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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.

**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

1.  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:

1.  \(a\) 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:

4.  \(1\) 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:

10. \(1\) 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:

17. \(1\) 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:

24. \(a\) 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:

33. \(1\) 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:

47. \(a\) 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:

58. \(1\) 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:

67. \(a\) 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:

77. \(a\) 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:

82. \(a\) 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:

87. \(1\) \$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:

90. \(a\) 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:

95. \(a\) 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:

105. \(1\) 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.

111. \(a\) **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.

115. \(1\) 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.

131. \(1\) **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.

**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:

134. 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.  \(1\) 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.  \(1\) 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:

148. \(1\) 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:

155. 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:

166. \(1\) 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:

170. 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:

174. \(1\) 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))

178. **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:

184. 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:

203. \(1\) 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.

**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:

220. \(1\) 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:

223. \(a\) 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.

234. \(a\) 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:

244. \(a\) 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:

247. \(a\) 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.

250. \(a\) 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.

258. \(a\) 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:

271. \(a\) 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:

274. \(a\) 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:

294. \(1\) 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:

304. \(a\) 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:

308. \(1\) 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:

311. \(a\) **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:

327. \(1\) 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:

333. \(1\) **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:

354. \(1\) 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:

365. \(1\) 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:

368. \(1\) 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:

373. \(1\) 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.

**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:

386. \(1\) 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:

389. 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:

399. \(1\) 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:

406. 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.

**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:

415. 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:

426. 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.\"

427. 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:

438. \(1\) 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:

444. \(a\) 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.

448. 

**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.