to 60 days when holders advise VA that additional time is
necessary for them to secure required approvals for debt reduction or
when local law does not permit rescheduling the sale within 30 days.

**4.14 Overbids at Foreclosure Sales** (38 CFR 36.4320(a)(1)(ii)(B))

a\. If an amount was specified, and the holder acquires the property at
the liquidation sale for an amount in excess of the specified amount,
the indebtedness must be credited with the proceeds of the sale. The
holder will not have the option to convey the property to VA.

b\. In some States, the holder can legally amend the amount bid at a
sale or set aside or vacate the sale. Holders should consult with the
appropriate VARO and their own counsel regarding possible methods to
correct an overbid. Notice of all legal actions must be provided to VA
(38 CFR 36.4319(a)).

c\. If a new sale is scheduled, the date of the first sale will be the
cutoff date for the purposes of claim computation. The procedures for
providing notice of sale (par. 4.12) and ordering a liquidation
appraisal (par. 4.11) should be followed so that appropriate advice can
be provided by VAROs in a timely manner.

**4.15 Property Preservation**

a\. A holder is responsible for measures needed to protect and preserve
the security for the loan, especially when the property becomes vacant.
This responsibility ends when VA accepts custody of the property after
receiving the holder\'s VA Form 26-8903, Notice of Election to Convey
and/or Invoice for Transfer of Property.

b\. The property must be inspected at least once a month after
liquidation proceedings have been started, unless servicing information
shows the property has remained owner-occupied (see par. 2.04, Property
Inspections). VARO releases describe the measures to be taken in
securing vacant properties and the maximum expenses allowed.

c\. VA must be notified of any damage to the property or if it is
abandoned, especially after the bidding instructions have been sent. (38
CFR 36.4320(e))

**4.16 Deficiency Judgment**

Unless a personal deficiency judgment is routinely obtained incident to
the foreclosure, VA requires the holder to obtain one only when it is
necessary to preserve the personal liability of the obligors and VA has
requested the holder to do so upon receiving the notice of intention to
foreclose. In such cases, VA will allow the cost of obtaining a
deficiency judgment to be included in the claim. In other cases, the
holder may also obtain a deficiency judgment at its own expense to
protect its interests provided foreclosure is not delayed.

**4.17 Acceptable Expenses** (38 CFR 36.4313(b))

a\. The following expenses may be included in any accounting with VA,
and in the computation of a claim under the guaranty, if authorized by
the loan agreement:

\(1\) Any expense reasonably necessary for preservation of the security.
VARO releases list the maximum amounts that will be reimbursed for
various property preservation measures in their area, including property
inspections.

\(2\) Court costs in a foreclosure or other prior judicial proceeding
involving the security.

\(3\) Other expenses reasonably necessary for collecting the debt or
liquidation of the security, including preliminary title and tax search
costs which are not considered part of the attorney or trustee\'s fee
and are not included in the cost of title evidence allowable under 38
CFR 36.4320(f)(2).

\(4\) Reasonable trustee\'s fees or commissions not in excess of those
allowed by statute and in no event in excess of 5 percent of the unpaid
indebtedness.

\(5\) A reasonable amount for legal services actually performed, as
determined by the VA office of jurisdiction. In no event may this amount
exceed 10 percent of the unpaid indebtedness as of the date of the first
uncured default, or \$700, whichever is less.

\(6\) Reasonable and customary costs of property inspections.

\(7\) Any other expense or fee that is approved in advance by VA.

b\. The total amount of trustee\'s fees and legal services may not
exceed \$700 unless prior approval for a higher figure has been granted
by the VARO. Such approval will normally only be granted for services
which are uniquely necessary because a VA-guaranteed loan is the subject
of the litigation. VA does not allow legal fees in connection with a
bankruptcy, but will reimburse the holder up to \$100 for each court
appearance made by counsel in connection with the action. The number of
appearances and the fees paid must be documented with the holder\'s
claim.

c\. As noted in paragraph 4.07, a charge of \$10 for each prior obligor
who must be provided with notice of the holder\'s intention to foreclose
may also be included in the claim.

\<I\<ADVANCED,26H94109.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-1. VA Form 26-6851, Notice of Intention to Foreclose\</D\>

\<I\<ADVANCED,26H94110.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-2. VA Form 26-6850a, Notice of Default and Intention to
Foreclose\</D\>

\<I\<ADVANCED,26H94111.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-3. Form Letter 26-567, Status of Loan Account - Foreclosure or Other
Liquidation\</D\>

\<I\<ADVANCED,26H94112.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-3\--Continued. Form Letter 26-567, Status of Loan Account -
Foreclosure or Other Liquidation (Reverse)\</D\>

\<I\<ADVANCED,26H94113.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-4. Form Letter 26-639, Specified Amount Letter\</D\>

\<I\<ADVANCED,26H94114.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-4\--Continued. Form Letter 26-639, Specified Amount Letter
(Reverse)\</D\>

\<I\<ADVANCED,26H94115.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-5. Form Letter 26-639, Specified Amount Letter\</D\>

\<I\<ADVANCED,26H94116.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
4-5\--Continued. Form Letter 26-639, Specified Amount Letter
(Reverse)\</D\>

**CONTENTS**

**CHAPTER 5. CONVEYING REAL PROPERTY TO VA**

**PARAGRAPH PAGE**

5.01 Background 5-1

5.02 Custody Retained by the Holder 5-1

5.03 Condominiums 5-2

5.04 Transfer of Custody to VA 5-2

5.05 Title 5-2

5.06 Property Preservation 5-5

5.07 Rentals 5-5

5.08 Hazard Insurance 5-5

5.09 Taxes 5-6

5.10 Acceptable Conveyance Expenses 5-6

**Figure**

5-1 VA Form 26-8903, Notice for Election to Convey and/or

Invoice for Transfer of Property 5-7

**CHAPTER 5. CONVEYING REAL PROPERTY TO VA**

**5.01 Background**

a\. Prior to the liquidation sale of a VA-guaranteed loan, holders
receive advice from VA on how to proceed and whether the holder will
have the opportunity to convey the property to VA. This is accomplished
through the form letters described in paragraph 4.13, which are commonly
referred to as either \"bid (specified amount or net value) letters\" or
\"no-bid letters.\" These letters require the holder to credit the
account indebtedness with the specified amount for purposes of
accounting with VA, even if a lesser amount is bid at the foreclosure
sale. If a greater amount is bid, the account must be credited with the
net proceeds of the sale.

b\. If VA specifies an amount for the holder to bid at the liquidation
sale or instructs the holder to bid the total indebtedness, the holder
can convey the property to VA as long as the bid at the sale does not
exceed the specified amount. Payment for the property will be authorized
when evidence of acceptable title is approved by VA. The holder will be
sent a letter at that time indicating when it should expect to receive
payment. As consideration for the conveyance, VA will pay the holder:

\(1\) The specified amount; or,

\(2\) The total eligible indebtedness, if VA advised the holder to
credit the total indebtedness on account of the sale. This type of bid
letter is commonly referred to as a \"debt plus costs\" or \"total
debt\" letter.

**5.02 Custody Retained by the Holder**

Holders normally convey property to VA after a loan has been liquidated.
However, there are five reasons that holders retain title:

a\. The holder chooses to do so;

b\. VA issues \"no-bid\" advice which precludes the holder from
conveying the property to VA;

c\. A failure to follow the regulations which form the basis of VA\'s
guaranty (e.g., notice of election to convey the property is not
received by VA within 15 days after the sale, bid at the sale exceeded
the net value of the property);

d\. Acceptable evidence of title cannot be provided; and/or,

e\. Acceptable evidence of title is not provided timely.

**5.03 Condominiums** (38 CFR 36.4320(h)(10))

A condominium may be conveyed to VA only if the property, including the
elements of the development or project owned in common with other unit
owners, is undamaged by fire, earthquake, windstorm, flooding or boiler
explosion. VA may agree to accept conveyance of a damaged condominium if
repairs are completed within a given period of time.

**5.04 Transfer of Custody to VA**

a\. **VA Form 26-8903, Notice for Election to Convey and/or Invoice for
Transfer of Property.** When a holder has the option to convey
liquidated property to VA and chooses to do so, the holder must notify
VA on VA Form 26-8903 in triplicate. An example of a completed Notice of
Election to Convey appears in figure 5-1. The notice must be received
not later than 15 days after the date of sale or confirmation of sale.
To facilitate processing of the conveyance, VA generally provides a
partially completed VA Form 26-8903, together with instructions as to
the title documentation which will be required, along with the specified
amount letter.

b\. **Acceptance of Custody.** VA will accept custody of the property
upon receipt of this form unless the holder specifically requests to
retain custody until conveyance of the property is approved. If VA has
not processed receipt of VA Form 26-8903, the holder will be mailed VA
Form 26-8802, Request to Lender for Results of Foreclosure - LCS, which
requests the results of the foreclosure sale, 30 days after the
scheduled sale date. The holder should immediately check its records to
verify that custody has been transferred to VA and contact the VA office
of jurisdiction to confirm whether or not the notice has been received.
Conveyance will not be accepted until the title package is reviewed and
approved. Upon acceptance of the holder\'s conveyance or transfer, VA
will pay the consideration for the property.

c\. **Risk of Loss.** (38 CFR 36.4320(h)(10)) The holder remains
responsible for loss due to property damage or personal injury at the
property from the date it acquires the property until risk of loss is
assumed by VA. Assumption of the risk of loss by VA usually occurs when
VA receives the holder\'s VA Form 26-8903 and accepts custody. At this
time the holder should discontinue all property management functions
unless it is retaining custody.

**5.05 Title**

a\. **Designation of Grantee.** Conveyances to VA should be made out to
the \"Secretary of Veterans Affairs, an Officer of the United States of
America, successors and assigns, at ([VA office of jurisdiction
address]{.underline}).\" This language may be modified so long as the
form of the modification is legally acceptable in the area. Care must be
taken to ensure the office of jurisdiction\'s address is used.

b\. **Conveyance by General Warranty.** (38 CFR 36.4320(h)(5)(ii)) In
most areas, a supervised lender or a holder of financial responsibility
satisfactory to VA may convey property to VA with a general warranty
deed instead of providing evidence of acceptable title. When a general
warranty is tendered (either in the conveyance or by separate
instrument), the conveyance will be accepted and placed on record
immediately and title examination will not be required. The holder must
still deliver to VA the title evidence it has.

c\. **Conveyance with Special Warranty and Acceptable Title Evidence**

\(1\) **Special Warranty.** When a general warranty is not used, the
conveyance will be with \"special warranty\" only. The grantor covenants
(or \"warrants\") in the deed or by separately executed instrument
against any claim to the property, or any interest therein, adverse to
grantee (Secretary of VA) by such grantor (transferor) and by any person
or persons claiming through or under it.

\(2\) **Acceptable Title Evidence** (38 CFR 36.4320(h)(5))

\(a\) Title to any real property conveyed to VA must be of the same
quality as the title generally required by prudent lenders, informed
buyers, title companies, and attorneys in the community where the
property is located. The definition of acceptable title evidence may
vary from State to State. Each VARO has issued a release describing the
title evidence and documents required in its jurisdiction. Holders
should receive a copy of these instructions with the bid letter when the
holder has an opportunity to convey the property to VA.

\(b\) In most areas of the country, loan holders may submit title
policies as acceptable title evidence and transfer deeds when
transferring title of property to VA. VA encourages use of this
procedure whenever it will facilitate the title approval process.

\(3\) **Cost of Title Evidence.** The customary cost of title evidence
will be borne by VA. The costs may not exceed the rates charged
generally by local title companies. In certain areas VA may save time
and expense by making arrangements with title insurers or others for
furnishing title policies or other evidence of title. Holders will be
notified of the arrangements and should use such sources to obtain the
required title evidence. If the VA office of jurisdiction has negotiated
a reduced fee for title evidence from one or more specific companies,
holders will only be reimbursed at the negotiated rate unless a
persuasive argument can be made for the need to obtain higher cost
evidence.

\(4\) **Quality of Title** (38 CFR 36.4320(h)(5))

\(a\) Encroachments, easements, restrictions with or without condition
of reverter, and other matters enumerated in the regulations (38 CFR
36.4350(b)) will not constitute objections to the acceptance of title.
However, if these items were not taken into account in determining the
reasonable value at loan origination, an adjustment of the claim may be
made.

\(b\) When the property is to be conveyed, there must not have been a
breach of any of the conditions affording the right to the exercise of
any reverter. However, title will not be unacceptable to VA by reason of
a violation of a restriction based on race, color, religion, sex or
national origin, even if the restriction provides for revision or
forfeiture of title or a lien for liquidated damages in the event of a
breach.

\(c\) The holder should have made persons in possession under a claim of
title parties to any judicial foreclosure proceedings and caused them to
be properly served. The final decree should appropriately dispose of the
rights of such parties. In nonjudicial foreclosure the holder should
have taken any feasible legal steps available under local law, by notice
or otherwise, to cut off the rights of any such persons.

d\. **Timeliness**

\(1\) Holders should submit title packages to VA as early as possible
because delays are costly to both VA and holders. Holders are not
compensated for interest accruals after completion of liquidation.

\(2\) The time allowed will generally be 60 days from the date of sale
or confirmation of sale, whichever is applicable. Each VARO has issued
informational releases regarding timeliness and includes this
information in the title submission instructions sent with the bid
letter. VARO instructions which allow more than 60 days take precedence
over the general 60 day rule.

\(3\) A holder that encounters an unavoidable delay in gathering the
necessary title evidence should request an extension before the end of
the time limit set by the VARO. The holder should send VA a written
explanation of the cause of the delay.

\(4\) Failure to timely submit a complete title package or an acceptable
request for an extension may result in reconveyance of the property.

e\. **Title Objections**

\(1\) When title is found to be unacceptable, the holder may be given a
reasonable period of time to correct the objections depending on the
circumstances of the particular case. An extension is a matter of
discretion and not a legal right. A written stipulation, stating the
duration and the conditions of the extension, must be signed by the
holder and by VA.

\(2\) When more than 30 days will be required to cure the title problem,
the holder will generally be required to retain or resume custody of the
property and to assume responsibility for all carrying charges, such as
taxes and maintenance, and any decrease in the value of the property,
from the date stated in the stipulation granting the extension until the
title is acceptable to VA.

\(3\) If title objections cannot be cleared within a reasonable time,
the holder will be required to retain the property and credit the
indebtedness with the specified amount. VA may, at its discretion, agree
with the holder to accept title with an adjustment of the amount that
would otherwise be payable, based upon the diminution in the value of
the property because of the title defects.

f\. **Subsequently Discovered Title Defects.** (38 CFR 36.4320(h)(6))
VA\'s legal rights are limited in certain respects as to title defects
discovered after delivery of a conveyance has been accepted. Generally,
once VA has accepted title, the holder is not responsible for clearing
defects which are subsequently discovered unless they are covered under
covenants or warranties given VA by the holder in conveying the
property.

**5.06 Property Preservation**

a\. During the time between the foreclosure sale date or confirmation of
sale date, and the date of receipt by VA of the holder\'s notice of
election to convey the property, holders should perform emergency
property preservation repairs not in excess of \$500. Repairs in excess
of \$500 must be approved in advance by VA. This limitation does not
apply to expenditures for heat, water, electricity, or other services
where:

\(1\) Properties are occupied by tenants,

\(2\) The terms of the rental agreements require the landlord to furnish
such services; and

\(3\) Upon acquisition of the property by the holder the tenants are
obligated to pay rents to the holder.

b\. VA will generally assume these functions when custody of the
property is transferred.

**5.07 Rentals**

a\. The holder may not rent the property to a new tenant or extend an
existing tenancy on other than a month-to-month basis unless the prior
approval of VA is obtained. (38 CFR 36.4320(h)(3))

b\. When the holder has continued custody of the property, or custody
has been returned to the holder by VA, the holder must, after conveyance
to VA, account for all rents and other income collected and authorized
disbursements made. (38 CFR 36.4320(h)(9)) If VA declines to accept a
conveyance of the property over which it assumed custody, it will
account to the holder for collections and disbursements.

**5.08 Hazard Insurance** (38 CFR 36.4320(h)(2))

a\. The holder must not cancel any insurance in force when it acquires
the property unless the VA office of jurisdiction has specifically
waived this requirement and requested that the policy be canceled and a
refund of the unearned premium obtained. VA may take such action in
areas in which the insurance policy in force does not extend coverage to
a party who acquires title through foreclosure or to that party\'s
grantee.

b\. After a property has been conveyed to VA, the holder must deliver to
VA, properly endorsed, all hazard insurance policies in force which had
been obtained before the holder acquired the property. Policies are to
be endorsed so that any amounts payable by the insurer will be paid to
VA. The endorsement should be made out to \"Secretary of Veterans
Affairs, an Officer of the United States of America, at ([VA office of
jurisdiction address]{.underline}).\"

**5.09 Taxes** (38 CFR 36.4320(h)(4))

The holder must pay any taxes, special assessments, or ground rents due
and payable within 30 days after the date of conveyance if the bills are
obtainable.

**5.10 Acceptable Conveyance Expenses** (38 CFR 36.4320(f))

The following expenses may be included in any accounting with VA in the
computation of a claim under the guaranty, if paid by the holder:

a\. Required State and documentary stamp taxes.

b\. The customary cost of obtaining evidence of title, as discussed in
paragraph 5.05c(3). The costs of title evidence obtained incident to
making the loan or any expenses incurred to clear title defects may not
be included.

c\. Taxes, special assessments, or ground rents, as discussed in
paragraph 5.09.

d\. Recording fees.

e\. Any other expenditures connected with the property approved in
advance by VA.

\<I\<ADVANCED,26H94117.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
5-1. VA Form 26-8903, Notice for Election to Convey and/or Invoice for
Transfer of Property\</D\>

**CONTENTS**

**CHAPTER 6. CLAIMS PROCEDURES**

**PARAGRAPH PAGE**

6.01 General 6-1

6.02 VA Form 26-1874, Claim Under Loan Guaranty 6-1

6.03 Other Required Documents 6-2

6.04 Computation of Claim 6-3

6.05 Limit to Claim 6-4

6.06 Partial or Total Loss of Guaranty and Suspension 6-4

6.07 Payment and Final Accounting 6-6

6.08 Supplemental Claim 6-6

**Figure**

6-1 VA Form 26-1874, Claim Under Loan Guaranty 6-7

6-2 Form Letter 26-641, Advice of Claim Payments 6-9

6-3 Analysis of Account and Claim 6-10

**CHAPTER 6. CLAIMS PROCEDURES**

**6.01 General**

a\. Holders may submit claims under the guaranty after a loan has been
terminated by foreclosure or the acceptance of a voluntary conveyance
(deed in lieu of foreclosure). A claim must also be submitted if VA
elects to purchase, or refund, the loan. In that case, the instructions
in paragraph 3.06, Refunding, should be followed. Procedures are also
different in a compromise agreement (see par. 3.04).

b\. A claim should generally be submitted after all expenses involved
with a terminated loan have been paid. VA will accept a supplemental
claim at a later date should an item be omitted from the original claim,
but as a practical matter, holders should try to include all expenses in
the original claim because processing primary claims is given priority
over supplementals.

c\. For timely payment, it is in the holder\'s best interest to ensure
that the claim form and supporting documents are complete and meet VA
requirements.

**6.02 VA Form 26-1874, Claim Under Loan Guaranty**

This form should be submitted in duplicate along with appropriate
supporting documents. The original must be signed by a corporate officer
or other full-time employee of the holder authorized to execute claims.
A completed example of this form appears in figure 6-1. In completing
this form, holders should pay special attention to the following items:

a\. Claimant (item 1) and holder\'s loan number (item 3B) when FNMA is
the holder. Be sure to list FNMA as the claimant and give the FNMA
number as the holder\'s loan number.

b\. **Payments**. This involves principal and interest only, not tax and
insurance amounts. Item 5B should total items 5C and 5D. Interest in
item 5C must include any interest adjustment shown on the HUD-1 form or
VA Form 26-1820, Report and Certification of Loan Disbursement.

c\. **Principal Balance (Item 11A)**. This is the unpaid principal
balance of the loan after credit is given for all payments received from
the borrower.

d\. **Balance in T&I Account (Item 11C)**. If any advance was made for
the payment of taxes or an insurance premium, the balance should be
zero.

e\. **Miscellaneous Credits (Item 11G)**. Provide a breakdown and
explanation of the amounts involved. Attach a separate sheet if
necessary.

f\. **Itemized Advances (Item 12)**. If the T&I account balance was not
sufficient to pay taxes or insurance when due, only the deficiency
(shortage) should be shown as an advance. Late charges or tax penalties
must not be included. Care should be taken to itemize advances prior to
and after a cutoff date. Because many advances are subject to caps
established by the VA office of jurisdiction, such as property
preservation charges and some liquidation costs, holders should obtain
current releases on allowable fees from each VA office with which they
may be filing a claim and limit the amount claimed for advances to the
amount allowable.

**6.03 Other Required Documents**

The following documents are required when submitting a claim:

a\. Originals or [certified]{.underline} copies of all instruments
evidencing the indebtedness and the agreement between the claimant and
the debtor. Copies of instruments which have been recorded must show
book, page, date, and place of recording. The note or evidence of the
debt should be endorsed as follows (except where the holder will not be
made whole and plans to pursue collection from the obligor) :

Pay to the order of the Secretary of Veterans Affairs, without recourse.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Holder)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Official Signature)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Title)

The note or other instrument should not be marked \"paid\" or
\"canceled.\"

b\. If claimant is an assignee or transferee of the original lender, a
[certified]{.underline} copy of the instrument of transfer.

c\. If a judgment has been obtained, an assignment thereof (in addition
to the note, unless by law or order of the court it is retained among
the court papers) to the Secretary of Veterans Affairs with advice of
the amount, if any, collected on the judgment.

d\. Certification that the loan termination has been reported to the
credit bureaus.

e\. A certified statement of account. This in effect should be a copy of
the ledger sheets or equivalent showing the amounts and dates of all
debits and credits to the account.

f\. Copies of all deeds transferring title from the original
veteran-obligor through the owner holding title at liquidation. Social
Security or taxpayer identification numbers of transferees should be
annotated on the deeds.

g\. Copies of all judicial proceedings involving the foreclosure and any
bankruptcies, if not previously provided to VA.

**6.04 Computation of Claim**

a\. Ordinarily, a proper claim will be processed within 30 days of
receipt if it is in good order and accompanied by the required
documents. VA will determine whether the claim is eligible for payment
under the guaranty. All claims will be checked for accuracy, the
propriety of the charges, and to verify proper disposition of funds.

b\. The total amount claimed (item 11H on VA Form 26-1874) does not
include interest. VA will calculate the accrued interest from the date
of the last paid installment to one of the following dates, whichever is
applicable:

\(1\) The date of liquidation;

\(2\) The date the deed is recorded (in a voluntary conveyance); or,

\(3\) A cutoff date established under the provisions of 38 CFR
36.4319(f) or 38 CFR 36.4321(b).

c\. For purposes of determining VA\'s guaranty liability, the total
indebtedness as calculated by VA will include unpaid principal, accrued
interest to the cutoff date, advances, and liquidation and property
preservation expenses if paid prior to the cutoff date and allowable by
regulation. Advances and liquidation expenses paid after the cutoff date
may be included in the holder\'s claim and are reimbursable to the
extent that the total claim payable does not exceed VA\'s guaranty
liability. Advances for insurance paid after the cutoff date, however,
may not be included in the claim. Advances for real estate taxes,
assessments, or ground rents paid after the cutoff date are generally
fully reimbursable unless a cutoff date which is prior to the
liquidation sale date has been established under 38 CFR 36.4319(f),
36.4321(b)(1) or 36.4321(b)(3). If an earlier cutoff date is in effect,
these costs may be allowed only on a pro rata basis through the cutoff
date. However, advances for taxes which must be paid pursuant to
paragraph 5.09 (38 CFR 36.4320(h)(4)) are reimbursable on the same basis
as liquidation expenses paid after the cutoff date.

d\. VA will also reimburse holders for the cost of the liquidation
appraisal, and advances and expenses which were requested to be paid by
the holder on behalf of VA. For example, as a result of the timing of a
foreclosure sale, property taxes are due more than 30 days after the
liquidation sale but there is insufficient time for VA to accept custody
of the property and pay the taxes so that a penalty will be avoided. In
such a situation, VA might authorize the holder to pay the tax and then
reimburse the holder even if payment exceeds the maximum claim payable.
Similarly, if a holder obtained VA\'s prior approval to make emergency
repairs to the property, then expenses are reimbursed to the holder.

e\. Items or amounts claimed that are not eligible, in excess of the
allowable amount, not supported by paid receipt, or not itemized, will
be disallowed.

**6.05 Limit to Claim**

The amount paid cannot exceed the amount or percentage guaranteed. The
guaranty increases or decreases pro rata with any increase or decrease
in the amount of guaranteed indebtedness up to the amount originally
guaranteed. For example, if VA originally issued a \$36,000, 40 percent
guaranty on a \$90,000 loan and the indebtedness at liquidation was
\$95,000, then the guaranty is capped at \$36,000. If indebtedness at
liquidation on the same \$90,000 loan was \$80,000, the amount of
guaranty would be 40 percent or \$32,000.

**6.06 Partial or Total Loss of Guaranty (38 CFR 36.4325) and Suspension
(38 CFR 36.4332)**

a\. **Forgery.** Forgery of the security instruments, loan or guaranty
application or other loan processing documents which are essential to
the underwriting process releases VA from guaranty liability on the
loan, regardless of the current holder. A counterfeit or falsified
discharge certificate or certificate of eligibility is similarly
treated.

b\. **Fraud or Willful Misrepresentation**

\(1\) A finding that the original lender obtained guaranty of a loan as
a result of willful and material fraud or misrepresentation will provide
a basis for denial of liability by VA if the fraud or misrepresentation
affected VA\'s decision to guaranty the loan. Examples of fraud and
willful misrepresentation include:

\(a\) Hiding unacceptable credit by obtaining multiple credit reports
and including only the report that shows acceptable credit history in
the loan package;

\(b\) Materially false information in the loan package as a result of
allowing the veteran to hand-carry employment, deposit or other income
or credit verifications instead of mailing them directly to the
employer, depository or other proper source of information;

\(c\) Not reporting a second lien executed in connection with the loan
closing to reimburse the seller or a third party for costs of the
transaction which are not payable by the veteran or not disclosed in the
loan package; and,

\(d\) Egregiously poor underwriting; e.g., approval of a loan without
resolving obvious discrepancies in the loan package or despite the
veteran\'s clear failure to meet VA\'s regulatory credit standards.

\(2\) Denial of liability for fraud or willful misrepresentation applies
only to the original lender, and not to a \"holder in due course.\" A
holder in due course is one who acquired the loan for value and did not
participate in or have notice of the fraud or misrepresentation. A
holder that acquired a loan from the original lender in a delinquent
status is not considered a holder in due course by VA.

c\. **Non-Willful Misrepresentation.** There is no basis for denial of
liability by VA when apparent misrepresentation occurs without the
willful complicity of the lender, or when the loan was acquired by a
holder in due course. These include cases of relatively minor errors in
judgment in processing the loan application resulting from
misunderstandings of the lender, and cases in which the veteran or some
other party intentionally misinforms the lender as to facts used in
underwriting the loan and in which prudent underwriters would not find a
basis for questioning the information. If the misrepresentation or error
is material to approval of the loan and it is determined that knowledge
of it was available to the lender prior to closing, VA may reduce its
claim liability to the extent that it can be shown to have been
increased by the misrepresentation or error.

d\. **Violation of VA Requirements**

\(1\) To the extent that a holder fails to comply with VA servicing
requirements, regulations and/or laws applicable to the servicing and
origination of GI loans, a claim under Loan Guaranty is subject to
adjustment by VA. VA\' s general policy in determining the amount of the
adjustment is to estimate the dollar amount by which the holder\'s
failure to comply increased the claim payable on the loan. The claim is
then adjusted by a corresponding amount. For example: if a holder
inadvertently released an obligor from liability, and the obligor
willfully defaulted as a result or VA lost a right to pursue collection
against the obligor after loan termination, VA would adjust the claim
payable to zero (38 CFR 36.4324(f) and 36.4325(b)(1)). Another example:
If the holder\'s failure to obtain a valid lien at loan origination
delayed foreclosure of the loan by 10 months, the holder\'s claim would
be reduced by accrued interest and incurred advances and expenses during
the 10 month period.

\(2\) The most common claim adjustments are for failure to report loan
defaults timely (38 CFR 36.4315(a)) and failure to begin and prosecute
liquidation (38 CFR 36.4319(f)) timely. Adjustments for failure to
obtain adequate insurance settlements of hazard losses and to ensure
that the settlements are applied to the loan balance or to restoration
of the security are not unusual. Most claim adjustments are completely
avoidable if holders are familiar with VA\'s requirements for servicing
and liquidating VA-guaranteed loans and maintain internal control
systems that monitor compliance. These standards are not significantly
different than those expected by FNMA (Federal National Mortgage
Association), FHLMC (Federal Home Loan Mortgage Corporation), GNMA
(Government National Mortgage Association) and private mortgage
insurors. Holders that make an effort to achieve familiarity with VA\'s
requirements and maintain high standards of compliance will benefit, as
will veterans and VA.

e\. **Debarment**

\(1\) VA is authorized under section 3704(d) of title 38, United States
Code, to debar a holder when a determination has been made that the
holder has failed to:

\(a\) Maintain adequate loan accounting records; or,

\(b\) Demonstrate proper ability to service loans adequately.

\(2\) Under 38 CFR part 44, these debarments can be made effective
Government-wide. Under 38 CFR 44.305, debarment may also be imposed
based on conviction or civil judgment for fraud or criminal offenses,
and for willful violation of a statutory or regulatory provision. This
includes a willful failure to comply with VA\'s servicing procedures (38
CFR 36.4346).

\(3\) Any debarment action will be preceded by a written notice of
intention to debar which will detail the servicing deficiencies or other
misconduct found by VA. The holder will be given the opportunity to
respond in writing and at a personal hearing before action is taken.

**6.07 Payment and Final Accounting**

a\. **Advice to Holder.** When the claim is vouchered for payment, a
notice will be sent to the holder/servicing agent together with a copy
of VA\'s Analysis of Account and Claim (figs. 6‑2 and

6-3).

b\. **Return of Evidence of Guaranty.** Immediately following the
receipt of a claim payment, the Loan Guaranty Certificate must be
returned to VA marked \"Canceled\" over an official signature of the
holder.

c\. **Record Retention.** VA regulations do not require holders to
retain records for any fixed period of time after a claim is paid. It is
recommended that they be retained for 3 years.

**6.08 Supplemental Claim**

A supplemental claim may be filed for any items omitted from the
original claim or paid for after it was submitted, or to contest a
disallowance on the original claim. It is not necessary to use VA Form
26-1874, but a supplemental claim must be supported by the same
documents required for the initial claim, such as receipts. A
supplemental claim will be processed in the same manner as an initial
claim.

\<I\<ADVANCED,26H94118.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
6-1. VA Form 26-1874, Claim Under Loan Guaranty\</D\>

\<I\<ADVANCED,26H94119.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
6-1\--Continued. VA Form 26-1874, Claim Under Loan Guaranty
(Reverse)\</D\>

\<I\<ADVANCED,26H94120.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
6-2. Form Letter 26-641, Advice of Claim Payments\</D\>

\<I\<ADVANCED,26H94121.RPL\>\> DOUBLE - CLICK HERE TO DISPLAY Figure
6-3. Analysis of Account and Claim\</D\>

**CONTENTS**

**APPENDIXES**

**APPENDIX PAGE**

A List of VA Regional Offices App. A-1

B Extract of Circular 26-93-14, VA Loan Identification Numbers App. B-1

C Extract of Circular 26-90-11, Loan File Setup App. C-1

D Circular 26-90-32, Forbearance on VA Home Loans During Special
Military

Actions and Soldiers\' and Sailors\' Civil Relief Act of 1940, as
Amended App. D-1

E Foreclosure Timeframes App. E-1

F VA Regulations (38 CFR 36.4300 [et seq]{.underline}.) App. F-1

**LOAN GUARANTY SERVICE**

**REGIONAL OFFICE ADDRESS LIST**

**State Address/Phone Number State Address/Phone Number**

**Alabama** VA Regional Office **Washington,** VA Regional Office

474 South Court St. **D.C.** 941 North Capitol St., N.E.

Montgomery, AL 36104 Washington, D.C. 20421

(205)223-7187 (202)208-1318

**Alaska** VAOC/Regional Office **Florida** VA Regional Office

2925 Debarr Road P.O. Box 1437

Anchorage, AK 99508 St. Petersburg, FL 33731

(907)257-4736 (813)893-3812

**Arizona** VA Regional Office **Georgia** VA Regional Office

3225 North Central Ave. 730 Peachtree St., N.E.

Phoenix, AZ 85012 Atlanta, GA 30365

(602)640-2745 (404)347-3488

**Arkansas** VA Regional Office **Hawaii** VA Medical and Regional

P. O. Box 1280 Office Center

Building 65, Fort Roots P.O. Box 50188

North Little Rock, AR 72115 Honolulu, HI 96850

(501)370-3760 (808)541-1480

**California** VA Regional Office **Idaho** VA Regional Office

Federal Building 805 Franklin Street

11000 Wilshire Blvd. Boise, ID 83702-5560

Los Angeles, CA 90024

(310)575-7192 **Illinois** VA Regional Office

536 South Clark Street

VA Regional Office P.O. Box 8136

Oakland Federal Building Chicago, IL 60680

1301 Clay Street (312)353-4056

Oakland, CA 94612-5209

(510)637-1126 **Indiana** VA Regional Office

575 N. Pennsylvania Street

**Colorado** VA Regional Office Indianapolis, IN 46204

Box 25126 (317)226-6681

44 Union Boulevard

Denver, CO 80225 **Iowa** VA Regional Office

210 Walnut Street

**Connecticut** Loan Guaranty consolidated Des Moines, IA 50309

with Manchester, NH (515)284-4657

**Delaware** Loan Guaranty consolidated

with Philadelphia, PA

**State Address/Phone Number State Address/Phone Number**

**Kansas** VA Medical and Regional **Nebraska** VA Regional Office

Office Center 5631 S. 48th Street

5500 E. Kellogg Lincoln, NE 68516

Wichita, KS 67218 (402)437-5032

(316)688-6720

**Nevada** Loan Guaranty

consolidated

**Kentucky** VA Regional Office with Oakland, CA

545 South 3rd Street

Louisville, KY 40202 **New Hampshire**VA Regional Office

(502)582-6025 275 Chestnut Street

Manchester, NH 03101

**Louisiana** VA Regional Office (603)666-7527

701 Loyola Avenue

New Orleans, LA 70113 **New Jersey** VA Regional Office

(504)589-6412 20 Washington Place

Newark, NJ 07102

**Maine** Loan Guaranty consolidated (201)645-3470

with Manchester, NH

**New Mexico** VA Regional Office

**Maryland** VA Regional Office 500 Gold Avenue, S.W.

Federal Building Albuquerque, NM 87102

31 Hopkins Plaza (505)766-2209

Baltimore, MD 21201

(410)962-4250 **New York** VA Regional Office

Federal Building

**Massachusetts** Loan Guaranty consolidated 111 West Huron Street

with Manchester, NH Buffalo, NY 14202

(716)846-5291

**Michigan** VA Regional Office

477 Michigan Ave. VA Regional Office

Detroit, MI 48226 252 Seventh Avenue

(313)226-4224 at 24th Street

New York, NY 10001

**Minnesota** VA Regional Office and (212)620-6421

Insurance Center

One Federal Drive **North Carolina** VA Regional Office

Fort Snelling, MN 55111 251 North Main Street

(612)725-3064 Winston-Salem, NC 27155

(919)631-5447

**Mississippi** VA Regional Office

100 West Capitol Street **North Dakota** Loan Guaranty Jackson, MS 39269
consolidated

\(601\) 965-4825 with Fort Snelling, MN

**Ohio** VA Regional Office

**Missouri** VA Regional Office 1240 East 9th Street

1520 Market Street Cleveland, OH 44199

St. Louis, MO 63103 (216)522-3614

\(314\) 539-3147

**Oklahoma** VA Regional Office

**Montana** VA Medical and Regional 125 S. Main Street

Office Center Muskogee, OK 74401

Fort Harrison, MT 59636 (918)687-2158

\(406\) 447-7901

**State Address/Phone Number State Address/Phone Number**

**Oregon** VA Regional Office **Vermont** Loan Guaranty consolidated

Federal Building with Manchester, NH

1220 S.W. Third Avenue

Portland, OR 97204

(503)326-2475 **Virginia** VA Regional Office

210 Franklin Road, S.W.

**Pennsylvania** VA Regional Office and Roanoke, VA 24011

Insurance Center (703)982-4736

5000 Wissahickon Avenue

P.O. Box 8079 **Washington** VA Regional Office

Philadelphia, PA 19101 Federal Building

(215)951-7847 915 Second Avenue

Seattle, WA 98147

VA Regional Office (206)220-6126

1000 Liberty Avenue

Pittsburgh, PA 15222 **West Virginia** VA Regional Office

(412)644-6660 640 4th Avenue

Huntington, WV 25701

**Puerto Rico** VA Regional Office (304)529-5414

GPO Box 4867

San Juan, PR 00936 **Wisconsin** VA Regional Office

(809)766-5120 Building 6

5000 West National Avenue

**Rhode Island** Loan Guaranty consolidated Milwaukee, WI 53295

with Manchester, NH (414)382-5050

**South Carolina** VA Regional Office **Wyoming** Loan Guaranty
consolidated

1801 Assembly Street with Denver, CO

Columbia, SC 29201

(803)765-5616

**South Dakota** Loan Guaranty consolidated

with Fort Snelling, MN

**Tennessee** VA Regional Office

110 9th Avenue, S.

Nashville, TN 37203

(615)736-5243

**Texas** VA Regional Office

8900 Lakes at 610 Drive

Houston, TX 77054

(713)660-4134

VA Regional Office

1400 N. Valley Mills Drive

Waco, TX 76799

(817)757-6822

**Utah** VA Regional Office

P.O. Box 11500

Salt Lake City, UT 84147

(801)524-5983

**(EXTRACT OF CIRCULAR 26-93-14,**

**DATED JULY 7, 1993)**

**VA LOAN IDENTIFICATION NUMBERS**

1\. **GENERAL**. As part of the Veterans Benefits Administration ADP
(Automatic Data Processing) modernization effort, Loan Guaranty Service
is updating its information and production systems. This effort
includes, but is not limited to, the recently installed LP (Loan
Processing) system, the LFF (Lockbox and Funding Fee) reporting system
and the LCS (Liquidation and Claims System). One functional requirement
of the Loan Guaranty modernization project is to integrate all automated
systems so that data can be shared across applications and support EDI
(Electronic Reporting and Electronic Data Interchange.)

2\. **VA LOAN IDENTIFICATION NUMBER**

a\. Electronic reporting of GI loan default, liquidation, claim and
other information will be of great benefit to both VA and the loan
servicing community. VA is actively supporting development of EDI
standards for the mortgage industry. However, a method of accurately
identifying the loan in VA\'s and the servicer\'s systems of records
must be implemented before electronic reporting will be practical. Since
the servicer\'s loan number may change each time the loan is sold on the
secondary mortgage market and VA\'s internal loan identification number
does not change, the logical choice as a common identifier is VA\'s loan
identification number.

b\. Under the Loan Guaranty Program a VA loan number has been entered
and displayed in a number of different configurations. These differences
have even extended to the various Loan Guaranty automated systems. This
has caused problems in a number of areas including the reporting of
default information by servicers and holders. To correct these problems
VA has developed a 12 position numeric VA LIN (Loan Identification
Number) that allows VA to accurately track a loan record across its
systems. (At some future date VA LIN may be extended to l3-digits to
accommodate a check digit.)

3\. **DEFINITIONS**. The VA loan identification number consists of the
following four subfields:

a\. **OJ (Office of Jurisdiction)**. A two-position numeric field which
identifies the regional office that currently has responsibility for the
loan. OJ may change over the life of the loan due to changes in the
areas of responsibility assigned to a specific regional office.

b\. **OO (Office of Origin)**. A two-position numeric field which
identifies the regional office which had jurisdiction for the area
within which the property securing the loan was located at the time the
loan closed. The OO assigned to a given loan does not change regardless
of shifts in areas of responsibilities or office consolidations.

c\. **LT (Loan Type)**. This is a one-position field identifying the
Federal legislation which authorized VA to guarantee the loan and the
fund backing the loan. This value is used for VA\'s internal accounting
and ensures the uniqueness of the identifier as loan number (defined
below) may be duplicated within OO. With the exception of guaranteed
loans which are being refunded (purchased) by VA, loan type does not
change.

d\. **Loan Number**. A seven-position serial number assigned to the loan
by the OO. Since each regional office traditionally assigned direct, GI
and vendee loan numbers from separate but overlapping registers, loan
numbers may be duplicated within OO, but are unique to the OJ-OO-loan
type combination. In this case the loan number does not change.

4\. **DETERMINING THE CORRECT VA LOAN IDENTIFICATION NUMBER**. The 12
position VA loan identification number is currently provided to lenders
via the LP system which prints the full VA loan identification number on
Loan Guaranty certificates and other correspondence. Also, areas served
by the St. Petersburg, Waco, Cleveland and Washington D.C. Regional
Offices receive certificates of reasonable value and other
correspondence utilizing the 12 position loan number as generated by the
automated Construction and Valuation systems installed at those offices.
All other VA output is being reviewed and revised to include the 12
position VA loan identification number where appropriate. The following
paragraphs describe how a VA loan identification number may be
constructed in those instances where it has not been provided to program
participants.

5\. **HOW TO DETERMINE THE CORRECT OJ**

a\. Servicers can, using information available in their own system of
records, develop an accurate 12 position VA loan identification number
for most GI loans in their inventory. This process begins with the
determination of the correct VA office of jurisdiction for the
guaranteed loan.

b\. Servicers may use the geographic location of the property securing
the loan to determine the current OJ. Each OJ is assigned to a specific
geographic area. Most OJs are responsible for the area in a single
State. A list of all current OJs and their areas of responsibility is
found in exhibit A. This list is arranged alphabetically by State and
references the current office of jurisdiction for subdivisions of the
State when the entire State is not under the jurisdiction of a single
regional office.

c\. To determine the office of jurisdiction for a particular loan, first
ascertain the location of the property securing the loan; then check
that location against exhibit A. For example, a

property securing a loan is located in South Dakota. Regional office
number 35, St. Paul, MN, is the current OJ for South Dakota; so OJ
equals 35.

6\. **HOW TO DETERMINE THE CORRECT OO**

a\. Office consolidations and territory changes have resulted in some
OJs which administer loans with different OOs. Since most consolidations
occurred more than 30 years ago, this is not a major problem. However,
to determine the correct OO for the situations where the consolidations
occurred in the past 30 years, the following rules apply:

\(1\) If the OJ for a loan is one of the following, the OO is the same
as the OJ:

06 09 10 11 13 14 15 16 17 18 19 20 21 22

23 25 26 27 28 29 30 31 34 36 39 40 41 43

44 45 46 47 48 49 50 51 52 55 59 62 63 72

\(2\) If the OJ is one of the these three stations, the following rules
apply:

07 Buffalo If the loan is secured by a property in Wayne County, New
York, and

> the date of the loan is prior to January 1, 1983, the OO is 06.
> Otherwise the OO is 07.

35 St. Paul If the loan is secured by a property in South Dakota and the
date of the

loan is prior to May 1, 1962, the OO is 38. Otherwise the OO is 35.

73 Manchester If the loan is secured by a property in Massachusetts or
Rhode Island

> and the date of the loan is prior to June 1, 1990, the OO is 01.
>
> If the loan is secured by a property in Maine and the date of the loan
> is prior to December 7, 1990, the OO is 02.
>
> If the loan is secured by a property in Vermont and the date of the
> loan is prior to October 1, 1984, the OO is 05.
>
> If the loan is secured by a property in Connecticut and the date of
> the loan is prior to June 1, 1990, the OO is 05.
>
> Otherwise the OO is 73.

b\. Occasionally, lenders, servicers or holders need to determine the
correct OO for a loan which was closed prior to 1962. Regional office
personnel may assist in making this determination by reviewing the
appropriate loan record in the LGY INDEX. Exhibit B is a listing by OJ
which shows the allowable OOs for a given OJ. This exhibit contains all
valid combinations taking into consideration territorial changes and
office combinations since the beginning of the program.

7\. **HOW TO DETERMINE THE CORRECT LT**

a\. Lenders, servicers and holders generally only originate, service and
hold VA guaranteed loans. A few servicers and holders are involved with
VA vendee loans which have been sold to private sector investors. Thus,
while most servicers and holders have only the two loan types
designating guaranteed loans in their portfolios, some may have
portfolios containing several VA loan types. Exhibit C defines all VA
loan types.

\(l\) If the loan is a VA guaranteed loan the following rules are used
to determine the correct loan type:

Loan Type 2 If the security for the loan is a manufactured home and the
loan was

processed under the provisions of Title 38, U. S. Code, section 37l2,
the

loan type is always 2.

If the security for the loan is not a manufactured home and the loan
closed

prior to January 1, 1990, the loan type is 2.

Loan Type 6 If the security for the loan is not a manufactured home and
the loan closed

on or after January 1, 1990, the loan type is 6.

\(2\) In addition to guaranteed loans, servicers and holders may have VA
vendee loans which VA has sold in the past. Presently these loans are
designated by two loan types. Vendee loans where the antecedent loan was
a VA direct loan are loan type 3. Vendee loans where the antecedent loan
was a VA guaranteed loan financed through LGRF (Loan Guaranty Revolving
Fund) are loan type 4. Vendee loans where the antecedent loan was a VA
guaranteed loan financed through GIF (Guaranty Indemnity Fund) have not
been sold by VA through 1992 but may be sold in the future. The loan
type for these loans is 7. Also, a few loans made under the provisions
of VA Direct Loan Program were sold with repurchase agreements rather
than being converted to guaranteed loans. The loan type for these loans
is l. The documentation which accompanied loans sold by VA identifies
the loan type.

\(3\) In addition to the loan types associated with loans which may be
held in the private sector, VA continues to hold in its portfolio direct
loans (loan type 1) it has made in the past, and acquired loans (loan
type 5 (LGRF) and loan type 8 (GIF)) it has refunded in the past.

8\. **HOW TO DETERMINE THE CORRECT LOAN NUMBER**

a\. There were 13 million GI loans guaranteed prior to deployment of LP.
For each of these cases, the loan number is printed on the Loan Guaranty
certificate issued by VA. That document should be used to determine the
correct loan number segment of a VA loan identification number.

b\. Traditionally, the loan number for VA guaranteed loans has been
referred to as the \"LH number\" since the letters \"LH\" or some
variation such as \"LHM\" (manufactured home) or \"LHR\" (refinancing
loan) have been used as a prefix to the actual number itself. In
addition to those prefixes, suffixes have often been appended to the
loan number. Neither prefixes or suffixes to the loan number should be
used in constructing a VA loan identification number.

c\. Since the loan number portion of a VA loan identification number is
a seven-position numeric value, loan numbers found on Loan Guaranty
certificates and other documents should be expanded to seven positions
in the event they are less than seven positions. This is accomplished by
appending leading zeros to the existing loan number.

9\. **STORAGE AND DISPLAY OF THE VA LOAN IDENTIFICATION NUMBER**

To construct a VA LIN, the four subfields are combined in OJ-OO-LT-loan
number order. The full l2 position number forms a unique identifier
within VA\'s system of records. It may be displayed as 12 contiguous
positions or with the components separated by either dashes or spaces.
It is always stored in VA ADP systems as l2 contiguous positions.

**LOAN GUARANTY REGIONAL OFFICE JURISDICTIONS**

**GEOGRAPHIC JURISDICTIONS**

**State or Political Subdivision Regional Office**

AL Entire State 22 Montgomery, AL

AK Entire State 63 Anchorage, AK

AR Entire State 50 Little Rock, AR

AZ Entire State 45 Phoenix, AZ

CA 11 counties: Imperial, Inyo, 44 Los Angeles, CA

Kern, Los Angeles, Orange, Riverside,

San Bernadino, San Diego, San Luis Obispo,

Santa Barbara, Ventura

CA All counties except those under Los Angeles 43 San Francisco, CA

CO Entire State. 39 Denver, CO

CT Entire State. 73 Manchester, NH

DE Entire State. 10 Philadelphia, PA

DC Entire district. 72 Washington, DC

FL Entire State. 17 St. Petersburg, FL

GA Entire State. 16 Atlanta, GA

HI Entire State. 59 Honolulu, HI

ID Entire State. 47 Boise, ID

IL Entire State. 28 Chicago, IL

IN Entire State. 26 Indianapolis, IN

IA Entire State. 33 Des Moines, IA

KS Entire State. 52 Wichita, KS

KY Entire State. 27 Louisville, KY

LA Entire State. 21 New Orleans, LA

ME Entire State. 73 Manchester, NH

**LOAN GUARANTY REGIONAL OFFICE JURISDICTIONS**

**GEOGRAPHIC JURISDICTIONS**

**State or Political Subdivision Regional Office**

MD All counties except those under 13 Baltimore, MD

Washington, DC.

MD 2 counties: Montgomery, 72 Washington, DC

Prince Georges.

MA Entire State. 73 Manchester, NH

MI Entire State. 29 Detroit, MI

MN Entire State. 35 St. Paul, MN

MS Entire State. 23 Jackson, MS

MO Entire State. 31 St. Louis, MO

MT Entire State. 36 Ft. Harrison, MT

NE Entire State. 34 Lincoln, NE

NV 2 counties: Clark, Lincoln. 44 Los Angeles, CA

NV All counties except those under 43 San Francisco, CA

Los Angeles.

NH Entire State. 73 Manchester, NH

NJ Entire State. 09 Newark, NJ

NM Entire State. 40 Albuquerque, NM

NY 14 counties: Allegany, Cattaraugus, 07 Buffalo, NY

Chautauqua, Erie, Genesee, Livingston,

Monroe, Niagara, Ontario, Orleans, Steuben,

Wayne, Wyoming, Yates.

NY All counties not assigned to Buffalo. 06 New York, NY

NC Entire State. 18 Winston-Salem, NC

ND Entire State. 35 St. Paul, MN

OH Entire State. 25 Cleveland, OH

OK Entire State. 51 Muskogee, OK

OR Entire State. 48 Portland, OR

**LOAN GUARANTY REGIONAL OFFICE JURISDICTIONS**

**GEOGRAPHIC JURISDICTIONS**

**State or Political Subdivision Regional Office**

PA 40 counties: Adams, Berks, Bradford, 10 Philadelphia, PA

Bucks, Cameron, Carbon, Centre, Chester,

Clinton, Columbia, Cumberland, Dauphin,

Delaware, Franklin, Juniata, Lackawanna,

Lancaster, Lebanon, Lehigh, Luzerne,

Lycoming, Mifflin, Monroe, Montgomery,

Montour, Northampton, Northumberland,

Perry, Philadelphia, Pike, Potter,

Schuylkill, Snyder, Sullivan, Wayne,

Wyoming, York.

PA 27 counties not assigned to 11 Pittsburgh, PA

Philadelphia.

PR Entire Commonwealth. 55 San Juan, PR

RI Entire State. 73 Manchester, NH

SC Entire State. 19 Columbia, SC

SD Entire State. 35 St. Paul, MN

TN Entire State. 20 Nashville, TN

TX 90 counties: Angelina, Aransas, 62 Houston, TX

Atascosa, Austin, Bandera, Bee, Bexar,

Blanco, Brazoria, Brewster, Brooks,

Caldwell, Calhoun, Cameron, Chambers,

Colorado, Comal, Crockett, DeWitt, Dimmit,

Duval, Edwards, Fort Bend, Frio, Galveston,

Gillespie, Goliad, Gonzales, Grimes,

Guadalupe, Hardin, Harris, Hays, Hidalgo,

Houston, Jackson, Jasper, Jefferson,

Jim Hogg, Jim Wells, Karnes, Kendall,

Kenedy, Kerr, Kimble, Kinney, Kleberg,

LaSalle, Lavaca, Liberty, Live Oak,

McCulloch, McMullen, Mason, Montgomery,

Nacogdoches, Newton, Nueces, Orange, Pecos,

Polk, Real, Refugio, Sabine, San Augustine,

San Jacinto, San Patricio, Schleicher,

Shelby, Starr, Sutton, Terrell, Trinity,

Tyler, Uvalde, Val Verde, Victoria, Walker,

Waller, Washington, Webb, Wharton, Willacy,

Wilson, Zapata, Zavala.

**LOAN GUARANTY REGIONAL OFFICE JURISDICTIONS**

**GEOGRAPHIC JURISDICTIONS**

**State or Political Subdivision Regional Office**

TX City of Texarkana. 50 Little Rock, AR

TX All counties except those assigned 49 Waco, TX

to Houston, TX, and the city of Texarkana,

TX, assigned to Little Rock, AR.

UT Entire State. 41 Salt Lake City, UT

VT Entire State. 73 Manchester, NH

VA 6 counties: Arlington, Fairfax, 72 Washington, DC

Loudoun, Prince William, Stafford,

Spotsylvania, and

4 independent VA cities: Alexandria,

Fairfax, Falls Church, Fredericksburg.

VA Entire state except the 6 counties 14 Roanoke, VA

and 4 independent cities assigned to

Washington, DC.

VI All US Virgin Islands. 55 San Juan, PR

WA 3 counties: Clark, Klickitat, 48 Portland, OR

Skamania.

WA Entire State except 3 counties 46 Seattle, WA

assigned to Portland, OR.

WV 4 counties: Brooke, Hancock, 11 Pittsburgh, PA

Marshall, Ohio.

WV Entire State except 4 counties 15 Huntington, WV

assigned to Pittsburgh, PA.

WI Entire State. 30 Milwaukee, WI

WY Entire State. 39 Denver, CO

Pacific Islands of: American Samoa, 59 Honolulu, HI

Guam, Wake, Midway, Commonwealth of

Northern Mariana Islands.

**HISTORICAL LISTING OF VALID OFFICE OF JURISDICTION**

**OFFICE OF ORIGIN COMBINATIONS SINCE THE BEGINNING OF THE PROGRAM**

**OJ OO STATION NAME OJ OO STATION NAME**

06 06 New York, NY 27 27 Louisville, KY

57 Albany, NY

70 Brooklyn, NY 28 28 Chicago, IL

71 Syracuse, NY 90 Springfield, IL

07 07 Buffalo, NY 29 29 Detroit, MI

06 New York, NY

30 30 Milwaukee, WI

09 09 Newark, NJ

31 31 St. Louis, MO

10 10 Philadelphia, PA 32 Kansas City, MO

13 Baltimore, MD

56 Wilkes-Barre, PA 33 33 Des Moines, IA

60 Wilmington, DE

34 34 Lincoln, NE

11 11 Pittsburgh, PA

35 35 St. Paul, MN

13 13 Baltimore, MD 37 Fargo, ND

60 Wilmington, DE 38 Sioux Falls, SD

14 14 Roanoke, VA 36 36 Ft. Harrison, MT

15 15 Huntington, WV 39 39 Denver, CO

42 Cheyenne, WY

16 16 Atlanta, GA

40 40 Albuquerque, NM

17 17 St. Petersburg, FL

69 Miami, FL 41 41 Salt Lake City, UT

18 18 Winston-Salem, NC 43 43 San Francisco, CA

54 Reno, NV

19 19 Columbia, SC

44 44 Los Angeles, CA

20 20 Nashville, TN 64 San Diego, CA

21 21 New Orleans, LA 45 45 Phoenix, AZ

66 Shreveport, LA

46 46 Seattle, WA

22 22 Montgomery, AL

47 47 Boise, ID

23 23 Jackson, MS

48 48 Portland, OR

25 25 Cleveland, OH 46 Seattle, WA

24 Cincinnati, OH

49 49 Waco, TX

26 26 Indianapolis, IN 61 Dallas, TX

65 Lubbock, TX

**HISTORICAL LISTING OF VALID OFFICE OF JURISDICTION**

**OFFICE OF ORIGIN COMBINATIONS SINCE THE**

**BEGINNING OF THE PROGRAM**

**OJ OO Station Name OJ OO Station Name**

50 50 Little Rock, AR 62 62 Houston, TX

53 San Antonio, TX

51 51 Muskogee, OK

67 Oklahoma City, OK 63 63 Anchorage, AK

52 52 Wichita, KS 72 72 Washington, DC

32 Kansas City, KS

73 73 Manchester, NH

55 55 San Juan, PR 01 Boston, MA

02 Togus, ME

59 59 Honolulu, HI 05 White River, VT

59 Guam, GU 08 Hartford, CT

**LOAN TYPE DEFINITIONS**

**Type Definition**

0 Withdrawn or rejected direct loan application dated

1950 through 1955.

1 Direct loan. Underwritten and made by VA. Associated with either the
DLRF

(Direct Loan Revolving Fund) or the NALF (Native American Loan Fund).

2 GI loan associated with the LGRF.

3 Vendee loan associated with the DLRF (e.g. foreclosed DL).

4 Vendee loan associated with the LGRF (type 2 GI).

5 Acquired loan associated with the LGRF (refunded type 2 GI) or the
DLRF

(repurchased previously sold type 1 direct loan).

6 Guaranteed loan associated with GIF.

7 Vendee loan associated with the GIF (type 6 GI).

8 Acquired loan associated with GIF (refunded type 6 loan).

**NOTE**: Loan types 5 and 8 are used only within VA. Servicers should
not have any of these loans in their portfolio.

a\. Loan types 1, 3 and 4 were sold in the past, other types may be sold
in the future.

b\. When VA refunds a GI loan from the LGRF Fund or a previously sold
direct loan, the loan type is changed to 5 and the remainder of the loan
identification number is kept constant. This change is internal to VA.

c\. When VA refunds a GI loan from the GIF, the loan type is changed to
8, and the remainder of the loan identification number is kept constant.
This change is internal to VA.

**(EXTRACT OF CIRCULAR 26-90-11**

**DATED MARCH 6, 1990)**

**LOAN FILE SETUP**

Lenders are expected to process and close loans in accordance with VA
regulations, directives and policies. Increasingly, lenders originating
VA guaranteed loans operate in more than one geographic area but
underwrite from a central or regional location. It is important that our
instructions to lenders be consistent. Because of the numerous different
local releases to lenders from field stations concerning loan file
setup, standardized submissions for prior approval loan applications,
prior approval loan closings and automatic loans, have been developed.
These standardized loan file setups will be for nationwide usage.

**LOAN DOCKET SETUP FOR PRIOR APPROVAL LOAN APPLICATIONS**

1\. Lender\'s cover letter (if used).

2\. VA Form 26-8320, Certificate of Eligibility

3\. VA Forms 26-1802a, VA Application for Home Loan Guaranty

4\. VA Form 26-8923, Interest Rate Reduction Refinancing Loan Worksheet
(if applicable)

5\. VA Form 26-8937, Verification of VA Benefit-Related Indebtedness

6\. VA Form 26-0503, Federal Collection Policy Notice (at application or
closing)

7\. VA Form 26-6393, Loan Analysis (if used)

8\. Original credit report and any related documents; e.g., proof of
debt payment, explanations, etc.

9\. VA Form 26-8497a, Request for Verification of Deposit and other
related documents

10\. VA Form 26-8497, Request for Verification of Employment;
verification(s) of other income (e.g., pay stubs, tax returns, profit
and loss statement and balance sheet)

11\. Purchase/Earnest money contract

12\. Copy of VA Form 26-1843a, Master Certificate of Reasonable Value
(if applicable)

13\. Remaining documents - no particular order

**LOAN DOCKET SETUP FOR PRIOR APPROVAL LOAN CLOSINGS**

1\. Lender\'s cover letter or transmittal letter (if used)

2\. VA Forms 26-1820, Report and Certification of Loan Disbursement

3\. VA Form 26-8923, Interest Rate Reduction Refinancing Loan Worksheet
(if applicable)

4\. VA Form 26-8998, Acknowledgment of Receipt of Funding Fee from
Mortgagee; and when applicable, VA Form 26-0500, Notification to
Mortgagee of Funding Fee Shortage, and VA Form 26-8999, Acknowledgment
of Receipt of Funding Fee Shortage to Mortgagee

5\. VA Form 26-0551, Debt Questionnaire (not applicable if VA Form
26-1802a, VA Application for Home Loan Guaranty, is used)

6\. VA Form 26-0503, Federal Collection Policy Notice (at application or
closing)

7\. HUD-1 Settlement Statement

8\. CRV requirements; e.g., warranty, final inspection, termite
certification, etc.

9\. VA Form 26-1859, Warranty of Completion of Construction in
Substantial Conformity with Approved Plans and Specifications (new
construction only)

**LOAN DOCKET SETUP FOR AUTOMATIC LOANS**

1\. Lender\'s cover letter or transmittal letter (if used)

2\. VA Form 26-8320, Certificate of Eligibility

3\. VA Form 26-1820, Report and Certification of Loan Disbursement

4\. VA Form 26-8923, Interest Rate Reduction Refinancing Loan Worksheet
(if applicable)

5\. VA Form 26-8998, Acknowledgment of Receipt of Funding Fee for
Mortgagee; and when applicable, VA Form 26-0500, Notification to
Mortgagee of Funding Fee Shortage and VA Form 26-8999, Acknowledgment of
Receipt of Funding Fee Shortage to Mortgagee

6\. VA Form 26-8937, Verification of VA Benefit-Related Indebtedness

7\. VA Form 26-0551, Debt Questionnaire (not applicable if VA Form
2601802a, VA Application for Home Loan Guaranty, is used)

8\. VA Form 26-0503, Federal Collection Policy Notice.

9\. HUD-1 Settlement Statement

10\. CRV requirements; e.g., final compliance inspection report, termite
certification, private road requirements, evidence of enrollment in 10
year insurance-backed protection plan

11\. VA Form 26-1859, Warranty of Completion of Construction in
Substantial Conformity with Approved Plans and Specifications (new
construction only)

12\. Veteran\'s loan application to lender or VA Form 26-1802a, VA
Application for Home Loan Guaranty (if used)

13\. VA Form 26-6393, Loan Analysis (if used)

14\. Original credit report and any related documents; e.g., proof of
debt payment, explanation, etc.

15\. VA Form 26-8497a, Request for Verification of Deposit, and other
related documents

16\. VA Form 26-8497, Request for Verification of Employment;
verification(s) of other income (e.g., pay stubs, tax returns, profit
and loss statement and balance sheet)

17\. The veteran\'s written application for an interest rate reduction
refinancing loan (if applicable)

18\. Purchase/earnest money contract

19\. Copy of VA Form 26-1843a, Master Certificate of Reasonable Value
(if applicable)

20\. Remaining documents - no particular order

**(EXTRACT OF CIRCULAR 26-90-32,**

**DATED AUGUST 23, 1992)**

**FORBEARANCE ON VA HOME LOANS**

**DURING SPECIAL MILITARY ACTIONS AND**

**SOLDIERS\' AND SAILORS\' CIVIL RELIEF ACT OF 1940, AS AMENDED**

1\. When members of the United States Armed Forces are required to make
immediate departures for distant lands in order to protect our nation\'s
interests, many military members are routinely prepared for family
separations and related financial rearrangements. However, some orders
may come with such limited advance warning that difficulties may arise
for spouses who must remain and manage households.

2\. It has been the longstanding policy of the Department of Veterans
Affairs to encourage loan holders to extend all reasonable forbearance
in the event a borrower becomes unable to meet the terms of a VA loan.
This policy is especially appropriate when delinquencies may be the
direct result of family disruptions due to special military actions.

3\. Financial difficulties may be even more severe in such situations
for members of the Reserves or National Guard who may be unforseeably
called to active duty for extended periods of time. If it appears that
more than simple forbearance is warranted, VA regulations allow holders
considerable latitude in modifying the terms of a loan to prevent
foreclosure and help the borrower to retain and pay for his or her home.
Such modifications may include loan extension, reamortization and
interest rate reduction refinancing to prevent and/or cure a default.

4\. Members of the Reserves or National Guard who have home loans and
are called to active military service are also entitled to protection
under the provisions of the Soldiers\' and Sailors\' Civil Relief Act of
1940, as amended (50 U.S.C. App. sections 501-590). While the Act does
not generally apply to obligations incurred during a current period of
active military service, provisions may cover veteran-borrowers on
active duty with respect to obligations they have incurred prior to
their current period of service. In order for a veteran to qualify for
the protections available under the Act, his or her obligation has to
have originated prior to the current period of active military service
(i.e., during a period of break in service between active duty tours or
during a periods of active military service which was followed by a
break in service) and, in the case of a secured loan obligation, the
property must still be owned by him or her during the current period of
active service. Benefits under the Act may also extend to co-obligors on
a loan.

5\. The purpose of the Act is to promote and strengthen the national
defense by suspending enforcement of certain civil liabilities of
certain persons serving in the armed forces. Therefore, when a
veteran-borrower\'s ability to meet his or her obligations has been
impaired due to military service, certain relief is afforded against the
penalties that would otherwise be imposed for nonpayment of such
obligations. In addition, the relief provisions include the right, in
some cases, to make reduced payments on obligations and protections
through the courts against foreclosure.

6\. VA is not charged with enforcement of the Act, but will perform its
mission of serving veterans by making every effort to ensure that they
receive the protections to which they are entitled. Moreover, it is not
VA\'s responsibility to provide legal advice to veterans or loan holders
with respect to requirements of the Act. We do, however, consider
certain provisions of the Act to be important to program participants
and the following, while not intended to be substituted for the advice
of counsel, is designed to inform program participants in a general way
about provisions of the law.

a\. **Six Percent Interest Rate Limitation**. When the Act applies (as
described in paragraph 4), any obligation or liability, such as a home
loan, bearing interest at a rate in excess of 6 percent per annum is,
during the veteran\'s period of active duty, reduced to a rate of no
more than 6 percent (50 U.S.C. App. 526). The rate cap of 6 percent is
calculated to include any fees or other charges otherwise payable on the
loan (e.g., late charges).

\(1\) The Act is silent as to any actions which the veteran must take to
begin payments at the lower rate. Absent a specific requirement,
veterans (or their spouses, other co-obligors or legal representatives)
should, however, be encouraged to notify their loan holder before
beginning payments at the reduced rate. Veterans should also be
encourage to cooperate with their loan holders by providing information
which will help demonstrate their eligibility for benefits available
under the Act. Loan holders are cautioned to review their payment
processing procedures in order to ensure that payments in the amount
allowable under the Act are not inappropriately returned to borrowers as
insufficient, even though no prior notice may have been received. Loan
holders should also be prepared to respond to inquiries from veterans as
to the amount of the monthly installment payment which would be required
at a 6 percent interest rate and to provide revised payment cards or
coupon books when appropriate.

\(2\) In order to restore application of the original interest rate on
the note during an obligor\'s period of military service, the holder
must apply to a court and show that the veteran\'s ability to repay the
obligation has not been materially affected by military service. The
court \"may take such order as in its opinion may be just\" with respect
to the rate of interest due and payable.

\(3\) At the time the Act became law, an interest rate of 4 percent or
less was typical for home loans. The fact that interest rates are
currently substantially higher does not, however, affect the
applicability of the Act.

\(4\) The Office of the General Counsel has determined that, for
purposes of accounting between VA and a loan holder when a claim is
filed under Loan Guaranty, VA\'s liability will not exceed the liability
of the veteran. Since the veteran is not obligated to pay interest at a
rate in excess of 6 percent, VA as guarantor is not obligated to include
interest on the obligation in excess of 6 percent for the period of time
that the veteran was eligible under the provisions of the Act. However,
if the holder obtained permission from a court of competent jurisdiction
to obligate the veteran under the terms of the original obligation or to
modify those terms, VA would be bound to honor the court\'s decision.

b\. **Stay in Enforcement**. In addition to an interest rate reduction,
the Act provides for a separate form of forbearance which a veteran can
obtain through order of a court if he or she applies for it during his
or her period of military service or within 6 months after separation
(50 U.S.C. App. 590). If the court finds that the ability of the veteran
to maintain the obligation has been materially affected by entry into
military service, it can issue a stay in the enforcement of the
obligation. The maximum period of the complete stay on payments would
coincide with the veteran\'s period of military service. The court could
then require that the creditor accept repayment of the delinquent
principal and interest (computed at the note rate) as of the date of
separation or the date the veteran applied to the court, whichever is
later, in equal installments over a period of time equal to the
remaining term of the loan plus the period of military service. A lesser
repayment period could also be established if the court were to find
such terms to be just; similarly, the court is not obligated to order a
complete suspension of payments during the period of military service
and could require the veteran to make regular partial payments prior to
separation.

\(1\) The Act does not specifically relate relief under this provision
to the interest rate reduction to which the veteran may be entitled. It
is therefore unclear whether these provisions are mutually exclusive or
may be combined.

\(2\) In view of the broad powers granted to courts to provide payment
relief to military personnel, loan holders are encouraged to negotiate
reasonable partial payment and repayment schedules with borrowers in
order to minimize the need for costly and time-consuming litigation.

c\. **Foreclosure**. Court permission is necessary to foreclose a loan
that falls under the provisions of the Soldiers\' and Sailors\' Civil
Relief Act of 1940, as amended. Foreclosure sales (or manufactured
housing repossessions) during the veteran\'s period of military service
or within 3 months thereafter will be invalid unless they take place
pursuant to a written agreement between the parties involved or they are
initiated \"upon an order previously granted \[the holder\] by the court
and a return thereto \[is\] made and approved by the court\"; i.e.,
approval before proceeding with a power of sale foreclosure and
subsequent court confirmation of sale may be necessary (50 U.S.C. App.
532).

\(1\) Many foreclosure actions require affidavits concerning the active
duty military status of the obligors, and the accuracy of such items is
very important in order to avoid title defects and possible penalties of
imprisonment and/or fines for violations of the provision of the Act, or
for attempts to violate its provisions.

\(2\) Loan holders are encouraged to become familiar with the Act in
order to avoid losses associated with foreclosures which might actually
be prevented through the exercise of forbearance, and to ensure
compliance with any restrictions on foreclosures which may apply in
their particular areas of operation.

d\. **Additional Stays**. A veteran-borrower can petition a court of
competent jurisdiction during the period of military service or within
60 days thereafter to request any action or proceeding be stayed (50
U.S.C. App. 521). Furthermore, the veteran-borrower can petition a court
for a complete stay against enforcement of the loan obligation (50
U.S.C. App. 590). Court determinations for any of these actions will
weigh heavily upon whether or not the veteran-borrower\'s ability to
discharge the obligation is materially affected by reason of his or her
military service. However, nothing in the Act prevents modification or
termination of loan agreements pursuant to a written agreement between
the parties involved executed during or after the period of military
service of the person concerned (50 U.S.C. App. 517).

e\. **Rights of Redemption**. The Act places a different restriction on
redemption periods than on foreclosure sales; namely, any statutory
redemption period stops running during the veteran\'s current tour of
military service and resumes after separation (50 U.S.C. App. 525). This
restriction applies with respect to any redemption period which would
otherwise run as a result of a foreclosure action against a person in
military service, regardless of whether or not the mortgage was executed
prior to the current period of service. The extension of a redemption
period will clearly affect VA\'s ability to market property acquired
subject to redemption; it will not, however, be considered a title
defect which would make a conveyance unacceptable.

7\. In general, the Act provides broad potential relief from obligations
to persons in military service. With respect to an obligor who has
entered military service and is subject to the Act, creditors must
obtain either written agreement from the obligor or approval from a
court in order to enforce their rights under a loan agreement. (Any
written agreement obtained prior to the obligor\'s entry into military
service may not provide a legal basis for enforcement of the creditor\'s
rights.) In reaching a decision, the court will primarily be guided by
consideration as to whether military service has affected the obligor\'s
ability to maintain the obligation or answer an legal proceeding, such
as foreclosure, brought by the creditor.

8\. VA\'s advice to veterans and their families will encourage them to
seek cooperation from their loan holders and to discuss other
possibilities with private counsel and military attorneys, as necessary.
VA is not in a position to offer legal advice to veterans or loan
holders concerning requirements of the Act or possible interpretations
by local courts. One source of such advice for veterans is Department of
the Army Pamphlet 27-166, Soldiers\' and Sailors\' Civil Relief Act
(August, 1981).

9\. Holders should obtain opinions from their own counsel to ensure
compliance with all provisions of the Act, as well as other local
statutes requiring the extension of forbearance, so as not to invalidate
a foreclosure. In some States, specific statutes have been enacted which
have provisions which may be similar or identical to those found in the
Act and, in some states, local statutes may afford obligors greater
rights and protections than those provided by the Act. Differences in
interpretation on individual cases should be brought to the attention of
the Office of the District Counsel and every effort should be made to
reconcile such differences fairly and without disruption in program
operations.

**VA Foreclosure Timeframes**

This is the timeframe used by the VARO of jurisdiction in calculating
initial cutoff dates under 38 CFR 36.4319(f). It provides a reasonable
allowance for completion of legal action. The timeframe represents the
interval from referral to counsel to begin foreclosure until the
completion of the action, assuming an uncontested foreclosure which is
not delayed by publication because not all parties can be personally
served. It may be extended when warranted by circumstances. The
timeframes in this table are subject to change by local offices upon the
advice of their District Counsel; any questions concerning them should
be addressed to the appropriate local office. The legal procedure given
below for each State is generally the most common procedure used. Where
more than one action is cited, consult the VARO of jurisdiction to
determine the circumstances under which each is appropriate.

**Jurisdiction Procedure FinalEvent Timeframe**

Alabama Sale with publication Sale 45 days

Alaska Non-judicial Trustee\'s Sale 100 days

Arizona Non-judicial Trustee\'s Sale 3 months

plus 1 week

Arkansas Judicial with

personal service Commisioner\'s Sale 120 days

Non-judicial Sheriff\'s Sale 90 days

California Non-judicial Trustee\'s Sale 130 days

Colorado Non-judicial Public Trustee\'s Sale 90 days

Connecticut Judicial Order:

Strict Foreclosure Judicial Order 6 months

Foreclosure by Sale Committee Deed 6 months

Delaware Judicial Sheriff\'s Sale 4 months

District of

Columbia Non-judicial Sale 60 days

Florida Judicial Confirmation 8 months

Georgia Non-judicial Sale 60 days\*

\*(First Tuesday of the month which is more than 30 and less than 60
days after referral)

Hawaii Judicial Confirmation 6 months

Idaho Non-judicial Sale 5 months

Illinois Judicial Sheriff\'s Sale 7 months

Indiana

(For loans closed on or after July 1, 1975)

Judicial Sheriff\'s Sale 6 months

(For loans closed before July 1, 1975)

Judicial Sheriff\'s Sale 9 months

Iowa Judicial Sheriff\'s Sale 7 months

Kansas Judicial Sheriff\'s Sale 20 weeks

Kentucky Judicial Confirmation of

Sale by the Account 5 months

Louisiana Judicial by Executor

Process Sheriff\'s Sale 5 months

Maine Judicial Order:

Strict Foreclosure Judicial Order 20 months

Foreclosure by Sale Deed 8 months

Maryland Judicial Trustee\'s Sale 90 days

Massachusetts Judicial Order Sale and Deed 10 months

Michigan Non-judicial Sheriff\'s Sale 75 days

Minnesota Non-judicial Sheriff\'s Sale 12 weeks

Mississippi Non-judicial Trustee\'s Sale 8 weeks

Missouri Non-judicial Trustee\'s Sale 8 weeks

Montana Non-judicial Trustee\'s Sale 6 months

Nebraska

Mortgage Judicial Confirmation 7 months

Deed of Trust Non-judicial Sheriff\'s Sale 3 months

Nevada Non-judicial Trustee\'s Sale 130 days

New Hampshire Non-judicial Sale and Deed 4 months

New Jersey Judicial Sheriff\'s Sale 12 months

New Mexico Judicial Confirmation 20 weeks

New York:

Allegany, Cattaraugus, Chautauqua, Erie, Genessee, Livingston, Monroe,
Niagara, Ontario, Orleans, Steuben, Wyoming, Yates and Wayne Counties

Judicial Referee\'s Sale 8 months

Other Counties Judicial Referee\'s Sale 9 months

North Carolina Non-judicial 10 days after

Sheriff\'s Sale 60 days

North Dakota Judicial Confirmation 18 weeks

Ohio:

Cuyahoga County Judicial Confirmation 12 months

Other Counties Judicial Confirmation 9 months

Oklahoma Judicial Confirmation 8 months

Oregon Non-judicial Trustee\'s Sale 150 days

Pennsylvania:

Western Counties under jurisdiction of the VA office in Pittsburgh

Judicial Sheriff\'s Sale 6 months

Eastern Counties under jurisdiction of the VA office in Philadelphia

Judicial Sheriff\'s Sale 8 months

Puerto Rico Judicial Confirmation 8 months

Rhode Island Non-judicial Sale and Deed 4 months

South Carolina Judicial Sale 9 months

South Dakota Judicial Sheriff\'s Sale 19 weeks

Non-judicial Sheriff\'s Sale 12 weeks

Tennessee Non-judicial Trustee\'s Sale 60 days

Texas Non-judicial Trustee\'s Sale 90 days\*

\*(First Tuesday of the month which is more than 60 and less than 90
days

after referral)

Utah Non-judicial Trustee\'s Sale 150 days

Vermont Judicial Certificate of

Non-Redemption 12 months

Virginia Non-judicial Trustee\'s Sale 60 days

Washington Non-judicial Trustee\'s Sale 150 days

West Virginia Non-judicial Trustee\'s Sale 3 months

Wisconsin Judicial Confirmation 330 days

Wyoming Non-judicial Sheriff\'s Sale 90 days

**TITLE 38 CFR 36.4300 SERIES**

**GUARANTY OR INSURANCE OF LOANS TO VETERANS**

AUTHORITY: Sections 36.4300 through 36.4375 issued under 38 U.S.C.
501(a)

**NOTE**: Those requirements, conditions, or limitations which are
expressly set forth in 38 U.S.C. chapter 37 are not restated in these
regulations and must be taken into consideration in conjunction with
§§36.4300 to 36.4393 of this part, inclusive.

**SECTION PAGE**

36.4300 Applicability of §§36.4300 to 36.4393, Inclusive App. F-1

36.4301 Definitions App. F-1

**General Provisions**

36.4302 Computation of Guaranties or Insurance Credits App. F-7

36.4303 Reporting Requirements App. F-9

36.4304 Deviations, Changes of Identity App. F-13

36.4305 Partial Disbursement App. F-13

36.4306 Refinancing of Mortgage or Other Lien Indebtedness App. F-14

36.4306a Interest Rate Reduction Refinancing Loan App. F-15

36.4307 Joint Loans App. F-16

36.4308 Transfer of Title by Borrower or Maturity by Demand or
Acceleration\...\...App. F-17

36.4309 Amortization App. F-19

36.4310 Prepayment App. F-20

36.4311 Interest Rates App. F-20

36.4312 Charges and Fees App. F-21

36.4313 Advances and Other Charges App. F-24

36.4314 Extensions and Reamortizations App. F-25

36.4315 Notice of Default and Acceptability of Partial Payments App.
F-26

36.4316 Continued Default App. F-27

36.4317 Notice of Intention to Foreclose App. F-27

36.4318 Refunding of Loans in Default App. F-28

36.4319 Legal Proceedings App. F-28

36.4320 Sale of Security App. F-29

36.4321 Computation of Guaranty Claims; Subsequent Accounting App. F-35

36.4322 Computation of Indebtedness App. F-37

36.4323 Subrogation and Indemnity App. F-37

36.4324 Release of Security App. F-40

36.4325 Partial or Total Loss of Guaranty or Insurance App. F-41

36.4326 Hazard Insurance App. F-42

36.4327 Substitution of Trustees App. F-42

36.4328 Capacity of Parties to Contract App. F-43

36.4329 Geographical Limits App. F-43

36.4330 Maintenance of Records App. F-43

36.4332 Delivery of Notice App. F-45

36.4333 Satisfaction of Indebtedness App. F-45

36.4334 Incorporation by Reference App. F-46

36.4335 Supplementary Administrative Action App. F-46

36.4336 Eligibility of Loans; Reasonable Value Requirements App. F-47

**TITLE 38 CFR 36.4300 SERIES**

**GUARANTY OR INSURANCE OF LOANS TO VETERANS\--Continued**

**SECTION PAGE**

**Underwriting Standards, Processing Procedures,**

**and Lender Responsibility and Certification**

36.4337 Underwriting Standards, Processing Procedures, Lender
Responsibility

and Lender Certification App. F-47

36.4338 Death or Insolvency of Holder App. F-60

36.4339 Qualification for Designated Fee Appraisers App. F-61

36.4340 Restriction on Designated Fee Appraisers App. F-61

36.4342 Delegation of Authority App. F-62

36.4343 Cooperative Loans App. F-63

36.4344 Lenders Appraisal Processing Program App. F-63

36.4345 Waivers, Consents, and Approvals; When Effective App. F-68

36.4346 Servicing Procedures for Holders App. F-68

36.4347 Minimum Property and Construction Requirements App. F-71

36.4348 Authority to Close Loans on the Automatic Basis App. F-71

36.4349 Withdrawal of Authority to Close Loans on the Automatic Basis
App. F-74

36.4350 Estate of Veteran in Real Property App. F-76

36.4351 Loans, First, Second or Unsecured App. F-80

36.4352 Tax, Special Assessment and Other Liens App. F-80

36.4353 Combination Residential and Business Property App. F-81

36.4354 \[Reserved\] App. F-81

36.4355 Supplemental Loans App. F-81

36.4356 Condominium Loans-General App. F-81

36.4357 Acceptable Ownership Arrangements and Documentation App. F-83

36.4358 Rights and Restrictions App. F-85

36.4359 Miscellaneous Legal Requirements App. F-88

36.4360 Documentation and Related Requirements-Flexible Condominiums and

Condominiums with Offsite Facilities App. F-89

36.4360a Appraisal Requirements App. F-90

36.4362 Requirement of Construction Warranty App. F-95

36.4363 Nondiscrimination and Equal Opportunity in Housing Certification

Requirements App. F-95

36.4364 Correction of Structural Defects App. F-96

**TITLE 38 CFR 36.4300 SERIES**

**GUARANTY OR INSURANCE OF LOANS TO VETERANS**

**§36.4300 APPLICABILITY OF §§36.4300 TO 36.4393, INCLUSIVE**

\(a\) Sections 36.4300 to 36.4393 of this part, inclusive, shall be
applicable to each loan entitled to an automatic guaranty, or otherwise
guaranteed or insured, on or after the date of publication in the
*Federal Register*, and shall be applicable to such loans previously
guaranteed or insured to the extent that no legal rights vested under
the regulations are impaired.

\(b\) Title 38, U.S.C., chapter 37, is a continuation and restatement of
the provisions of title III of the Servicemen\'s Readjustment Act of
1944, and may be considered an amendment to such Title III. References
to the sections or chapters of Title 38, U.S.C., shall, where
applicable, be deemed to refer to the prior corresponding provisions of
the law. (Authority: 38 U.S.C. 501(a), 3703(c), 3712(g))

**§36.4301 DEFINITIONS**

Whenever used in 38 U.S.C., chapter 37 or §§36.4300 to 36.4375 of this
part, inclusive, and §§36.4390 and 36.4393 of this part, unless the
context otherwise requires, the terms defined in this section shall have
the following meaning:

**A period of more than 180 days**. For the purposes of sections 3707
and 3702(a)(2)(C) of title 38, U.S.C., the term *a period of more than
180 days* shall mean 181 or more calendar days of continuous active
duty.

**Acquisition and improvement loan**. A loan to purchase an existing
property which includes additional funds for the purpose of installing
energy conservation improvements or making other alterations,
improvements, or repairs. (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(1),
(4), and (7))

**Alterations**. Any structural changes or additions to existing
improved realty.

**Automatic Lender**. A lender that may process a loan or assumption
without submitting the credit package to the Department of Veterans
Affairs for underwriting review. Pursuant to 38 U.S.C. 3702(d) there are
two categories of lenders who may process loans automatically: (1)
Entities such as banks, savings and loan associations, and mortgage and
loan companies that are subject to examination by an agency of the
United States or any State and (2) lenders approved by the Department of
Veterans Affairs pursuant to standards established by the Department of
Veterans Affairs. (Authority: 38 U.S.C. 3702(d))

**Condominium**. Unless otherwise provided by State law, a condominium
is a form of ownership where the buyer receives title to a three
dimensional air space containing the individual living unit together
with an undivided interest or share in the ownership of common elements.

**Cost** means the entire consideration paid or payable for or on
account of the application of materials and labor to tangible property.

**Credit Package**. Any information, reports or verifications used by a
lender, holder or authorized servicing agent to determine the
creditworthiness of an applicant for a Department of Veterans Affairs
guaranteed loan or the assumer of such a loan. (Authority: 38 U.S.C.
3710 and 3714)

**Date of First Uncured Default** means the due date of the earliest
payment not fully satisfied by the proper application of available
credits or deposits.

**Default** means failure of a borrower to comply with the terms of a
loan agreement.

**Designated Appraiser** means a person requested by the Secretary to
render an estimate of the reasonable value of a property, or of a
specified type of property, within a stated area for the purpose of
justifying the extension of credit to an eligible veteran for any of the
purposes stated in 38 U.S.C. Chapter 37. An appraiser on a fee basis is
not an agent of the Secretary.

**Discharge or Release**. For purposes of basic eligibility a person
will be considered discharged or released if the veteran was issued a
discharge certificate under conditions other than dishonorable (38
U.S.C. 3702(c)). The term *discharge or release* includes (1) retirement
from the active military, naval, or air service, and (2) the
satisfactory completion of the period of active military, naval, or air
service for which a person was obligated at the time of entry into such
service in the case of a period who, due to enlistment or reenlistment,
was not awarded a discharge or release from such period of service at
the time of such completion thereof and who, at such time, would
otherwise have been eligible for the award of a discharge or release
under conditions other than dishonorable. (Authority: 38 U.S.C. 101(18))

**Dwelling**. Any building designed primarily for use as a home
consisting of not more than four family units plus an added unit for
each veteran if more than one eligible veteran participates in the
ownership, except that in the case of a condominium housing development
or project within the purview of 38 U.S.C. 3710(a)(6) and §§36.4356
through 36.4360(a) of this part the term is limited to a one
single-family residential unit. Also, a manufactured home, permanently
affixed to a lot owned by a veteran and classified as real property
under the laws of the State where it is located. (Authority: 38 U.S.C.
3710(a)(9) and (f))

**Economic Readjustment** means rearrangement of an eligible veteran\'s
indebtedness in a manner calculated to enable the veteran to meet
obligations and thereby avoid imminent loss of the property which
secures the delinquent obligation.

**Energy Conservation Improvement**. An improvement to an existing
dwelling or farm residence through the installation of a solar heating
system, a solar heating and cooling system, or a combined solar heating
and cooling system, or through application of a residential energy
conservation measure as prescribed in 38 U.S.C. 3710(d) or by the
Secretary. (Authority: 38 U.S.C. 3710(a)(7))

**Full Disbursement**. Payment by a lender of the entire proceeds of a
loan for the purposes described in the report of the lender in respect
of such loan to the Secretary either:

\(1\) By payment to those contracting with the borrower for such
purposes, or

\(2\) By payment to the borrower, or

\(3\) By transfer to an account against which the borrower can draw at
will, or

\(4\) By transfer to an escrow account, or

\(5\) By transfer to an earmarked account if

\(i\) The amount is not in excess of 10 percent of the loan, or

\(ii\) The loan is an acquisition and improvement loan pursuant to
§36.4301, or

\(iii\) The loan is one submitted by a lender of the class specified in
38 U.S.C. 3702(d) or 3703(a)(2). (Authority: 38 U.S.C. 3703(c)(1))

**Graduated Payment Mortgage Loan**. A loan for the purpose of acquiring
a single-family dwelling unit involving a plan for repayment in which a
portion of the interest due is deferred for a period of time. The
interest so deferred is added to the principal balance thus resulting in
a principal amount greater than at loan origination (negative
amortization). The monthly payments increase on an annual basis
(graduate) for a predetermined period of time until the payments reach a
level which will fully amortize the loan during the remaining loan term.
(Authority: 38 U.S.C. 3703(c) and (d))

**Guaranty**. The obligation of the United States, assumed by virtue of
38 U.S.C. Chapter 37, to repay a specified percentage of a loan upon the
default of the primary debtor.

**Holder**. The lender or any subsequent assignee or transferee of the
guaranteed or insured obligation or the authorized servicing agent of
the lender or of the assignee or transferee if the obligation has been
assigned or transferred.

**Home** means place of residence.

**Improvements**. Any alteration that improves the property for the
purpose for which it is occupied.

**Indebtedness**. The unpaid principal and interest plus any other
amounts allowable under the terms of a loan including those authorized
by statute and consistent with §§36.4300 to 36.4393 of this part,
inclusive, which have been paid and debited to the loan account as of
the applicable date established pursuant to paragraph (f) of §36.4319 or
§36.4321 of this part. (Authority: 38 U.S.C. 3732)

**Insurance** means the obligation assumed by the United States to
indemnify a lender to the extent specified in §§36.4300 to 36.4393,
inclusive, for any loss incurred upon any loan insured under 38 U.S.C.
3703(a)(2).

**Insurance Account** means the record of the amount available to a
lender or purchaser for losses incurred on loans insured under 38 U.S.C.
3715.

**Lender**. The payee or assignee or transferee of an obligation at the
time it is guaranteed or insured. This term also includes any sole
proprietorship, partnership, or corporation and the owners, officers,
and employees of a sole proprietorship, partnership, or corporation
engaged in the origination, procurement, transfer, servicing, or funding
or a loan which is guaranteed or insured by VA. (Authority: 38 U.S.C.
3704(d); 3712(g))

**Lien** means any interest in, or power over, real or personal
property, reserved by the vendor, or created by the parties or by
operation of law, chiefly or solely for the purpose of assuring the
payment of the purchase price, or a debt, and irrespective of the
identity of the party in whom title to the property is vested, including
but not limited to mortgages, deeds with a defeasance therein or
collaterally, deeds of trust, security deeds, mechanics\' liens,
lease-purchase contracts, conditional sales contracts, consignments.

**Liquidation Sale**. Any judicial, contractual or statutory disposition
of real property, under the terms of the loan instruments and applicable
law, to liquidate a defaulted loan that is secured by such property.
This includes a voluntary conveyance made to avoid such disposition of
the obligation or of the security. (Authority: 38 U.S.C. 3732)

**Lot**. A parcel of land acceptable to the Secretary as a manufactured
home site. (Authority: 38 U.S.C. 3710(a)(9))

**Manufactured Home**. A moveable dwelling unit designed and constructed
for year-round occupancy by a single family, on land, containing
permanent eating, cooking, sleeping and sanitary facilities. A
double-wide manufactured home is a moveable dwelling designed for
occupancy by one family and consisting of (1) two or more units intended
to be joined together horizontally when located on a site, but capable
of independent movement or (2) a unit having a section or sections which
unfold along the entire length of the unit. For the purposes of this
section of VA regulations, manufactured home/lot loans guaranteed under
the purview of §§36.4300 to 36.4393, inclusive, must be for units
permanently affixed to a lot and considered to be real property under
the laws of the State where it is located. If the loan is for the
purchase of a manufactured home and lot it must be considered as one
loan. (Authority: 38 U.S.C. 3710(a)(9))

**Net Loss (insured loans)** means the indebtedness, plus any other
charges authorized under §36.4313, remaining unsatisfied after the
liquidation of all available security and recourse to all intangible
rights of the holder against those obligated on the debt.

**Net Value**. The fair market value of real property, minus the total
of the costs the Secretary estimates would be incurred by VA resulting
from the acquisition and disposition of the property for property taxes,
assessments, liens, property maintenance, property improvement,
administration, and resale. For purposes of determination of net value,
*property improvement* is defined as any repair which must be completed
to satisfy minimum property requirements for existing construction as
described by the Secretary. Costs other than property improvement will
be estimated as a percentage of the fair market value. Each year VA will
review the average operating expenses incurred for properties acquired
under §36.4320 of this part which were sold during the preceding 3
fiscal years and the average administrative cost to the government
associated with the property management activity. The cost items
reviewed will be:

\(1\) **Property Operating Expenses**. All disbursements made for
payment of taxes, assessments, liens, property maintenance and related
repairs, management broker\'s fees and commissions, and any other
charges to the property account excluding property improvements and
selling expenses.

\(2\) **Selling Expenses**. All disbursements for sales commissions plus
any other costs incurred and paid in connection with the sale of the
property.

\(3\) **Administrative Costs**. An estimate of the total costs for VA of
personnel compensation and overhead (including all travel,
transportation, standard level user charges (SLUC), communication,
utilities, printing, supplies, equipment, insurance claims and other
services) associated with the acquisition, management and disposition of
property acquired under §36.4320 of this part. The average
administrative costs will be determined by:

\(i\) Dividing the salary and benefits cost by the average number of
properties on hand and adjusting this figure based on the average
holding time for properties sold during the preceding fiscal year; then

\(ii\) Dividing part (i) by the VBA ratio of personal services to total
obligations.

The three cost averages will be added and the sum will be divided by the
average fair market value at the time of acquisition for properties
which were sold during the 3 preceding fiscal years to derive the
percentage to be used in estimating net value. (The Secretary may, when
determining property management costs, group properties in incremental
value brackets.) The calculation of net value will be based on the
actual cost incurred over the last 3 years. Based on fiscal year 1989
data, the percentage to be used when calculating net value will be 11.45
percent. The fiscal year and the percentage will be updated annually
through a notice in the *Federal Register*. (Authority: 38 U.S.C. 3732)

**Purchase Price**. The entire legal consideration paid or payable upon
or on account of the sale of property, exclusive of acquisition costs,
or for the cost of materials and labor to be applied to the property.

**Real Estate Loan**. Any obligation incurred for the purchase of real
property or a leasehold estate as limited in §§36.4300 to 36.4393,
inclusive, or for the construction of fixtures or appurtenances thereon
or for alterations, improvements, or repairs thereon required by
§§36.4300 to 36.4393, inclusive, to be secured by a lien on such
property or is so secured. Loans for the purpose specified in 38 U.S.C.
3710(a)(5) (refinancing of mortgage loans or other liens on a dwelling
or farm residence), loan for the purpose specified in 38 U.S.C.
3710(a)(8) (refinancing of a VA guaranteed, insured or direct loan to
lower the interest rate) loans for the purposes specified in 38 U.S.C.
3710(a)(9) (purchase of manufactured homes/lots or the refinancing of
such loans, in order to reduce the interest rate or purchase a lot, in
States in which manufactured homes, when permanently affixed to a lot,
are considered real property, and loans to purchase one-family
residential units in condominium housing developments or projects within
the purview of 38 U.S.C. 3710(a)(6) and §§36.4356 through 36.4360a shall
also be considered real estate loans.

**Reasonable Value** means that figure which represents the amount a
reputable and qualified appraiser, unaffected by personal interest,
bias, or prejudice, would recommend to a prospective purchaser as a
proper price or cost in the light of prevailing conditions.

**Registered Mail**. The term *registered mail* wherever used in the
regulations concerning guaranty or insurance of loans to veterans shall
include certified mail.

**Repairs**. Any alteration of existing improved realty or equipment
which is necessary or advisable for protective, safety or restorative
purposes.

**Repossession - Repossessed** means recovery or acquisition of such
physical control of property (pursuant to the provisions of the security
instrument or as otherwise provided by law) as to make further legal or
other action unnecessary in order to obtain actual possession of the
property or to dispose of the same by sale or otherwise.

**Residential Property** (1) Any one-family residential unit in a
condominium housing development within the purview of 38 U.S.C.
3710(a)(6) and §§36.4356 through 36.4360a; (2) any manufactured home
permanently affixed to a lot owned or being purchased by a veteran and
considered to be real property under the laws of the State where it is
located; and (3) any improved real property (other than a condominium
housing development or a manufactured home and/or lot) or leasehold
estate therein as limited by §§36.4300 to 36.4393, inclusive, the
primary use of which is for occupancy as a home, consisting of not more
than four family units, plus an added unit for each eligible veteran if
more than one participates in the ownership thereof, or (4) any land to
be purchased out of the proceeds of a loan for the construction of a
dwelling, and on which such dwelling is to be erected. (Authority: 38
U.S.C. 3710(f)(2) and (3))

**Secretary**. The Secretary of Veterans Affairs, or any employee of VA
authorized to act in the Secretary\'s stead.

**Servicing Agent**. An agent designated by the loan holder as the
entity to collect installments on the loan and/or perform other
functions as necessary to protect the interests of the holder.
(Authority: 38 U.S.C. 3714)

**Specified Amount**. A sum, equal to the lesser of the net value of
real property or the total indebtedness secured thereby, which the
Secretary designates as the minimum amount to be credited to the
indebtedness incident to a liquidation sale. (Authority: 38 U.S.C. 3732)

**Unguaranteed Portion of the Indebtedness**. The indebtedness computed
as of the applicable date of under paragraph (f) of §36.4319 or §36.4321
of this part minus the amount of the guaranty payable as of such date.
(Authority: 38 U.S.C. 3732) (Authority: 38 U.S.C. 501(a), 3703(c)(1))

**GENERAL PROVISIONS**

**§36.4302 COMPUTATION OF GUARANTIES OR INSURANCE CREDITS**

\(a\) With respect to a loan to a veteran guaranteed under 38 U.S.C.
3710 the guaranty shall not exceed the lesser of the dollar amount of
entitlement available to the veteran; or

\(1\) 50 percent of the original principal loan amount where the loan
amount is not more than \$45,000; or

\(2\) \$22,500 where the original principal loan exceeds \$45,000, but
is not more than \$56,250; or

\(3\) Except as provided in subparagraph (4), the lesser of \$36,000 or
40 percent of the original principal loan amount where the loan amount
exceeds \$56,250; or

\(4\) The lesser of \$46,000 or 25 percent of the original principal
loan amount where the loan amount exceeds \$144,000 and the loan is for
the purchase or construction of a home or the purchase of a condominium
unit. (Authority: 38 U.S.C. 3703(a))

\(b\) With respect to a loan guaranteed under 38 U.S.C. 3710(a)(8) or
(9)(B)(i) the dollar amount of guaranty may not exceed the original
dollar amount of guaranty on the loan being refinanced. (Authority: 38
U.S.C. 3703(a))

\(c\) An amount equal to 15 percent of the original principal amount of
each insured loan shall be credited to the insurance account of the
lender and shall be charged against the guaranty entitlement of the
borrower: *Provided*, That no loan may be insured unless the borrower
has sufficient entitlement remaining to permit such credit.

\(d\) Subject to the provisions of paragraph (g) of §36.4303, the
following formulas shall govern the computation of the amount of the
guaranty or insurance entitlement which remains available to an eligible
veteran after prior use of entitlement:

\(1\) If a veteran previously secured a nonrealty (business) loan, the
amount of nonrealty entitlement used is doubled and subtracted from
\$36,000. The sum remaining is the amount of available entitlement for
use except that (i) entitlement may be increased by up to \$10,000 if
the loan amount exceeds \$144,000 and the loan is for purchase or
construction of a home or purchase of a condominium, and (ii)
entitlement for manufactured home loans that are to be guaranteed under
38 U.S.C. 3712 may not exceed \$20,000.

\(2\) If a veteran previously secured a realty (home) loan, the amount
of realty (home) loan entitlement used is subtracted from \$36,000. The
sum remaining is the amount of available entitlement for use except that
(i) entitlement may be increased by up to \$10,000 if the loan amount
exceeds \$144,000 and the loan is for purchase or construction of a home
or purchase of a condominium, and (ii) entitlement for manufactured home
loans that are to be guaranteed under 38 U.S.C. 3712 may not exceed
\$20,000.

\(3\) If a veteran previously secured a manufactured home loan under 38
U.S.C. 3712; the amount of entitlement used for that loan is subtracted
from \$36,000. The sum remaining is the amount of available entitlement
for home loans or manufactured home/lot loans guaranteed under 38 U.S.C.
3710, except that entitlement may be increased by up to \$10,000 if the
loan amount exceeds \$144,000 and the loan is for purchase or
construction of a home or purchase of a condominium. To determine the
amount of entitlement available for manufactured home loans, processed
under 38 U.S.C. 3712, the amount of entitlement previously used for that
purpose is subtracted from \$20,000. The sum remaining is the amount of
available entitlement for use for manufactured home loan purposes under
38 U.S.C. 3712. (Authority: 38 U.S.C. 3703(a), 3712(c)(4))

\(e\) For the purpose of computing the remaining guaranty or insurance
benefit to which a veteran is entitled, loans guaranteed prior to the
effective date of §§36.4300 to 36.4393, inclusive, shall be taken into
consideration as if made subsequent thereto.

\(f\) A loan eligible for insurance may be either guaranteed or insured
at the option of the borrower and the lender: Provided, That if the
Secretary is not advised of the exercise of such option at the time the
loan is reported pursuant to §36.4303, such loan will not be eligible
for insurance.

\(g\) A guaranty is reduced or increased pro rata with any deduction or
increase in the amount of the guaranteed indebtedness, but in no event
will the amount payable on a guaranty exceed the amount of the original
guaranty or the percentage of the indebtedness corresponding to that of
the original guaranty whichever is less. However, on a graduated payment
mortgage loan, the percentage of guaranty applicable to the original
loan amount pursuant to paragraph (a) of this section shall apply to the
loan indebtedness to the extent scheduled deferred interest is added to
principal during the graduation period without regard to the original
maximum dollar amount of guaranty. (Authority: 38 U.S.C. 3703(b) and
(d))

\(h\) The amount of any guaranty or the amount credited to a lender\'s
insurance account in relation to any insured loan shall be charged
against the original or remainder of the guaranty benefit of the
borrower. Complete or partial liquidation, by payment or otherwise, of
the veteran\'s guaranteed or insured indebtedness does not increase the
remainder of the guaranty benefit, if any, otherwise available to the
veteran. When the maximum amount of guaranty or insurance legally
available to a veteran shall have been granted, no further guaranty or
insurance is available to the veteran.

\(i\) Notwithstanding the provisions of paragraph (g) of this section,
the Secretary may exclude the amount of guaranty or insurance
entitlement used for any guaranteed or insured loan provided:

\(1\) The property which served as security for the loan has been
disposed of by the veteran, or has been destroyed by fire or other
natural hazard; and

\(2\) The loan has been repaid in full, or the Secretary has been
released from liability as to the loan, or if the Secretary has suffered
a loss on said loan, such loss has been paid in full; or

\(3\) A veteran-transferee has agreed to assume the outstanding balance
on the loan and consented to the use of his or her entitlement to the
extent the entitlement of the veteran-transferor has been used
originally.

\(4\) The loan has been repaid in full, and the loan for which the
veteran seeks to use entitlement is secured by the same property which
secured the fully repaid loan. (Authority: 38 U.S.C. 3710(e)(3))

\(j\) (1) The amount of guaranty entitlement, available and unused, of
an eligible unmarried surviving spouse (whose eligibility does not
result from his or her own service) is determinable in the same manner
as in the case of any veteran, and any entitlement which the decedent
(who was his or her spouse) used shall be disregarded. A certificate as
to the eligibility of such surviving spouse, issued by the Secretary,
shall be a condition precedent to the guaranty or insurance of any loan
made to a surviving spouse in such capacity. (Authority: 38 U.S.C.
3701(a))

\(2\) An unmarried surviving spouse who was a co-obligor under an
existing VA guaranteed, insured or direct loan shall be considered to be
a veteran eligible for an interest rate reduction refinancing loan
pursuant to 38 U.S.C. 3710(a)(8) or (9)(B)(i). (Authority: 38 U.S.C.
3710(e)(3)) (Authority: 38 U.S.C. 501(a), 3703(c)(1))

**§36.4303 REPORTING REQUIREMENTS**

\(a\) With respect to loans automatically guaranteed under 38 U.S.C.
3703(a)(1) evidence of the guaranty will be issuable to a lender of a
class described under 38 U.S.C. 3702(d) if the loan is reported to the
Secretary within 60 days following full disbursement, and upon the
certification of the lender that:

\(1\) No default exists thereunder which has continued for more than 30
days;

\(2\) Except for acquisition and improvement loans as defined in
§36.4301, any construction, repairs, alterations, or improvements
effected subsequent to the appraisal of reasonable value, and paid for
out of the proceeds of the loan, which have not been inspected and
approved upon completion by a compliance inspector designated by the
Secretary have been completed properly in full accordance with the plans
and specifications upon which the original appraisal was based, and any
deviations or changes of identity in said property have been approved as
required in §36.4304 concerning guaranty or insurance of loans to
veterans;

\(3\) The loan conforms otherwise with the applicable provisions of 38
U.S.C., Chapter 37 and of the regulations concerning guaranty or
insurance of loans to veterans. (Authority: 38 U.S.C. 3703(c)(1))

\(b\) Loans made pursuant to 38 U.S.C. 3715 although not entitled to
automatic insurance thereunder may, when made by a lender of a class
described in 38 U.S.C. 3702(d)(1), be reported for issuance of an
insurance credit. (Authority: 38 U.S.C. 3702(d), 3715)

\(c\) Each loan proposed to be made to an eligible veteran by a lender
not within a class described in 38 U.S.C. 3702(d) shall be submitted to
the Secretary for approval prior to closing. Lenders described in 38
U.S.C. 3702(d) shall have the optional right to submit any loan for such
prior approval. The Secretary upon determining any loan so submitted to
be eligible for a guaranty, or for insurance, will issue a certificate
of commitment with respect thereto.

\(d\) A certificate of commitment shall entitle the holder to the
issuance of the evidence of guaranty or insurance upon the ultimate
actual payment of the full proceeds of the loan for the purposes
described in the original report and upon the submission within 60 days
thereafter of a supplemental report showing that fact and:

\(1\) The identity of any property purchased therewith,

\(2\) That all property purchased or acquired with the proceeds of the
loan has been encumbered as required by the regulations concerning
guaranty or insurance of loans to veterans,

\(3\) Except for acquisition and improvement loans as defined in
§36.4301, any construction, repairs, alterations, or improvements paid
for out of the proceeds of the loan which have not been inspected and
approved subsequent to completion by a compliance inspector designated
by the Secretary have been completed properly in full accordance with
the plans and specifications upon which the original appraisal was based
and that any deviations or changes of identity in said property have
been approved as required by §36.4304; and

\(4\) That the loan conforms otherwise with the applicable provisions of
38 U.S.C. Chapter 37 and the regulations concerning guaranty or
insurance of loans to veterans. (Authority: 38 U.S.C. 3703(c)(1))

\(e\) Upon the failure of the lender to report in accordance with the
provisions of paragraph (d) of this section, the certificate of
commitment shall have no further effect, or the amount of guaranty or
insurance shall be reduced pro rata, as may be appropriate under the
facts of the case: *Provided, nevertheless*, That if the loan otherwise
meets the requirements of this section, said certificate of commitment
may be given effect by the Secretary notwithstanding the report is
received after the date otherwise required.

\(f\) Evidence of a guaranty will be issued by the Secretary by
appropriate endorsement on the note or other instrument evidencing the
obligation, or by a separate certificate at the option of the lender.
Notice of credit to an insurance account will be given to the lender.
Unused certificates of eligibility issued prior to March 1, 1946, are
void. No certificate of commitment shall be issued and no loan shall be
guaranteed or insured unless the lender, the veteran, and the loan are
shown to be eligible. Evidence of guaranty or insurance will not be
issued on any loan for the purchase or construction of residential
property unless the veteran, or the veteran\'s spouse in the case of a
veteran who cannot occupy the property because of active duty status
with the Armed Forces, certifies in such form as the Secretary shall
prescribe, that the veteran, or spouse of the active duty veteran,
intends to occupy the property as his or her home. Guaranty or insurance
evidence will not be issued on any loan for the alteration, improvement,
or repair of any residential property or on a refinancing loan unless
the veteran, or spouse of an active duty service member, certifies that
he or she presently occupies the property as his or her home. An
exception to this is if the home improvement or refinancing loan is for
extensive changes to the property which will prevent the veteran or the
spouse of the active duty veteran from occupying the property while the
work is being completed. In such case the veteran or spouse of the
active duty veteran must certify that he or she intends to occupy or to
reoccupy the property as his or her home upon completion of the
substantial improvements or repairs. All of the mentioned certifications
must take place at the time of loan application and closing except in
the case of loans automatically guaranteed, in which case veterans or in
the case of an active duty veteran, the veteran\'s spouse shall make the
required certifications only at the time the loan is closed. (Authority:
38 U.S.C. 3704(c))

\(g\) Subject to compliance with the regulations concerning guaranty or
insurance of loans to veterans, the certificate of guaranty or the
evidence of insurance credit will be issuable within the available
entitlement of the veteran on the basis of the loan stated in the final
loan report or certification of loan disbursement, except for
refinancing loans for interest rate reductions. The available
entitlement of a veteran will be determined by the Secretary as of the
date of receipt of an application for guaranty or insurance of a loan or
of a loan report. Such date of receipt shall be the date the application
or loan report is date stamped into the Department of Veterans Affairs.
Eligibility derived from the most recent period of service.

\(1\) Shall cancel any unused entitlement derived from any earlier
period of service, and

\(2\) Shall be reduced by the amount by which entitlement from service
during any earlier period has been used to obtain a direct, guaranteed,
or insured loan.

\(i\) On property which the veteran owns at the time of application, or

\(ii\) As to which the Secretary has incurred actual liability or loss,
unless in the event of loss or the incurrence and payment of such
liability by the Secretary the resulting indebtedness of the veteran to
the United States has been paid in full.

*Provided*, That if the Secretary issues or has issued a certificate of
commitment covering the loan described in the application for guaranty
or insurance or in the loan report, the amount and percentage of
guaranty or the amount of the insurance credit contemplated by the
certificate of commitment shall not be subject to reduction if the loan
has been or is closed on a date which is not later than the expiration
date of the certificate of commitment, notwithstanding that the
Secretary in the meantime and prior to the issuance of the evidence of
guaranty or insurance shall have incurred actual liability or loss on a
direct, guaranteed, or insured loan previously obtained by the borrower.
For the purposes of this paragraph, the Secretary will be deemed to have
incurred actual loss on a guaranteed or insured loan if the Secretary
has paid a guaranty or insurance claim thereon and the veteran\'s
resultant indebtedness to the Government has not been paid in full, and
to have incurred actual liability on a guaranteed or insured loan if the
Secretary is in receipt of a claim on the guaranty or insurance or is in
receipt of a notice of default. In the case of a direct loan, the
Secretary will be deemed to have incurred an actual loss if the loan is
in default. A loan, the proceeds of which are to be disbursed
progressively or at intervals, will be deemed to have been closed for
the purposes of this paragraph if the loan has been completed in all
respects excepting the actual \"pay-out\" of the entire loan proceeds.
(Authority: 38 U.S.C. 3702(a), 3710(c))

\(h\) Any amounts which are disbursed for an ineligible purpose shall be
excluded in computing the amount of guaranty or insurance credit.

\(i\) Notwithstanding the lender has erroneously, but without intent to
misrepresent, made certification with respect to paragraph (a)(1) of
this section, the guaranty or insurance will become effective upon the
curing of such default and its continuing current for a period of not
less than 60 days thereafter. For the purpose of this paragraph a loan
will be deemed current so long as the installment is received within 30
days after its due date.

\(j\) No guaranty or insurance commitment or evidence of guaranty or
insurance will be issuable in respect to any loan to finance a contract
which:

\(1\) Is for the purchase, construction, repair, alteration, or
improvement of a dwelling or farm residence;

\(2\) Is dated on or after June 4, 1969;

\(3\) Provides for a purchase price or cost to the veteran in excess of
the reasonable value established by the Secretary; and

\(4\) Was signed by the veteran prior to the veteran\'s receipt of
notice of such reasonable value; unless such contract includes, or is
amended to include, a provision substantially as follows:

> It is expressly agreed that, notwithstanding any other provisions of
> this contract, the purchaser shall not incur any penalty by forfeiture
> of earnest money or otherwise or be obligated to complete the purchase
> of the property described herein, if the contract purchase price or
> cost exceeds the reasonable value of the property established by the
> Department of Veterans Affairs. The purchaser shall, however, have the
> privilege and option of proceeding with the consummation of this
> contract without regard to the amount of the reasonable value
> established by the Department of Veterans Affairs.

(Authority: 38 U.S.C. 501(a), 3703(c)(1))

\(k\) With respect to any loan for which a commitment was made on or
after March 1, 1988, the Secretary must be notified whenever the holder
receives knowledge of disposition of the residential property securing a
Department of Veterans Affairs guaranteed loan.

\(1\) If the seller applies for prior approval of the assumption of the
loan, then:

\(i\) A holder (or its authorized servicing agent) who is an automatic
lender must examine the creditworthiness of the purchaser and determine
compliance with the provisions of 38 U.S.C. 3714. The creditworthiness
review must be performed by the party that has automatic authority. If
both the holder and its servicing agent are automatic lenders, then they
must decide between themselves which one will make the determination of
creditworthiness, whether the loan is current and whether there is a
contractual obligation to assume the loan, as required by 38 U.S.C.
3714. If the actual loan holder does not have automatic authority and
its servicing agent is an automatic lender, then the servicing agent
must make the determinations required by 38 U.S.C. 3714 on behalf of the
holder. The actual holder will remain ultimately responsible for any
failure of its servicing agent to comply with the applicable law and
Department of Veterans Affairs regulations.

\(A\) If the assumption is approved and the transfer of the security is
completed, then the notice required by this paragraph shall consist of
the credit package (unless previously provided in accordance with
paragraph (k)(1)(i)(B) of this section) and a copy of the executed deed
and/or assumption agreement as required by the Department of Veterans
Affairs office of jurisdiction. The notice shall be submitted to the
Department of Veterans Affairs with the Department of Veterans Affairs
receipt for the funding fee provided for in §36.4312(e)(3) of this part.

\(B\) If the application for assumption is disapproved, the holder shall
notify the seller and the purchaser that the decision may be appealed to
the Department of Veterans Affairs office of jurisdiction with 30 days.
The holder shall make available to that Department of Veterans Affairs
office all items used by the holder in making the holder\'s decision in
case the decision is appealed to the Department of Veterans Affairs. If
the application remains disapproved after 60 days (to allow time for
appeal to and review by the Department of Veterans Affairs) then the
holder must refund \$50 of any fee previously collected under the
provisions of §36.4312(d)(8) of this part. If the application is
subsequently approved and the sale is completed, then the holder (or its
authorized servicing agent) shall provide the notice described in
paragraph (k)(1)(i)(A) of this section.

\(C\) In performing the requirements of paragraphs (k)(1)(i)(A) or
(k)(1)(i)(B) of this section the holder must complete its examination of
the creditworthiness of the prospective purchaser and advise the seller
no later than 45 days after the date of receipt by the holder of a
complete application package for the approval of the assumption. The
45-day period may be extended by an interval not to exceed the time
caused by delays in processing of the application which are documented
as beyond the control of the holder, such as employers or dispositories
not responding to requests for verifications, which were timely
forwarded, or followups on those requests.

\(ii\) If neither the holder nor its authorized servicing agent is an
automatic lender, the notice to the Department of Veterans Affairs shall
include:

\(A\) Advice regarding whether the loan is current or in default;

\(B\) A copy of the purchase contract; and

\(C\) A complete credit package developed by the holder which the
Secretary may use for determining the creditworthiness of the purchaser.

\(D\) The notice and documents required by this section must be
submitted to the Department of Veterans Affairs office of jurisdiction
no later than 35 days after the date of receipt by the holder of a
complete application package for the approval of the assumption, subject
to the same extensions as provided in paragraph (k)(1)(i) of this
section. If the assumption is not automatically approved by the holder
or its authorized agent, pursuant to the automatic authority provisions,
\$50 of any fee collected in accordance with §36.4312(d)(8) of this part
must be refunded. If the Department of Veterans Affairs does not approve
the assumption, the holder will be notified and an additional \$50 of
any fee collected under §36.4312(d)(8) of this section must be refunded
following the expiration of the 30-day appeal period set out in
paragraph (k)(1)(i)(B) of this section. If such an appeal is made to the
Department of Veterans Affairs, then the review will be conducted at the
Department of Veterans Affairs office of jurisdiction by an individual
who was not involved in the original disapproval decision. If the
application for assumption is approved and the transfer of security is
completed, then the holder (or its authorized servicing agent) shall
provide the notice required in paragraph (k)(1)(i)(A) of this section.

\(2\) If the seller fails to notify the holder before disposing of
property securing the loan, the holder shall notify the Secretary within
60 days after learning of the transfer. Such notice shall advise whether
or not the holder intends to exercise its option to immediately
accelerate the loan and whether or not an opportunity will be extended
to the transferor and transferee to apply for retroactive approval of
the assumption under the terms of this paragraph. (Authority: 38 U.S.C.
3714)

**§36.4304 DEVIATIONS, CHANGES OF IDENTITY**

A deviation of more than 5 percent between the estimates upon which a
certificate of commitment has been issued and the report of final
payment of the proceeds of the loan, or a change in the identity of the
property upon which the original appraisal was based, will invalidate
the certificate of commitment unless such deviation or change be
approved by the Secretary. Any deviation in excess of 5 percent or
change in the identity of the property upon which the original appraisal
was based must be supported by a new or supplemental appraisal of
reasonable value: *Provided*, That substitution of materials of equal or
better quality and value approved by the veteran and the designated
appraiser shall not be deemed a *change in the identity of the property*
within the purview of this section. A deviation not in excess of 5
percent will not require the prior approval of the Secretary.

**§36.4305 PARTIAL DISBURSEMENT**

In cases where intervening circumstances make it impracticable to
complete the actual paying out of the loan originally proposed, or
justify the lender in declining to make further disbursements on a
construction loan, evidence of guaranty or of insurance of the loan or
the proper pro rata part thereof will be issuable if the loan is
otherwise eligible for automatic guaranty or a certificate of commitment
was issued thereon, *Provided*:

\(a\) A report of the loan is submitted to the Secretary within a
reasonable time subsequent to the last disbursement, but in no event
more than 90 days thereafter, unless report of the facts and
circumstances is made and an extension of time obtained from the
Secretary.

\(b\) There has been no default on the loan, except that the existence
of a default shall not preclude issuance of a guaranty certificate or
insurance advice if a certificate of commitment was issued with respect
to the loan.

\(c\) The Secretary determines that a person of reasonable prudence
similarly situated would not make further disbursements in the situation
presented.

\(d\) There has been full compliance with the provisions of 38 U.S.C.
Chapter 37 and of the applicable regulations up to the time of the last
disbursement.

\(e\) In the case of a construction loan when the construction is not
fully completed, the amount and percentage of the guaranty and the
amount of the loan for the purposes of insurance or accounting to the
Secretary shall be based upon such portion of the amount disbursed out
of the proceeds of the loan which, when added to any other payments made
by or on behalf of the veteran to the builder or the contractor, does
not exceed 80 percent of the value of that portion of the construction
performed (basing value on the contract price) plus the sum, if any,
disbursed by the lender out of the proceeds of the loan for the land on
which the construction is situated: *And provided further*, That the
lender shall certify as follows:

\(1\) Any amount advanced for land is protected by title or lien as
provided in the regulations concerning guaranty or insurance of loans to
veterans; and

\(2\) No enforceable liens, for any work done or material furnished for
that part of the construction completed and for which payment has been
made out of the proceeds of the loan, exist or can come into existence.

**§36.4306 REFINANCING OF MORTGAGE OR OTHER LIEN INDEBTEDNESS**

\(a\) Any loan for the purpose of refinancing (38 U.S.C. 3710(a)(5)) an
existing mortgage loan or other indebtedness secured by a lien of record
on a dwelling or farm residence owned and occupied or to be reoccupied
if the refinancing loan is for the completion of major alterations,
repairs, or improvements to the property, by an eligible veteran as the
veteran\'s home, or in the case of an eligible veteran unable to occupy
the property because of active duty status in the Armed Forces, occupied
or to be reoccupied by the veteran\'s spouse as the spouse\'s home,
shall be eligible for guaranty in an amount as computed under
§36.4302(a) provided that:

\(1\) The amount of the loan may not exceed an amount equal to 90
percent of the reasonable value of the dwelling or farm residence which
will secure the loan, as determined by the Secretary. (Authority: 38
U.S.C. 3710(e)(1) and 3710(h))

\(2\) The dollar amount of discount, if any, to be paid by the veteran
is reasonable in amount as determined by the Secretary in accordance
with §36.4312(d)(7)(i),

\(3\) The loan is otherwise eligible for guaranty.

\(b\) Reserved.

\(c\) Nothing shall preclude guaranty of a loan to an eligible veteran
having home loan guaranty entitlement to refinance under the provisions
of 38 U.S.C. 3710(a)(5) a VA guaranteed or insured (or direct) mortgage
loan made to him or her which is outstanding on the dwelling or farm
residence owned and occupied or to be reoccupied after the completion of
major alterations, repairs, or improvements to the property, by the
veteran as a home, or in the case of an eligible veteran unable to
occupy the property because of active duty status in the Armed Forces,
occupied or to be reoccupied by the veteran\'s spouse as the spouse\'s
home. (Authority: 38 U.S.C. 3710(e)(1))

\(d\) A refinancing loan may include contractual prepayment penalties,
if any, due the holder of the mortgage or other lien indebtedness to be
refinanced.

\(e\) Reserved.

\(f\) Nothing in this section shall preclude the refinancing of the
balance due for the purchase of land on which new construction is to be
financed through the proceeds of the loan, or the refinancing of the
balance due on an existing land sale contract relating to a veteran\'s
dwelling or farm residence.

\(g\) A veteran may refinance (38 U.S.C. 3710(a)(9)(B)(ii)) an existing
loan that was for the purchase of, and is secured by, a manufactured
home in order to purchase the lot on which the manufactured home is or
will be permanently affixed, provided the following requirements are
met:

\(1\) The refinancing of a manufactured home and the purchase of a lot
must be considered as one loan;

\(2\) The manufactured home upon being permanently affixed to the lot
will be considered real property under the laws of the State where it is
located;

\(3\) The loan must be secured by the same manufactured home which is
being refinanced and the real property on which the manufactured home is
or will be located;

\(4\) The amount of the loan may not exceed an amount equal to the sum
of the balance of the loan being refinanced; the purchase price, not to
exceed the reasonable value of the lot; the costs of the necessary site
preparation of the lot as determined by the Secretary; a reasonable
discount as authorized in §36.4312(d)(6) with respect to that portion of
the loan used to refinance the existing purchase money lien on the
manufactured home, and closing costs as authorized in §36.4312.

\(5\) If the loan being refinanced was guaranteed by VA, the portion of
the loan made for the purpose of refinancing an existing purchase money
manufactured home loan may be guaranteed without regard to the
outstanding guaranty entitlement available for use by the veteran, and
the veteran\'s guaranty entitlement shall not be charged as a result of
any guaranty provided for the refinancing portion of the loan. For the
purposes enumerated in 38 U.S.C. 3702(b) the refinancing portion of the
loan shall be considered to have been obtained with the guaranty
entitlement used to obtain the VA-guaranteed loan being refinanced. The
total guaranty for the new loan shall be the sum of the guaranty
entitlement used to obtain VA-guaranteed loan being refinanced and any
additional guaranty entitlement available to the veteran. However, the
total guaranty may not exceed the guaranty amount as calculated under
§36.4302(a) of this part. (Authority: 38 U.S.C. 3703(a))

**§36.4306a INTEREST RATE REDUCTION REFINANCING LOAN**

\(a\) Pursuant to 38 U.S.C. 3710(a)(8) and (9)(B)(i), a veteran may
refinance an existing VA guaranteed, insured or direct loan to reduce
the interest rate payable on the existing loan provided the following
requirements are met:

\(1\) The loan must be secured by the same dwelling or farm residence as
the loan being refinanced; and

\(2\) The veteran must own the dwelling or farm residence securing the
loan; and

\(i\) Must occupy the dwelling or residence as his or her home; or

\(ii\) Must have previously occupied the dwelling or residence as his or
her home and must certify, in such form as the Secretary shall require,
that he or she has previously occupied the dwelling or residence; or

\(iii\) In any case in which the veteran is on, or was on, active duty
status as a member of the Armed Forces and is unable, or was unable, to
occupy the residence or dwelling as a home because of such active duty
status, the spouse of the veteran must occupy, or must have previously
occupied, such dwelling or residence as the spouse\'s home and must
certify to that occupancy in such form as the Secretary shall require.
(Authority: 38 U.S.C. 3710(e)(1))

\(3\) The amount of the refinancing loan may not exceed an amount equal
to the sum of the balance of the loan being refinanced and such closing
costs as authorized by §36.4312(d) and a discount not to exceed a dollar
amount determined in accordance with §36.4312(d)(7)(i);

\(4\) The dollar amount of the guaranty of the 38 U.S.C. 3710(a)(8) or
(9)(B)(i) loan may not exceed the original dollar amount of guaranty
applicable to the loan being refinanced, less any dollar amount of
guaranty previously paid as a claim on the loan being refinanced; and

\(5\) The term of the refinancing loan (38 U.S.C. 3710(a)(8)) may not
exceed the original term of the loan being financed plus ten years or
the maximum loan term allowed under 38 U.S.C. 3703(d)(1), whichever is
less. For manufactured home loans that were previously guaranteed under
38 U.S.C. 3712 the loan term, if being refinanced under 38 U.S.C.
3710(a)(9)(B)(i), may exceed the original term of the loan but may not
exceed the maximum loan term allowed under 38 U.S.C. 3703(d)(1).
(Authority: 38 U.S.C. 3710(e)(1))

\(b\) Notwithstanding any other regulatory provision, the interest rate
reduction refinancing loan may be guaranteed without regard to the
amount of guaranty entitlement available for use by the veteran and the
amount of the veteran\'s remaining guaranty entitlement, if any, shall
not be charged for an interest rate reduction refinancing loan. The
interest rate reduction refinancing loan will be guaranteed with the
lesser of the entitlement used by the veteran to obtain the loan being
refinanced or the amount of the guaranty as calculated under §36.4302(a)
of this part. The veteran\'s loan guaranty entitlement originally used
for the purpose as enumerated in 38 U.S.C. 3710(a)(1) through (7) and
(9)(A)(i) and (ii) and subsequently transferred to an interest rate
reduction refinancing loan (38 U.S.C. 3710(a)(8) or (9)(B)(i)) shall be
eligible for restoration when the interest rate reduction refinancing
loan or subsequent interest rate reduction refinancing loans on the same
property meets the requirements of §36.4302(h). (Authority: 38 U.S.C.
3703(a))

\(c\) Title to the estate which is refinanced for the purpose of an
interest rate reduction must be in conformity with §36.4350. (Authority:
38 U.S.C. 3710(a)(8), (9)(B)(i) and (e))

**§36.4307 JOINT LOANS**

\(a\) Except as provided in paragraph (b) of this section, the prior
approval of the Secretary is required in respect to any loan to be made
to two or more borrowers who become jointly and severally liable, or
jointly liable therefor, and who will acquire an undivided interest in
the property to be purchased or who will otherwise share in the proceeds
of the loan, or in respect to any loan to be made to an eligible veteran
whose interest in the property owned, or to be acquired with the loan
proceeds, is an undivided interest only, unless such interest is at
least a 50 percent interest in a partnership. The amount of the guaranty
or insurance credit shall be computed in such cases only on that portion
of the loan allocable to the eligible veteran which, taking into
consideration all relevant factors, represents the proper contribution
of the veteran to the transaction. Such loans shall be secured to the
extent required by 38 U.S.C. Chapter 37 and the regulations concerning
guaranty or insurance of loans to veterans.

\(b\) Notwithstanding the provisions of paragraph (a) of this section,
the joinder of the spouse of a veteran-borrower in the ownership of
residential property shall not require prior approval or preclude the
issuance of a guaranty or insurance credit based upon the entire amount
of the loan. If both spouses be eligible veterans, either or both may,
within permissible maxima, utilize available guaranty or insurance
entitlement.

\(c\) For the purpose of determining the rights and the liabilities of
the Secretary with respect to a loan subject to paragraph (a) of this
section, credits legally applicable to the entire loan shall be applied
as follows:

\(1\) Prepayments made expressly for credit to that portion of the
indebtedness allocable to the veteran (including the gratuity paid
pursuant to former provisions of law), shall be applied to such portion
of the indebtedness. All other payments shall be applied ratably to
those portions of the loan allocable respectively to the veteran and to
the other debtors.

\(2\) Proceeds of the sale or other liquidation of the security shall be
applied ratably to the respective portions of the loan, such portion of
the proceeds as represents the interest of the veteran being applied to
that portion of the loan allocable to such veteran.

**§36.4308 TRANSFER OF TITLE BY BORROWER OR MATURITY BY DEMAND OR
ACCELERATION**

\(a\) Except as provided by paragraphs (b) or (c) of this section the
conveyance of or other transfer of title to property by operation of law
or otherwise, after the creation of a lien thereon to secure a loan
which is guaranteed or insured in whole or in part by the Secretary,
shall not constitute an event of default, or acceleration of maturity,
elective or otherwise, and shall not of itself terminate or otherwise
affect the guaranty or insurance.

\(b\) (1) The Secretary may issue guaranty on loans in which a State,
Territorial, or local governmental agency provides assistance to a
veteran for the acquisition of a dwelling. Such loans will not be
considered ineligible for guaranty if the State, Territorial, or local
authority, by virtue of its laws or regulations or by virtue of Federal
law, requires the acceleration of maturity of the loan upon the sale or
conveyance of the security property to a person ineligible for
assistance from such authority.

\(2\) At the time of application for a loan assisted by a State,
Territorial, or local governmental agency, the veteran-applicant must be
fully informed and consent in writing to the housing authority
restrictions. A copy of the veteran\'s consent statement must be
forwarded with the loan application or the report of a loan processed on
the automatic basis.

(Authority: 38 U.S.C. 3703(c))

\(c\) Any housing loan which is financed under 38 U.S.C. chapter 37, and
to which section 3714 of that chapter applies, shall include a provision
in the security instrument that the holder may declare the loan
immediately due and payable upon transfer of the property securing such
loan to any transferee unless the acceptability of the assumption of the
loan is established pursuant to section 3714.

\(1\) A holder may not exercise its option to accelerate a loan upon:

\(i\) The creation of a lien or other encumbrance subordinate to the
lender\'s security instrument which does not relate to the transfer of
rights of occupancy in the property;

\(ii\) The creation of a purchase money security interest for household
appliances;

\(iii\) A transfer by devise, descent, or operation of law on the death
of a joint tenant or tenant by the entirety;

\(iv\) The granting of a leasehold interest of three years or less not
containing an option to purchase;

\(v\) A transfer to a relative resulting from the death of a borrower;

\(vi\) A transfer where the spouse or children of the borrower become
joint owners of the property with the borrower;

\(vii\) A transfer resulting from a decree of a dissolution of marriage,
legal separation agreement, or from an incidental property settlement
agreement by which the spouse of the borrower becomes the sole owner of
the property. In such a case the borrower shall have the option of
applying directly to the Department of Veterans Affairs regional office
of jurisdiction for a release of liability in accordance with §36.4323
of this part; or

\(viii\) A transfer into an inter vivos trust in which the borrower is
and remains a beneficiary and which does not relate to a transfer of
rights of occupancy in the property.

\(2\) The mortgage or deed of trust and the promissory note or bond
evidencing a loan to which this paragraph applies shall bear in a
conspicuous position in capital letters on the first page of the
document in type at least 2 1/2 times larger than the regular type on
such page the following warning: \"THIS LOAN IS NOT ASSUMABLE WITHOUT
THE APPROVAL OF THE DEPARTMENT OF VETERANS AFFAIRS OR ITS AUTHORIZED
AGENT.\" Due to the difficulty in obtaining some commercial type sizes
which are exactly 2 1/2 times larger in height than other sizes, minor
deviations in size will be permitted based on commercially available
type sizes nearest to 2 1/2 times the size of the print on the document.
A similar warning in regular size type must appear on every assumption
statement provided on a loan to which this paragraph applies.
(Authority: 38 U.S.C. 3704 and 3714)

\(d\) The term of payment of any guaranteed or insured obligation shall
bear a proper relation to the borrower\'s present and anticipated income
and expenses (except loans pursuant to 38 U.S.C. 3710(a)(8) or
(9)(B)(i)). In addition the terms of payment of any guaranteed or
insured obligation shall provide for discharge of the obligation at a
definite date or dates or intervals, in amounts specified on or
computable from the face of the instrument. A loan which is payable on
demand, or at sight, or on presentation, or at a time not specified or
computable from the language in the note, mortgage, or other loan
instrument, or which contemplates periodic renewals at the option of the
holder to satisfy the repayment requirements of this section, is not
eligible for guaranty or insurance, except as provided in paragraph (f)
of this section.

\(e\) No guaranteed or insured obligation shall contain a provision to
the effect that the holder shall have the right to declare the
indebtedness due, or to pursue one or more legal or equitable remedies,
if holder \"shall feel insecure,\" or upon the occurrence of one or more
such conditions optional to the holder, without regard to an act or
omission by the debtor, which condition by the terms of the note,
mortgage, or other loan instrument would at the option of the holder
afford a basis for declaring a default.

\(f\) Notwithstanding the inclusion in the guaranteed or insured
obligation of a provision contrary to the provisions of this section,
the right of the holder to payment of the guaranty or insurance shall
not be thereby impaired, *Provided*:

\(1\) Default was declared or maturity was accelerated under some other
provision of the note, mortgage, or other loan instrument, or

\(2\) Activation or enforcement of such provision is warranted under
§36.4317(a), or

\(3\) The prior approval of the Secretary was obtained. (Authority: 38
U.S.C. 3703(c))

\(g\) The holder of any guaranteed or insured obligation shall have the
right, notwithstanding the absence of express provision therefor in the
instruments evidencing the indebtedness, to accelerate the maturity or
such obligation at any time after the continuance of any default for the
period specified in §36.4316.

\(h\) If sufficient funds are tendered to bring a delinquency current at
any time prior to a judicial or statutory sale or other public sale
under power of sale provisions contained in the loan instruments to
liquidate any security for a guaranteed loan, the holder shall be
obligated to accept the funds in payment of the delinquency unless:

\(1\) The prior approval of the Secretary is obtained to do otherwise,
or

\(2\) Reinstatement of the loan would adversely affect the dignity of
the lien or be otherwise precluded by law.

A delinquency will include all installment payments (principal,
interest, taxes, insurance, advances, etc.) due and unpaid and any
accumulated late charges, plus any reasonable expenses incurred and paid
by the holder if termination proceedings have begun (e.g., advertising
costs, foreclosure costs, attorney or trustee fees, recording fees,
etc.). (Authority: 38 U.S.C. 3703(c)(1)) (Authority: 38 U.S.C. 501(a),
3703(c), 3712(g))

**§36.4309 AMORTIZATION**

\(a\) All loans, the maturity date of which is beyond 5 years from date
of loan or date of assumption by the veteran, shall be amortized. Except
as provided in paragraph (e) of this section, the schedule of payments
thereon shall be in accordance with any generally recognized plan of
amortization requiring approximately equal periodic payments and shall
require a principal reduction not less often than annually during the
life of the loan. The final installment on any loan shall not be in
excess of two times the average of the preceding installments, except
that on a construction loan such installment may be for an amount not in
excess of 5 per centum of the original principal amount of the loan. The
limitations imposed herein on the amount of the final installment shall
not apply in the case of any loan extended pursuant to §36.4314(a).

\(b\) Any plan of repayment on loans required to be amortized which does
not provide for a approximately equal periodic payments shall not be
eligible unless the plan conforms with the provisions of paragraph (e)
of this section, or is otherwise approved by the Secretary.

\(c\) Every guaranteed or insured loan shall be repayable within the
estimated economic life of the property securing the loan.

\(d\) Subject to paragraph (a) of this section, any amounts which under
the terms of a loan do not become due and payable on or before the last
maturity date permissible for loans of its class under the limitations
contained in 38 U.S.C. Chapter 37 shall automatically fall due on such
date. (See §36.4334.)

\(e\) A graduated payment mortgage loan, providing for deferrals of
interest during the first 5 years of the loan and addition of the
deferred amounts to principal shall be eligible, *Provided*:

\(1\) The loan is for the purpose of acquiring a single-family dwelling
unit, including a condominium unit or simultaneously acquiring and
improving a previously occupied, existing single-family dwelling unit.

\(2\) (i) For proposed construction or existing homes not previously
occupied (new homes), the maximum loan amount cannot exceed 97.5 percent
of the lesser of the reasonable value of the property as of the time the
loan is made or the purchase price.

\(ii\) For previously occupied, existing homes the maximum loan amount
must be computed to assure that the principal amount of the loan,
including all interest scheduled to be deferred and added to the loan
principal, will not exceed the purchase price or reasonable value of the
property, whichever is less, as of the time the loan is made;

\(3\) The increases in the monthly periodic payment amount occur
annually on each of the first five annual anniversary dates of the first
loan installment due date, at a rate of 7.5 percent over the preceding
year\'s monthly payment amount;

\(4\) Beginning with the payment due on the fifth annual anniversary
date of the first loan installment due date, all remaining monthly
periodic payments are approximately equal in amount and amortize the
loan fully in accordance with the requirements of this section, and

\(5\) The plan is otherwise acceptable to the Secretary. (Authority: 38
U.S.C. 3703(d)) (Authority: 38 U.S.C. 501(a), 1803(c)(1))

**§36.4310 PREPAYMENT**

The debtor shall have the right to prepay at any time, without premium
or fee, the entire indebtedness or any part thereof not less than the
amount of one installment, or \$100, whichever is less. Any prepayment
in full of the indebtedness shall be credited on the date received, and
no interest may be charged thereafter. Any partial prepayment made on
other than an installment due date need not be credited until the next
following installment due date or 30 days after such prepayment,
whichever is earlier. The holder and the debtor may agree at any time
that any prepayment not previously applied in satisfaction of matured
installments shall be reapplied for the purpose of curing or preventing
any subsequent default.

**§36.4311 INTEREST RATES**

\(a\) Excepting loans guaranteed or insured pursuant to guaranty or
insurance commitments issued by VA which specify an interest rate in
excess of 7-1/2 per centum per annum, effective August 12, 1992, the
interest rate on any home or condominium loan, other than a graduated
payment mortgage loan, guaranteed or insured wholly or in part on or
after such date may not exceed 7-1/2 per centum per annum on the unpaid
principal balance.

\(b\) Excepting loans guaranteed or insured pursuant to guaranty or
insurance commitments issued by VA which specify an interest rate in
excess of 7-3/4 per centum per annum, effective August 12, 1992, the
interest rate of any graduated payment mortgage loan guaranteed or
insured wholly or in part on or after such date may not exceed 7-3/4 per
centum per annum. (Authority: 38 U.S.C. 3703(c)(1))

\(c\) Effective August 12, 1992, the interest rate on any loan solely
for energy conservation improvements or other alterations, improvements
or repairs, which is guaranteed or insured wholly or in part on or after
such date may not exceed 9 per centum per annum on the unpaid principal
balance. (Authority: 38 U.S.C. 3703(c)(1))

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

\(e\) Refinancing loans for the purpose of an interest rate reduction
(38 U.S.C. 3710(a)(8) or (9)(B)(i)) may specify an interest rate in
excess of the rate specified in paragraph (a), (b) and (c) of this
section provided the interest rate of the refinancing loan is less than
the interest rate of the current VA loan being refinanced. (Authority:
38 U.S.C. 3703(c)(1) and 3710(c))

**§36.4312 CHARGES AND FEES**

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

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

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

\(d\) The following schedule of permissible fees and charges shall be
applicable to all VA guaranteed or insured loans:

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

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

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

\(iii\) Credit report.

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

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

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

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

\(viii\) Such other items as may be authorized in advance by the Chief
Benefits Director as appropriate for inclusion under this paragraph as
proper local variances.

\(2\) A lender may charge and the veteran may pay a flat charge not
exceeding 1 percent of the amount of the loan, provided that such flat
charge shall be in lieu of all other charges relating to costs of
origination not expressly specified and allowed in this schedule.

\(3\) In cases where a lender makes advances to a veteran during the
progress of construction, alteration, improvement, or repair, either
under a commitment of the Department of Veterans Affairs to issue a
guaranty certificate or insurance credit upon completion, or where the
lender would be entitled to guaranty or insurance on such advances when
reported under automatic procedure, the lender may make a charge against
the veteran of not exceeding 2 percent of the amount of the loan for its
services in supervising the making of advances and the progress of
construction notwithstanding that the \"holdback\" or final advance is
not actually paid out until after the construction, alteration,
improvement, or repair is fully completed: *Provided*, That the major
portion (51 percent or more) of the loan proceeds is paid out during the
actual progress of the construction, alteration, improvement, or repair.
Such charge may be in addition to the 1 percent charge allowed under
paragraph (d)(2) of this section.

\(4\) In construction, alteration, improvement or repair loans,
including supplemental loans made pursuant to §36.4355, where no charge
is permissible under the provisions of paragraph (d)(3) of this section
the lender may charge and the veteran may pay a flat sum not exceeding 1
percent of the amount of the loan. Such charge may be in addition to the
1 percent allowed under paragraph (d)(2) of this section.

\(5\) The fees and charges permitted under this paragraph are maximums
and are not intended to preclude a lender from making alternative
charges against the veteran which are not specifically authorized in the
schedule provided the imposition of such alternative charges would not
result in an aggregate charge or payment in excess of the prescribed
maximum.

\(6\) **Allowable Discounts**. The veteran borrower subject to the
limitations set forth in paragraphs (d)(6) and (7) of this section may
pay a discount required by a lender when the proceeds of the loan will
be used for any of the following purposes:

\(i\) To refinance existing indebtedness pursuant to 38 U.S.C.
3710(a)(5), (8), or (9)(B)(i), or (ii);

\(ii\) To repair, alter or improve a dwelling owned by the veteran
pursuant to 38 U.S.C. 3710(a)(4) or (7) if such loan is to be secured by
a first lien;

\(iii\) To construct a dwelling or farm residence on land already owned
or to be acquired by the veteran, provided that the veteran did not or
will not acquire the land directly or indirectly from a builder or
developer who will be constructing such dwelling or farm residence;

\(iv\) To purchase a dwelling from a class of sellers which the
Secretary determines are legally precluded under all circumstances from
paying such a discount if the best interest of the veteran would be so
served.

\(7\) **Computation of Discounts**

\(i\) **Computation of Discount - Loans Secured by a First Lien**.
Unless otherwise approved by the Secretary, the discount, if any, to be
paid by the borrower may not exceed the difference between the bid
price, rounded to the lower whole number, and par value for GNMA
(Government National Mortgage Association) 90-day forward bid closing
price for pass through securities 1/2 percent less than the face note
rate of the loan. Unless the lender and borrower negotiate a firm
written commitment for a maximum amount of discount to be paid, the bid
price to be used in the computation must be the GNMA 90-day forward bid
closing quote for any day 1 to 4 business days prior to loan closing.
\"Loan closing\" is defined for this purpose as the date on which the
borrower\'s 3-day right of rescission commences pursuant to the Truth in
Lending Act. If the lender and borrower choose to negotiate a firm
discount commitment for a maximum amount of discount to be paid, the bid
price to be used in establishing the maximum discount must be the
closing quote for the business day prior to the date of the commitment.
Lenders negotiating firm commitments must close that loan at a discount
no higher than the firm commitment regardless of changes in the maximum
allowable Department of Veterans Affairs interest rate. If a lender\'s
commitment expires prior to loan closing, the lender and borrower may
negotiate a new firm commitment based on the procedure outlined in this
paragraph (d)(7)(i) or may use the procedure for determining the
discount based on the GNMA 90-day forward bid closing quote for any day
1 to 4 business days prior to loan closing.

\(ii\) **Computation of Discount - Unsecured Loans or Loans Secured by
Less than a First Lien**. The borrower, subject to the limitations set
forth in paragraph (d)(6) and (7) of this section, may pay a discount
required by the lender when the proceeds of the loan will be used to
repair, alter, or improve a dwelling owned by the veteran pursuant to 38
U.S.C. 3710(a)(4) or (7) if such loan is unsecured or secured by less
than a first lien. No such discount may be charged unless:

\(A\) The loan is submitted to the Secretary for prior approval;

\(B\) The dollar amount of the discount is disclosed to the Secretary
and the veteran prior to the issuance by the Secretary of the
certificate of commitment. Said certificate of commitment shall specify
the discount to be paid by the veteran, and this discount may not be
increased once the commitment is issued without the approval of the
Secretary;

\(C\) The discount has been determined by the Secretary to be reasonable
in amount.

\(iii\) A veteran may pay the discount on an acquisition and improvement
loan (as defined in §36.4301) provided:

\(A\) The veteran pays no discount on the acquisition portion of the
loan except in accordance with paragraph (d)(6)(iv) of this section; and

\(B\) The discount paid on the improvements portion of the loan does not
exceed the percentage of discount paid on the acquisition portion of the
loan.

Acquisition and improvement loans may be closed either on the automatic
or prior approval basis.

\(iv\) Unless the Chief Benefits Director otherwise directs, all powers
of the Secretary under paragraph (d)(6) and (7) of this section are
hereby delegated to the officials designated by §36.4342(b). (Authority:
38 U.S.C. 3703(c)(1) and (3), 3710(a))

\(8\) On any loan to which section 3714 of 38 U.S.C., chapter 37
applies, the holder may charge a reasonable fee, not to exceed the
lesser of (i) \$300 and the actual cost of any credit report required,
or (ii) any maximum prescribed by applicable State law, for processing
an application for assumption and changing its records. (Authority: 38
U.S.C. 3714)

\(e\) (1) Subject to the limitations set out in paragraphs (e)(4) and
(e)(5) of this section, a fee must be paid to the Secretary. The fee
shall be 1.25 percent of the total loan amount on all refinancing loans
and for all loans for the purchase or construction of a home on which
the veteran does not make a downpayment. On purchase or construction
loans on which the veteran makes a downpayment of 5 percent or more, but
less than 10 percent, the amount of the funding fee shall be 0.75
percent of the total loan amount. On purchase or construction loans on
which the veteran makes a downpayment of 10 percent or more, the amount
of the funding fee shall be 0.5 percent of the total loan amount. All or
part of such fee may be paid in cash at loan closing or all or part of
the fee may be included in the loan without regard to the reasonable
value of the property or the computed maximum loan amount, as
appropriate. In computing the fee, the lender will disregard any amount
included in the loan to enable the borrower to pay such fee. (Authority:
38 U.S.C. 3729(a))

\(2\) Subject to the limitations set out in this section, a fee of
one-half of one percent of the loan balance must be paid to the
Secretary in a manner prescribed by the Secretary by a person assuming a
loan to which section 3714 of title 38 U.S.C. applies. The instrument
securing such a loan shall contain a provision describing the right of
the holder to collect this fee as trustee for the Department of Veterans
Affairs. The loan holder shall list the amount of this fee in every
assumption statement provided and include a notice that the fee must be
paid to the holder immediately following loan settlement. The fee must
be transmitted to the Secretary within 15 days of the receipt by the
holder of the notice of transfer. (Authority: 38 U.S.C. 3714, 3729(d))

\(3\) The lender is required to pay to the Secretary the fee described
in paragraph (e)(1) of this section within 15 days after loan closing.
Any lender closing a loan, subject to the limitations set out in
paragraphs (e)(4) and (e)(5) of this section who fails to submit timely
payment of this fee will be subject to a late charge equal to 4 percent
of the total fee due. If payment of the fee described in paragraph
(e)(1) of this section is made more than 30 days after loan closing,
interest will be assessed at a rate set in conformity with the
Department of Treasury\'s Fiscal Requirements Manual. This interest
charge is in addition to the 4 percent late charge, but the late charge
is not included in the amount on which interest is computed. This
interest charge is to be calculated on a daily basis beginning on the
date of closing, although the interest will be assessed only on funding
fee payments received more than 30 days after closing.

\(4\) The fee described in paragraph (e)(1) and (e)(2) of this section
shall not be collected from a veteran who is receiving compensation (or
who but for the receipt of retirement pay would be entitled to receive
compensation) or from a surviving spouse described in section 3701(b) of
title 38, United States Code. (Authority: 38 U.S.C. 3729(b))

**§36.4313 ADVANCES AND OTHER CHARGES**

\(a\) A holder may advance any amount reasonably necessary and proper
for the maintenance or repair of the security, or for the payment of
accrued taxes, special assessments, ground or water rents, or premiums
on fire or other casualty insurance against loss of or damage to such
property and any such advance so made may be added to the guaranteed or
insured indebtedness. A holder may also advance the one-half of one
percent funding fee due on a transfer under 38 U.S.C. 3714 when this is
not paid at the time of transfer. All security instruments for loans to
which 38 U.S.C. 3714 applies must include a clause authorizing the
collection of an assumption funding fee and an advance for this fee if
it is not paid at the time of transfer. (Authority: 38 U.S.C. 3714)

\(b\) In addition to advances allowable under paragraph (a) of this
section, the holder may charge against the proceeds of the sale of the
security; against gross amounts collected; in any accounting to the
Secretary after payment of a claim under the guaranty in the computation
of a claim under the guaranty, if lawfully authorized by the loan
agreement and subject to §36.4321(a) or, in the computation of an
insurance loss, any of the following items actually paid:

\(1\) Any expense which is reasonably necessary for preservation of the
security,

\(2\) Court costs in a foreclosure or other prior judicial proceeding
involving the security,

\(3\) Other expenses reasonably necessary for collecting the debt, or
repossession or liquidation of the security,

\(4\) Reasonable trustee\'s fees or commissions not in excess of those
allowed by statute and in no event in excess of 5 percent of the unpaid
indebtedness,

\(5\) Reasonable amount for legal services actually performed not to
exceed 10 percent of the unpaid indebtedness as of the date of the first
uncured default, or \$700, whichever is less,

\(6\) The cost of a credit report(s) on the debtor(s), which is (are) to
be forwarded to the Secretary in connection with the claim,

\(7\) Reasonable and customary costs of property inspections,

\(8\) Any other expense or fee that is approved in advance by the
Secretary. (Authority: 38 U.S.C. 3720(a)(3))

In no event may the combined total of the amounts claimed for trustee\'s
fees and legal services (par. (b)(4) and (5) of this section) exceed
\$700. (Authority: 38 U.S.C. 3712(g), 3720(a)(3))

\(c\) Any advances or charges enumerated in paragraph (a) or (b) of this
section may be included as specified in the holder\'s accounting to the
Secretary, but they are not chargeable to the debtor unless he or she
otherwise be liable therefor.

\(d\) Advances of the type enumerated in paragraph (a) of this section
and any other advances determined to be necessary and proper in order to
preserve or protect the security may be authorized by employees
designated in §36.4342(b) in the case of any property constituting the

security for a loan acquired by the Secretary or constituting the
security for the unpaid balance of the purchase price owing to the
Secretary on account of the sale of such property. Such advances shall
be secured to the extent legal and practicable by a lien on the
property.

\(e\) Notwithstanding the provisions of paragraph (a) and (b) of this
section, holders of condominium loans guaranteed or insured under 38
U.S.C. 3710(a)(6) shall not pay those assessments or charges allocable
to the condominium unit which are provided for in the instruments
establishing the condominium form of ownership in the absence of the
prior approval of the Secretary.

**§36.4314 EXTENSIONS AND REAMORTIZATIONS**

\(a\) Provided the debtor(s) is (are) a reasonable credit risk(s), as
determined by the holder based upon review of the debtor\'s(s\')
creditworthiness, including a review of a current credit report(s) on
the debtor(s), the terms of repayment of any loan may by written
agreement between the holder and the debtor(s), be extended in the event
of default, to avoid imminent default, or in any other case where the
prior approval of the Secretary is obtained. Except with the prior
approval of the Secretary, no such extension shall set a rate of
amortization less than that sufficient to fully amortize at least 80
percent of the loan balance so extended within the maximum maturity
prescribed for loans of its class.

\(b\) In the event of a partial prepayment pursuant to §36.4310 the
balance of the indebtedness may, by written agreement between the holder
the debtor(s), be reamortized, provided the reamortization schedule will
result in full repayment of the loan within the original maturity, and
provided the debtor(s) is (are) reasonable credit risk(s), as determined
by the holder based upon review of the debtor\'s(s\') creditworthiness,
including a review of a current credit report(s) on the debtor(s).

\(c\) In the event an additional loan is proposed to be made pursuant to
§36.4351 for the repair, alteration, or improvement of real property on
which there is an existing loan guaranteed or insured under 38 U.S.C.
chapter 37, the terms of repayment of the prior loan may, by written
agreement between the holder and the debtor, be recast to combine the
schedule of repayments on the two loans, provided the entire
indebtedness is repayable within the permissible maximum maturity of the
original loan.

\(d\) Unless the prior approval of the Secretary has been obtained, any
extension or reamortization agreed to by a holder which relieves any
obligor from liability will release the liability of the Secretary under
the guaranty or insurance on the entire loan. However, if such release
of liability of an obligor results through operation of law by reason of
an extension or other act of forbearance, the liability of the Secretary
as guarantor or insurer will not be affected thereby, provided the
required lien is maintained and the title holder is and will remain
liable for the payment of the indebtedness: *And further provided*, That
if such extension or act of forbearance will result in the release of
the veteran, all delinquent installments, plus any foreclosure expenses
which may have been incurred, shall have been fully paid.

\(e\) The holder shall promptly forward to the Secretary an advice of
the terms of any agreement effecting a reamortization or extension of a
guaranteed or insured loan, together with a cop(y)(ies) of the credit
report(s) obtained on the debtor(s). (Authority: 38 U.S.C. 3703(c)(1))

**§36.4315 NOTICE OF DEFAULT AND ACCEPTABILITY OF PARTIAL PAYMENTS**

\(a\) **Reporting of Defaults**. The holder of any guaranteed or insured
loan shall give notice to the Secretary within 45 days after any debtor:

\(1\) Is in default by reason of nonpayment of any installment for a
period of 60 days from the date of first uncured default (see
§36.4301(f)); or

\(2\) Is in default by failing to comply with any other covenant or
obligation of such guaranteed or insured loan which failure persists for
a continuing period of 90 days after demand for compliance therewith has
been made, except that if the default is due to nonpayment of real
estate taxes, the notice shall not be required until the failure to pay
when due has persisted for a continuing period of 180 days.

\(b\) [Partial Payments]{.underline}. A partial payment is a remittance
on a loan in default (as defined in §36.4301(g)) of any amount less than
the full amount due under the terms of the loan and security instruments
at the time the remittance is tendered.

\(1\) Except as provided in paragraph (b)(2) of this section, or upon
the express waiver of the Secretary, the mortgage holder shall accept
any partial payment and either apply it to the mortgagor\'s account or
identify it with the mortgagor\'s account and hold it in a special
account pending disposition. When partial payments held for disposition
aggregate a full monthly installment, including escrow, they shall be
applied to the mortgagor\'s account.

\(2\) A partial payment may be returned to the mortgagor, within 10
calendar days from date of receipt of such payment, with a letter of
explanation only if one or more of the following conditions exist:

\(i\) The property is wholly or partially tenant-occupied and rental
payments are not being remitted to the holder for application to the
loan account;

\(ii\) The payment is less than one full monthly installment, including
escrows and late charge, if applicable, unless the lesser payment amount
has been agreed to under a written repayment plan;

\(iii\) The payment is less than 50 percent of the total amount then due
unless the lesser payment amount has been agreed to under a written
repayment plan;

\(iv\) The payment is less than the amount agreed to in a written
repayment plan;

\(v\) The amount tendered is in the form of a personal check and the
holder has previously notified the mortgagor in writing that only cash
or certified remittances are acceptable;

\(vi\) A delinquency of any amount has continued for at least 6 months
since the account first became delinquent and no written repayment plan
has been arranged;

\(vii\) Foreclosure has been commenced by the taking of the first action
required for foreclosure under local law;

\(viii\) The holder\'s lien position would be jeopardized by acceptance
of the partial payment.

\(3\) A failure by the holder to comply with the provisions of this
paragraph may result in a partial or total loss of guaranty or insurance
pursuant to §36.4325(b), but such failure shall not constitute a defense
to any legal action to terminate the loan. (Authority: 38 U.S.C.
3703(c)(1))

**§36.4316 CONTINUED DEFAULT**

\(a\) In the event any failure of the debtor to discharge the debtor\'s
obligations under the loan continues for a period of 3 months, or for
more than 1 month on an extended loan or on a term loan, the holder may
at the holder\'s option then or thereafter, submit a claim for payment
of the guaranty. The holder may also then or thereafter give the notice
prescribed in §36.4317.

\(b\) A claim for the guaranty, or the notice prescribed in §36.4317 may
be submitted prior to the time prescribed in paragraph (a) of this
section in any case where any material prejudice to the rights of the
holder or to the Secretary or hazard to the security warrants more
prompt action.

\(c\) A claim for the guaranty must include a copy(ies) or a current
credit report(s) on the debtor(s). (Authority: 38 U.S.C. 3732)

**§36.4317 NOTICE OF INTENTION TO FORECLOSE**

(See also §36.4319.) Except upon the express waiver of the Secretary, a
holder shall not begin proceedings in court or give notice of sale under
power of sale, other otherwise take steps to terminate the debtor\'s
rights in the security until the expiration of 30 days after delivery by
registered mail to the Secretary of a notice of intention to take such
action: *Provided*, That:

\(a\) Immediate action as required under 38 CFR 36.4346(i), may be taken
if the property to be affected thereby has been abandoned by the debtor,
or has been or may be otherwise subjected to extraordinary waste or
hazard, or if there exist conditions justifying the appointment of a
receiver for the property (without reference to any contractual
provisions for such appointment);

\(b\) Any right of a holder to repossess personal property may be
exercised without prior notice to the Secretary; but notice of any such
action taken shall be given by certified mail to the Secretary within
ten days thereafter; and

\(c\) The notice required under this paragraph shall also be provided to
the original veteran-borrower and any other liable obligors by certified
mail within 30 days after such notice is provided to the Secretary in
all cases in which the current owner of the property is not the original
veteran-borrower. A failure by the holder to make a good faith effort to
comply with the provisions of this subparagraph may result in a partial
or total loss of guaranty or insurance pursuant to VA Regulation
36.4325(b), but such faillure shall not constitute a defense to any
legal action to terminate the loan. A good faith effort will include,
but is not limited to:

\(1\) A search of the holder\'s automated and physical loan record
systems to identify the name and current or last known address of the
original veteran and any other liable obligors;

\(2\) A search of the holder\'s automated and physical loan record
systems to identify sufficient information (e.g., Social Security
Number) to perform a routine trace inquiry through a major consumer
credit bureau;

\(3\) Conducting the trace inquiry using an in-house credit reporting
terminal;

\(4\) Obtaining the results of the inquiry;

\(5\) Mailing the required notices and concurrently providing the
Secretary with the names and addresses of all obligors identified and
sent notice; and,

\(6\) Documentation of the holder\'s records.

**§36.4318 REFUNDING OF LOANS IN DEFAULT**

\(a\) Upon receiving a notice of default or a claim for a guaranty or a
notice under §36.4317, the Secretary may within 30 days thereafter
require the holder upon penalty of otherwise losing the guaranty or
insurance to transfer and assign the loan and the security therefor to
the Secretary or to another designated by the Secretary upon receipt of
payment in full of the balance of the indebtedness remaining unpaid to
the date of such assignment. Such assignment may be made without
recourse but the transferor shall not thereby be relieved from the
provisions of §36.4325.

\(b\) If the obligation is assigned or transferred to a third party
pursuant to paragraph (a) of this section, the Secretary may continue in
effect the guaranty or insurance issued with respect to the previous
loan in such manner as to cover the assignee or transferee.

**§36.4319 LEGAL PROCEEDINGS**

\(a\) When the holder institutes suit or otherwise becomes a party in
any legal or equitable proceeding brought on or in connection with the
guaranteed or insured indebtedness, or involving title to, or other lien
on, the security, such holder, within the time that would be required if
the Secretary were a party to the proceeding, shall deliver to the
Secretary, by mail or otherwise, by making such delivery to the Loan
Guaranty Officer at the office which granted the guaranty or the
insurance, or other office to which the holder has been notified the
file is transferred, a copy of every procedural paper filed on behalf of
holder, and shall also so deliver, as promptly as possible, a copy of
each similar pleading served on holder or filed in the cause by any
other party thereto. Notice of, or motion for, continuance and orders
thereon are excepted from the foregoing.

\(b\) A copy of a notice of sale shall be similarly delivered by the
holder, or the holder\'s agent or trustee, to the Secretary at the VA
Regional Office of jurisdiction at least 30 days prior to the scheduled
liquidation sale, or within 5 days after the date of first publication
of the notice, whichever is later. A copy of any other notice of sale or
acquisition of the property served on the holder or advice of any sale
of which the holder has knowledge shall be similarly delivered to the
Secretary, including any such notice of a tax sale or other superior
lien or judicial sale. Such notice shall be accompanied by a statement
of the account indebtedness and a copy of the liquidation appraisal
request, if not previously delivered. (Authority: 38 U.S.C. 3732)

\(c\) The procedure prescribed in paragraph (a) and (b) of this section
shall not be applicable in any proceeding to which the Secretary is a
party, after the Secretary\'s appearance shall have been entered therein
by a duly authorized attorney.

\(d\) In any legal or equitable proceeding (including probate and
bankruptcy proceedings) to which the Secretary is a party, original
process and any other process prior to appearance, proper to be served
on the Secretary, shall be delivered to the Loan Guaranty Officer of the
regional office of the VA having jurisdiction of the area in which the
court is situated. Within the time required by applicable law, or rule
of court, the Secretary will cause appropriate special or general
appearance to be entered in the case by an authorized attorney.
(Authority: 38 U.S.C. 3732)

\(e\) After appearance of the Secretary by attorney all process and
notice otherwise proper to serve on the Secretary before or after
judgment, if served on the attorney of record, shall have the same
effect as if the Secretary were personally served within the
jurisdiction of the court. (Authority: 38 U.S.C. 3732)

\(f\) If following a default, the holder does not bring appropriate
action within 30 days after requested in writing by the Secretary to do
so, or does not prosecute such action with reasonable diligence, the
Secretary may at the Secretary\'s option fix a date beyond which no
further charges may be included in the computation of the indebtedness
for the purposes of accounting between the holder and the Secretary. The
Secretary may also intervene in, or begin and prosecute to completion
any action or proceeding in the Secretary\'s name or in the name of the
holder, which the Secretary deems necessary or appropriate. The
Secretary shall pay, in advance if necessary, any court costs or other
expenses incurred by the Secretary or properly taxed against the
Secretary in any such action to which the Secretary is a party, but may
charge the same, and also a reasonable amount for legal services,
against the guaranteed or insured indebtedness, or the proceeds of the
sale of the security to the same extent as the holder (see §36.4313 of
this part), or otherwise collect from the holder any such expenses
incurred by the Secretary because of the neglect or failure of the
holder to take or complete proper action. The rights and remedies herein
reserved are without prejudice to any other rights, remedies, or
defenses, in law or in equity, available to the Secretary. (Authority:
38 U.S.C. 3732)

**§36.4320 SALE OF SECURITY**

\(a\) Upon receipt by the Secretary of notice of a liquidation sale of
any security for a guaranteed or insured loan, the Secretary shall
determine the net value of the security and shall notify the holder of
the net value and of the regulatory provision which will govern the
disposition of the security.

\(1\) If the net value of the real property securing a guaranteed or
insured loan exceeds the unguaranteed portion of the indebtedness, the
Secretary shall specify in advance of the liquidation sale the minimum
amount which shall be credited to the indebtedness of the borrower on
account of the value of the security to be sold, subject to the
following:

\(i\) The specified amount in such cases shall be the lesser of the net
value of the property or the total indebtedness,

\(ii\) If a minimum amount for credit to the indebtedness has been
specified in relation to a liquidation sale of real property, and:

\(A\) The holder acquires the property, or the rights to the property,
at the sale for an amount not in excess of such specified amount, the
holder shall credit to the indebtedness the amount specified. The holder
then may retain the property or, not later than 15 days after the date
of sale, advise the Secretary of the holder\'s election to convey or
transfer the property, or the rights to the property, to the Secretary;

\(B\) The holder acquires the property, or the rights to the property,
at the liquidation sale for an amount in excess of the specified amount,
the indebtedness shall be credited with the proceeds of the sale. The
holder shall not have the option to convey the property to the Secretary
unless a bid in excess of the specified amount was made pursuant to
paragraph (a)(3) of this section;

\(C\) A third party acquires the property, or the rights to the
property, at the liquidation sale for an amount equal to or in excess of
that specified, the holder shall credit to the indebtedness the net
proceeds of the sale;

\(D\) A third party acquires the property, or the rights to the
property, at the liquidation sale for an amount less than that
specified, the holder shall credit to the indebtedness the amount
specified.

\(iii\) If a minimum amount has been specified by the Secretary, the
Secretary\'s liability under loan guaranty shall be the total
indebtedness less the amount credited to the indebtedness under
paragraph (a)(1)(ii) of this section, not to exceed the Secretary\'s
maximum liability as computed under §36.4321 of this part.

\(2\) If the net value of the real property securing a guaranteed or
insured loan does not exceed the unguaranteed portion of the
indebtedness:

\(i\) The Secretary shall notify the holder that no minimum amount will
be specified for credit to the indebtedness on account of the value of
the security to be sold;

\(ii\) The Secretary may not accept conveyance or transfer of the
property;

\(iii\) The holder shall credit against the indebtedness the net
proceeds of the sale, and the Secretary\'s liability under loan guaranty
shall be limited to the total indebtedness less the amount credited to
the indebtedness not to exceed the Secretary\'s maximum liability as
computed under §36.432l of this part; and

\(iv\) The liability of the Secretary shall not be subject to adjustment
by reason of any subsequent disposition of the property by the holder.

\(3\) If a minimum bid is required under applicable State law, or decree
of foreclosure or order of sale, or other lawful order or decree, and:

\(i\) Such minimum bid exceeds an amount which has been specified by the
Secretary under paragraph (a)(1) of this section; and

\(ii\) The holder acquires the property at the liquidation sale for an
amount not exceeding the amount legally required; the holder may elect
to convey the property to the Secretary pursuant to paragraph
(a)(1)(ii)(A) of this section. The amount bid at the sale or the total
indebtedness, whichever is less, shall govern instead of the specified
amount and for the purpose of determining the Secretary\'s liability
under loan guaranty. (Authority: 38 U.S.C. 3732)

\(b\) The holder should not carry out a liquidation sale until the
Secretary has furnished the notice required under paragraph (a) of this
section. In the event the holder carries out a liquidation sale prior to
receiving such notice, the holder shall credit against the indebtedness
the greater of:

\(1\) The net proceeds of the sale; or

\(2\) The amount of the indebtedness or the net value of the property,
whichever is less.

The provisions of paragraph (a)(1)(ii)(A) of this section, which extends
to the holder the option of conveying or transferring the property to
the Secretary, shall not be applicable, and the Secretary\'s liability
under the loan guaranty shall be the total indebtedness less the amount
credited to the indebtedness under paragraph (b)(1) or (2) of this
section, not to exceed the Secretary\'s maximum liability as computed
under §36.4321 of this part. (Authority: 38 U.S.C. 3732)

\(c\) When a debtor proposes to convey or transfer any real property to
a holder to avoid foreclosure or other judicial, contractual, or
statutory disposition of the obligation or of the security, the consent
of the Secretary to the terms of such proposal shall be obtained in
advance of such conveyance or transfer. In consenting to the terms of
the debtor\'s proposal the Secretary shall furnish the notice required
under paragraph (a) of this section. (Authority: 38 U.S.C. 3732)

\(d\) Upon receipt by the Secretary of notice of a judicial or statutory
sale, or other public sale under power of sale contained in the loan
instruments, to liquidate any personal property which is security for a
guaranteed or insured loan, the Secretary may specify in advance of such
sale the minimum amount which shall be credited to the indebtedness of
the borrower on account of the value of the security to be sold.

\(1\) If a minimum amount has been specified by the Secretary, and

\(i\) The holder is the successful bidder at the sale for an amount not
in excess of such minimum amount, the holder shall sell the property
pursuant to paragraph (d)(3) of this section and the amount realized
from the resale of the property shall govern, instead of the specified
minimum amount, in the final accounting for determining the rights and
liabilities of the holder and the Secretary,

\(ii\) A third party is the successful bidder at the sale for an amount
equal to or in excess of that specified, the holder shall credit to the
indebtedness the net proceeds of the sale,

\(iii\) A third party is the successful bidder at the sale for an amount
less than that specified, the holder shall credit to the indebtedness
the amount specified,

\(iv\) The holder is the successful bidder at the sale for an amount in
excess of the specified amount, the indebtedness shall be credited with
the proceeds of the sale or the amount realized from the resale of the
property pursuant to paragraph (d)(3) of this section, whichever is the
greater, unless the bid in excess of the specified amount was made
pursuant to paragraph (d)(4) of this section.

\(2\) If a minimum amount has not been specified by the Secretary under
paragraph (d)(1) of this section, the holder shall credit against the
indebtedness the net proceeds of the sale except as provided in
paragraph (d)(4) of this section.

\(3\) If personal property has been repossessed or otherwise acquired by
a holder and no public sale is proposed or required to be held to
entitle the holder to effect a further disposition of such property, or
if the holder is the successful bidder at the sale of personal property
as provided in paragraph (d)(1) of this section, the holder shall sell
the property within a reasonable time. The holder shall submit to the
Secretary a written advice setting forth the price, terms, conditions
and the expenses of the proposed sale at least 10 days in advance, and
the Secretary shall either assent to such sale in which event the holder
shall credit against the indebtedness the net proceeds of the sale or,
upon agreement to indemnify the holder to the extent of any increased or
resultant loss, the Secretary may specify the minimum net price for
which the security may be sold. If such amount has been specified, the
holder shall sell the personal property within a reasonable time in the
open market for the best price obtainable: *Provided*, that the prior
approval of the Secretary shall be obtained if the property is to be
sold for a net amount less than the specified amount, or if the property
is to be sold on terms other than all cash. The ultimate net amount
realized by the holder from such sale shall be reported by the holder to
the Secretary in an accounting which will determine their respective
rights and liabilities.

\(4\) If a minimum bid is required under applicable State law, or decree
of foreclosure or order of sale, or other lawful order or decree, the
holder may bid an amount not exceeding such amount legally required. If
an amount has been specified by the Secretary and the holder is the
successful bidder for an amount not exceeding the amount legally
required, such specified amount shall govern for the purposes of this
paragraph and for the purpose of computing the ultimate loss under the
guaranty or insurance. In the event no amount is specified and the
holder is the successful bidder for an amount not exceeding the amount
legally required, the amount paid or payable by the Secretary under the
guaranty shall not be subject to any adjustment by reason of such bid.
(Authority: 38 U.S.C. 3732)

\(e\) If the Secretary has specified an amount as provided in this
section, and the holder learns of any material damage to the property
occurring prior to the foreclosure sale or to the acceptance of a deed
in lieu of foreclosure or prior to any other event to which such
specified amount is applicable, the holder shall promptly advise the
Secretary of such damage.

\(f\) The holder in accounting to the Secretary in connection with the
disposition of any property in accordance with paragraph (a), (b), or
(d) of this section, may include as a part of the indebtedness all
actual expenses or costs of the proceedings, paid by the holder, within
the limits defined in §36.4313 of this part. In connection with the
conveyance or transfer of property to the Secretary the holder may
include in accounting to the Secretary the following expense items if
actually paid by the holder, in addition to the consideration payable
for the property under paragraph (g) of this section. (Authority: 38
U.S.C. 3732)

\(1\) State and documentary stamp taxes as may be required.

\(2\) The customary cost of obtaining evidence of title in favor of the
Secretary as specified in paragraph (h)(5) of this section but not
including title evidence obtained incident to the making of the loan or
any expenses incurred to clear title defects.

\(3\) Amount expended for taxes, special assessments, including such
payments which are specified in paragraph (h)(4) of this section.

\(4\) Recording fees.

\(5\) Any other expenditures in connection with the property which are
approved by the Secretary.

\(g\) In the event a holder elects to convey or transfer the property to
the Secretary pursuant to paragraph (a), (b), or (c) of this section,
the consideration to be paid by the Secretary in return for the property
shall be the specified amount: *Provided*, that if a claim under the
guaranty was previously paid, the consideration payable for the property
shall be an amount equal to the indebtedness (less the amount previously
paid on the guaranty) or the specified amount, whichever is less. If no
claim under the guaranty was previously paid, the holder may, pursuant
to §36.4321(b) submit a claim within the maximum guaranty liability for
the difference between the specified amount and an amount equal to the
indebtedness. In the case of an insured loan, the holder may submit a
claim for the difference between an amount equal to the indebtedness and
the specified amount pursuant to §36.4374.

\(h\) The conveyance or transfer of any property to the Secretary
pursuant to paragraphs (a), (b), or (c) of this section shall be subject
to the following provisions:

\(1\) If the holder\'s notice to the Secretary electing to convey or
transfer the property precedes the acquisition of the property by the
holder and the holder then acquires the property, the holder shall
promptly after such acquisition advise the Secretary of the acquisition.
Such advice, or the notice of election if given subsequent to
acquisition, shall state the amount of the successful bid (if the
property was acquired by the holder at public sale) and shall state the
insurance coverage then in force, specifying for each policy, the name
of the insurance company, the hazard covered, the amount, and the
expiration date.

\(2\) The holder shall not cancel any insurance in force when the holder
acquires the property. Coincident with the notice of election to convey
or transfer the property to the Secretary or with the acquisition of the
property by the holder, following such notice, whichever is later, the
holder shall obtain endorsements on all such insurance policies naming
the Secretary as an assured, as his/her interest may appear. Such
insurance policies shall be forwarded to the Secretary at the time of
the conveyance or transfer of the property to the Secretary or as soon
after that time as feasible.

\(3\) Occupancy of the property by anyone properly in possession by
virtue of and during a period of redemption, or by any one else unless
under a claim of title which makes the title sought to be conveyed by
the holder of less dignity or quality than that required by this
section, shall not preclude the holder from conveying or transferring
the property to the Secretary. Except with the prior approval of the
Secretary, the holder shall not rent the property to a new tenant, nor
extend the term of an existing tenancy on other than a month-to-month
basis.

\(4\) Any taxes, special assessments or ground rents due and payable
within 30 days after date of conveyance or transfer to the Secretary
shall be paid by the holder if bills therefor are obtainable before such
conveyance or transfer.

\(5\) Each conveyance or transfer of real property to the Secretary
pursuant to this section shall be acceptable if the holder thereby
covenants or warrants against the acts of the holder and those claiming
under the holder (e.g., by special warranty deed) and if it vests in the
Secretary or will entitle the Secretary to such title as is or would be
acceptable to prudent lending institutions, informed buyers, title
companies, and attorneys, generally in the community in which the
property is situated. Any title so acceptable will not be unacceptable
to the Secretary by reason of any of the limitations on the quantum or
quality of the property or title stated in §36.4350(b) of this part:

*Provided, That*

\(i\) At the time of conveyance or transfer to the Secretary there has
been no breach of any conditions affording a right to the exercise of
any reverter, except that title will not be unacceptable to the
Secretary by reason of a violation of a restriction based on race,
color, creed, or national origin, whether or not such restriction
provides for reversion or forfeiture of title or a lien for liquidated
damages in the event of a breach.

\(ii\) With respect to any such limitations which came into existence
subsequent to the making of the loan, full compliance was had with the
requirements of §36.4324 of this part. The acceptability of a conveyance
or transfer pursuant to the requirements of this paragraph will be
established by delivery to the Secretary of any of the following
evidence of title issued by an institution or person satisfactory to the
Secretary, in form satisfactory to him/her showing that title to the
property of the quality specified in this paragraph is or will be vested
in the Secretary:

\(A\) A title policy insuring the Secretary in an amount approximately
equal to the consideration for the property, or a commitment for such
title policy; or

\(B\) A certificate of record title; or

\(C\) An abstract of title accompanied by a legal opinion as to the
quality of such title of record; or

\(D\) A Torrens or similar title certificate; or

\(E\) Such other evidence of title as the Secretary may approve.

In lieu of such title evidence, the Secretary will accept a conveyance
or transfer with general warranty with respect to the title from a
holder described in 38 U.S.C. 3702(d) or from a holder of financial
responsibility satisfactory to the Secretary. In any case where the
holder does not deliver evidence of title of the character specified in
this paragraph, the holder to aid the Secretary in determination of
acceptability of title shall without expense to the Secretary furnish
such evidence of title, including survey, if any, as may have been
obtained by the holder incident to the making of the loan or attendant
to the foreclosure.

\(6\) Except with respect to matters covered by any covenants or
warranties of the holder, the acceptance by the Secretary of a
conveyance or transfer by the holder shall conclude the responsibility
of the holder to the Secretary under the regulations of this subpart
with respect to the title and in the event of the subsequent discovery
of title defects, the Secretary shall have no recourse against the
holder with respect to such title other than by reason of such covenants
or warranties.

\(7\) As between the holder and the Secretary, the responsibility for
any loss due to damage to or destruction of the property or due to
personal injury sustained in respect to such property shall be governed
by the provisions of this paragraph and paragraph (h)(10) of this
section. Ordinary wear and tear excepted, the holder shall bear such
risk of loss from the date of acquisition by the holder to the date such
risk of loss is assumed by the Secretary. Such risk of loss is assumed
by the Secretary from the date of receipt to the holder\'s election to
convey or transfer the property to the Secretary or, in the event of
receipt of notice of such election prior to acquisition, from the date
of the Secretary\'s receipt of notice of acquisition by the holder:

*Provided* that if custody over the property has not been delivered by
the holder to the Secretary on the date when the Secretary otherwise
would have assumed the risk of loss, the Secretary\'s assumption of the
risk of loss will be deferred until such custody over the property is
delivered, or until the property has been conveyed or transferred to the
Secretary. The amount of any loss chargeable to the holder may be
deducted from the amount payable by the Secretary at the time the
property is transferred. In any case where pursuant to the VA
regulations rejection of the title is legally proper, the Secretary may
surrender custody of the property as of the date specified in the
Secretary\'s notice to the holder. The Secretary\'s assumption of such
risk shall terminate upon such surrender.

\(8\) The holder shall not be liable to the Secretary for any portion of
the paid or unpaid taxes, special assessments, ground rents, insurance
premiums, or other similar items.

\(9\) The Secretary shall be entitled to all rentals and other income
collected from the property and to any insurance proceeds or refunds
subsequent to the date of acquisition by the holder.

\(10\) In respect to a property which was the security for a condominium
loan guaranteed or insured under 38 U.S.C. 3710(a)(6) the responsibility
for any loss due to damage to or destruction of the property or due to
personal injury sustained in respect to such property shall in no event
pass to the Secretary until the Secretary expressly assumes such
responsibility or until conveyance of the property to the Secretary,
whichever first occurs. The holder shall have the right to convey such
property to the Secretary only if the property (including elements of
the development or project owned in common with other unit owners) is
undamaged by fire, earthquake, windstorm, flooding or boiler explosion.
The absence of a right in the holder to convey such property which is so
damaged shall not preclude a conveyance, if the Secretary agrees in a
given case to such a conveyance upon completion of repairs within a
specified period of time and such repairs are so completed and the
conveyance is otherwise in order.

\(i\) (1) The terms *date of sale* or *date of acquisition* as used in
this section are defined as the date of the event (e.g., sale,
confirmation of sale when required under local practice, delivery of
deed in case of voluntary conveyance, etc.) which fixes the rights of
the parties in the property.

\(2\) The term *property* or *real property* as used in this section
shall include:

\(i\) A leasehold estate which at the time of closing the loan was not
less duration than prescribed by 36.4350(a)(2) of this part, and

\(ii\) The rights derived by the holder through a foreclosure sale of
real estate whether or not such rights constitute an estate in real
property under local law.

\(j\) Except as provided in paragraph (h)(6) of this section, the
provisions of this section shall not be in derogation of any rights
which the Secretary may have under §36.4325 of this part. The Chief
Benefits Director, or the Director, Loan Guaranty Service, may authorize
any deviation from the provisions of this section, within the
limitations prescribed in 38 U.S.C. Chapter 37, which may be necessary
or desirable to accomplish the objectives of this section if such
deviation is made necessary by reason of any laws or practice in any
State or Territory or the District of Columbia: *Provided, that* no such
deviation shall impair the rights of any holder not consenting to the
deviation with respect to loans made or approved prior to the date the
holder is notified of such action.

**§36.4321 COMPUTATION OF GUARANTY CLAIMS; SUBSEQUENT ACCOUNTING**

\(a\) Subject to the limitation that the total amounts payable shall in
no event exceed the amount originally guaranteed, the amount payable on
a claim for the guaranty shall be the percentage of the loan originally
guaranteed applied to the indebtedness computed as of the earliest of
the following dates:

\(1\) The date of the liquidation sale; or,

\(2\) The cutoff date established under paragraph (f) of §36.4319 of
this part; or,

\(3\) The cutoff date established under paragraph (b) of this section.

Deposits or other credits or setoffs legally applicable to the
indebtedness on the date of computation shall be applied in reduction of
the indebtedness on which the claim is based. Any escrowed or earmarked
funds not subject to superior claims of third persons must likewise be
so applied.

\(b\) In any case in which there is a delay in the liquidation sale
caused by:

\(1\) The holder of the loan extending forbearance in excess of 30 days
at the request of the Secretary, the cutoff date for computation of the
indebtedness shall be 30 days after the date the Secretary determines
the liquidation sale would have taken place if there had been no such
delay, provided: the net value of the real property securing the loan
does not exceed the unguaranteed portion of the indebtedness as of the
actual liquidation sale date *and* such net value will exceed the
unguaranteed portion of the indebtedness as of the cutoff date;

\(2\) The Secretary, including the Secretary\'s failure to provide the
holder with advice as to the net value of the security within two
working days prior to a scheduled liquidation sale but excluding
forbearance exercised at the request of the Secretary, with respect to a
holder which has complied with the provisions of §36.4319(b) of this
part, the cutoff date for computation of the indebtedness shall be the
date the liquidation sale would have taken place if there had been no
such delay;

\(3\) A voluntary case commenced under Title 11, United States Code
(relating to bankruptcy), the cutoff date for computation of the
indebtedness shall be 30 days after the date the Secretary determines
the liquidation sale would have taken place if there had been no such
delay, provided: the net value of the real property securing the loan
does not exceed the unguaranteed portion of the indebtedness as of the
actual liquidation sale date *and* such net value will exceed the
unguaranteed portion of the indebtedness as of the cutoff date.

\(c\) Adjustment of cutoff dates:

\(1\) Any cutoff date established under §36.4319(f) of this part or
paragraph (b) of this section will be adjusted by a period of months
corresponding to the number of installment payments, if any, received by
the holder and credited to the indebtedness after the cutoff date is
established.

\(2\) When a cutoff date is established under paragraph (b)(2) of this
section, the actual liquidation sale date will be used for purposes of
computing the indebtedness in any subsequent accounting between the
holder and the Secretary; if an earlier cutoff date is in effect at the
time delay in liquidation sale is caused by the Secretary, such date
will not be modified by application of the provisions of paragraph
(b)(2) of this section, but will be extended by an interval
corresponding to the delay in the liquidation sale caused by the
Secretary for purposes of computing the indebtedness in any subsequent
accounting between the holder and the Secretary.

\(3\) Any cutoff date established under §36.4319 of this part or
paragraph (b) of this section will be considered to be the liquidation
sale date. Such date will be modified in accordance with paragraph (b)
of this section of the provisions of that paragraph are applicable after
such date has been established. (Authority: 38 U.S.C. 501(a))

\(d\) Credits accruing from the proceeds of a sale or other disposition
of the security subsequent to the date of computation, and prior to the
submission of this claim, shall be reported to the Secretary incident to
such submission, and the amount payable on the claim shall in no event
exceed the remaining balance of the indebtedness. (Authority: 38 U.S.C.
501(a))

\(e\) The claimant shall be deemed to have received as trustee for the
benefit of the United States any amounts received on account of the
indebtedness after the date of the claim, from the proceeds of a sale of
the security or otherwise, to the extent such credits exceed the balance
of the indebtedness unsatisfied by the payment of the guaranty. The
claimant shall immediately pay such amounts to the Secretary to the
extent of the debtor\'s liability to the Secretary as guarantor.
(Authority: 38 U.S.C. 501(a))

[§]{.underline}**36.4322 COMPUTATION OF INDEBTEDNESS**

In computing the indebtedness for the purpose of filing a claim for
payment of a guaranty, or for payment of an insured loss, or in the
event of a transfer of the loan under §36.4318(a), or other accounting
to the Secretary, the holder shall not be entitled to treat repayments
theretofore made as liquidated damages, or rentals, or otherwise than as
payments on the indebtedness, notwithstanding any provision in the note,
or mortgage, or otherwise, to the contrary.

**§36.4323 SUBROGATION AND INDEMNITY**

\(a\) The Secretary shall be subrogated to the contract and the lien or
other rights of the holder to the extent of any sum paid on a guaranty
or on account of an insured loss, which right shall be junior to the
holder\'s rights as against the debtor or the encumbered property until
the holder shall have received the full amount payable under the
contract with the debtor. No partial or complete release by a creditor
shall impair the rights of the Secretary with respect to the debtor\'s
obligation.

\(b\) The holder, upon request, shall execute, acknowledge and deliver
an appropriate instrument tendered for that purpose, evidencing any
payment received from the Secretary and the Secretary\'s resulting right
of subrogation.

\(c\) The Secretary shall cause the instrument required by paragraph (b)
of this section to be filed for record in the office of the recorder of
deeds, or other appropriate office of the proper county, town or State,
in accordance with the applicable State law. The filing or failure to
file such instrument for record shall have the legal results prescribed
by the applicable law of the State where the real or personal property
is situated, with respect to filing or failure to so file mortgages and
other lien instruments and assignments thereof.

The references herein to \"filing for record\" include \"registration\"
or any similar transaction, by whatever name designated when title to
the encumbered property has been \"registered\" pursuant to a Torrens or
other similar title registration system provided by law.

\(d\) As a condition to paying a claim for an insured loss the Secretary
may require that the loan, including any security or judgment held
therefor, be assigned to the extent of such payment, and if any claim
has been filed in bankruptcy, insolvency, probate, or similar
proceedings such claim may likewise be required to be so assigned.

\(e\) Any amounts paid by the Secretary on account of the liabilities of
any veteran guaranteed or insured under the provisions of 38 U.S.C.,
chapter 37 shall constitute a debt owing to the United States by such
veteran. (Authority: 38 U.S.C. 3732)

\(1\) Prior to a liquidation sale, an official authorized to act for the
Secretary under provisions of §36.4342 of this part may approve a
complete release of the Secretary\'s right to collect a debt owing to
the United States under this paragraph and/or under paragraph (a) of
this section provided such official determines:

\(i\) The loan default was caused by circumstances beyond the control of
the obligor;

\(ii\) There are no indications of fraud, misrepresentation or bad faith
on the part of the obligor in obtaining the loan or in connection with
the loan default;

\(iii\) The obligor cooperated with VA in exploring all realistic
alternatives to termination of the loan through foreclosure; and, either

\(iv\) Review of the obligor\'s current financial situation and
prospective earning potential and obligations indicates there are no
realistic prospects that the obligor could repay all or part of the
anticipated debt within six years of the liquidation sale while
providing the necessities of life for himself or herself and his or her
family; or,

\(v\) In consideration for a release of the Secretary\'s collection
rights the obligor completes, or VA is enabled to authorize, an action
which reduces the Government\'s claim liability sufficiently to offset
the amount of the anticipated indebtedness which would otherwise be
established pursuant to this paragraph and likely be collectable by VA
after foreclosure in view of the obligor\'s financial situation; such
actions would include termination of the loan by means of a deed in lieu
of foreclosure, private sale of the property for less than the
indebtedness with a reduced claim paid by VA for the balance due the
loan holder or enabling VA to authorize the holder to elect a more
expeditious foreclosure procedure when such an election would result in
the legal release of the obligor\'s liability.

\(2\) Prior to a liquidation sale, an official authorized to act for the
Secretary under provisions of §36.4342 of this part may approve a
partial release of the Secretary\'s right to collect a debt owing to the
United States under this paragraph and/or under paragraph (a) of this
section provided such official determines:

\(i\) The loan default was caused by circumstances beyond the control of
the obligor:

\(ii\) There are no indications of fraud, misrepresentation or bad faith
on the part of the obligor in obtaining the loan or in connection with
the loan default;

\(iii\) The obligor cooperated with VA in exploring all realistic
alternatives to termination of the loan through foreclosure;

\(iv\) Review of the obligor\'s current financial situation and
prospective earning potential and obligations indicates there are no
realistic prospects that the obligor could repay all of the anticipated
debt within six years of the liquidation sale while providing the
necessities of life for himself or herself and his or her family; and,

\(v\) The obligor executes a written agreement acknowledging his or her
liability to VA under this paragraph and executes a promissory note
which provides for regular amortized monthly payments of an amount
determined by VA in accordance with paragraph (e)(3) of this section
including interest on the total amount payable at the rate in effect for
Loan Guaranty liability accounts at the time of execution, or, the
obligor agrees to other terms of repayment acceptable to VA including
payment of a lump sum in settlement of his or her obligation under this
paragraph;

\(3\) For purposes of this paragraph a review of an obligor\'s financial
situation will take into consideration:

\(i\) The obligor\'s current and anticipated family income based on
employment skills and experience;

\(ii\) The obligor\'s current short-term and long-term financial
obligations, including the obligation to repay the Government which must
be afforded consideration at least equal to his or her consumer debt
obligations;

\(iii\) A current credit report on the obligor;

\(iv\) The obligor\'s assets and net worth; and,

\(v\) The required balance available for family support used in
underwriting VA guaranteed loans in the area.

The amount of indebtedness established will be such that the obligor\'s
financial situation permits repayment of the debt to the Government in
regular monthly installments of principal plus interest over a five year
period commencing within one year after the date the promissory note is
executed, except in those cases in which a lump sum settlement appears
to be in the best interest of the Government or in which it appears the
obligor may reasonably expect significant changes in his or her
financial situation which would permit higher payments to be made during
later periods of the life of the note.

\(4\) Determinations made under paragraphs (e)(2) and (e)(3) of this
section are intended for the benefit of the Government in reducing the
amount of claim payable by VA and/or avoiding the establishment of
uncollectable debts owing to the United States. Such determinations are
discretionary on the part of VA and shall not constitute a defense to
any legal action to terminate the loan nor vest any appellate right in
an obligor which would require further review of the case. (Authority:
38 U.S.C. 501(a), 3703(c)(1))

\(f\) Whenever any veteran disposes of residential property securing a
guaranteed or insured loan obtained by him or her under 38 U.S.C.,
chapter 37, and for which the commitment to make the loan was made prior
to March 1, 1988, the Secretary, upon application made by such veteran,
shall issue to the veteran a release relieving him or her of all further
liability to the Secretary on account of such loan (including liability
for any loss resulting from any default of the transferee or any
subsequent purchaser of such property) if the Secretary has determined,
after such investigation as may be deemed appropriate, that there has
been compliance with the conditions prescribed in 38 U.S.C. 3713. The
assumption of full liability for repayment of the loan by the transferee
of the property must be evidenced by an agreement in writing in such
form as the Secretary may require. Release of the veteran from liability
to the Secretary will not impair or otherwise affect the Secretary\'s
guaranty or insurance liability on the loan, or the liability of the
veteran to the holder. Any release of liability granted to a veteran by
the Secretary shall inure to the spouse of such veteran. The release of
the veteran from liability to the Secretary will constitute the
Secretary\'s prior approval to a release of the veteran from liability
on the loan by the holder thereof. (Authority: 38 U.S.C. 3713)

\(g\) If, on or after July 1, 1972, any veteran disposes of residential
property securing a guaranteed or insured loan obtained under 38 U.S.C.,
chapter 37, without receiving a release from liability with respect to
such loan under 38 U.S.C. 3713 and a default subsequently occurs which
results in liability of the veteran to the Secretary on account of the
loan, the Secretary may relieve the veteran of such liability if he
determines that:

\(1\) A transferee either immediate or remote is legally liable to the
Secretary for the debt of the original veteran-borrower established
after the termination of the loan, and

\(2\) The original loan was current at the time such transferee acquired
the property, and

\(3\) The transferee who is liable to the Secretary is found to have
been a satisfactory credit risk at the time he or she acquired the
property.

\(h\) If a veteran or any other person disposes of residential property
securing a guaranteed or insured loan for which a commitment was made on
or after March 1, 1988, and the veteran or other person notifies the
loan holder in writing before disposing of the property, the veteran or
other person shall be relieved of all further liability to the Secretary
with respect to the loan (including liability for any loss resulting
from any default of the purchaser or any subsequent owner of the
property) and the application for assumption shall be approved if the
holder determines that:

\(1\) The proposed purchaser is creditworthy;

\(2\) The proposed purchaser is contractually obligated to assume the
loan and the liability to indemnify the Department of Veterans Affairs
for the amount of any claim paid under the guaranty as a result of a
default on the loan, or has already done so; and,

\(3\) The payments on the loan are current.

Should these requirements be satisfied, the holder may also release the
veteran or other person from liability on the loan. This does not apply
if the approval for the assumption is granted upon special appeal to
avoid immediate foreclosure. (Authority: 38 U.S.C. 3714)

**§36.4324 RELEASE OF SECURITY**

\(a\) Except upon full payment of the indebtedness the holder shall not
release a lien or other right in or to real property held as security
for a guaranteed or insured loan, or grant a fee or other interest in
such property, without the prior approval of the Secretary, unless in
the opinion of the holder such release does not involve a decrease in
the value of the security in excess of \$2,500: *Provided*, that the
aggregate of the reduction in the original value of the security
resultant from such releases without the Secretary\'s prior approval
does not exceed \$2,500.

\(b\) Holder may release from the lien personal property including crops
without the prior approval of the Secretary.

\(c\) Except upon full payment of the indebtedness or upon the prior
approval of the Secretary, the holder shall not release a lien under
paragraph (a) or (b) of this section unless the consideration received
for the release is commensurate with the fair market value of the
property released and the entire consideration is applied to the
indebtedness, or if encumbrance on other property is accepted in lieu of
that released it shall be the holder\'s duty to acquire such lien on
property of substantially equal value which is reasonably capable of
serving the purpose for which the property released was utilized.

\(d\) Failure of the holder to comply with the provisions of this
section shall not in itself affect the validity of the title of a
purchaser to the property released.

\(e\) The holder shall notify the Secretary of any such release or
substitution of security within 30 days after completion of such
transaction.

\(f\) The release of the personal liability of any obligor on a
guaranteed or insured obligation resultant from the act or omission of
any holder without the prior approval of the Secretary shall release the
obligation of the Secretary as guarantor or insurer, except when such
act or omission consists of:

\(1\) Failure to establish the debt as a valid claim against the assets
of the estate of any deceased obligor, provided no lien for the
guaranteed or insured debt is thereby impaired or destroyed; or

\(2\) An election and appropriate prosecution of legally available
effective remedies with respect to the repossession or the liquidation
of the security in any case, irrespective of the identity or the
survival of the original or of any subsequent debtor, if holder shall
have given such notice as required by §36.4317 of this part and if,
after receiving such notice, the Secretary shall have failed to notify
the holder within 15 days to proceed in such manner as to effectively
preserve the personal liability of the parties liable, or such of them
as the Secretary indicates in such notice to the holder; or

\(3\) The release of an obligor, or obligors, from liability on an
obligation secured by a lien on property, which release is an incident
of and contemporaneous with the sale of such property to an eligible
veteran who assumed such obligation, which assumed obligation is
guaranteed on the assuming veteran\'s account pursuant to 38 U.S.C.,
chapter 37; or

\(4\) The release of an obligor or obligors as provided in §36.4314(d)
of this part; or, the release of an obligor, or obligors, incident to
the sale of property securing the loan which the holder is authorized to
approve under the provisions of 38 U.S.C. 3714. (Authority: 38 U.S.C.
3714)

**§36.4325 PARTIAL OR TOTAL LOSS OF GUARANTY OR INSURANCE**

\(a\) Subject to the incontestable provisions of 38 U.S.C. 3721 as to
loans guaranteed or insured on or subsequent to July 1, 1948, there
shall be no liability on account of a guaranty or insurance, or any
certificate or other evidence thereof, with respect to a transaction in
which a signature to the note, the mortgage, or any other loan papers,
or the application for guaranty or insurance is a forgery; or in which
the certificate of discharge or the certificate of eligibility is
counterfeited, or falsified, or is not issued by the Government.

\(l\) Except as to a holder who acquired the loan instrument before
maturity, for value, and without notice, and who has not directly or by
agent participated in the fraud, or in the misrepresentation hereinafter
specified, any willful and material misrepresentation or fraud by the
lender, or by a holder, or the agent of either, in procuring the
guaranty or the insurance credit, shall relieve the Secretary of
liability, or, as to loans guaranteed or insured on or subsequent to
July 1, 1948, shall constitute a defense against liability on account of
the guaranty or insurance of the loan in respect to which the willful
misrepresentation, or the fraud, is practiced: *Provided*, That if a
misrepresentation, although material, is not made willfully, or with
fraudulent intent, it shall have only the consequences prescribed in
paragraphs (b) and (c) of this section.

\(b\) In taking security required by 38 U.S.C., chapter 37 and the
regulations concerning guaranty or insurance of loans to veterans, a
holder shall obtain the required lien on property the title to which is
such as to be acceptable to prudent lending institutions, informed
buyers, title companies, and attorneys, generally, in the community in
which the property is situated: *Provided*, That a title will not be
unacceptable by reason of any of the limitations on the quantum or
quality of the property or title stated in §36.4350(b) and if such
holder fails in this respect or fails to comply with 38 U.S.C., chapter
37 and the regulations concerning guaranty or insurance of loans to
veterans with respect to:

\(1\) Obtaining and retaining a lien of the dignity prescribed on all
property upon which a lien is required by 38 U.S.C., chapter 37 or the
regulations concerning guaranty or insurance of loans to veterans,

\(2\) Inclusion of power to substitute trustees (§36.4327),

\(3\) The procurement and maintenance of insurance coverage (§36.4326),

\(4\) Advice to Secretary as to default (§36.4315),

\(5\) Notice of intention to begin action (§36.4317),

\(6\) Notice to the Secretary in any suit or action, or notice of sale
(§36.4319),

\(7\) The release, conveyance, substitution, or exchange of security
(§36.4324),

\(8\) Lack of legal capacity of a party to the transaction incident to
which the guaranty or the insurance is granted (§36.4328),

\(9\) Failure of the lender to see that any escrowed or earmarked
account is expended in accordance with the agreement,

\(10\) The taking into consideration of limitations upon the quantum or
quality of the estate or property (§36.4350(b)),

\(11\) Any other requirement of 38 U.S.C., chapter 37 or the regulations
concerning guaranty or insurance of loans to veterans which does not by
the terms of said chapter or the regulations concerning guaranty or
insurance of loans to veterans result in relieving the Secretary of all
liability with respect to the loan,

no claim on the guaranty or insurance shall be paid on account of the
loan with respect to which such failure occurred, or in respect to which
an unwillful misrepresentation occurred, until the amount by which the
ultimate liability of the Secretary would thereby be increased has been
ascertained. The burden of proof shall be upon the holder to establish
that no increase of ultimate liability is attributable to such failure
or misrepresentation. The amount of increased liability of the Secretary
shall be offset by deduction from the amount of the guaranty or
insurance otherwise payable, or if consequent upon loss of security
shall be offset by crediting to the indebtedness the amount of the
impairment as proceeds of the sale of security in the final accounting
to the Secretary. To the extent the loss resultant from the failure or
misrepresentation prejudices the Secretary\'s right of subrogation
acceptance by the holder of the guaranty or insurance payment shall
subordinate the holder\'s right to those of the Secretary.

\(c\) If after the payment of a guaranty or an insurance loss, or after
a loan is transferred pursuant to §36.4318(a), the fraud,
misrepresentation or failure to comply with the regulations in this
subpart as provided in this section is discovered and the Secretary
determines that an increased loss to the Government resulted therefrom,
the transferor or person to whom such payment was made shall be liable
to the Secretary for the amount of the loss caused by such
misrepresentation or failure.

**§36.4326 HAZARD INSURANCE**

The holder shall require insurance policies to be procured and
maintained in an amount sufficient to protect the security against the
risks or hazards to which it may be subjected to the extent customary in
the locality. Flood insurance will be required in respect to any loan
closed on and after March 2, 1974, if the security is located in an area
identified by the Secretary of Housing and Urban Development as having
special flood hazards and in which the sale of flood insurance is
available under the National Flood Insurance Program. The amount of
flood insurance required will be equal to the outstanding balance of the
loan or the maximum limit of coverage available for the particular type
of property under the national flood insurance program, whichever is
less. All moneys received under such policies covering payment of
insured losses shall be applied to restoration of the security or to the
loan balance.

**§36.4327 SUBSTITUTION OF TRUSTEES**

In jurisdictions in which valid, any deed of trust or mortgage securing
a guaranteed or insured loan, if it names trustees, or confers a power
of sale otherwise, shall contain a provision empowering any holder of
the indebtedness to appoint substitute trustees, or other person with
such power to sell, who shall succeed to all the rights, powers, and
duties of the trustees, or other person, originally designated.

**§36.4328 CAPACITY OF PARTIES TO CONTRACT**

Nothing in §§36.4300 to 36.4375, inclusive, shall be construed to
relieve any lender of responsibility otherwise existing, for any loss
caused by the lack of legal capacity of any person to contract, convey,
or encumber, or caused by the existence of other legal disability or
defects invalidating, or rendering unenforceable in whole or in part,
either the loan obligation or the security therefor.

**§36.4329 GEOGRAPHICAL LIMITS**

Any real property purchased, constructed, altered, improved, or repaired
with the proceeds of a guaranteed or insured loan shall be situated
within the United States which for purposes of 38 U.S.C., chapter 37 is
here defined as the several States, Territories and possessions, and the
District of Columbia, the Commonwealth of Puerto Rico, and the
Commonwealth of the Northern Mariana Islands.

**§36.4330 MAINTENANCE OF RECORDS**

\(a\) The holder shall maintain a record of the amounts of payments
received on the obligation and disbursements chargeable thereto and the
dates thereof. This record shall be maintained until the Secretary
ceases to be liable as guarantor or insurer of the loan. For the purpose
of any accounting with the Secretary or computation of a claim any
holder who fails to maintain such record shall be presumed to have
received on the dates due all sums which by the terms of the contract
are payable prior to date of claim for default, and the burden of going
forward with evidence and of ultimate proof of the contrary shall be on
such holder.

\(b\) The lender shall retain copies of all loan origination records on
a VA guaranteed loan for at least one year from the date of loan
closing. Loan origination records include the loan application,
including any preliminary application, verifications of employment and
deposit, all credit reports, including preliminary credit reports,
copies of each sales contract and addendums, letters of explanation for
adverse credit items, discrepancies and the like, direct references from
creditors, correspondence with employers, appraisal and compliance
inspection reports, reports on termite and other inspections of the
property, builder change orders, and all closing papers and documents.
(Authority: 38 U.S.C. 501(a), 3703(c)(1))

\(c\) The Secretary has the right to inspect, examine, or audit, at a
reasonable time and place, the records or accounts of a holder
pertaining to loans guaranteed or insured by the Secretary.

**§36.4332 DELIVERY OF NOTICE**

Any notice required by §§36.4300 to 36.4375 to be given the Secretary
must be in writing or such communications medium as may be approved by
an official designated in §36.4342 and delivered, by mail or otherwise,
to the VA office at which the guaranty or insurance was issued, or to
any changed address of which the holder has been given notice. Such
notice must plainly identify the case by setting forth the name of the
original veteran obligor and the file number assigned to the case by the
Secretary, if available, or otherwise the name and serial number of the
veteran. If mailed, the notice shall be by certified mail when so
provided by §§36.4300 to 36.4375. This paragraph does not apply to legal
process.

**§36.4333 SATISFACTION OF INDEBTEDNESS**

Upon full satisfaction of a guaranteed loan by payment or otherwise it
shall be the duty of the holder to cancel the endorsement, if any, of
the Secretary; and forthwith inform the Secretary of such cancellation.
In the event the Secretary\'s liability thereon is evidenced by an
instrument separate from the instrument evidencing the debtor\'s
obligation, the instrument evidencing the obligation of the Secretary
shall be returned to the Department of Veterans Affairs office issuing
same, or to the Central Office, with the holder\'s cancellation or
endorsement of release thereon.

**§36.4334 INCORPORATION BY REFERENCE**

Regulations issued under 38 U.S.C. Chapter 37, and in effect on the date
of any loan which is submitted and accepted or approved for a guaranty
or for insurance thereunder, shall govern the rights, duties, and
liabilities of the parties to such loan and any provisions of the loan
instruments inconsistent with such regulations are hereby amended and
supplemented to conform thereto.

**§36.4335 SUPPLEMENTARY ADMINISTRATIVE ACTION**

Notwithstanding any requirement, condition, or limitation stated in or
imposed by the regulations concerning the guaranty or insurance of loans
to veterans, the Chief Benefits Director, or the Director, Loan Guaranty
Service, within the limitations and conditions prescribed by the
Secretary, is hereby authorized, if he or she finds the interests of the
Government are not adversely affected, to relieve undue prejudice to a
debtor, holder, or other person, which might otherwise result, provided
no such action may be taken which would impair the vested rights of any
person affected thereby. If such requirement, condition, or limitation
is of an administrative or procedural (not substantive) nature, any
employee designated in §36.4342 is hereby authorized to grant similar
relief if he or she finds the failure or error of the lender was due to
misunderstanding or mistake and that the interests of the Government are
not adversely affected. Provisions of the regulations considered to be
of an administrative or procedural (nonsubstantive) nature are limited
to the following:

\(a\) The requirement in §36.4303(a) that a lender of a class described
under 38 U.S.C. 3702(d) originating a loan under the automatic (nonprior
approval) procedure report such loan for issuance of guaranty or
insurance evidence within 60 days following full disbursement. Waiver of
the lender\'s failure to report the loan within the 60-day period shall
be confined to cases where the loan is not in default.

\(b\) The requirement in §36.4303(d) that a lender originating a loan
under a certificate of commitment report the loan for issuance of
guaranty or insurance evidence within 60 days following actual payment
of the full proceeds of the loan. In such cases it is not necessary that
a finding be made that the loan is not in default.

\(c\) The requirement in §36.4314(e) that a holder promptly forward an
advice of the terms of any agreement effecting a reamortization or
extension of a loan.

\(d\) The 45-day requirement in §36.4315(a) concerning the giving of
notice of default.

\(e\) The requirement in §36.4317 that a holder give 30 days advance
notice of its intention to foreclose.

\(f\) The requirement in §36.4317(b) that a holder give notice of
repossession of personal property within 10 days after such repossession
has occurred.

\(g\) The requirement in §36.4307(a) that a lender obtain the prior
approval of the Secretary before closing a joint loan if the lender or
class of lenders is eligible or has been approved by the Secretary to
close loans on the automatic basis pursuant to 38 U.S.C. 3702(d).
(Authority: 38 U.S.C. 3703(c)(1))

\(h\) The requirements in §36.4303(k) of this part concerning the giving
of notice in assumption cases under 38 U.S.C. 3714. (Authority: 38
U.S.C. 3714 and 3720)

**§36.4336 ELIGIBILITY OF LOANS; REASONABLE VALUE REQUIREMENTS**

\(a\) Evidence of guaranty or insurance shall be issued in respect to a
loan for any of the purposes specified in 38 U.S.C. 3710(a) only if:

\(1\) The proceeds of such loan have been used to pay for the property
purchased, constructed, repaired, refinanced, altered, or improved and;

\(2\) (i) Except as to refinancing loans pursuant to 38 U.S.C.
3710(a)(8) or (9)(B)(i), the loan including any scheduled deferred
interest added to principal, does not exceed the reasonable value of the
property or projected reasonable value of a new home which is security
for a graduated payment mortgage loan, as appropriate, as determined by
the Secretary, and

\(ii\) For the purpose of determining the reasonable value of a
graduated payment mortgage loan to purchase a new home, the reasonable
value of the property as of the time the loan is made shall be
calculated to increase at a rate not in excess of 2.5 percent per year,
but in no event may the projected value of the property exceed 115
percent of the initially established reasonable value, and (Authority:
38 U.S.C. 3703(d)(2))

\(3\) The veteran has certified, in such form as the Secretary may
prescribe, that the veteran has paid in cash from his or her own
resources on account of such purchase, construction, alteration, repair,
or improvement a sum equal to the difference, if any, between the
purchase price or cost of the property and its reasonable value.

\(b\) Notwithstanding that the aggregate of the loan amount in the case
of loans for the purposes specified in paragraph (a) of this section,
and the amount remaining unpaid on taxes, special assessments, prior
mortgage indebtedness, or other obligations of any character secured by
enforceable superior liens or a right to such lien existing as of the
date the loan is closed exceeds the reasonable value of such property as
of said date and that evidence of guaranty or insurance credit is issued
in respect thereof, as between the holder and Secretary (for the purpose
of computing the claim on the guaranty or insurance and for the purposes
of §36.4320, and all accountings), the indebtedness which is the subject
of the guaranty or insurance shall be deemed to have been reduced as of
the date of the loan by a sum equal to such excess, less any amounts
secured by liens released or paid on the obligations secured by such
superior liens or rights by a holder or others without expense to or
obligation on the debtor resulting from such payment, or release of lien
or right; and all payments made on the loan shall be applied to the
indebtedness as so reduced. Nothing in this paragraph affects any right
or liability resulting from fraud or willful misrepresentation.
(Authority: 38 U.S.C. 501(a), 3703(c)(1); 38 U.S.C. 501(a), 3710, 3712)

**Underwriting Standards, Processing Procedures,**

**and Lender Responsibility and Certification**

**§36.4337 UNDERWRITING STANDARDS, PROCESSING PROCEDURES, LENDER
RESPONSIBILITY AND LENDER CERTIFICATION**

\(a\) Except for refinancing loans guaranteed pursuant to 38 U.S.C.
3710(a)(8), the standards contained in paragraph (b) of this section
will be used to determine that the veteran\'s present and anticipated
income and expenses, and credit history are satisfactory.

\(b\) *Methods*. There are two primary underwriting tools that will be
used in determining the adequacy of the veteran\'s present and
anticipated income. They are: debt-to-income ratio and residual income.
Each is described in paragraphs (c) and (d) of this section
respectively. Ordinarily, in order to qualify for a loan, the veteran
must meet both standards. Failure to meet one standard, however, will
not automatically disqualify a veteran. The following shall apply to
cases where a veteran does not meet both standards:

\(1\) If the debt-to-income ratio is 41 percent of less, and the veteran
does not meet the residual income standard, the loan may be approved
with justification, by the underwriter\'s supervisor, as set out in
paragraph (b)(4) of this section.

\(2\) If the debt-to-income ratio is greater than 41 percent, (unless it
is larger due solely to the existence of tax-free income which should be
noted in the loan file) the loan may be approved with justification, by
the underwriter\'s supervisor, as set out in paragraph (b)(4) of this
section.

\(3\) If the ratio is greater than 41 percent and the residual income
exceeds the guidelines by at least 20 percent the second level review
and statement of justification is not required.

\(4\) In any case described by paragraphs (b)(1) and (b)(2) of this
section, the lender must fully justify the decision to approve the loan
or submit the loan to the Secretary for prior approval in writing. The
lender\'s statement must not be perfunctory, but should address the
specific compensating factors, as set forth in (b)(5), of this section,
justifying the approval or submission of the loan. The statement must be
signed by the underwriter\'s supervisor. It must be stressed that the
statute requires not only consideration of a veteran\'s present and
anticipated income and expenses, but also that the veteran be a
satisfactory credit risk. Therefore, meeting both the debt-to-income
ratio and residual income standards does not mean the loan is
automatically approved. It is the lender\'s responsibility to base the
loan approval or disapproval on all the factors present for any
individual veteran. The veteran\'s credit must be evaluated based on
criteria set forth in paragraph (c) of this section as well as a variety
of compensating factors that should be evaluated.

\(5\) The following are examples of acceptable compensating factors to
be considered in the course of underwriting a loan:

\(i\) Excellent long-term credit;

\(ii\) Conservative use of consumer credit;

\(iii\) Minimal consumer debt;

\(iv\) Long-term employment;

\(v\) Significant liquid assets;

\(vi\) Down payment or the existence of equity in refinancing loans;
(vii) Little or no increase in shelter expense;

\(viii\) Military benefits;

\(ix\) Satisfactory homeownership experience;

\(x\) High residual income; and

\(xi\) Low debt-to-income ratio.

This list is not exhaustive and the items are not in any priority order.
Valid compensating factors should represent unusual strengths rather
that mere satisfaction of basic program requirements. Compensating
factors must be relevant to the marginality of weakness.

\(c\) *Debt-to-income ratio*. A debt-to-income ratio that compares the
veteran\'s anticipated monthly housing expense and total monthly
obligations to his or her stable monthly income will be computed to
assist in the assessment of the potential risk of the loan. The ratio
will be determined by taking the sum of the monthly Principal, Interest,
Taxes and Insurance (PITI) to the loan being applied for, homeowners and
other assessments such as special assessments, condominium fees,
homeowners association fees, etc., and any long-term obligations divided
by the total of gross salary or earnings and other compensation or
income. The ratio should be rounded to the nearest two digits; i.e.,
35.6 percent would be rounded to 36 percent. The standard is 41 percent
or less. If the ratio is greater than 41 percent (unless it is larger
due solely to the existence of tax free income which should be noted in
the loan file) the steps cited in paragraphs (b)(1) through (b)(5) of
this section apply.

\(d\) *Residual income*.

\(1\) The guidelines provided in this subparagraph for residual income
will be used to determine whether the veteran\'s monthly residual income
will be adequate to meet living expenses after estimated monthly shelter
expenses have been paid and other monthly obligations have been met. The
guidelines for residual income are based on data supplied in the
Consumer Expenditure Survey (CES) published by the Department of
Labor\'s Bureau of Labor Statistics. Regional minimum incomes have been
developed for loan amounts up to \$69,999 and for loan amounts of
\$70,000 and above. It is recognized that the purchase price of the
property may affect family expenditure levels in individual cases. This
factor may be given consideration in the final determination in
individual loan analyses. For example, a family purchasing in a
higher-priced neighborhood may feel a need to incur higher than average
expenses to support a lifestyle comparable to that in their environment,
whereas a substantially lower-priced home purchase may not compel such
expenditures. It should also be clearly understood from this information
that no single factor is a final determinant in any applicant\'s
qualification for a VA guaranteed loan. Once the residual income has
been established, other important factors must be examined. One such
consideration is the amount being paid currently for rental or housing
expenses. If the proposed shelter expense is materially in excess of
what is currently being paid, the case may required closer scrutiny. In
such cases, consideration should be given to the ability of the borrower
and spouse to accumulate liquid assets, i.e., cash and bonds, and to the
amount of debts incurred while paying a lesser amount for shelter. For
example, if an application allows little or no capital reserves and
excessive obligations, it may not be reasonable to conclude that a
substantial increase in shelter expenses can be absorbed. Another factor
of prime importance is the applicant\'s manner of meeting obligations. A
poor credit history alone is a basis for disapproving a loan, as is an
obviously inadequate income. When one or the other is marginal, however,
the remaining aspect must be closely examined to assure that the loan
applied for will not exceed the applicant\'s ability or capacity to
repay. Therefore, it is important to remember that the figures provided
below for residual income are to be used as a guide and should be used
in conjunction with the steps outlined in paragraphs (b)(1) through
(b)(6) of this section. The residual income guidelines are as follows:

\(i\) Table of residual incomes by region (for loan amounts of \$69,999
and below):

**Table of Residual Incomes by Region**

\[For loan amounts of \$69,999 and below\]

Family Size1 Northeast Midwest South West

1\...\...\...\...\...\...\...\....\$348\...\...\...\...\$340\...\...\...\$340\...\...\$379

2\...\...\...\...\...\...\...\.....583\...\...\...\.....570\...\...\.....570\...\.....635

3\...\...\...\...\...\...\...\.....702\...\...\...\.....687\...\...\.....687\...\.....765

4\...\...\...\...\...\...\...\.....791\...\...\...\.....773\...\...\.....773\...\.....861

5\...\...\...\...\...\...\...\.....821\...\...\...\.....803\...\...\.....803\...\.....894

1\. For families with more than five members, add \$70 for each
additional member up to a family of seven.

\(ii\) Table of residual income by region (for loan amounts of \$70,000
and above):

**Table of Residual Incomes by Region**

\[For loan amounts of \$70,000 and above\]

Family Size1 Northeast Midwest South West

1\...\...\...\...\...\...\...\....\$401\...\...\.....\$393\...\.....\$393\...\...\$437

2\...\...\...\...\...\...\...\.....673\...\...\...\....658\...\...\....658\...\.....733

3\...\...\...\...\...\...\...\.....810\...\...\...\....792\...\...\....792\...\.....882

4\...\...\...\...\...\...\...\.....913\...\...\...\....893\...\...\....893\...\.....995

5\...\...\...\...\...\...\...\.....946\...\...\...\....925\...\...\....925\.....1,031

1\. For families with more than five members, add \$70 for each
additional member up to a family of seven.

\(iii\) *Geographic regions for residual income guidelines*:
Northeast\--Connecticut, Maine, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island, and Vermont;
Midwest\--Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota,
Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin;
South\--Alabama, Arkansas, Delaware, District of Columbia, Florida,
Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina,
Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, and
West Virginia; West\-- Alaska, Arizona, California, Colorado, Hawaii,
Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and
Wyoming.

\(iv\) *Military adjustments*: For loan applications in which either the
borrower or the spouse is an active-duty serviceperson, the residual
income figures will be reduced by a minimum of 5 percent if there is a
clear indication that the borrower or spouse will continue to receive
the benefits resulting from the use of facilities on a nearby military
base. (This reduction applies to tables in paragraphs (d)(1)(i) and
(d)(1)(ii) of this section.)

\(2\) *Income*. Only stable and reliable income of the veteran and
spouse can be considered in determining ability to meet mortgage
payments. Income can be considered stable and reliable if it can be
concluded that it will continue during the foreseeable future.

\(i\) *Verification*. Income of the borrower and spouse which is derived
from employment and which is considered in determining the family\'s
ability to meet the mortgage payments, payments on debts and other
obligations, and other expenses, must be verified if the spouse is
employed and will be contractually obligated on the loan, the combined
income of both the veteran and spouse is considered when the income of
the veteran alone is not sufficient to qualify for the amount of the
loan sought. In other than community property States, if the spouse will
not be contractually obligated on the loan, Regulation B, promulgated by
the Federal Reserve Board pursuant to the Equal Credit Opportunity Act
prohibits any request for, or consideration of information concerning
the spouse (including income, employment, assets, or liabilities),
except that if the applicant is relying on alimony, child support, or
maintenance payments from a spouse or former spouse as a basis for
repayment of the loan, information concerning such spouse or former
spouse may be requested and considered (see paragraph (d)(3)(iii) of
this section). In community property States, information concerning a
spouse may be requested and considered in the same manner as that for
the applicant. The standards applied to income of the veteran are also
applicable to that of the spouse. There can be no discounting of income
on account of sex, marital status, or any other basis prohibited by the
Equal Credit Opportunity Act. Income claimed by an applicant that is not
or cannot be verified cannot be given consideration when analyzing the
loan. If the veteran or spouse has been employed by a present employer
for less than 2-years, a 2-year history covering prior employment,
schooling or other training must be secured. Any periods of unemployment
must be explained. Employment verifications must be no more than 90 days
old to be considered valid. For loans closed automatically, this
requirement will be considered satisfied if the date of the employment
verification is within 90 days of the date of the veteran\'s application
to the lender.

\(ii\) *Income Reliability*. Income received by the borrower and spouse
is to be used only if it can be concluded that the income will continue
during the foreseeable future and thus should be properly considered in
determining ability to meet the mortgage payments. There can be no
discounting of income solely because it is derived from an annuity,
pension or other retirement benefit, or from part-time employment.
However, unless income from overtime work and part-time or second jobs
can be accorded a reasonable likelihood that it is continuous and will
continue in the foreseeable future, such income should not be used. The
hours of duty and other work conditions of the applicant\'s primary job,
and the period of time in which the applicant was employed under such
arrangement must be such as to permit a clear conclusion as to a good
probability that overtime or part-time or secondary employment can and
will continue. Income from overtime work and part-time jobs not eligible
for inclusion as primary income, may, if properly verified, be used to
offset the payments due on debts and obligations of a relatively short
term. Such income must be described in the loan file. The amount of any
pension or compensation and other income such as dividends from stocks,
interest from bonds, savings accounts, or other deposits, rents,
royalties, etc., will be used as primary income if it is reasonable to
conclude that such income will continue in the foreseeable future.
Otherwise, it may be used only to offset short-term debts, as above.
Certain military allowances, as to which likely duration cannot be
determined, will also be used only to offset short-term obligations.
Such allowances are: pro-pay, flight or hazard pay, and overseas or
combat pay, all of which are subject to periodic review and/or testing
of the recipient to ascertain whether eligibility for such pay will
continue. Only if it can be shown that such pay has continued for a
prolonged period and can be expected to continue because of the nature
of the recipient\'s assigned duties, will such income be considered as
primary income. For instance, flight pay verified for a pilot can be
regarded as probably continuous and thus should be added to the base
pay. Income derived from service in the reserves or National Guard may
be used if the applicant has served in such capacity for a period of
time sufficient to evidence good probability that such income will
continue. The total period of active and reserve service may be helpful
in this regard. Otherwise, such income may be used to offset short-term
debts. There are a number of additional income sources whose contingent
nature precludes their being considered as available for repayment of a
long-term mortgage obligation. Temporary income items such as VA
educational allowances and unemployment compensation do not represent
stable and reliable income and will not be taken into consideration in
determining the ability of the veteran to meet the income requirement of
the governing law. As required by the Equal Opportunity Act Amendments
of 1976, Public Law 94-239, income from public assistance programs is
used to qualify a loan if it can be determined that the income will
probably continue for a substantial fraction of the term of the loan;
i.e., one-third or more. For instance, aid to dependent children being
received for a 5-year old child that will continue until the child
achieves majority would be used to qualify for a 30-year loan.

\(iii\) *Alimony, child support, maintenance payments*. If an applicant
chooses to reveal income from alimony, child support, or maintenance
payments (after first having been informed that any such disclosure is
voluntary pursuant to the Federal Reserve Board\'s Regulation B) such
payments are considered as income to the extent that the payments are
likely to be considered made. Factors to be considered in determining
the likelihood of consistent payments include, but are not limited to:
Whether the payments are received pursuant to a written agreement or
court decree; the length of time the payments have been received; the
regularity of receipt; the availability of procedures to compel payment;
and the creditworthiness of the payor, including credit history of the
payor when available under the Fair Credit Reporting Act or other
applicable laws. However, the Fair Credit Reporting Act (15 U.S.C.
1681b) limits the permissible purposes for which credit reports may be
ordered, in the absence of written instructions of the consumer to whom
the report relates, to business transactions involving the subject of
the credit report or extensions of credit to the subject of the credit
report.

\(iv\) *Military quarters allowance*. With respect to off-base housing
(quarters) allowances for service personnel on active duty, it is the
policy of the Department of Defense (DoD) to utilize available on-base
housing when possible. In order for a quarters allowances to be
considered as continuing income, it is necessary that the applicant
furnish written authorization from his or her commanding officer for
off-base housing. This authorization should verify that quarters will
not be made available and that the individual should make permanent
arrangements for nonmilitary housing. DD Form 1747, Status of Housing
Availability, is used by the Family Housing Office to advise personnel
regarding family housing. Unless conditions of item (e) or (f) of DD
Form 1747 apply, the applicant\'s quarters allowance cannot be
considered. Of course, if the applicant\'s income less quarters
allowance is sufficient, there is no need for assurance that the
applicant has permission to occupy nonmilitary housing provided that a
determination can be made that the occupancy requirements of the law
will be met. Also, authorization to obtain off-base housing will not be
required when certain duty assignments would clearly qualify service
personnel with families for quarters allowance. For instance, off-base
housing authorizations need not be obtained for service personnel
stationed overseas who are not accompanied by their families, recruiters
on detached duty, or military personnel stationed in areas where no
on-base housing exists. In any case in which no off-base housing
authorization is obtained, an explanation of the circumstances
justifying its omission must be included with the loan application
except when it has been established by the VA facility of jurisdiction
that the waiting lists for off-base housing are so long that is
improbable that individuals desiring to purchase off-base housing would
be precluded from doing so in the foreseeable future. If stations make
such a determination, a release shall be issued to inform lenders.

\(v\) *Commissions*. When all or a major portion of the veteran\'s
income is derived from commissions, it will be necessary to establish
the stability of such income if it is to be considered in the loan
analysis for the repayment of the mortgage debt and/or short-term
obligations. In order to assess the value of such income, lenders should
obtain written verification of the actual amount of commissions paid to
date, the basis for the payment of such commissions and when commissions
are paid; i.e., monthly, quarterly, semiannually, or annually. The
length of the veteran\'s employment in this type of occupation is also
an important factor in the assessment of the stability of the income. If
the veteran has been employed for a relatively short time, the income
should not normally be considered stable unless the product or service
was the same or closely related to the product or service sold in an
immediate prior position.

\(vi\) *Self-employment*. When a self-employed applicant has been in the
business a relatively short period of time (i.e., less that 2 years),
sufficient information must be obtained to ascertain that the applicant
has the training, experience and other qualifications necessary to be
successful in the enterprise. For any self-employed person, verification
of the amount of income is accomplished by obtaining a profit and loss
statement for the prior fiscal year (12-month accounting cycle), plus
the period year to date since the end of the last fiscal year (or for
whatever shorter period records may be available), and a current balance
sheet showing all assets and liabilities. The profit and loss statement
and balance sheet will be prepared by an accountant based on the
financial records. In some cases the nature of the business or the
content of the financial statement may necessitate an independent audit
certified as accurate by the accountant. Depending on the situation,
this data may be on the veteran and/or the business. When it is
otherwise not possible to determine a self-employed applicant\'s
qualification from an income standpoint, the applicant may wish to
voluntarily offer to submit copies of complete income tax returns,
including all schedules for the past 2 years, or for whatever additional
period is deemed necessary to properly demonstrate a satisfactory
earning record. Depreciation claimed as a deduction on the tax return or
financial record of the business may be added in as net income. If the
business is a corporation or partnership, a list of all stockholders or
partners showing the interest each holds in the business will be
required. Some cases may justify a written credit report on the business
as well as the applicant. When the business is of an unusual type and it
is difficult to determine the probability of its continued operation,
explanations as to the function and purpose of the business may be
needed from the applicant and/or any other qualified party with the
acknowledged expertise to express a valid opinion.

\(vii\) *Recently discharged veterans*. Loan applications received from
recently discharged veterans who have little or no employment experience
other than military occupation and from veterans seeking VA guaranteed
loans who have retired after 20 years of active military duty require
special attention. The retirement income of the latter veterans in many
cases may not be sufficient to meet the statutory income requirements
for the loan amount sought. Many have obtained full-time employment and
have been employed in their new jobs for a very short time.

\(A\) It is essential in determining whether veterans in these
categories qualify from the income standpoint for the amount of the loan
sought, that the facts in respect to their present employment and
retirement income be fully developed, and that each case be considered
on its individual merits.

\(B\) In most cases the veteran\'s current income or current income plus
his or her retirement income is sufficient. The problem lies in
determining whether it can be properly concluded that such income level
will continue for the foreseeable future. If the veteran\'s employment
status is that of a trainee or apprentice, this will, of course, be a
factor. In cases of the self-employed, the question to be resolved is
whether there are reasonable prospects that the business enterprise will
be successful and produce the required income. Unless a favorable
conclusion can be made, the income from such source should not be
considered in the loan analysis.

\(C\) If a recently discharged veteran has no prior employment history
and the veteran\'s verification of employment shows he or she has not
been on the job a sufficient time in which to become established,
consideration should be given to the duties the veteran performed in the
military service. When it can be determined that the duties a veteran
performed in the service are similar or are in direct relation to the
duties of the applicant\'s present position, such duties may be
construed as adding weight to his or her present employment experience
and the income from the veteran\'s present employment thus may be
considered available for qualifying the loan, notwithstanding the fact
that the applicant has been on the present job only a short time. The
same principle may be applied to veterans recently retired from the
service. In addition, when the veteran\'s income from retirement, in
relation to the total of the estimated shelter expense, long-term debts
and amount available for family support, is such that only minimal
income from employment is necessary to quality from the income
standpoint, it would be proper to resolve the doubt in favor of the
veteran. It would be erroneous, however, to give consideration to a
veteran\'s income from employment for a short duration in a job
requiring skills for which the applicant has had no training or
experience.

\(D\) To illustrate the foregoing, it would be proper to use short-term
employment income in qualifying a veteran who had experience as an
airplane mechanic in the military service and the individual\'s
employment after discharge or retirement from the service is in the same
or allied fields; e.g., auto mechanic or machinist. This presumes,
however, that the verification of employment included a statement that
the veteran was performing the duties of the job satisfactorily, the
possibility of continued employment was favorable and that the loan
application is eligible in all other respects. An example of
non-qualifying experience is that of a veteran who was an Air Force
pilot and has been employed in insurance sales on commission for a short
time. Most cases, of course, fall somewhere between those extremes. It
is for this reason that the facts of each case must be fully developed
prior to closing the loan automatically or submitting the case to VA for
prior approval.

\(viii\) *Employment of short duration*. The provisions of paragraph
(d)(2)(vii) of this section are similarly applicable to applicants whose
employment is of short duration. Such cases will entail careful
consideration of the employer\'s confirmation of employment, probability
of permanency, past employment record, the applicant\'s qualifications
for the position, and previous training, including that received in the
military service. In the event that such considerations do not enable a
determination that the income from the veteran\'s current position has a
reasonable likelihood of continuance, such income should not be
considered in the analysis. Applications received from persons employed
in the building trades, or in other occupations affected by climatic
conditions, should be supported by documentation evidencing the
applicant\'s total earnings to date and covering a period of not less
that 1 year. If the applicant works out of a union, evidence of the
previous year\'s earnings should be obtained together with a
verification of employment from the current employer.

\(xi\) *Rental income*.

\(A\) *Multi-unit Subject Property*. When the loan pertains to a
structure with more that a one-family dwelling unit, the prospective
rental income will not be considered unless the veteran can demonstrate
a reasonable likelihood of success as a landlord, and sufficient cash
reserves are verified to enable the veteran to carry the mortgage loan
payments (principal, interest, taxes, and insurance) without assistance
from the rental income for a period of at least 6 months. The
determination of the veteran\'s likelihood of success as a landlord will
be based on documentation prior experience in managing rental units, or
other collection activities. The amount of rental income to be used in
the loan analysis will be based on the prior rental history of the units
as verified by the seller\'s financial records (e.g., prior years\' tax
returns) for existing structures or, for proposed construction, the
appraiser\'s opinion of the property\'s fair monthly rental. Adjustments
will be applied to reduce estimated gross rental income by proper
allowances for operating expenses and vacancy losses.

\(B\) *Rental of Existing Home*. Proposed rental of a veteran\'s
existing property may be used to offset the mortgage payment on that
property, provided there is no indication that the property will be
difficult to rent. If available, a copy of the rental agreement should
be obtained. It is the responsibility of the loan underwriter to be
aware of the condition of the local rental market. For instance, in
areas where the rental market is very strong the absence of a lease
should not automatically prohibit the offset of the mortgage by the
proposed rental income.

\(C\) *Other Rental Property*. If income from rental property will be
used to qualify for the new loan, the documentation required of a
self-employed applicant should be obtained together with evidence of
cash reserves equaling 3 months PITI on the rental property. As for any
self-employed earnings (see paragraph (d)(3)(vi) of this section),
depreciation claimed may be added back in as income. In the case of a
veteran who has no experience as a landlord, it is unlikely that the
income from a rental property may be used to qualify for the new loan.

\(x\) *Taxes and other deductions*. Deductions to be applied for Federal
income taxes and Social Security may be obtained from the Employer\'s
Tax Guide (Circular E) issued by the Internal Revenue Service (IRS).
(For veterans receiving a mortgage credit certificate (MCC), see
paragraph (D)(3)(xi) of this section.) Any State or local taxes should
be estimated or obtained from charts similar to those provided by IRS
which may be available in those States with withholding taxes. A
determination of the amount paid or withheld for retirement purposes
should be made and used when calculating deductions from gross income.
In determining whether a veteran-applicant meets the income criteria for
a loan, some consideration may be given to the potential tax benefits
the veteran will realize if the loan is approved. This can be done by
using the instructions and worksheet portion of IRS Form W-4,
Employee\'s Withholding Allowance Certificate, to compute the total
number of permissible withholding allowances. That number can then be
used when referring to IRS Circular E and any appropriate similar State
withholding charts to arrive at the amount of Federal and State income
tax to be deducted from gross income.

\(xi\) *Mortgage credit certificates*.

\(A\) The Internal Revenue Code, as amended by the Tax Reform Act of
1984, allows States and other political subdivisions to trade in all or
part of their authority to issue mortgage revenue bonds for authority to
issue MCC\'s. Veterans who are recipients of MCC\'s may realize a
significant reduction in their income tax liability by receiving a
Federal tax credit for a percentage of their mortgage interest payment
on debt incurred on or after January 1, 1985.

\(B\) Lenders must provide a copy of the MCC to VA with the home loan
application. The MCC will specify the rate of credit allowed and the
amount of certified indebtedness; i.e., the indebtedness incurred by the
veteran to acquire a principal residence or as a qualified home
improvement or rehabilitation loan.

\(C\) For credit underwriting purposes, the amount of tax credit allowed
to a veteran under MCC will be treated as a reduction in the monthly
Federal income tax. For example, a veteran having a \$600 monthly
interest payment and an MCC providing a 30-percent tax credit would
receive a \$180 (30% x \$600) tax credit each month. However, because
the annual tax credit, which amounts to \$2,160 (12 x \$180), exceeds
\$2,000 and is based on a 30-percent credit rate, the maximum tax credit
the veteran can receive is limited to \$2,000 per year (Pub. L. 98-369)
or \$167 per month (\$2,000/12). As a consequence of the tax credit, the
interest on which a deduction can be taken will be reduced to the amount
of the tax credit to \$433 (\$600 - \$167). This reduction should also
be reflected when calculating Federal income tax.

\(D\) For underwriting purposes, the amount of the tax credit is limited
to the amount of the veteran\'s maximum tax liability. If, in the above
example, the veteran\'s tax liability for the year were only \$1,500,
the monthly tax credit would be limited to \$125 (1,500/12).

\(E\) *Credit*. The conclusion reached as to whether or not the borrower
and spouse are satisfactory credit risks must also be based on a careful
analysis of the available credit data. Regulation B (Equal Credit
Opportunity Act) requires that lender include, in evaluating
creditworthiness on a veteran\'s request, the credit history, when
available, of any account reported in the name of the veteran\'s spouse
or former spouse which the veteran can demonstrate reflects accurately
the veteran\'s willingness or ability to repay.

\(1\) *Adverse data*. If the analysis develops any derogatory credit
information and, despite such facts, it is determined that the borrower
and spouse are satisfactory credit risks, the basis for the decision
must be explained. If a borrower and spouse have debts outstanding which
have not been paid timely, or which they have refused to pay, the fact
that the outstanding debts are paid after the acceptability of the
credit is questioned or in anticipation of applying for new credit does
not, of course, alter the fact that the record for paying debts has been
unsatisfactory. With respect to unpaid debts, lenders may take into
consideration a veteran\'s claim of bona fide or legal defenses. This is
not applicable when the debt has been reduced to judgment.

\(2\) *Prior VA loans*. When the veteran\'s certificate of eligibility,
or loan application, or other information available to the lender
indicates use of VA guaranteed loan entitlement in connection with a
prior loan, the lender to which the veteran is currently applying for an
additional loan is on notice that VA loan experience with the applicant
is an element to be considered. Such experience, especially if it is
recent, may be so unfavorable that further credit is not warranted.
Since credit experience with veterans\' guaranteed or insured loans may
not be reported by lenders to credit agencies, credit reports obtained
in connection with the evaluation of subsequent loan may be deficient to
that extent. Therefore, lenders processing loans on an automatic basis
should develop evidence through the originator or holder of the previous
loan(s) on the status and experience of such loan(s). If information
cannot be obtained, lenders may contact the VA regional office through
which the loan(s) was obtained. Failure to do so will subject the lender
to the risk of a possible determination by VA that when all the facts
and circumstances that were readily available are considered, the
conclusion of the lender relative to compliance with 38 U.S.C.
3710(b)(3) ought not be recognized as reasonable and proper and that the
loan should be considered ineligible for guaranty.

\(3\) *Bankruptcy*. When the credit information shows that the borrower
or spouse has been discharged in bankruptcy under the \"straight\"
liquidation and discharge provisions of the bankruptcy law, this would
not in itself disqualify the loan. However, in such cases it is
necessary to develop complete information as to the facts and
circumstances concerning the bankruptcy. Generally speaking, when the
borrower or spouse, as the case may be, has been regularly employed (not
self-employed) and has been discharged in bankruptcy within the last 2
or 3 years, it probably would not be possible to determine that the
borrower or spouse is a satisfactory credit risk unless both of the
following requirements are satisfied:

\(i\) The borrower or spouse has obtained consumer items on credit
subsequent to the bankruptcy and has met the payments on these
obligations in a satisfactory manner over a continued period, and

\(ii\) The bankruptcy was caused by circumstances beyond control of the
borrower or spouse, e.g., unemployment, prolonged strikes, medical bills
not covered by insurance. The circumstances alleged must be verified. If
a borrower or spouse is self-employed, has been adjudicated bankrupt,
and subsequently obtains a permanent position, a finding as to
satisfactory credit risks may be made provided there is no derogatory
credit information prior to self-employment, there is no evidence of
derogatory credit information subsequent to the bankruptcy, and the
failure of the business was not due to misconduct. A bankruptcy
discharged more than 5 years ago may be disregarded. A bankruptcy
discharged between 3 and 5 years ago may be given some consideration,
depending upon the circumstances of the bankruptcy, and submission of
evidence that the veteran has been paying his or her obligations in a
timely manner.

\(4\) *Petition under Chapter 13 of Bankruptcy Law*. A wage earner\'s
petition under chapter 13 of the Bankruptcy Law filed by the borrower or
spouse is indicative of an effort to pay their creditors. Some plans may
provide for full payment of debts while others arrange for payment of
scaled down debts. Regular payments are made to a court-appointed
trustee over a 2- to 3-year period (or up to 5 years in some cases).
When the borrowers have made all payments in a satisfactory manner, they
may be considered as having reestablished satisfactory credit. When they
apply for a home loan before completion of the payout period, favorable
consideration may nevertheless be given if at least three-fourths of the
payments have been made satisfactorily and the Trustee or Bankruptcy
Judge (Referee) approves of the new credit.

\(5\) *Absence of credit history*. The fact that recently discharged
veterans may have had no opportunity to develop a credit history will
not preclude a determination of satisfactory credit. Similarly, other
loan applicants may not have established credit histories as a result of
a preference for purchasing consumer items with cash rather than credit.
There are also cases in which individuals may be genuinely wary of
acquiring new obligations following bankruptcy, consumer credit
counseling (debt proration), or other disruptive credit occurrence. The
absence of the credit history in these cases will not generally be
viewed as an adverse factor in credit underwriting. However, before a
favorable decision is made for cases involving bankruptcies or other
derogatory credit factors, efforts should be made to develop evidence of
timely payment of non-installment debts such as rent and utilities. It
is anticipated that this special consideration in the absence of a
credit history following bankruptcy would be the rare case and generally
confined to bankruptcies which occurred over 3 years ago.

\(6\) *Long-term v. Short-term-debts*. All known debts and obligations
including any alimony and/or child support payments of the borrower and
spouse must be documented. Significant liabilities, to be deducted from
the total income in determining ability to meet the mortgage payments
are accounts that, generally, are of a relatively long-term; i.e., 6
months or over. Other accounts for terms of less than 6 months must, of
course, be considered in determining ability to meet family expenses.
Certainly any account with less than 6 months\' duration which requires
payments so large as to cause a severe impact on the family\'s resources
for any period of time must be considered in the loan analysis. For
example, monthly payments of \$100 on an auto loan with a remaining
balance of \$500 would be included in those obligations to be deducted
from the total income regardless of the fact that the account can be
expected to pay out in 5 months. It is clear that the applicant will, in
this case, continue to carry the burden of those \$100 payments for the
first, most critical, months of the home loan. Similarly, when the
credit information shows open accounts of several years\' duration which
are clearly of a revolving or open-end type, the regular monthly payment
for such accounts should be considered as a long-term obligation to be
deducted from income.

\(7\) *Requirements for verifications*. If the credit investigation
reveals debts or obligations of a material nature which were not
divulged by the applicant, lenders must be certain to obtain
clarification as to the status of such debts from the borrower. A proper
analysis is obviously not possible unless there is total correlation
between the obligations claimed by the borrower and those revealed by a
credit report or deposit verification. Conversely, significant debts and
obligations reported by the borrower must be rated. If the credit report
fails to provide necessary information on such accounts, lenders will be
expected to obtain their own verifications of those debts directly from
the creditors. Credit reports and verifications must be no more than 90
days old to be considered valid. For loans closed automatically, this
requirement will be considered satisfied if the date of the credit
report or verification is within 90 days of the date of the veteran\'s
application to the lender. Of major significance are the applicant\'s
rental history and outstanding or recently retired mortgages, if any,
and lenders should be sure ratings on such accounts are obtained. A
determination is necessary as to whether alimony and/or child support
payments are required. Verification of the amount of such obligations
should be obtained although documentation concerning an applicant\'s
divorce should not be obtained automatically unless it is necessary to
verify the amount of any alimony or child support liability indicated by
the applicant. If in the routine course of processing the loan
application, however, direct evidence is received (e.g., from the credit
report) that an obligation to pay alimony or child support exists (as
opposed to mere evidence that the veteran was previously divorced), the
discrepancy between the loan application and credit report can and
should be fully resolved in the same manner as any other such
discrepancy would be handled.

\(8\) *Job-related expenses*. Known job-related expenses should be
documented. This will include costs for any dependent care, union dues,
significant commuting costs, etc. When a family\'s circumstances are
such that dependent care arrangements would probably be necessary, it is
important to determine the cost of such services in order to arrive at
an accurate total of deductions.

\(9\) *Credit reports*. Credit reports obtained by lenders on VA
guaranteed loan applications must be in conformance with the Residential
Mortgage Credit Report Standards formulated jointly by the Department of
Veterans Affairs, Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, Federal Housing Administration, Farmers Home
Administration, credit repositories, repository affiliated consumer
reporting agencies and independent consumer reporting agencies. The
Residential Mortgage Credit Report is a detailed account of the credit,
employment, and residence history as well as public records information
concerning an individual. From time to time the Secretary as well as the
entities listed above will provide the names of the national
organizations that provide credit reports meeting the requirements of
the Residential Mortgage Credit Report Standards. The names of such
organizations are available through VA and other participating entities.
All credit reports obtained by the lender must be submitted to VA.

\(f\) *Borrower\'s personal and financial status*. The number and ages
of dependents have an important bearing on whether income after
deduction of fixed charges is sufficient to support the family. Type and
duration of employment of both the borrower and spouse are important as
an indication of stability of their employment. The amount of liquid
assets owned by the borrower or spouse, or both, is an important factor
in determining that they have sufficient funds to close the loan, as
well as being significant in analyzing the overall qualifications for
the loan. (It is imperative that adequate cash assets from the
veteran\'s own resources are verified to allow the payment of any
difference between the sales price of the property and the loan amount,
in addition to that necessary to cover closing costs, if the sales price
exceeds the reasonable value established by VA (38 CFR 36.4336(a)(3)).
Verifications must be no more that 90 days old to be considered valid.
For loans closed on the automatic basis, this requirement will be
considered satisfied if the date of the deposit verification is within
90 days of the date of the veteran\'s application to the lender. Current
monthly rental or other housing expense is an important consideration
when compared to that to be undertaken in connection with the
contemplated housing purchase.

\(g\) *Estimated monthly shelter expenses*. It is important that monthly
expenses such as taxes, insurance, assessments and maintenance and
utilities be estimated accurately based on property location and type of
house; e.g., old or new, large or small, rather than using or applying a
\"rule of thumb\" to all properties alike. Maintenance and utility
amounts for various types of property should be realistically estimated.
Local utility companies should be consulted for current rates. The age
and type of construction of a house may well affect these expenses. In
the case of condominiums or houses in a planned unit development (PUD),
the monthly-amount of the maintenance assessment payable to a homeowners
association should be added. If the amount currently assessed is less
than the maximum provided in the covenants or master deed, and it
appears likely that the amount will be insufficient for operation of the
condominium or PUD, the amount used will be the maximum the veteran
could be charged. If it is expected that real estate taxes will be
raised, or if any special assessments are expected, the increased or
additional amounts should be used. In special flood hazard areas,
include the premium for any required flood insurance.

\(h\) *Lender responsibility*.

\(1\) Lenders are fully responsible for developing all credit
information; i.e., for obtaining verifications of employment and
deposit, credit reports, and for the accuracy of the information
contained in the loan application.

\(2\) Verifications of employment and deposits, and requests for credit
reports and/or credit information must be initiated and received by the
lender.

\(3\) In cases where the real estate broker/agent, or any other party
requests any of this information, the report(s) must be returned
directly to the lender. This fact must be disclosed by appropriately
completing the required certification on the loan application or report
and the parties must be identified as agents of the lender.

\(4\) Where the lender relies on other parties to secure any of the
credit or employment information or otherwise accepts such information
obtained by any other party such parties shall be construed for purposes
of the submission of the loan documents to VA to be authorized agents of
the lender, regardless of the actual relationship between such parties
and the lender, even if disclosure is not provided to VA under paragraph
(h)(3) of this section. Any negligent or willful misrepresentation by
such parties shall be imputed to the lender as if the lender had
processed those documents and the lender shall remain responsible for
the quality and accuracy of the information provided to VA.

\(5\) All credit reports secured by the lender or other parties as
identified in paragraphs (h)(3) and (h)(4) of this section shall be
provided to VA. If updated credit reports reflect materially different
information than that in other reports such discrepancies must be
explained by the lender and the ultimate decision as to the effects of
the discrepancy upon the loan application fully addressed by the
underwriter.

\(6\) Lender originating loans are responsible for determining and
certifying to VA on the appropriate application or closing form that the
loan meets all statutory and regulatory requirements. Lenders will
affirmatively certify that loans were made in full compliance with the
law and loan guaranty regulations as prescribed in these regulations.

\(i\) *Definitions*.

\(1\) The definitions contained in part 42 of this chapter are
applicable in this section.

\(2\) *Another Appropriate Amount*. In determining the appropriate
amount of a lender\'s civil penalty in cases where the Secretary has not
sustained a loss or where two times the amount of the Secretary\'s loss
on the loan involved does not exceed \$10,000, the Secretary shall
consider:

\(i\) The materiality and importance of the false certification to the
determination to issue the guaranty, or to approve the assumption;

\(ii\) The frequency and past pattern of such false certifications by
the lender; and,

\(iii\) Any exculpatory or mitigating circumstances.

\(3\) *Complaint* includes the assessment of liability served pursuant
to this subsection.

\(4\) *Defendant* means a lender named in the complaint.

\(5\) *Lender* includes the holder approving loan assumptions pursuant
to 38 U.S.C. 3714.

\(j\) *Procedures for certification*.

\(1\) As a condition to VA issuance of a loan guaranty on all loans
closed on or after the effective date of these regulations, and as a
prerequisite to an effective loan assumption on all loans assumed
pursuant to 38 U.S.C. 3714 on or after the effective date of these
regulations, the following certification shall accompany each loan
closing or assumption package:

> \"The undersigned lender certifies that the (loan) (assumption)
> application, all verifications of employment, deposit, and other
> income and credit verification documents have been processed in
> compliance with 38 CFR part 36; that all credit reports obtained or
> generated in connection with the processing of this borrower\'s (loan)
> (assumption) application have been provided to VA; that, to the best
> of the undersigned lender\'s knowledge and belief the (loan)
> (assumption) meets the underwriting standards recited in 38 U.S.C.
> chapter 37 and 38 CFR part 36; and that all information provided in
> support of this (loan) (assumption) is true, complete and accurate to
> the best of the undersigned lender\'s knowledge and belief.\"

\(2\) The certification shall be executed by an officer of the lender
authorized to execute documents and act on behalf of the lender.

\(3\) Any lender who knowingly and willfully makes a false certification
required pursuant to §36.3447(j)(1) shall be liable to the United State
Government for a civil penalty equal to two times the amount of the
Secretary\'s loss on the loan involved or to another appropriate amount,
not to exceed \$10,000, whichever is greater.

\(k\) *Assessment of liability*.

\(1\) Upon an assessment confirmed by the Chief Benefits Director, in
consultation with the Investigating Official, that a certification, as
required in this section, is false, a report of findings of the Chief
Benefits Director shall be submitted to the Reviewing Official setting
forth:

\(i\) The evidence that supports the allegations of a false
certification and of liability;

\(ii\) A description of the claims or statements upon which the
allegations of liability are based;

\(iii\) The amount of the VA demand to be made; and,

\(iv\) Any exculpatory or mitigating circumstances that may relate to
the certification.

\(2\) The Reviewing Official shall review all of the information
provided and will either inform the Chief Benefits Director and
Investigating Official that there is not adequate evidence, that the
lender is liable, or serve a complaint on the lender stating:

\(i\) The allegations of a false certification and of liability;

(ii)The amount being assessed by the Secretary and the basis for the
amount assessed;

\(iii\) Instructions on how to satisfy the assessment and how to file an
answer to request a hearing, including a specific statement of the
lender\'s right to request a hearing by filing an answer and to be
represented by counsel; and

\(iv\) That failure to file an answer within 30 days of the complaint
will result in the imposition of the assessment without right to appeal
the assessment to the Secretary.

\(l\) *Hearing procedures*. A lender hearing on an assessment
established pursuant to this section shall be governed by the procedures
recited at 38 CFR 42.8 through 42.47.

\(m\) *Additional remedies*. Any assessment under this section may be in
addition to other remedies available to VA, such as debarment and
suspension pursuant to 38 U.S.C. 3704 and part 44 of this chapter or
loss of automatic processing authority pursuant to 38 U.S.C. 3702, or
other actions by the Government under any other law including but not
limited to title 18, U.S.C. and 31 U.S.C 3732. (Authority: 38 U.S.C.
3710).

**§36.4338 DEATH OR INSOLVENCY OF HOLDER**

\(a\) Immediately upon the death of the holder and without the necessity
of request or other action by the debtor or the Secretary, all sums then
standing as a credit balance in a trust, or deposit, or other account to
cover taxes, insurance accruals, or other items in connection with the
loan secured by the encumbered property, whether stated to be such or
otherwise designated, and which have not been credited on the note
shall, nevertheless, be treated as a setoff and shall be deemed to have
been credited thereon as of the date of the last debit to such account,
so that the unpaid balance of the note as of that date will be reduced
by the amount of such credit balance:

*Provided*, That any unpaid taxes, insurance premiums, ground rents, or
advances may be paid by the holder of the indebtedness, at the holder\'s
option, and the amount which otherwise would have been deemed to have
been credited on the note reduced accordingly. This paragraph shall be
applicable whether the estate of the deceased holder is solvent or
insolvent.

\(b\) The provisions of paragraph (a) of this section shall also be
applicable in the event of:

\(1\) Insolvency of holder;

\(2\) Initiation of any bankruptcy or reorganization, or liquidation
proceedings as to the holder, whether voluntary or involuntary;

\(3\) Appointment of a general or ancillary receiver for the holder\'s
property; or in any case

\(4\) Upon the written request of the debtor if all secured and due
insurance premiums, taxes, and ground rents have been paid, and
appropriate provisions made for future accruals.

\(c\) Upon the occurrence of any of the events enumerated in paragraph
(a) or (b) of this section, interest on the note and on the credit
balance of the deposits mentioned in paragraph (a) shall be set off
against each other at the rate payable on the principal of the note, as
of the date of last debit to the deposit account. Any excess credit of
interest shall be treated as a set-off against the unpaid advances, if
any and the unpaid balance of the note.

\(d\) The provisions of paragraphs (a), (b) and (c) of this section
shall apply also to corporations. The dissolution thereof by expiration
of charter, by forfeiture, or otherwise shall be treated as is the death
of an individual as provided in paragraph (a) of this section.

**§36.4339 QUALIFICATION FOR DESIGNATED FEE APPRAISERS**

To qualify for approval as a designated fee appraiser, an applicant must
show to the satisfaction of the Secretary that his or her character,
experience, and the type of work in which he or she has had experience
for at least 5 years qualifies the applicant to competently appraise and
value within a prescribed area the type of property to which the
approval relates.

**§36.4340 RESTRICTION ON DESIGNATED FEE APPRAISERS**

\(a\) A designated fee appraiser shall not make an appraisal, excepting
of alterations, improvements, or repairs to real property entailing a
cost of not more than \$3,500, if such appraiser is an officer,
director, trustee, employer, or employee of the lender, contractor, or
vendor.

\(b\) An appraisal made by a designated fee appraiser shall be subject
to review and adjustment by the Secretary. The amount determined to be
proper upon any such review or adjustment shall constitute the
\"reasonable value\" for the purpose of determining the eligibility of
the related loan.

**§36.4342 DELEGATION OF AUTHORITY**

\(a\) Except as hereinafter provided, each employee of the Department of
Veterans Affairs heretofore or hereafter appointed to, or lawfully
filling, any position designated in paragraph (b) of this section is
hereby delegated authority, within the limitations and conditions
prescribed by law, to exercise the powers and functions of the Secretary
with respect to the guaranty or insurance of loans and the rights and
liabilities arising therefrom, including but not limited to the
adjudication and allowance, disallowance, and compromise of claims; the
collection or compromise of amounts due, in money or other property; the
extension, rearrangement, or acquisition of loans; the management and
disposition of secured and unsecured notes and other property; and those
functions expressly or impliedly embraced within paragraphs (2) to (6),
inclusive, of 38 U.S.C. 3720(a). Incidental to the exercise and
performance of the powers and functions hereby delegated, each such
employee is authorized to execute and deliver (with or without
acknowledgment) for, and on behalf of, the Secretary, evidence of
guaranty or of insurance credits and such certificates, forms,
conveyances, and other instruments as may be appropriate in connection
with the acquisition, ownership, management, sale, transfer, assignment,
encumbrance, rental, or other disposition of real or personal property
or of any right, title, or interest therein, including, but not limited
to, contracts of sale, installment contracts, deeds, leases, bills of
sale, assignments, and releases; and to approve disbursements to be made
for any purpose authorized by 38 U.S.C., chapter 37.

\(b\) Designated positions:

Chief Benefits Director

Director, Loan Guaranty Service

Director, Medical and Regional Office Center

Director, Regional Office and Insurance Center

Director, VA Regional Office

Loan Guaranty Officer

Assistant Loan Guaranty Officer

The authority hereby delegated to employees of the positions designated
in this paragraph may, with the approval of the Chief Benefits Director,
be redelegated.

\(c\) Nothing in this section shall be construed (1) to authorize any
such employee to exercise the authority vested in the Secretary under 38
U.S.C. 501(a) or 3703(a)(2) or to sue, or enter appearance for and on
behalf of the Secretary, or confess judgment against the Secretary in
any court without the Secretary\'s prior authorization; or (2) to
include the authority to exercise those powers delegated to the Chief
Benefits Director, or the Director, Loan Guaranty Service, under
§36.4320(j), 36.4335, or 36.4343:

*Provided*, That, anything in the regulations concerning guaranty or
insurance of loans to veterans to the contrary notwithstanding, any
evidence of guaranty or insurance issued on or after July 1, 1948, by
any of the employees designated in paragraph (b) of this section or by
any employee designated an authorized agent or a loan guaranty agent
shall be deemed to have been issued by the Secretary, subject to the
defenses reserved in 38 U.S.C. 3721.

\(d\) Each Regional Office, regional office and insurance center, and
Medical and Regional Office Center shall maintain and keep current a
cumulative list of all employees of that Office or Center who, since May
1, 1980, have occupied the positions of Director, Loan Guaranty Officer,
and Assistant Loan Guaranty Officer. This list will include each
employee\'s name, title, date the employee assumed the position, and the
termination date, if applicable, of the employee\'s tenure in such
position. The list shall be available for public inspection and copying
at the Regional Office, or Center, during normal business hours.
(Authority: 38 U.S.C. 501(a)(1), 3720(a)(5))

**§36.4343 COOPERATIVE LOANS**

\(a\) Any loan, which is (1) related to an enterprise in which more than
10 individuals will participate; or (2) to be made for the purchase or
construction of residential units in any housing development,
cooperative or otherwise, the title to which development or to the
individual units therein is not to be held directly by the
veteran-participants, or which contemplates the ownership or maintenance
of more than three units or of their major appurtenances in common, to
be eligible for guaranty or insurance shall require prior approval of
the Chief Benefits Director, or the Director, Loan Guaranty Service, who
may issue such approval upon such conditions and limitations deemed
appropriate, not inconsistent with the provisions of 38 U.S.C., chapter
37 and regulations concerning guaranty or insurance of loans to
veterans.

\(b\) The issuance of such approval with respect to residential
development under paragraph (a)(2) of this section also shall be subject
to such conditions and stipulation as in the judgment of the approving
officer are possible and proper to (1) afford reasonable and feasible
protection to the rights of the Government as guarantor or insurer, and
as subrogee, and to each veteran-participant against loss of his or her
respective equity consequent upon the failure of other participants to
discharge their obligations; (2) provide for a reasonable and workable
plan for the operation and management of the project; (3) limit the
personal liability of each veteran-participant to those sums allocable
on a proper ratable basis to the purchase, cost, and maintenance of his
or her individual unit or participating interest; (4) limit commercial
features to those reasonably calculated to promote the economic
soundness of the project and the living convenience of the participants,
retaining the essential character of a residential project.

\(c\) No such project, development, or enterprise may be approved which
involves an initial grouping of more then 500 veterans, or a cost of
more than five million dollars, unless it is conclusively shown to the
satisfaction of the approving officer that a greater number of veterans
or dollar amount will assure substantial advantages to the
veteran-participants which could not be achieved in a smaller project.

\(d\) When approved as in this section provided, and upon performance of
the conditions indicated in the prior approval, proper guaranty
certificate or certificates may be issued in connection with the loan or
loans to be guaranteed on behalf of eligible veterans participating in
the project, development or enterprise not to exceed in total amount the
sum of the guaranties applied for by the individual participants and for
which guaranty each participant is then eligible.

\(e\) In lieu of guaranty as authorized in paragraph (d) of this
section, insurance shall be available on application by the lender and
all veterans concerned. In such case the insurance credit shall be
limited to 15 percent of the obligation of the veteran-applicant
(subject to available eligibility) and the total insurance credit in
respect to the veterans\' loans involved in the project shall not exceed
15 percent of the aggregate of the principal sums of the individual
indebtedness incurred by the veterans participating in the project for
the purpose of acquiring their respective interests therein.

**§36.4344 LENDER APPRAISAL PROCESSING PROGRAM**

\(a\) *Delegation of Authority to Lenders to Review Appraisals and
Determine Reasonable Value*

\(1\) To be eligible for delegation of authority to review VA appraisals
and determine the reasonable value of properties to be purchased with VA
guaranteed loans, a lender must (i) have automatic processing authority
under 38 U.S.C. 3702(d), and (ii) employ one or more staff appraisal
reviewers acceptable to the Secretary.

\(2\) To qualify as a lender\'s staff appraisal reviewer an applicant
must be a full-time member of the lender\'s permanent staff and may not
be employed by, or perform services for, any other mortgagee. The
individual must not engage in any private pursuits in which there will
be, or appear to be, any conflict of interest between those pursuits and
his/her duties, responsibilities, and performance as a Lender Appraisal
Processing Program (LAPP) staff appraisal reviewer. Three years of
experience is necessary to qualify as a lender\'s staff appraisal
reviewer. That experience must demonstrate a knowledge of, and the
ability to apply industry-accepted principles, methods, practices and
techniques of appraising, and the ability to competently determine the
value of property within a prescribed geographical area. The individual
must demonstrate the ability to review the work of others and to
recognize deviations from accepted appraisal principles, practices, and
techniques, errors in computations, and unjustifiable and unsupportable
conclusions.

\(3\) Lenders that meet the requirements of 38 U.S.C. 3702(d), and have
a staff appraisal reviewer determined acceptable by VA, will be
authorized to review appraisals and make reasonable value determinations
on properties that will be security for VA guaranteed loans. The
lender\'s authorization will be subject to a one-year probationary
period. Additionally, lenders must satisfy initial and subsequent VA
office case review requirements prior to being allowed to determine
reasonable value without VA involvement. The initial office case review
requirement must be satisfied in the VA regional office in whose
jurisdiction the lender\'s staff appraisal reviewer is located before
the LAPP authority may be utilized by that lender in any other VA
office\'s jurisdiction. To satisfy the initial office case review
requirement, the first five cases of each lender staff appraisal
reviewer involving properties in the regional office location where the
staff appraisal reviewer is located will be processed by him or her up
to the point where he or she has made a reasonable value determination
and fully drafted, but not issued, the lender\'s notification of
reasonable value letter to the veteran. At that point, and prior to loan
closing, each of the five cases will be submitted to the local VA
office. After a staff review of each case, VA will issue a Certificate
of Reasonable Value, which the lender may use in closing the loan
automatically if it meets all other requirements of the VA. If these
five cases are found to be acceptable by VA, the lender\'s staff
appraisal reviewer will be allowed to fully process subsequent
appraisals for properties located in that VA office\'s jurisdiction
without prior submission to VA and issuance by VA of a Certificate of
Reasonable Value. Lenders must also satisfy a subsequent VA office case
review requirement in each additional VA office location in which they
desire to extend and utilize this authority. Under this requirement, the
lender must have first satisfied the initial office case review
requirement and then must submit to the additional VA office(s) the
first case each staff appraisal reviewer processes in the jurisdiction
of that office. As provided under the initial office case review
requirement, VA office personnel will issue a Certificate of Reasonable
value for this case and subsequently determine the acceptability of the
lender\'s staff appraisal reviewer\'s processing. If VA finds this first
case to be acceptable, the lender\'s staff appraisal reviewer will be
allowed to fully process subsequent cases in that additional VA
office\'s jurisdiction without prior submission to VA. The initial and
subsequent office case review requirements may be expanded by VA if
acceptable performance has not been demonstrated. After satisfaction of
the initial and subsequent office case review requirements, routine
reviews of LAPP cases will be made by VA staff based upon quality
control procedures established by the Chief Benefits Director. Such
review will be made on a random sampling or performance related basis.
During the probationary period a high percentage of reviews will be made
by VA staff.

\(4\) The following certification by the lender\'s nominated staff
appraisal reviewer must be provided with the lender\'s application for
delegation of LAPP authority:

> I hereby acknowledge and represent that by signing the Uniform
> Residential Appraisal Report (URAR), FHLMC (Federal Home Loan Mortgage
> Corporation) Form 70/FNMA (Federal Notice Mortgage Association) Form
> 1004, I am certifying, in all cases, that I have personally reviewed
> the appraisal report. In doing so I have considered and utilized
> recognized professional appraisal techniques, have found the appraisal
> report to have been prepared in compliance with applicable VA
> requirements, and concur with the recommendations of the fee
> appraiser, who was assigned by VA to the case. Furthermore, in those
> cases where clarifications or corrections have been requested from the
> VA fee appraiser there has been no pressure or influence exerted on
> that appraiser to remove or change information that might be
> considered detrimental to the subject property, or VA\'s interests, or
> to reach a predetermined value for that property.
>
> Signature of Staff Appraisal Reviewer.

\(5\) Other certifications required from the lender will be specified
with particularity in the separate instructions issued by the Secretary,
as noted in §36.4344(b).

\(b\) *Instructions for LAPP Procedures*. The Secretary will publish
separate instructions for processing appraisals under the Lenders
Appraisal Processing Program. Compliance with these regulations and the
separate instructions issued by the Secretary is deemed by VA to be the
minimum exercise of due diligence in processing LAPP cases. Due
diligence is considered by VA to represent that care, as is to be
properly expected from, and ordinarily exercised by, reasonable and
prudent lenders who would be dependent on the property as security to
protect its investment.

\(c\) *VA Minimum Property Requirements*. Lenders are responsible for
determining that the property meets VA minimum property requirements.
The separate instructions issued by the Secretary will set forth the
lender\'s ability to adjust, remove, or alter the fee appraiser\'s or
fee compliance inspector\'s recommendations concerning VA minimum
property requirements. Condominiums, planned-unit developments and
leasehold estates must have been determined acceptable by VA. A
condominium or planned-unit development which is acceptable to the
Department of Housing and Urban Development or the Department of
Agriculture may also be acceptable to VA.

\(d\) *Adjustment of Value Recommendations*. The amount of authority to
upwardly adjust the fee appraiser\'s estimated market value during the
lender staff appraisal reviewer\'s initial review of the appraisal
report or to subsequently process an appeal of the lender\'s established
reasonable value will be specified in the separate instructions issued
by VA as noted in §36.4344(b). The amount specified must not in any way
be considered an administrative adjustment figure which may be applied
indiscriminately and without valid basis or justification with the sole
purpose of reaching an amount necessary to complete the sale or mortgage
transaction.

\(1\) *Adjustment During Initial Review*. Any adjustment during the
staff appraisal reviewer\'s initial review of the appraisal report must
be fully and clearly justified in writing on the appraisal report form
or, if necessary, on an addendum. The basis for the adjustment must be
adequate and reasonable by professional appraisal standards. If real
estate market or other valid data was utilized in arriving at the
decision to make the adjustment, such data must be attached to the
appraisal report. All adjustments, comments, corrections,
justifications, etc., to the appraisal report must be made in a
contrasting color, be clearly legible, and signed and dated by the staff
appraisal reviewer.

\(2\) *Processing Appeals*. The authority provided under 38 U.S.C.
3731(d) which permits a lender to obtain a VA fee panel appraiser\'s
report which VA is obligated to consider in an appeal of the established
reasonable value shall not apply to cases processed under the authority
provided by this section. All appeals of VA fee appraisers\' estimated
market values or lenders\' reasonable value determinations above the
amount specified in the separate instructions issued by VA must be
submitted, along with the lender\'s recommendations, if any, to VA for
processing and final determination. Unless otherwise authorized in the
separate instructions lenders must also submit appeals, regardless of
the amount, to VA in all cases where the staff appraisal reviewer has
made an adjustment during their initial review of the appraisal report
to the fee appraiser\'s market value estimate. The fee appraiser\'s
estimated market value or lender\'s reasonable value determination may
be increased only when such increase is clearly warranted and fully
supported by real estate market or other valid data considered adequate
and reasonable by professional appraisal standards and the lender\'s
staff appraisal reviewer clearly and fully justifies the reasoning and
basis for the increase in writing on the appraisal report form or an
addendum. The staff appraisal reviewer must date and sign the written
justification and must cite within it the data used in arriving at the
decision to make the increase. All such data shall be attached to the
appraisal report form and any addendum.

\(e\) *Notification*. It will be the responsibility of the lender to
notify the veteran borrower in writing of the determination of
reasonable value and related conditions specific to the property and to
provide the veteran with a copy of the appraisal report. Any delay in
processing the notification of value must be documented. Any delay of
more than five work days between the date of the lender\'s receipt of
the fee appraiser\'s report and date of the notification of value to the
veteran, without reasonable and documented extenuating circumstances,
will not be acceptable. A copy of the lender notification letter to the
veteran and the appraisal report must be forwarded to the VA office of
jurisdiction at the same time the veteran is notified. In addition, the
original appraisal report, related appraisal documentation, and a copy
of the reasonable value determination notification to the veteran must
be submitted to the VA with the request for loan guaranty.

\(f\) *Indemnification*. When the Secretary has incurred a loss as a
result of a payment of claim under guaranty and in which the Secretary
determines an increase made by the lender under §36.4344(d) or (f) was
unwarranted, or arbitrary and capricious, the lender shall indemnify the
Secretary to the extent the Secretary determines such loss was caused,
or increased, by the increase in value.

\(g\) *Affiliations*. A lender affiliated with a real estate firm
builder, land developer or escrow agent as a subsidiary division,
investment or any other entity in which it has a financial interest or
which it owns may not use this authority for any cases involving the
affiliate unless the lender demonstrates to the Secretary\'s
satisfaction that the lender and its affiliate(s) are essentially
separate entities that operate independently of each other, free of all
cross-influences (e.g., a formal corporate agreement exists which
specifically sets forth this fact).

\(h\) *Quality Control Plans*. The lender must have an effective
self-policing or quality control system to ensure the adequacy and
quality of their LAPP staff appraisal reviewer\'s processing and, that
its activities do not deviate from high standards of integrity. The
quality control system must include frequent, periodic audits that
specifically address the appraisal review activity. These audits may be
performed by an independent party, or by the lender\'s independent
internal audit division which reports directly to the firm\'s chief
executive officer. The lender must agree to furnish findings and
information under this system to VA on demand. While the quality control
personnel need not be appraisers, they should have basic familiarity
with appraisal theory and techniques and the ability to prescribe
appropriate corrective action(s) in the appraisal review process when
discrepancies or problems are identified. The basic elements of the
system will be described in separate instructions issued by the
Secretary. Copies of the lender\'s quality control plan or self-policing
system evidencing appraisal related matters must be provided to the VA
office of jurisdiction with the lender\'s application for LAPP
authority.

\(i\) *Fees*. The Secretary may require mortgagees to pay an application
fee and/or annual fees, including additional fees for each branch office
authorized to process cases under the authority delegated under this
section, in such amounts and at such times as the Secretary may require.

\(j\) *Withdrawal of Lender Authority*. The authority for a lender to
determine reasonable value may be withdrawn by the Loan Guaranty Officer
when proper cause exists. A lender\'s authority to make reasonable value
determinations shall be withdrawn when the lender no longer meets the
basic requirements for delegating the authority, or when it can be shown
that the lender\'s reasonable value determinations have not been made in
accordance with VA regulations, requirements, guidelines, instructions
or applicable laws, or when there is adequate evidence to support
reasonable belief by VA that a particular unacceptable act, practice, or
performance by the lender or the lender\'s staff has occurred. Such
acts, practices or performance include, but are not limited to:
Demonstrated technical incompetence (i.e., conduct which demonstrates an
insufficient knowledge of industry accepted appraisal principles,
techniques and practices; or the lack of technical competence to review
appraisal reports and make value determinations in accordance with those
requirements); substantive or repetitive errors (i.e., any error(s) of a
nature that would materially or significantly affect the determination
of reasonable value or condition of the property; or a number or series
of errors that, considered individually, may not significantly impact
the determination of reasonable value or property condition, but which
when considered in the aggregate would establish that appraisal reviews
or LAPP case processing are being performed in a careless or negligent
manner), or continued instances of disregard for VA requirements after
they have been called to the lender\'s attention.

\(1\) Withdrawal of authority by the Loan Guaranty Officer may be either
for an indefinite or a specified period of time. For any withdrawal
longer than 90 days a reapplication for lender authority to process
appraisals under these regulations will be required. Written notice will
be provided at least 30 days in advance of withdrawal unless the
Government\'s interests are exposed to immediate risk from the lender\'s
activities in which case the withdrawal will be effected immediately.
The notice will clearly and specifically set forth the basis and grounds
for the action. There is no right to a formal hearing to contest the
withdrawal of LAPP processing privileges. However, if within 15 days
after receiving notice the lender requests an opportunity to contest the
withdrawal, the lender may submit, in person, in writing, or through a
representative, information and argument to the Loan Guaranty Officer in
opposition to the withdrawal. The Loan Guaranty Officer will make a
recommendation to the Regional Office Director who shall make the
determination as to whether the action should be sustained, modified or
rescinded. The lender will be informed in writing of the decision.

\(2\) The lender has the right to appeal the Regional Office Director\'s
decision to the Chief Benefits Director. In the event of such an appeal,
the Chief Benefits Director will review all relevant material concerning
the matter and make a determination that shall constitute final agency
action. If the lender\'s submission in opposition raises a genuine
dispute over facts material to the withdrawal of LAPP authority, the
lender will be afforded an opportunity to appear with a representative,
submit documentary evidence, present witnesses and confront any witness
the Veterans Benefits Administration presents. The Chief Benefits
Director will appoint a hearing officer or panel to conduct the hearing.
When such additional proceedings are necessary, the Chief Benefits
Director shall base the determination on the facts as found, together
with any information and argument submitted by the lender.

\(3\) In actions based upon a conviction or civil judgment, or in which
there is no genuine dispute over material facts, the Chief Benefits
Director shall make a decision on the basis of all the information in
the administrative record, including any submission made by the lender.

\(4\) Withdrawal of the LAPP authority will require that VA make
subsequent determinations of reasonable value for the lender.
Consequently, VA staff will review each appraisal report and issue a
Certificate of Reasonable Value which can then be used by the lender to
close loans on either the prior VA approval or automatic basis.

\(5\) Withdrawal by VA of the lender\'s LAPP authority does not prevent
VA from also withdrawing automatic processing authority or taking
debarment or suspension action based upon the same conduct by the
lender. (Authority: 38 U.S.C. 3731)

**§36.4345 WAIVERS, CONSENTS, AND APPROVALS; WHEN EFFECTIVE**

No waiver, consent, or approval required or authorized by the
regulations concerning guaranty or insurance of loans to veterans shall
be valid unless in writing signed by the Secretary or the subordinate
officer to whom authority has been delegated by the Secretary.

**§36.4346 SERVICING PROCEDURES FOR HOLDERS**

\(a\) *Establishment of loan servicing program*. The holder of a loan
guaranteed or insured by the Secretary shall develop and maintain a loan
servicing program which follows accepted industry standards for
servicing of similar type conventional loans. The loan servicing program
established pursuant to this section may employ different servicing
approaches to fit individual borrower circumstances and avoid
establishing a fixed routine. However, it must incorporate each of the
provisions specified in paragraphs (b) through (1) of this section.

\(b\) *Procedures for providing information*.

\(1\) Loan holders shall establish procedures to provide loan
information to borrowers, arrange for individual loan consultations upon
request and maintain controls to assure prompt responses to inquiries.
One or more of the following means of making information readily
available to borrowers is required.

\(i\) An office staffed with trained servicing personnel with access to
loan account information located within 200 miles of the property.

\(ii\) Toll-free telephone service or acceptance of collect telephone
calls at an office capable of providing needed information.

\(2\) All borrowers must be informed of the system available for
obtaining answers to loan inquiries, the office from which the needed
information may be obtained, and reminded of the system at least
annually.

\(c\) *Statement for income tax purposes*. Within 60 days after the end
of each calendar year, the holder shall furnish to the borrower a
statement of the interest paid and, if applicable, a statement of the
taxes disbursed from the escrow account during the preceding year. At
the borrower\'s request, the holder shall furnish a statement of the
escrow account sufficient to enable the borrower to reconcile the
account.

\(d\) *Change of servicing*. Whenever servicing of a loan guaranteed or
insured by the Secretary is transferred from one holder to another,
notice of such transfer by both the transferor and transferee, the form
and content of such notice, the timing of such notice, the treatment of
payments during the period of such transfer, and damages and costs for
failure to comply with these requirements shall be governed by the
pertinent provisions of the Real Estate Settlement Procedures Act as
administered by the Department of Housing and Urban Development.

\(e\) *Escrow accounts*. A holder of a loan guaranteed or insured by the
Secretary may collect periodic deposits from the borrower for taxes
and/or insurance on the security and maintain a tax and insurance escrow
account provided such a requirement is authorized under the terms of the
security instruments. In maintaining such accounts, the holder shall
comply with the pertinent provisions of the Real Estate Settlement
Procedures Act.

\(f\) *System for servicing delinquent loans*. In addition to the
requirements of the Real Estate Settlement Procedures Act, concerning
the duties of the loan servicer to respond to borrower

inquiries, to protect the borrower\'s credit rating during a payment
dispute period, and to pay damages and costs for noncompliance, holders
shall establish a system for servicing delinquent loans which ensures
that prompt action is taken to collect amounts due from borrowers and
minimize the number of loans in a default status. The holder\'s
servicing system must include the following:

\(1\) An accounting system which promptly alerts servicing personnel
when a loan becomes delinquent;

\(2\) A collection staff which is trained in techniques of loan
servicing and counseling delinquent borrowers to advise borrowers how to
cure delinquencies, protect their equity and credit rating and, if the
default is insoluble, pursue alternatives to foreclosure;

\(3\) Procedural guidelines for individual analysis of each delinquency;

\(4\) Instructions and appropriate controls for sending delinquent
notices, assessing late charges, handling partial payments, maintaining
servicing histories and evaluating repayment proposals;

\(5\) Management review procedures for evaluating efforts made to
collect the delinquency and the response from the borrower before a
decision is made to initiate action to liquidate a loan;

\(6\) Procedures for reporting delinquencies of 90 days or more and loan
terminations to major consumer credit bureaus as specified by the
Secretary and for informing borrowers that such action will be taken;
and

\(7\) Controls to ensure that all notices required to be given to the
Secretary on delinquent loans are provided timely and in such form as
the Secretary shall require.

\(g\) *Collection actions*.

\(1\) Holders shall employ collection techniques which provide
flexibility to adapt to the individual needs and circumstances of each
borrower. A variety of collection techniques may be used based on the
holder\'s determination of the most effective means of contact with
borrowers during various stagesm of delinquency. However, at a minimum
the holder\'s collection procedures must include the following actions:

\(i\) A written delinquency notice to the borrower(s) requesting
immediate payment if a loan installment has not been received within 17
days after the due date. This notice must be mailed no later than the
20th day of the delinquency and state the amount of the payment and of
any late charges that are due.

\(ii\) An effort, concurrent with the written delinquency notice to
establish contact with the borrower(s) by telephone. When talking with
the borrower(s), the holder should attempt to determine why payment was
not made and emphasize the importance of remitting loan installments as
they come due.

\(iii\) A letter to the borrower(s) if payment has not been received
within 30 days after it is due and telephone contact could not be made.
This letter should emphasize the seriousness of the delinquency and the
importance of taking prompt action to resolve the default. It should
also notify the borrower(s) that the loan is in default, state the total
amount due and advise the borrower(s) how to contact the holder to make
arrangements for curing the default.

\(iv\) In the event the holder has not established contact with the
borrower(s) and has not determined the financial circumstances of the
borrower(s) or established a reason for the default or obtained
agreement to a repayment plan from the borrower(s), then a face-to-face
interview with the borrower(s) or a reasonable effort to arrange such a
meeting is required.

\(2\) The holder must provide a valid explanation of any failure to
perform these collection actions when reporting loan defaults to the
Secretary. A pattern of such failure may be a basis for sanctions under
38 CFR §36.4331.

\(h\) *Conducting interviews with delinquent borrowers*. When personal
contact with the borrower(s) is established, the holder shall solicit
sufficient information to properly evaluate the prospects for curing the
default and whether the granting of forbearance or other relief
assistance would be appropriate. At a minimum, the holder must make a
reasonable effort to establish the following:

\(1\) The reason for the default and whether the reason is a temporary
or permanent condition;

\(2\) The present income and employment of the borrower(s);

\(3\) The current monthly expenses of the borrower(s) including
household and debt obligations;

\(4\) The current mailing address and telephone number of the
borrower(s); and

\(5\) A realistic and mutually satisfactory arrangement for curing the
default.

\(i\) *Property inspections*.

\(1\) The holder shall make an inspection of the property securing the
loan whenever it becomes aware that the physical condition of the
security may be in jeopardy. Unless a repayment agreement is in effect,
a property inspection shall also be made at the following times:

\(i\) Before the 60th day of delinquency or before initiating action to
liquidate a loan, whichever is earlier; and,

\(ii\) At least once each month after liquidation proceedings have been
started unless servicing information shows the property remains
owner-occupied.

\(2\) Whenever a holder obtains information which indicates that the
property securing the loan is abandoned, it shall make appropriate
arrangements to protect the property from vandalism and the elements.
Thereafter, the holder shall schedule inspections at least monthly to
prevent unnecessary deterioration due to vandalism, or neglect. With
respect to any loan more than 30 days delinquent, a property abandonment
must be reported to the Secretary and appropriate action initiated under
\_ §36.4317(a) within 15 days after the holder confirms the property is
abandoned.

\(j\) *Collection records*. The holder shall maintain individual file
records of collection action on delinquent loans and make such records
available to the Secretary for inspection on request. Such collection
records shall show:

\(1\) The dates and content of letters and notices which were mailed to
the borrower(s);

\(2\) Dated summaries of each personal servicing contact and the result
of same;

\(3\) The indicated reason(s) for default; and,

\(4\) The date and result of each property inspection.

\(k\) *Reporting to the Secretary*. A summary of collection efforts, the
information obtained through such efforts and the holder\'s evaluation
of the reason for the default and prospects for resolution of the
default must be included in any notice provided to the Secretary
pursuant to \_\_ §36.4315 and §36.4317.

\(l\) *Quality control procedures*. No later than 180 days after the
effective date of this regulation, each loan holder shall establish
internal controls to periodically assess the quality of the servicing
performed on loans guaranteed by the Secretary and assure that all
requirements of this section are being met. Those procedures must
provide for a review of the holder\'s servicing activities at least
annually and include an evaluation of delinquency and foreclosure rates
on loans in its portfolio which are guaranteed by the Secretary. As part
of its evaluation of delinquency and foreclosure rates, the holder
shall:

\(1\) Collect and maintain appropriate data on delinquency and
foreclosure rates to enable the holder to evaluate effectiveness of its
collection efforts;

\(2\) Determine how its VA delinquency and foreclosure rates compare
with rates in reports published by the industry, investors and others;
and,

\(3\) Analyze significant variances between its foreclosure and
delinquency rates and those found in available reports and publications
and take appropriate corrective action.

\(m\) Holders shall provide available statistical data on delinquency
and foreclosure rates and their analysis of such data to the Secretary
upon request.

**§36.4347 MINIMUM PROPERTY AND CONSTRUCTION REQUIREMENTS**

No loan for the purchase or construction of residential property shall
be eligible for guaranty or insurance unless such property complies or
conforms with those standards of planning, construction, and general
acceptability that may be applicable thereto and prescribed by the
Secretary pursuant to 38 U.S.C. 3704(a).

**§36.4348 AUTHORITY TO CLOSE LOANS ON THE AUTOMATIC BASIS**

\(a\) Supervised lenders of the classes described in 38 U.S.C.
3702(d)(1) and (2) are authorized by statue to process VA guaranteed
home loans on the automatic basis. This category of lenders includes any
Federal land bank, national bank, State bank, private bank, building and
loan association, insurance company, credit union or mortgage and loan
company that is subject to examination and supervision by an agency of
the United States or of any State or by any State.

\(b\) Nonsupervised lenders of the class described in 38 U.S.C. 3702
(d)(3) must apply to the Secretary for authority to process loans on the
automatic basis. The following minimum requirements must be met:

\(1\) *Minimum assets*. A minimum of \$50,000 of working capital must be
maintained. Working capital is defined as the excess of current assets
over current liabilities. Current assets are defined as cash or other
assets that could readily be converted into cash within 1 year on the
normal accounting or business cycle. Current liabilities are defined as
obligations that would be paid within a year on a normal accounting or
business cycle. The lender\'s latest financial statements (profit and
loss statements and balance sheets), audited and certified by a CPA
(certified public accountant), must accompany the application. If the
date of the financial statement precedes that of the application by more
than 6 months, the lender-applicant must also attach a copy of its
latest internal quarterly report. In addition, the lender-applicant must
agree that if the application is approved, the applicant will provide
within 120 days following the end of its fiscal year an audited
financial statement to the Director, Loan Guaranty Service for review.

\(2\) *Experience*. The firm must have been actively engaged in
originating VA mortgages for at least three recent years. Alternately,
each principal officer of the firm who is actively involved in managing
origination functions must have a minimum of three recent years\' total
experience in the field of VA mortgages in managerial functions in
either the present company of employment or in companies other than that
of his or her present employment. In either case, every principal
officer (president and vice presidents) must submit a resume of his or
her experience in the mortgage lending field. Should the secretary
and/or treasurer participate in the management of origination functions,
they too must submit a resume and meet the minimum experience
requirement if the company does not meet the experience requirement.
Should the lender or any of its directors or officers ever have been
debarred or suspended by any Federal agency or department or any of its
directors or officers have been a director or officer of any other
lender or corporation that was so debarred or suspended, or if the
lender-applicant ever had a servicing contract with an investor
terminated for cause, a statement of the facts must also be submitted.

\(3\) *Underwriter*. The senior officer of the firm must nominate and
recommend a full-time qualified employee(s) to act in the firms behalf
as underwriter(s) to personally review and make underwriting decisions
associated with the submission of loans to VA which will be closed on
the automatic basis. Nominees for underwriter must have a minimum of
three years\' experience in mortgage lending credit and making
underwriting decisions, with at least two recent years in connection
with loans submitted to VA for guaranty. This experience must have been
with an institutional investor originating for its own portfolio or
purchasing this type of loan, or with an originator selling this type of
loan to investors.

\(4\) *Lines of credit*. The lender-applicant must have one or more
lines of credit aggregating at least \$1 million. The identity of the
source(s) of warehouse lines of credit must be revealed to VA and the
applicant must agree that VA may contact the named source(s) for the
purpose of verifying the information.

\(5\) *Secondary market*. If the lender-applicant customarily sells
loans it originates, it must have a minimum of two permanent investors.
These may consist of the Government National Mortgage Association (GNMA)
and other government agencies, including State housing agencies, and the
Federal National Mortgage Association (FNMA).

\(6\) *Lender processing*. The lender-applicant must agree that all
prospective VA loans will be reviewed at its home or main office prior
to closing and the decision to make or reject the loan will be made at
that office by an approved underwriter, unless VA authorizes that
company to operate through regional underwriting offices.

\(7\) *Liaison*. The lender-applicant must designate one employee and an
alternate to act as liaison on its behalf with VA. If possible, the
lender-applicant should select employees other than VA approved
underwriters to act as liaison with VA.

\(8\) *Courtesy closing*. The lender-applicant must certify to VA that
it will not close loans on an automatic basis as a courtesy or
accommodation for other mortgage lenders, whether or not such lenders
are themselves approved to close on an automatic basis, without the
express approval of VA. However, a lender with automatic authority may
close loans for which information and supporting credit data have been
developed on its behalf by a duly authorized agent.

\(9\) *Lender agents*. A lender using an agent or any other entity, such
as a real estate broker, to perform a portion of the work involved in
originating and closing a VA guaranteed loan on an automatic basis must
take full responsibility by certification, on the appropriate VA form,
or by corporate resolution for all acts, errors and omissions of the
agent or other entity and its employees for the work performed. Any such
acts, errors or omissions will be treated as those of the lender and
appropriate sanctions may be imposed against the lender and its agent or
any other entity developing information used by the lender in
underwriting and processing the loan.

\(10\) *Subsidiaries/affiliates*. A lender approved for automatic
processing may not close loans on the automatic basis for any builder,
real estate broker, or other entity in which it has a financial interest
or which it owns, is owned by, or with which it is affiliated. However,
when the only relationship that exists between a lender and a builder is
a construction loan, the lender may close the permanent mortgage on an
automatic basis. This restriction may be eliminated for lenders that can
provide documentation which demonstrates to VA\'s satisfaction that (i)
the lender and builder or other affiliate are separate entities that
operate independently of each other, and (ii) the percentage of all VA
loans based on the affiliate\'s production originated by the lender
during at least a one-year period on which payments are past due 90 days
or more, is no higher that the national average for the same period for
all mortgage loans.

\(11\) *Minimum use of automatic authority*. If approved, lenders should
use their automatic authority to the maximum extent possible. Any lender
with automatic authority who submits a loan on the prior approval basis
will be required to submit an explanation from the VA approved
underwriter as to why the loan was not closed automatically. Such a
statement will not be needed for loans that must be processed on the
prior approval basis; e.g., joint loans.

\(12\) *Probation*. Lender-applicants meeting the requirements of this
section will be approved to close loans on an automatic basis for a
one-year probationary period. Poor underwriting and/or consistently
careless processing by the lender during the probationary period will be
a basis for withdrawal of automatic authority.

\(13\) *Quality control system*. In order to be approved as a
nonsupervised lender for automatic processing authority, the lender must
implement a written quality control system which ensures compliance with
VA requirements. The lender must agree to furnish findings under its
systems to VA on demand. The elements of the quality control system must
include the following:

\(i\) *Underwriting policies*. Each office of the mortgagee shall
maintain copies of VA credit standards and all available VA underwriting
guidelines.

\(ii\) *Corrective measures*. The system should ensure that effective
corrective measures are taken promptly when deficiencies in loan
originations are identified by either the lender or VA. Any cases
involving major discrepancies which are discovered under the system must
be reported to VA.

\(iii\) *System integrity*. The quality control system should be
independent of the mortgage loan production function.

\(iv\) *Scope*. The review of underwriting decisions and certifications
must include compliance with VA underwriting requirements, sufficiency
of documentation and soundness of underwriting judgments.

\(v\) *Appraisal quality*. For lenders approved for the Lender Appraisal
Processing Program (LAPP), the quality control system must specifically
contain provisions concerning the adequacy and quality of real property
appraisals. While the lender\'s quality control personnel need not be
appraisers, they should have basic familiarity with appraisal theory and
techniques so that they can select appropriate cases for review if
discretionary sampling is used, and prescribe appropriate corrective
action(s) in the appraisal review process when discrepancies or problems
are identified. Copies of the lender\'s quality control plan or
self-policing system evidencing appraisal related matters must be
provided to the VA office of jurisdiction.

\(c\) A lender approved to close loans on the automatic basis who
subsequently fails to meet the requirements of this section must report
the circumstances surrounding the deficiency and the remedial action to
be taken to cure it to VA. (Authority: 38 U.S.C. 510(a), 3703(c)(1))

\(d\) To participate in VA\'s Automatic Lending Program (ALP)
nonsupervised lenders of the class described in paragraph 3702(d)(3) of
title 38 U.S. Code shall pay fees as follows:

\(1\) \$500 for new applications;

\(2\) \$200 for reinstatement of lapsed or terminated automatic
authority;

\(3\) \$100 for each underwriter approval;

\(4\) \$100 for each agent approval;

\(5\) \$100 for each regional underwriting office approval;

\(6\) A minimum fee of \$100 for any other VA administrative action
pertaining to a lender\'s participation in ALP;

\(7\) \$200 annually for certification of home offices;

\(8\) \$100 annually for certification of regional offices;

\(9\) \$100 annually for each agent renewal.

\(e\) Supervised lenders of the classes described in paragraphs (d)(1)
and (d)(2) of 38 U.S. Code 3702 participating in VA\'s Loan Guaranty
Program shall pay fees as follows:

\(1\) \$100 for each agent approval; and

\(2\) \$100 annually for each agent renewal. (Authority: 38 U.S.C.
501(a) and 3703(c)(1))

\(f\) Lender participating in VA\'s Lender Appraisal Processing Program
shall pay a fee of \$100 for approval of each staff appraisal reviewer.

**§36.4349 WITHDRAWAL OF AUTHORITY TO CLOSE LOANS ON THE AUTOMATIC
BASIS.**

\(a\) (1) As provided in 38 U.S.C. 3702(e), the authority of any lender
to close loans on the automatic basis may be withdrawn by the Secretary
at any time upon 30 days notice. The automatic processing of both
supervised and nonsupervised lenders may be withdrawn for engaging in
practices which are imprudent from a lending standpoint or which are
prejudicial to the interests of veterans or the Government but are of a
lesser degree than would warrant complete suspension or debarment of the
lender from participation in the program.

\(2\) Automatic processing authority may be withdrawn for failure to
meet basic qualifying criteria. For non-supervised lenders, this
includes lack of an approved underwriter, failure to maintain \$50,000
working capital, and/or failure to file required financial statements.
For supervised lenders this includes loss of status as an entity subject
to examination and supervision by a Federal or State supervisory agency
as required by 38 U.S.C. 3702(d). During the 1 year probationary period
for newly-approved nonsupervised automatic lenders, automatic authority
may be withdrawn based upon poor underwriting or consistently careless
processing by the lender, as determined by VA.

\(3\) Automatic processing authority may also be withdrawn for any of
the causes for debarment set forth at 44.305 of this title.

\(b\) Authority to close loans on the automatic basis may also be
temporarily withdrawn for a period of time under the following schedule.

\(1\) Withdrawal for 60 days:

\(i\) Automatic loan submissions show deficiencies in credit
underwriting, such as use of unstable sources of income to qualify the
borrower, ignoring significant adverse credit items affecting the
applicant\'s creditworthiness, etc., after such deficiencies have been
repeatedly called to the lender\'s attention;

\(ii\) Employment or deposit verifications are handcarried by applicants
or otherwise improperly permitted to pass through the hands of a third
party;

\(iii\) Automatic loan submissions are consistently incomplete after
such deficiencies have been repeatedly called to the lender\'s attention
by VA; or

\(iv\) There are continued instances of disregard of VA requirements
after they have been called to the lender\'s attention.

\(2\) Withdrawal for 180 days:

\(i\) Loans are closed automatically which conflict with VA credit
standards and which would not have been made by a lender acting
prudently;

\(ii\) The lender fails to disclose to VA significant obligations or
other information so material to the veteran\'s ability to repay the
loan that undue risk to the Government results;

\(iii\) Employment or deposit verifications are allowed to be
handcarried by applicant or otherwise mishandled, resulting in the
submission of significant misinformation to VA;

\(iv\) Substantiated complaints are received that the lender
misrepresented VA requirements to veterans to the detriment of their
interests (e.g., veteran was dissuaded from seeking a lower interest
rate based on lender\'s incorrect advice that such options were
precluded by VA requirements);

\(v\) Closing documentation shows instances of improper charges to the
veterans after the impropriety of such charges has been called to the
lender\'s attention by VA, or refusal to refund such charges after
notification by VA; or

\(vi\) There are other instances of lender actions which are prejudicial
to the interests of veterans such as deliberate delays in scheduling
loan closings.

\(3\) Withdrawal for a period of from one year to three years:

\(i\) The lender fails to properly disburse loans (e.g., loan
disbursement checks returned due to insufficient funds);

\(ii\) There is involvement by the lender in the improper use of a
veteran\'s entitlement (e.g., knowingly permitting the veteran to
violate occupancy requirements, lender involvement in sale of veteran\'s
entitlement, etc.).

\(4\) A continuation of actions that have led to previous withdrawal of
automatic authority justifies withdrawal of automatic authority for the
next longer period of time.

\(5\) Withdrawal of automatic processing authority does not prevent a
lender from processing VA guaranteed loans on the prior approval basis.

\(6\) Action by VA to remove a lender\'s automatic authority does not
prevent VA from also taking debarment or suspension action based on the
same conduct by the lender.

\(7\) VA field facilities are authorized to withdraw automatic
privileges for 60 days, based on any of the violations set forth in
paragraphs (b)(1) through (b)(3) of this section, for nonsupervised
lenders without operations in other stations\' jurisdictions. All
determinations regarding withdrawal of automatic authority for longer
periods of time or multi-jurisdictional lenders must be made in Central
Office.

\(c\) VA will provide 30 days notice of a withdrawal of automatic
authority in order to enable the lender to either close or obtain prior
approval for a loan on which processing has begun. There is no right to
a formal hearing to contest the withdrawal of automatic processing
privileges. However, if within 15 days after receiving notice the lender
requests an opportunity to contest the withdrawal, the lender may submit
in person, in writing, or through a representative, information and
argument in opposition to the withdrawal.

\(d\) If the lender\'s submission in opposition raises a dispute over
facts material to the withdrawal of automatic authority, the lender will
be afforded an opportunity to appear with a representative, submit
documentary evidence, present witnesses, and confront any witnesses VA
presents. The Chief Benefits Director will appoint a hearing officer or
panel to conduct the hearing.

\(e\) A transcribed record of the proceedings shall be made available at
cost to the lender, upon request, unless the requirement for a
transcript is waived by mutual agreement.

\(f\) In actions based upon a conviction or civil judgment, or in which
there is no genuine dispute over material facts, the Chief Benefits
Director shall make a decision on the basis of all the information in
the administrative record, including any submission made by the lender.

\(g\) In actions in which additional proceedings are necessary to
determine disputed material facts, written findings of fact will be
prepared by the hearing officer or panel. The Chief Benefits Director
shall base the decision on the facts as found, together with any
information and argument submitted by the lender and any other
information in the administrative record. (Authority: 38 U.S.C. 501(a),
3703(c)(1))

**§36.4350 ESTATE OF VETERAN IN REAL PROPERTY**

\(a\) The estate in the realty acquired by the veteran, wholly or partly
with the proceeds of a guaranteed or insured loan, or owned by him or
her and on which construction, or repairs, or alterations or
improvements are to be made, shall be not less than:

\(1\) A fee simple estate therein, legal or equitable; or

\(2\) A leasehold estate running or renewable at the option of the
lessee for a period of not less than 14 years from the maturity of the
loan, or to any earlier date at which the fee simple title will vest in
the lessee, which is assignable or transferable, if the same be
subjected to the lien; however, a leasehold estate which is not freely
assignable and transferable will be considered an acceptable estate if
it is determined by the Chief Benefits Director, or the Director, Loan
Guaranty Service, (i) that such type of leasehold is customary in the
area where the property is located, (ii) that a veteran or veterans will
be prejudiced if the requirement for free assignability is adhered to
and, (iii) that the assignability and other provisions applicable to the
leasehold estate are sufficient to protect the interests of the veteran
and the Government and are otherwise acceptable; or

\(3\) A life estate, provided that the remainder and reversionary
interests are subjected to the lien.

The title to such estate shall be such as is acceptable to informed
buyers, title companies, and attorneys, generally, in the community in
which the property is situated, except as modified by paragraph (b) of
this section.

\(b\) Any such property or estate will not fail to comply with the
requirements of paragraph (a) of this section by reason of the
following:

\(1\) Encroachments;

\(2\) Easements;

\(3\) Servitudes;

\(4\) Reservations for water, timber, or subsurface rights;

\(5\) Sale and lease restrictions:

\(i\) Except as to condominiums, the right in any grantor or cotenant in
the chain title, or a successor of either, to purchase for cash, which
right was established by an instrument recorded prior to December 1,
1976, and by the terms thereof is exercisable only if:

\(A\) An owner elects to sell,

\(B\) The option price is not less than the price at which the then
owner is willing to sell to another, and

\(C\) Exercised within 30 days after notice is mailed by registered mail
to the address of optionee last known to the then owner of the then
owner\'s election to sell, stating the price and the identity of the
proposed vendee;

\(ii\) A condominium estate established by the filing for record of the
Master Deed, or other enabling document before December 1, 1976, will
not fail to comply with the requirements of paragraph (a) of this
section by reason of:

\(A\) Prohibition against leasing a unit for a period of less than 6
months.

\(B\) The existence of a right of first option to purchase or right to
provide a substitute buyer reserved to the condominium association
provided such option or right is exercisable only if:

\(1\) An owner elects to sell;

\(2\) The option price is not less than the price at which the then
owner is willing to sell to another,

\(3\) The terms and conditions under which the option price is to be
paid are identical to or are not less favorable to the owner than the
terms and conditions under which the owner was willing to sell to the
owner\'s prospective buyer, and

\(4\) Notice of the association\'s decision to exercise the option must
be mailed to the owner by registered or certified mail within 30 days
after notice is mailed by registered or certified mail to the address of
the association last known to the owner of the owner\'s election to
sell, stating the price, terms of sale, and the identity of the proposed
vendee;

\(iii\) Any property subject to a restriction on the owner\'s right to
convey to any party of the owner\'s choice, which restriction is
established by a document recorded on or after December 1, 1976, will
not qualify as security for a guaranteed or insured loan. A prohibition
or restriction on leasing an individual unit in a condominium will not
cause the condominium estate to fail to qualify as security for such
loan, provided the restriction is in accordance with §36.4358(c);

\(iv\) Notwithstanding the provisions of paragraph (b), (5)(i), (ii),
and (iii) of this section, a property shall not be considered ineligible
pursuant to paragraph (a) of this section if:

\(A\) The veteran obtained the property under a State or local political
subdivision program designed to assist low- or moderate-income
purchasers, and as a condition the purchaser must agree to one or more
of the following restrictions:

\(1\) If the property is resold within a time period as established by
local law or ordinance, after the purchaser acquires title, the
purchaser must first offer the property to the Government housing
agency, or a low- or moderate-income purchaser designated by such
agency, provided the option to purchase is exercised within 90 days
after notice by the purchaser to the agency of intention to sell;

\(2\) If the property is resold within a time period as established by
local law or ordinance after the purchaser acquires title, a
governmental agency may specify a maximum price which the veteran may
receive for the property upon resale; or

\(3\) Such other restriction approved by the Secretary designed to
insure either that a property acquired under such program again be made
available to low- or moderate-income purchasers, or to prevent a private
purchaser from obtaining a windfall profit on the resale of such
property, while assuring that the purchaser has a reasonable opportunity
to dispose of the property without undue difficulty at a reasonable
price.

The sale price of a property under any of the restrictions of paragraph
(b)(5)(iv)(A) of this section shall not be less than the lowest of the
following: The price designated by the owner as the asking price; the
appraised value of the property; or the original purchase price of the
property, increased by a factor reflecting all or a reasonable portion
of the increased costs of housing or the percentage increase in median
income in the area between the date of original purchase and resale,
plus the reasonable value or actual costs of any capital improvements
made by the owner plus a reasonable real estate commission less the cost
of necessary repairs required to place the property in saleable
condition; or other reasonable formula approved by the Secretary. The
veteran must be fully informed and consent in writing to the housing
restrictions. A copy of the veteran\'s consent statement must be
forwarded with the application for home loan guaranty or the report of a
home loan processed on the automatic basis; or (Authority: 38 U.S.C.
3703(c))

\(B\) A recorded restriction on title designed to provide housing for
older persons, provided that the restriction is acceptable under the
provisions of the Fair Housing Act, title VIII of the Civil Rights Act
of 1968, as amended by the Fair Housing Amendments Act of 1988, 42
U.S.C. 3601 *et seq*. The veteran must be fully informed and consent in
writing to the restrictions. A copy of the veteran\'s consent statement
must be forwarded with the application for home loan guaranty or the
report of a home loan processed on the automatic basis; (Authority: 38
U.S.C. 501(a), 3703(c)(1))

\(6\) Building and use restrictions whether or not enforceable by a
reverter clause if there has been no breach of the conditions affording
a right to an exercise of the reverter;

\(7\) Violation of a restriction based on race, color, creed, or
national origin, whether or not such restriction provides for reversion
or forfeiture of title or a lien for liquidated damages in the event of
a breach;

\(8\) Any other covenant, condition, restriction, or limitation approved
by the Secretary in the particular case. Such approval shall be a
condition precedent to the guaranty or insurance of the loan;

*Provided*, That the limitations on the quantum or quality of the estate
or property that are indicated in this paragraph, insofar as they may
materially affect the value of the property for the purpose for which it
is used, are taken into account in the appraisal of reasonable value
required by 38 U.S.C., chapter 37.

\(c\) The following limitations on the quantum or quality of the estate
or property shall be deemed for the purposes of paragraph (b) of this
section to have been taken into account in the appraisal of residential
property and determined by the Secretary as not materially affecting the
reasonable value of such property:

\(1\) *Building or Use Restrictions*. Provided, (i) no violation exists,
(ii) the proposed use by a veteran does not presage a violation of a
condition affording a right of reverter, and (iii) any right of future
modification contained in the building or use restrictions is not
exercisable, by its own terms, until at least 10 years following the
date of the loan.

\(2\) *Violations of Racial and Creed Restrictions*. Violations of a
restriction based on race, color, creed or national origin, whether or
not such restriction provides for reversion or forfeiture of title or a
lien for liquidated damages in the event of a breach.

\(3\) *Violations of Building or Use Restrictions of Record*. Violations
of building or use restrictions of record which have existed for more
than 1 year, are not the subject of pending or threatened litigation,
and which do not provide for a reversion or termination of title, or
condemnation by municipal authorities, or, a lien for liquidated damages
which may be superior to the lien of the guaranteed or insured mortgage.

\(4\) *Easements*

\(i\) Easements for public utilities along one or more of the property
lines and easements for drainage or irrigation ditches, provided the
exercise of the rights thereof do not interfere with the use of any of
the buildings or improvements located on the subject property.

\(ii\) Mutual easements for joint driveways located partly on the
subject property and partly on adjoining property, provided the
agreement is recorded in the public records.

\(iii\) Easements for underground conduits which are in place and which
do not extend under any buildings in the subject property.

\(5\) *Encroachments*

\(i\) On the subject property by improvements on the adjoining property
where such encroachments do not exceed 1 foot within the subject
boundaries, provided such encroachments do not touch any buildings or
interfere with the use or enjoyment of any building or improvement on
the subject property.

\(ii\) By hedges or removable fences belonging to subject or adjoining
property.

\(iii\) Not exceeding 1 foot on adjoining property by driveways
belonging to subject property, provided there exists a clearance of at
least 8 feet between the buildings on the subject property and the
property line affected by the encroachment.

\(6\) *Variations of Lot Lines*. Variations between the length of the
subject property lines as shown on the plot plan or other exhibits
submitted to the Department of Veterans Affairs and as shown by the
record or possession lines, provided such variations do not interfere
with the current use of any of the improvements on the subject property
and do not involve a deficiency of more then 2 percent with respect to
the length of the front line or more than 5 percent with respect to the
length of any other line. (Authority: 38 U.S.C. 501(a), 3703(c),
3712(g))

**§36.4351 LOANS, FIRST, SECOND OR UNSECURED**

Loans for the purchase of real property or a leasehold estate as limited
in the regulations concerning guaranty or insurance of loans to
veterans, or for the alteration, improvement, or repair thereof, and for
more than \$1,500 and more than 40 percent of the reasonable value of
such property or estate prior thereto shall be secured by a first lien
on the property or estate. Loans for such alteration, improvement, or
repairs for more than \$1,500 but 40 percent or less of the prior
reasonable value of the property shall be secured by a lien reasonable
and customary in the community for the type of alteration, improvement,
or repair financed. Those for \$1,500 or less need not be secured, and
in lieu of the title examination, the lender may accept a statement from
the borrower that he or she has an interest in the property not less
than that prescribed in §36.4350(a).

**§36.4352 TAX, SPECIAL ASSESSMENT AND OTHER LIENS**

Tax liens, special assessment liens, and ground rents shall be
disregarded with respect to any requirement that loans shall be secured
by a lien of specified dignity. With the prior approval of the
Secretary, Chief Benefits Director, or Director, Loan Guaranty Service,
liens retained by nongovernmental entities to secure assessments or
charges for municipal type services and facilities clearly within the
public purpose doctrine may be disregarded. In determining whether a
loan for the purchase or construction of a home is secured by a first
lien the Secretary may also disregard a superior lien created by a duly
recorded covenant running with the realty in favor of a private entity
to secure an obligation to such entity for the homeowner\'s share of the
costs of the management, operation, or maintenance of property, services
or programs within and for the benefit of the development or community
in which the veteran\'s realty is located, if the Secretary determines
that the interests of the veteran-borrower and of the Government will
not be prejudiced by the operation of such covenant. In respect to any
such superior lien to be created after June 6, 1969, the Secretary\'s
determination must have been made prior to the recordation of the
covenant.

**§36.4353 COMBINATION RESIDENTIAL AND BUSINESS PROPERTY**

If otherwise eligible, a loan for the purchase or construction of a
combination of residential property and business property which the
veteran proposes to occupy in part as a home will be eligible under 38
U.S.C. 3710, if the property is primarily for residential purposes and
no more than one business unit is included in the property.

**§36.4354** \[Reserved\]

**§36.4355 SUPPLEMENTAL LOANS**

\(a\) Any loan for the alteration, repair, improvement, extension,
replacement, or expansion of a home, with respect to which a guaranteed
or insured obligation of the borrower is currently outstanding, may be
reported for guaranty or insurance coverage, if such loan is made by the
holder of the currently outstanding obligation, notwithstanding the fact
no guaranty entitlement remains available to the borrower:

*Provided*, That if no entitlement remains available the maximum amount
payable on the revised guaranty shall not exceed the amount payable on
the original guaranty on the date of closing the supplemental loan, and
the percentage of guaranty shall be based upon the proportion the said
maximum amount bears to the aggregate indebtedness, or, in the case of
an insured loan, no additional credit to the holder\'s insurance account
may be made: *Provided further*, That the prior approval of the
Secretary shall be required if

\(1\) The loan will be made by a lender who is not the holder of the
currently guaranteed or insured obligation; or

\(2\) The loan will be made by a lender not of a class specified in 38
U.S.C. 3702(d); or

\(3\) An obligor liable on the currently outstanding obligation will be
released from personal liability.

In any case in which the unpaid balance of the prior loan currently
outstanding is combined or consolidated with the amount of the
supplemental loan, the entire aggregate indebtedness shall be repayable
in full within the maximum maturity currently prescribed by statute for
the original loan. No supplemental loan for the repair, alteration, or
improvement of residential property will be eligible for guaranty or
insurance unless such repair, alteration, or improvement substantially
protects or improves the basic livability or utility of the property
involved.

\(b\) Such loan shall be secured as required in §36.4351: *Provided*,
That a lien of lesser dignity than therein specified will suffice if the
lien obtained is immediately junior to the lien of the original
guaranteed or insured obligation: *Provided further*, The liens of
successive supplemental loans may be of lesser dignity so long as they
are immediately junior to the lien of the last previous guaranteed or
insured obligation having a lien of required dignity.

\(c\) Upon providing or extending guaranty or insurance coverage in
respect to any such supplemental loan, the rights of the Secretary to
the proceeds of the sale of security shall be subordinate to the right
of the holder to satisfy therefrom the indebtedness outstanding on the
original and supplemental loans.

**§36.4356 CONDOMINIUM LOANS-GENERAL**

\(a\) *Authority-Applicability of Other Loan Guaranty Regulations 38
CFR, Part 36*[.]{.underline} A loan to an eligible veteran to purchase a
one-family residential unit in a condominium housing development or
project shall be eligible for guaranty or insurance to the same extent
and on the same terms as other loans under 38 U.S.C. 3710 provided the
loan conforms to the provisions of chapter 37, title 38, U.S.C., except
for sections 3711 (direct loans), and 3727 (structural defects). The
loan must also conform to the otherwise applicable provisions of the
regulations concerning the guaranty or insurance of loans to veterans.
Sections 36.4353, 36.4355, and 36.4364 shall not be applicable.

\(b\) *Definitions*. On and after July 1, 1979, the following
definitions shall be applicable to each condominium loan entitled to be
guaranteed or insured, and shall be applicable to such loans previously
guaranteed or insured to the extent that no legal rights vested
thereunder are impaired. Whenever used in 38 U.S.C., chapter 37 or the
§36.4300 series, unless the context otherwise requires, the terms
defined in this paragraph shall have the meaning stated.

\(1\) *Affiliate of Declarant*. Affiliate of declarant means any person
or entity which controls, is controlled by, or is under common control
with, a declarant.

\(i\) A person or entity shall be considered to control a declarant if
that person or entity is a general partner, officer, director, or
employee of the declarant who:

\(a\) Directly or indirectly or acting in concert with one or more
persons, or through one or more subsidiaries, owns, controls, or holds
with power to vote, or holds proxies representing, more than 20 percent
of the voting shares of the declarant;

\(b\) Controls in any manner the election of a majority of the directors
of the declarant; or

\(c\) Has contributed more than 20 percent of the capital of the
declarant.

\(ii\) A person or entity shall be considered to be controlled by a
declarant if the declarant is a general partner, officer, director, or
employee of that person or entity who:

\(a\) Directly or indirectly or acting in concert with one or more
persons or through one or more subsidiaries, owns, controls, or holds
with power to vote, or holds proxies representing, more than 20 percent
of the voting shares of that person or entity;

\(b\) Controls in any manner the election of a majority of the directors
of that person or entity; or

\(c\) Has contributed more than 20 percent of the capital of that person
or entity.

\(2\) *Condominium*. Unless otherwise provided by State law, a
condominium is a form of ownership in which the buyer receives title to
a three dimensional air space containing the individual living unit
together with an undivided interest or share in the ownership of common
elements (restatement of §36.4301, Condominium.)

\(3\) *Conversion Condominium*. Condominium projects not originally
built and sold as condominiums but subsequently converted to condominium
form of ownership.

\(4\) *Declarant*. Any person who has executed a declaration or an
amendment to a declaration to add additional real estate to the project,
or any successors or assigns of the declarant who offers to sell or
sells units in the condominium project and who assumes declarant rights
in the project including the right to: Add, convert or withdraw real
estate from the condominium project; maintain sales offices, management
offices and rental units; exercise easements through the common elements
for the purpose of making improvements within the condominium; or
exercise control of the owners\' association. Declarant is further
defined as any sponsor of a project or affiliate of the declarant who is
acting on behalf of or exercising the rights of the declarant.

\(5\) *Existing-Declarant in Control or Marketing Units*. A condominium
in which all onsite or offsite improvements were completed or the
conversion was completed prior to appraisal by the Department of
Veterans Affairs, but the declarant is in control of the owners\'
association and/or is currently marketing units for initial transfer to
individual unit owners.

\(6\) *Existing-Resale*. A condominium in which all onsite or offsite
improvements were completed or the conversion was completed prior to
appraisal by the Department of Veterans Affairs, and the declarant is no
longer in control of the owners\' association and/or marketing units for
initial transfer to individual unit owners.

\(7\) *Expandable Condominium*. A project which may be increased in size
by the declarant. An expandable condominium is constructed in phases (or
stages). After each phase is completed and constituted, the common
estates are merged. Each unit owner, thereby, gains an individual
interest in all of the facilities of the common estate.

\(8\) *Foreclosure*. Foreclosure shall mean the termination of a lien by
either judicial or nonjudicial procedures in accordance with local law
or the voluntary transfer of property by a deed-in-lieu of foreclosure
or similar procedures.

\(9\) *High Rise Condominium*. A condominium project which is a
multi-story elevator building.

\(10\) *Horizontal Condominium*. A condominium project in which
generally no part of a living unit extends over and under another living
unit.

\(11\) *Low Rise Condominium*. A condominium project in which all or a
part of a living unit extends over or under another living unit; e.g.,
garden apartment or walk-up project.

\(12\) *Proposed Condominium*. A condominium project that is to be
constructed or is under construction. In the case of a condominium
conversion, the declarant proposes to convert a building or buildings to
the condominium form of ownership, or the declarant is in the process of
converting the building or buildings to the condominium form of
ownership.

\(13\) *Series Condominium*. A number of adjoining but separately
constituted condominiums. As association of owners is established for
each project, and each association is responsible for maintenance and
upkeep of the common elements in its own project. Cross-easements
between the separate condominiums may be created to permit members of
the separate condominiums to use the common areas of the other
condominiums.

\(c\) *Project Approval*. Prior to the Department of Veterans Affairs
guaranty of an individual unit loan in a condominium, the legal
documentation establishing the condominium project or development must
be approved by the Secretary. (Authority: 38 U.S.C. 501(b), 3703(c)(1),
3710(a)(6))

**§36.4357 ACCEPTABLE OWNERSHIP ARRANGEMENTS AND DOCUMENTATION**

\(a\) *Types of Condominium Ownership*. The following types of basic
ownership arrangements are generally acceptable provided they are
established in compliance with the applicable condominium law of the
jurisdiction(s) in which the condominium is located:

\(1\) Ownership of units by individual owners coupled with an undivided
interest in all common elements.

\(2\) Ownership of units by individual owners coupled with an undivided
interest in general common elements and specified limited common
elements.

\(3\) Individual ownership of units coupled with an undivided interest
in the general common elements and/or limited common elements, with
title to additional property for common use vested in an association of
unit owners, with mandatory membership by unit owners or owners\'
associations. Any such arrangement must not be precluded by applicable
State law. (Authority: 38 U.S.C. 510(b), 3710(a)(6))

\(b\) *Estate of Unit Owner.* The legal estate of each unit owner must
comply with the provisions of §36.4350. The declaration or equivalent
document shall allocate an undivided interest in the common elements to
each unit. Such interest may be allocated equally to each unit, may be
proportionate to that unit\'s relative size or value, or may be
allocated according to any other specified criteria provided that the
method chosen is equitable and reasonable for the condominium.
(Authority: 38 U.S.C. 510(b), 3703(c)(1), (d)(3), 3710(a)(6))

\(c\) *Condominium Documentation*

\(1\) *Compliance with Applicable Law*. The declaration, bylaws and
other enabling documentation shall conform to the laws governing the
establishment and maintenance of condominium regimes within the
jurisdiction in which the condominium is located, and to all other laws
which apply to the condominium.

\(2\) *Recordation*. The declaration and all amendments or modifications
thereof shall be placed of record in the manner prescribed by the
appropriate jurisdiction. If recording of plats, plans, or bylaws or
equivalent documents and all amendments or modifications thereof is the
prevailing practice or is required by law within the jurisdiction where
the project is located, then such documents shall be placed of record.
If the bylaws are not recorded, then covenants, restrictions and other
matters requiring record notice should be contained in the declaration
or equivalent document.

\(3\) *Availability*. The owners\' association shall be required to make
available to unit owners, lenders and the holders, insurers and
guarantors of the first mortgage on any unit, current copies of the
declaration, bylaws and other rules governing the condominium, and other
books, records and financial statements of the owners\' association. The
owners\' association also shall be required to make available to
prospective purchasers current copies of the declaration, bylaws, other
rules governing the condominium, and the most recent annual audited
financial statement, if such is prepared. \"Available\" as used in this
paragraph (c)(3) shall at least mean available for inspection, upon
request, during normal business hours or under other reasonable
circumstances.

\(4\) *Amendments to Documents After Department of Veterans Affairs
Project Approval.* While the declarant is in control of the owners\'
association, amendments to the declaration, bylaws or other enabling
documentation must be approved by the Secretary. The declarant should
have proposed amendments reviewed prior to recordation. This provision
does not apply to amendments which annex additional phases to the
condominium regime in accordance with a general plan of development.
(§36.4360(a)(3) and §36.4360a(b)(6).). (Authority: 38 U.S.C. 501(b),
3703(c)(1), 3710(a)(6))

\(d\) *Real Property Descriptions in the Declaration*

\(1\) *Clarity-Conformity with the Law of the Jurisdiction*. The
description of the units, common elements, any recreational facilities
and other related amenities, and any limited common elements shall be
clear and in conformity with the law of the jurisdiction where the
project is located. Responsibility for maintenance and repair of all
portions of the condominium shall be set forth clearly.

\(2\) *Developmental Plan-Proposed Condominiums*. The declaration or
other legally enforceable and binding document must state in a
reasonable manner the overall development plan of the condominium,
including building types, architectural style and the size of the units
for those phases of the condominium which are required to be built.
Under the applicable provisions of the declaration or such other legally
enforceable and binding document, the development of the required
portion of the condominium must be consistent with the overall plan,
except that the declarant may reserve the right to change the overall
plan or decide not to construct planned units or improvements to the
common elements if the declaration sets forth the conditions required to
be satisfied prior to the exercise of that right the time within which
the right may be exercised, and any other limitations and criteria that
would be necessary or appropriate under the particular circumstances.
Such conditions, time restraints and other limitations must be
reasonable in light of the overall plan for the condominium. In an
expandable project, additional phases which are not required to be built
may be described in the development plan in very general terms, or the
declaration may provide that the declarant makes no assurances
concerning the construction, building types, architectural style and
size of the units, etc., of these phases. However, the minimum number of
units to be built should be that which would be adequate to reasonably
support the common elements. (See §36.4360(a)(6).) (Authority: 38 U.S.C.
501(b), 3703(c)(1), 3710(a)(6))

**§36.4358 RIGHTS AND RESTRICTIONS**

\(a\) *Declarant\'s Rights and Restrictions*

\(1\) *Disclosure and Reasonableness of Reserved Rights.* Any right
reserved by the declarant must be reasonable and set forth in the
declaration.

\(2\) *Examples of Reserved Rights of Declarant, Sponsor, or Affiliate
of Declarant which are Usually Unacceptable*. Binding the owners\'
association either directly or indirectly to any of the following
agreements is not acceptable unless the owners\' association shall have
a right of termination thereof which is exercisable without penalty at
any time after transfer of control, upon not more than 90 days\' notice
to the other party thereto:

\(i\) Any management contract, employment contract or lease of
recreational or parking areas or facilities;

\(ii\) Any contract or lease, including franchises and licenses, to
which a declarant is a party.

The requirements of paragraphs (a)(2)(i) and (ii) of this section do not
apply to acceptable ground leases.

\(3\) *Examples of Reserved Rights which are Usually Acceptable*. The
following rights in the common elements may usually be reserved by the
declarant for a reasonable period of time, subject to a concomitant
obligation to restore:

\(i\) Easement over and upon the common elements and upon lands
appurtenant to the condominium for the purpose of completing
improvements for which provision is made in the declaration, but only if
access thereto is otherwise not reasonably available.

\(ii\) Easement over and upon the common elements for the purpose of
making repairs required pursuant to the declaration or contracts of sale
made with unit purchasers.

\(iii\) Right to maintain facilities in the common areas which are
identified in the declaration and which are reasonably necessary to
market the units. These may include sales and management offices, model
units, parking areas, and advertising signs. (Authority: 38 U.S.C.
501(b), 3703(c)(1), 3710(a)(6))

\(b\) *Owners\' Association\'s Rights and Restrictions*

\(1\) *Right of Entry Upon Units and Limited Common Elements*. The
owners\' association shall be granted a right of entry upon unit
premises and any limited common elements to effect emergency repairs,
and a reasonable right of entry thereupon to effect other repairs,
improvements, replacement or maintenance as necessary.

\(2\) *Power to Grant Rights and Restrictions in Common Elements.* The
owners\' association should be granted other rights, such as the right
to grant utility easements under, through or over the common elements,
which are reasonably necessary to the ongoing development and operation
of the project.

\(3\) *Responsibility for Damage to Common Elements and Units.* A
provision may be made in the declaration or bylaws for allocation of
responsibility for damages resulting from the exercise of any of the
above rights.

\(4\) *Assessments.*

\(i\) *Levy and Collection*. The declaration or its equivalent shall
describe the authority of the owners\' association to levy and enforce
the collection of general and special assessments for common expenses
and shall describe adequate remedies for failure to pay such common
expenses. The common expenses assessed against any unit, with interest,
late charges, costs and a reasonable attorney\'s fee shall be a lien
upon such unit in accordance with applicable law. Each such assessment,
together with interest, late charges, costs, and attorney\'s fee, shall
also be the personal obligation of the person who was the owner of such
unit at the time the assessment fell due. The personal obligation for
delinquent assessments shall not pass to successors in title or interest
unless assumed by them, or required by applicable law. Common expenses
as used in this subdivision shall mean expenditures made or liabilities
incurred by or on behalf of the owners\' association, together with any
assessments for the creation and maintenance of reserves.

\(ii\) *Reserves and Working Capital*. There shall be in new or proposed
condominium projects (including conversions) a provision for an adequate
reserve fund for the periodic maintenance, repair and replacement of the
common elements, which fund shall be maintained out of regular
assessments for common expenses. Additionally, a working capital fund
must be established for the initial months of the project operations
equal to at least 2 months\' estimated common area charge for each unit.

\(iii\) *Priority of Lien.* Any assessment lien must be subordinate to
any Department of Veterans Affairs guaranteed mortgage except as
provided in §36.4352. A lien for common expense charges and assessments
shall not be affected by any sale or transfer of a unit except that a
sale or transfer pursuant to a foreclosure of a first mortgage shall
extinguish a subordinate lien for common expense charges and assessments
which became payable prior to such sale or transfer. Any such sale or
transfer pursuant to a foreclosure shall not relieve the purchaser or
transferee of a unit from liability for, nor the unit so sold or
transferred from the lien of, any common expense charges thereafter
becoming due. (Authority: 38 U.S.C. 501(b), 3703(c)(1), (d)(3),
3710(a)(6))

\(c\) *Unit Owners\' Rights and Restrictions.*

\(1\) *Obligation to Pay Expenses.* The declaration or equivalent
document shall establish a duty on each unit owner, including the
declarant, to pay a proportionate share of common expenses upon being
assessed therefor by the owners\' association. Such share may be
allocated equally to each unit, may be proportionate to that unit\'s
common element interest, relative size or value, or may be allocated
according to any other specified criteria provided that the method
chosen is equitable and reasonable for that condominium.

\(2\) *Voting Rights.* The declaration or equivalent document shall
allocate a portion of the votes in the association to each unit. Such
portion may be allocated equally to each unit, may be proportionate to
that unit\'s common expense liability, common element interest, relative
size or value, or may be allocated according to any other specified
criteria provided that the method is equitable and reasonable for the
condominium. The declaration may provide different criteria for
allocations of votes to the units on particular specified matters and
may also provide different percentages of required unit owner approvals
for such particular specified matters.

\(3\) *Ingress and Egress of Unit Owners.* There may not be any
restriction upon any unit owner\'s right of ingress and egress to his or
her unit.

\(4\) *Encroachment - Units and Common Elements.*

\(i\) *Easements for Encroachments.* In the event any portion of the
common elements encroaches upon any unit or any unit encroaches upon the
common elements or another unit as a result of the construction,
reconstruction, repair, shifting, settlement, or movement of any portion
of the improvements, a valid easement for the encroachment and for the
maintenance of the same shall exist so long as the encroachment exists.
The declaration may provide, however, reasonable limits on the extent of
any easement created by the overlap of units, common elements, and
limited common elements resulting from such encroachments; or

\(ii\) *Monuments as Boundaries*. If permitted by the governing law
within the jurisdiction where the project is located, the existing
physical boundaries of a unit or a common element of the physical
boundaries of a unit or a common element reconstructed in substantial
accordance with the original plats and plans thereof become its
boundaries rather than the metes and bounds expressed in the deed, plat
or plan, regardless of settling or lateral movement of the building, or
minor variance between boundaries should on the plats, plans or in the
deed and those of the building. The declaration should provide
reasonable limits on the extent of any such revised boundary(ies)
created by the overlap of units, common elements, and limited common
elements resulting from such encroachments.

\(5\) *Right of First Refusal*. The right of a unit owner to sell,
transfer, or otherwise convey his or her unit in a condominium shall not
be subject to any right of first refusal or similar restriction if the
declaration or similar document is recorded on or after December 1,
1976. If the declaration was recorded prior to December 1, 1976, the
right of first refusal must comply with §36.4350(b)(5)(ii); *Provided,
however*, restrictions on the basis of age or restrictions established
by a State, Territorial, or local government agency as part of a program
for providing assistance to low- and moderate-income purchasers shall be
governed by §36.4350(b)(5)(iv). (Authority: 38 U.S.C. 3703(c))

\(6\) *Leasing Restrictions*. Except as provided in this paragraph,
there shall be no prohibition or restriction on a condominium unit
owner\'s right to lease his or her unit. The following restrictions are
acceptable:

\(i\) A requirement that leases have a minimum initial term of up to 1
year, or

\(ii\) Age restrictions or restrictions imposed by State or local
housing authorities which are allowable under §36.4308(e) or
§36.4350(b)(5)(iv).

\(d\) *Rights of Action*. The owners\' association and any aggrieved
unit owner should be granted a right of action against unit owners for
failure to comply with the provisions of the declaration, bylaws, or
equivalent documents, or with decisions of the owners\' association
which are made pursuant to authority granted the owners\' association in
such documents. Unit owners should have similar rights of action against
the owners\' association. (Authority: 38 U.S.C. 501(b), 3703(c)(1),
3710(a)(6))

**§36.4359 MISCELLANEOUS LEGAL REQUIREMENTS**

\(a\) *Declarant Transfer of Control of Owners\' Association.*

\(1\) *Standards for Transfer of Control*. The declarant shall
relinquish all special rights, expressed or implied, through which the
declarant may directly or indirectly control, direct, modify, or veto
any action of the owners\' association, its executive board, or a
majority of unit owners, and control of the owners\' association shall
pass to the owners of units within the project, not later than the
earlier of the following:

\(i\) 120 days after the date by which 75 percent of the units have been
conveyed to unit purchasers, or

\(ii\) The last date of a specified period of time following the first
conveyance to a unit purchaser; such period of time is to be reasonable
for the particular project. The maximum acceptable period usually will
be from 3 to 5 years for single-phased condominium regimes and 5 to 7
years for expandable condominiums.

\(iii\) On a case basis, modifications or variations of the requirements
of paragraphs (a)(i) and (ii) of this section (a)(1) will be acceptable,
particularly in circumstances involving very large condominium
developments.

\(2\) *Declarant\'s Unit Votes after Transfer of Control.* The
requirements of paragraph (a)(1) of this section shall not affect the
declarant\'s rights, as a unit owner, to exercise the votes allocated to
units which declarant owns.

\(3\) *Unit Owners\' Participation in Management*. Declarants should
provide for and foster early participation of unit owners in the
management of the project.

\(b\) *Taxes*. Unless otherwise provided by State law, real estate taxes
must be assessed and be lienable only against the individual units,
together with their undivided interests in the common elements, and not
against the multifamily structure. The owners\' association usually owns
no real estate, so it has no obligation concerning ad valorem taxes.
Unless taxes are assessed only against the individual units, a tax lien
could amount to more than the value of any particular unit in the
structure.

\(c\) \[Reserved.\]

\(d\) *Policies for Bylaws*. The bylaws of the condominium should be
sufficiently detailed for the successful governance of the condominium
by unit owners. Among other things, such documents should contain
adequate provisions for the election and removal of directors and
officers.

\(e\) *Insurance and Related Requirements*

\(1\) *Insurance*. The holder shall require hazard and flood insurance
policies to be procured and maintained in accordance with §36.4326.
Because of the nature of condominiums, additional types of insurance
coverages-such as tort liability insurance for injuries sustained on the
premises, personal liability insurance for directors and officers
managing association affairs, boiler insurance, etc. should be
considered in appropriate circumstances.

\(2\) *Fidelity Bond Coverage*. The securing of appropriate fidelity
bond coverage is recommended but not required, for any person or entity
handling funds of the owners\' association, including, but not limited
to, employees of the professional managers. Such fidelity bonds should
name the association as an obligee, and be written in an amount equal to
at least the estimated maximum of funds, including reserve funds, in the
custody of the owners\' association or the management agent at any given
time during the term of the fidelity bond. However, the bond should not
be less than a sum equal to 3 months\' aggregate assessments on all
units plus reserve funds. (Authority: 38 U.S.C. 501(b), 3703(c)(1),
3710(a)(6))

**§36.4360 DOCUMENTATION AND RELATED REQUIREMENTS-FLEXIBLE**

**CONDOMINIUMS AND CONDOMINIUMS WITH OFFSITE FACILITIES**

\(a\) *Expandable Condominiums*. The following policies apply to
condominium regimes which may be increased in size by the declarant:

\(1\) The declarant\'s right to expand the regime must be fully
described in the declaration. The declaration must contain provisions
adequate to ensure that future improvements to the condominium will be
consistent with initial improvements in terms of quality of
construction. The declarant must build each phase in accordance with an
approved general plan for the total development (§36.4357(d)(2))
supported by detailed plats and plans of each phase prior to the
construction of the particular phase.

\(2\) The reservation of a right to expand the condominium regime, the
method of expansion and the result of an expansion must not affect the
statutory validity of the condominium regime or the validity of title to
the units.

\(3\) The declaration or equivalent document must contain a covenant
that the condominium regime may not be amended or merged with a
successor condominium regime without prior written approval of the
Secretary. The declarant may have the proposed legal documentation to
accomplish the merger reviewed prior to recordation. However, the
Secretary\'s final approval of the merger will not be granted until the
successor condominium has been legally established and construction
completed. The declarant may add phases to an expandable condominium
regime without the prior approval of the Secretary if the phasing
implements a previously approved general plan for the total development.
A copy of the amendment to the declaration or other annexation document
which adds each phase must be submitted to the Secretary in accordance
with §36.4360a(b)(6).

\(4\) Liens arising in connection with the declarant\'s ownership of,
and construction of improvements upon, the property to be added must not
adversely affect the rights of existing unit owners, or the priority of
first mortgages on units in the existing condominium property. All
taxes, assessments, mechanic\'s liens, and other charges affecting such
property, covering any period prior to the addition of the property,
must be paid or otherwise satisfactorily provided for by the declarant.

\(5\) The declarant must purchase (at declarant\'s own expense) a
general liability insurance policy in an amount not less than \$1
million for each occurrence, to cover any liability which owners of
previously sold units are exposed to as a result of further condominium
development.

\(6\) Each expandable project shall have a specified maximum number of
units which will give each unit owner a minimum percentage of interest
in the common elements. Each project shall also have a specified minimum
number of units which will give each unit owner a maximum percentage of
interest in the common elements. The minimum number of units to be built
should be that which would be adequate to reasonably support the common
elements. The maximum number of units to be built should be that which
would not overload the capacity of the common facilities. The maximum
possible percentage(s) and the minimum possible percentage(s) of
undivided interest in the common elements for each type of unit must be
stated in the declaration or equivalent document.

\(7\) The declaration or equivalent document shall set forth clearly the
basis for reallocation of unit owner\'s ownership interests, common
expense liabilities and voting rights in the event the number of units
in the condominium is increased. Such reallocation shall be according to
the applicable criteria set forth in §§36.4357(b) and 36.4358(c)(1) and
(2).

\(8\) The declarant\'s right to expand the condominium must be for a
reasonable period of time with a specific ending date. The maximum
acceptable period will usually be from 5 to 7 years after the date of
recording the declaration. On a case bases, longer periods of expansion
rights will be acceptable, particularly in circumstances involving
sizable condominium developments.

\(b\) *Series Projects.*

\(1\) Each phase in the series approach is to be considered as a
separate project. A separate set of legal documents must be filed for
each phase or project that relates to the condominium within its own
boundary. The declaration for each phase must describe the particular
project as a part of the whole development area, but subject only the
one phase to the condominium regime. A separate unit ratio must be
established that would relate each unit to all units of the particular
condominium for purposes of ownership in the common areas, voting rights
and assessment liability. A separate association may be created to
govern the affairs of each condominium. Each phase is subject to a
separate presale requirement.

\(2\) In the case of proposed projects, or projects under construction,
the declaration should state the number of total units that the
developer intends to build on other sections of the development area.

\(c\) *Other Flexible Condominiums*. Condominiums containing
withdrawable real estate (contractable condominiums) and condominiums
containing convertible real estate (portions of the condominium within
which additional units or limited common elements, or both, may be
created) will be considered acceptable provided the flexible condominium
complies with the §36.4300 series. (Authority: 38 U.S.C. 501(b),
3703(c)(1), 3710(a)(6))

**§36.4360a APPRAISAL REQUIREMENTS**

\(a\) *Existing Resale Condominiums*. Upon acceptance by the local
office of the organizational documents, the project and unit(s) proposed
as security for guaranteed financing shall be appraised to ensure that
they meet MPR\'s (Minimum Property Requirements) and are safe, sanitary,
and structurally sound. The Department of Veterans Affairs MPR\'s for
existing construction apply to all existing resale condominiums
including conversions, except that water, heating, ventilating,
air-conditioning and sewer service may be supplied from a central
source. (Authority: 38 U.S.C. 501(b), 3703(c)(1), 3710(a)(6), (b)(5))

\(b\) *Proposed Condominiums or Existing Condominiums with Declarant in
Control or Marketing Units.*

\(1\) *Low Rise and High Rise Condominiums*. Low rise and high rise
condominiums shall comply with local building codes. Only the
alterations, improvements or repairs to low rise and high rise buildings
proposed to be converted to the condominium form of ownership must
comply with current local building codes, unless local authorities
require total code compliance on the entire structure when a building is
being converted to the condominium form of ownership. In those areas
where local standards are nonexistent, inferior to, or in conflict with
the Department of Veterans Affairs objectives, a certification will be
required from a registered professional architect and/or registered
engineer certifying that the plans and specifications conform to one of
the national building codes which is typical of similar construction
methods and standards for condominiums used in the area. Those portions
of the condominium conversion which are not being altered, improved or
repaired must be appraised in accordance with paragraph (a) of this
section.

\(2\) *Horizontal Condominiums*. Department of Veterans Affairs policies
and procedures applicable to single-family residential construction
shall also apply to horizontal condominiums. Proposed or existing
(declarant in control or marketing units) horizontal condominium
conversions shall comply with current local building codes for
alterations and improvements or repairs made to convert the building to
the condominium form of ownership unless local authorities require total
code compliance on the entire structure when a building is being
converted to the condominium form of ownership. In those areas where
local standards are nonexistent, inferior to, or in conflict with
Department of Veterans Affairs objectives, a certification will be
required from a professional architect and/or registered engineer
certifying that the plans and specifications conform to one of the
national building codes which is typical of similar construction methods
and standards for condominiums used in the area. Those portions of the
condominium conversion which are not being altered, improved or repaired
must be appraised in accordance with paragraph (a) of this section.
(Authority: 38 U.S.C. 501(b), 3703(c)(1))

\(3\) *Unit Completion*. All units in the individual project or phase
must be substantially completed except for customer preference items,
such as interior finishes, appliances or equipments.

\(4\) *Common Element Completion*. All amenities of the condominium (to
include offsite community facilities), that are to be considered in the
unit value, must be bound legally to the condominium regime. All such
amenities as well as the common elements of the project, must be
substantially completed and available for use by the unit owners. In
large multi-phase projects, the declarant should construct common
elements in a manner consistent with the addition of units to support
the entire development. The Secretary, in appropriate cases, may approve
the placement of adequate funds by the declarant in an escrow or
otherwise earmarked account or accept a letter of credit or surety bond
to assure completion of amenities and allow closing of VA-guaranteed (or
insured) loans. Such funds must be adequate to assure completion of the
amenities free and clear of all liens. (Authority: 38 U.S.C. 501(b),
3703(c)(1), 3710(a)(6))

\(5\) *Information Brochure/Public Offering Statement*. When units are
being sold by the declarant (not applicable to resales), and information
brochure/public offering statement must be given to veteran buyers prior
to the time a downpayment is received and an agreement is signed, unless
State law authorized receipt of the downpayment and delivery of the
information brochure followed by a period in which purchasers may cancel
the purchase agreement without penalty for a specified number of days.
Information brochures must be written in simple terms to inform buyers
that the association does not provide owner\'s contents and personal
liability policies which are the owner\'s responsibility. In the event
the development is expandable, series, etc., there must be full
disclosure of the impact of the total development plan. In expandable,
series or other projects with more than one phase, the information
brochure must disclose fully later development rights, and the general
plans of the declarant for additional phases. If the declarant makes no
assurance concerning phases which are not required to be built, the
declarant should state that no assurances are given concerning
construction, unit sizes, building types, architectural styles, etc. In
condominium conversions, the information brochure must list the major
structural and mechanical components and the estimated remaining useful
life of the components. A brief explanation must be furnished in the
brochure explaining that certain major structural or mechanical
components may require replacement within a specified time period. If
the declarant has elected to place funds into a condominium reserve fund
for replacement of a major component under the provisions of
§36.4360a(b)(7), the amount of the contribution into the reserve fund
must be specified in the information brochure.

\(6\) *Evidence of Proper Phasing*. In an expandable or flexible
condominium, evidence of the addition of each phase in accordance with a
previously approved general plan of development must be submitted to the
Secretary prior to the guaranty of the first loan in the added area.

\(7\) *Additional Condominium Conversion Requirements.*

\(i\) The declarant of a condominium project, which is (A) proposed, (B)
under construction, or (C) an existing project with a declarant in
control or marketing units not previously occupied, must furnish
structural and mechanical common element component statements on the
present condition of all accessible structural and mechanical components
material to the use and enjoyment of the condominium. These statements
must be completed by a registered professional engineer and/or architect
prior to the guaranty of the first unit loan in the project. Each
statement must also give an estimate of the expected useful life of the
roof, elevators, heating and cooling, plumbing and electrical systems
assuming normal maintenance. A minimum of 10 years estimated remaining
useful life is required on all structural and mechanical components. In
the alternative, the declarant may contribute an amount of funds to the
condominium reserve fund equal to a minimum of 1/10 (one-tenth) of the
estimated costs of replacement of a major structural or mechanical
component (as determined by an independent registered professional
architect or engineer) for each year of estimated remaining useful life
less than 10 years; e.g., 7 years remaining useful life equals a 3/10
required declarant contribution to the reserve fund of the component\'s
estimated replacement cost. The noted statements and remaining useful
life requirement are not applicable to existing resale conversion
projects when the declarant is no longer marketing units and/or in
control of the association. Expandable or series condominium conversions
require engineering and architectural statements on each stage or phase.

\(ii\) In declarant controlled projects, a statement(s) by the local
authority(ies) of the adequacy of offsite utilities servicing the site
(e.g., sanitary or water) is required. If a local authority(ies)
declines to issue such a statement(s), a statement(s) may be obtained
from a registered professional engineer.

\(c\) *Presale Requirements.*

\(1\) *Proposed Construction or Existing Declarant in Control*. Bona
fide agreements of sale must have been executed by purchasers other than
the declarant (who are obligated contractually to complete the purchase)
of 70 percent of the total number of units in the project. Lenders shall
certify as to satisfaction of the presale requirement prior to VA
guaranty of the first unit loan. When a declarant can demonstrate that a
lower percentage would be justified, the Secretary, on an individual
case basis, may approve a presale requirement of less than 70 percent.
Reduction of the 70 percent presale requirement will be considered when:

\(i\) Strong initial sales demonstrate a ready market, or

\(ii\) The declarant will provide cash assets or acceptable bonds for
payment of full common area assessments to the owners\' association
until such assessments are assumed by unit purchasers, or

\(iii\) Subsequent phases of an overall development are being undertaken
in a proven market area, or

\(iv\) Previous experience in similar projects in the same market area
indicates strong market acceptance, or

\(v\) The development is in a market area that has repeatedly indicated
acceptance of such projects.

\(2\) *Multiphase-Proposed or Existing Declarant in Control*. The
requirements of paragraph (c)(1) of this section shall apply to each
individual phase of a multiphase development, taking into consideration
that each individual phase must be capable of self-support in the event
that the developer does not complete all planned phases.

\(d\) *Warranty*. Except in condominium conversion projects, each CRV
(certificate of reasonable value) issued by the Secretary relating to a
proposed or existing not previously occupied dwelling unit in a
condominium project shall be subject to the express condition that the
builder, seller, or the real party in interest in the transaction shall
deliver to the veteran purchasing the dwelling unit with the aid of a
guaranteed or insured loan a warranty against defects for the unit and
common elements. The unit shall be warranted for 1 year from the date of
settlement or the date of occupancy (whichever first occurs). The common
elements shall be warranted for 2 years from the date each of the common
elements is completed and available for use by the unit owners, or 2
years from the date the first unit is conveyed to a unit owner other
than the declarant, whichever is later, in the particular phase of the
condominium containing the common element. For these purposes, defects
shall be those items reasonably requiring the repair, renovation,
restoration, or replacement of any of the components constituting the
unit or common elements. Items of maintenance relating to the unit or
common elements are not covered by the warranty. No certificate of
guaranty or insurance credit shall be issued unless a copy of such
warranty, duly receipted by the purchaser, is submitted with the loan
papers.

\(e\) *Ownership and Operation of Offsite Facilities.*

\(1\) *Title Requirements*. Evidence must be presented that the offsite
facility owned by an owners\' association with mandatory membership by
condominium unit owners or condominium unit owners\' associations has
been completed and conveyed free of encumbrances by the declarant for
the benefit of the unit owners with title insured by an owner\'s title
policy or other acceptable title evidence. Offsite facilities conveyed
to a nonprofit corporation are the preferred method of offsite
facilities ownership; however, the Secretary will consider other forms
of ownership on an individual case basis.

\(2\) *Mandatory Membership*. The declaration of the condominium (each
condominium in a series development) and the legal documentation of the
corporation or association which owns the offsite facility must provide
the following:

\(i\) The owner of a condominium unit is automatically a member of the
offsite facility corporation or association and that upon the sale of
the unit, membership is transferred automatically to the new
owner/purchaser. It is also acceptable if each condominium owners\'
association (in lieu of each individual unit owner) is automatically a
member of the offsite facility corporation or association coupled with
use rights for each of the unit owners or residents. If membership in an
offsite owners\' association is voluntary, no credit in the CRV
valuation may be given for such offsite amenities.

\(ii\) Each member of the offsite facility corporation or association
must be entitled to a representative vote at meetings of the offsite
facility corporation or association. If the individual condominium
owners\' association is a member of the offsite facility corporation or
association, each condominium owners\' association must be entitled to a
representative vote at meetings of the offsite facility corporation or
association.

\(iii\) Each member must agree by acceptance of the unit deed to pay a
share of the expenses of the offsite facility corporation or association
as assessed by the corporation or association for upkeep, insurance,
reserve fund for replacements, maintenance and operation of the offsite
facility. The share of said expenses shall be determined equitably.
Failure to pay such assessment must result in a lien against the
individual unit in the same manner as unpaid assessments by the owners\'
association of the condominium. If each condominium owners\' association
is a member of the offsite facility in lieu of individual unit owners
failure of the condominium owners\' association to pay its equitable
assessment to the offsite facility must result in an enforceable lien.

\(3\) *Declarant Payment of Offsite Facility in a Series Project*. Until
the declarant has completed all of the intended condominium phases in a
total condominium development or established each condominium regime by
filing a separate declaration in a series development, the balance of
the total sum of the expenses of the offsite facility not covered by the
assessment against the unit owners should be assessed against and be
payable by the declarant commencing on the first day of the first month
after the first unit is conveyed to a homeowner in the first phase. If
this balance is not paid, it must become a lien against those parcels of
land in the development area which are owned by the declarant. The
collection of such debt and enforcement of such lien may be by
foreclosure or such other remedies afforded the corporation or
association under local law.

\(f\) *Professional Management*. Many condominiums are small enough and
their common areas so minimal that professional management is not
necessary. VA does not have a requirement for professional management of
condominiums. The powers given to the owners\' association by the
declaration and bylaws are fundamentally for \"use control\" and
maintenance of the undivided interest all of the owners have in the
common areas. These powers normally include management which may, if
desired, be delegated to a professional manager. However, if the board
of directors wants professional management, the management agreement
must be terminable for cause upon 30 days\' notice, and run for a
reasonable period of from 1 to 3 years and be renewable by consent of
the association and management. (Management contracts negotiated by the
declarant should not exceed 2 years.)

\(g\) *Commercial Areas*. With respect to existing and proposed
condominiums, commercial areas within condominium developments are
acceptable, but such interests will be considered in value. (Authority:
38 U.S.C. 501(b), 3703(c)(1), 3710(a)(6))

**§36.4362 REQUIREMENT OF CONSTRUCTION WARRANTY**

Each certificate of reasonable value issued by the Secretary relating to
a proposed or newly constructed dwelling unit, except those covering
one-family residential units in condominium housing developments or
projects within the purview of §36.4356 through §36.4360a, shall be
subject to the express condition that the builder, seller, or the real
party in interest in the transaction shall deliver to the veteran
constructing or purchasing such dwelling with the aid of a guaranteed or
insured loan a warranty, in the form prescribed by the Secretary, that
the property has been completed in substantial conformity with the plans
and specifications upon which the Secretary based the valuation of the
property, including any modifications thereof, or changes or variations
therein, approved in writing by the Secretary, and no certificate of
guaranty or insurance credit shall be issued unless a copy of such
warranty duly receipted by the purchaser is submitted with the loan
papers.

**§36.4363 NONDISCRIMINATION AND EQUAL OPPORTUNITY IN HOUSING**

**CERTIFICATION REQUIREMENTS**

\(a\) Any request for a master certificate of reasonable value on
proposed or existing construction, and any request for appraisal of
individual existing housing not previously occupied, which is received
on or after November 21, 1962, will not be assigned for appraisal prior
to receipt of a certification from the builder, sponsor or other seller,
in the form prescribed by the Secretary, that neither it nor anyone
authorized to act for it will decline to sell any property included in
such request to a prospective purchaser because of his or her race,
color, religion, sex or national origin.

\(b\) On requests for appraisal of individual proposed construction
received on or after November 21, 1962, the prescribed nondiscrimination
certification will be required if the builder is to sell the veteran the
lot on which the dwelling is to be constructed, but will not be required
if:

\(1\) The veteran owns the lot; or

\(2\) The lot is being acquired by the veteran from a seller other than
the builder and there is no identity of interest between the builder and
the seller of the lot.

\(c\) Each builder, sponsor or other seller requesting approval of site
and subdivision planning shall be required to furnish a certification,
in the form prescribed by the Secretary, that neither it nor anyone
authorized to act for it will decline to sell any property included in
such request to a prospective purchaser because of his or her race,
color, religion, sex or national origin. Site and subdivision analysis
will not be commenced by the Department of Veterans Affairs prior to
receipt of such certification.

\(d\) No commitment shall be issued and no loan shall be guaranteed or
insured under 38 U.S.C. Chapter 37 unless the veteran certifies, in such
form as the Secretary shall prescribe, that

\(1\) Neither he/she, nor anyone authorized to act for him/her, will
refuse to sell or rent, after the making of a bona fide offer, or refuse
to negotiate for the sale or rental of, or otherwise make unavailable or
deny the dwelling or property covered by this loan to any person because
of race, color, religion, sex, or national origin;

\(2\) He/she recognizes that any restrictive covenant on the property
relating to race, color, religion, sex or national origin is illegal and
void and any such covenant is specifically disclaimed; and

\(3\) He/she understands that civil action for preventive relief may be
brought by the Attorney General of the United States in any appropriate
U.S. District Court against any person responsible for a violation of
the applicable law.

**§36.4364 CORRECTION OF STRUCTURAL DEFECTS**

\(a\) The purpose of this section is to specify the types of assistance
that the Secretary may render pursuant to 38 U.S.C. 3727 to an eligible
borrower who has been unable to secure satisfactory correction of
structural defects in a dwelling encumbered by a mortgage securing a
guaranteed, insured or direct loan, and the terms and conditions under
which such assistance will be rendered.

\(b\) A written application for assistance in the correction of
structural defects shall be filed by a borrower under a guaranteed,
insured or direct loan with the Director of the Department of Veterans
Affairs office having loan jurisdiction over the area in which the
dwelling is located. The application must be filed not later than 4
years after the date on which the first direct, guaranteed or insured
mortgage loan on the dwelling was made, guaranteed or insured by the
Secretary. A borrower under a direct, guaranteed or insured mortgage
loan on the same dwelling which was made, guaranteed or insured
subsequent to the first such loan shall be entitled to file an
application if it is filed within 4 years of the date on which such
first loan was made, guaranteed or insured by the Secretary.

\(c\) An applicant for assistance under this section must establish
that:

\(1\) The applicant is the owner of a one- to four-family dwelling which
was inspected during construction by the Department of Veterans Affairs
or the Federal Housing Administration.

\(2\) The applicant is an original veteran-borrower on an outstanding
guaranteed, insured or direct loan secured by a mortgage on such
dwelling which was made, guaranteed or insured on or after May 8, 1968.
The Secretary may, however, recognize an applicant who is not the
original veteran-borrower but who contracted to assume such borrower\'s
personal obligation thereunder, if the Secretary determines that such
recognition would be in the best interests of the Government in the
particular case.

\(3\) There exists in such dwelling structural defect, not the result of
fire, earthquake, flood, windstorm, or waste, which seriously affects
the livability of the dwelling.

\(4\) The applicant has made reasonable efforts to obtain correction of
such structural defect by the builder, seller, or other person or firm
responsible for the construction of the dwelling.

\(d\) In those instances in which the Secretary determines that
assistance under this section is appropriate and necessary the Secretary
may take any of the following actions:

\(1\) Pay such amount as is reasonably necessary to correct the defect,
or

\(2\) Pay the claim of the borrower for reimbursement of the borrower\'s
expenses for correcting or obtaining correction of the defect, or

\(3\) Acquire title to the property upon terms acceptable to the
borrower and the holder of the guaranteed or insured loan.

\(e\) To the extent of any expenditure made by the Secretary pursuant to
paragraph (d) of this section the Secretary shall be subrogated to any
legal rights the borrower or applicant described in paragraph (c)(2) of
this section may have against the builder, seller, or other persons
arising out of the structural defect or defects.

\(f\) The borrower shall not be entitled, as a matter of right, to
receive the assistance in the correction of structural defects provided
in this section. Any determination made by the Secretary in connection
with a borrower\'s application for assistance shall be final and
conclusive and shall not be subject to judicial or other review.
Authority to act for the Secretary under this section is delegated to
the Chief Benefits Director.

\(g\) For the purpose of this section the term \"structural defects
seriously affecting livability\" shall in no event be deemed to include
(1) defects of any nature in a dwelling in respect to which the
applicant for assistance under this section was the builder or general
contractor, or (2) structural features, improvements, amenities, or
equipment which were not taken into account in the Secretary\'s
determination of reasonable value.