[**REGULATIONS GOVERNING THE VA LOAN GUARANTY
PROGRAM**](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=LH95&s1=@docn&l=100&SECT1=TXTHLB&SECT5=LH95&u=./hudclips.cgi&p=1&r=24&f=G)

CONTENTS

PART IV. TITLE 38 CFR 36.4300 SERIES

GUARANTY OR INSURANCE OF LOANS TO VETERANS

SECTION PAGE

36.4300 Applicability of 36.4300 to 36.4393, Inclusive IV-1

36.4301 Definitions IV-1

General Provisions

36.4302 Computation of Guaranties or Insurance Credits IV-9

36.4303 Reporting Requirements IV-12

36.4304 Deviations, Changes of Identity IV-17

36.4305 Partial Disbursement IV-18

36.4306 Refinancing of Mortgage or Other Lien Indebtedness IV-19

36.4306a Interest Rate Reduction Refinancing Loan IV-20

36.4307 Joint Loans IV-22

36.4308 Transfer of Title by Borrower or Maturity by Demand or

Acceleration IV-23

36.4309 Amortization IV-25

36.4310 Prepayment IV-27

36.4311 Interest Rates IV-27

36.4312 Charges and Fees IV-28

36.4313 Advances and Other Charges IV-33

36.4314 Extensions and Reamortizations IV-34

36.4315 Notice of Default and Acceptability of Partial Payments IV-35

36.4316 Continued Default IV-36

36.4317 Notice of Intention to Foreclose IV-37

36.4318 Refunding of Loans in Default IV-37

36.4319 Legal Proceedings IV-37

36.4320 Sale of Security IV-39

36.4321 Computation of Guaranty Claims; Subsequent Accounting IV-47

36.4322 Computation of Indebtedness IV-49

36.4323 Subrogation and Indemnity IV-49

36.4324 Release of Security IV-53

36.4325 Partial or Total Loss of Guaranty or Insurance IV-54

36.4326 Hazard Insurance IV-56

36.4327 Substitution of Trustees IV-57

36.4328 Capacity of Parties to Contract IV-57

36.4329 Geographical Limits IV-57

36.4330 Accounting Records IV-57

36.4331 Disqualification of Lenders IV-58

36.4332 Delivery of Notice IV-61

36.4333 Satisfaction of Indebtedness IV-61

36.4334 Incorporation by Reference IV-61

36.4335 Supplementary Administrative Action IV-61

36.4336 Eligibility of Loans; Reasonable Value Requirements IV-62

36.4337 Canceled

36.4338 Death or Insolvency of Holder IV-64

36.4339 Qualification for Designated Fee Appraiser IV-64

IV-i

CONTENTS

PART IV. TITLE 38 CFR 36.4300 SERIES

GUARANTY OR INSURANCE OF LOANS TO VETERANS\--Continued

SECTION PAGE

36.4340 Restriction on Designated Fee Appraisers IV-65

36.4341 Suspension or Removal of Appraisers IV-65

36.4342 Delegation of Authority IV-65

36.4343 Cooperative Loans IV-66

36.4344 Lenders Appraisal Processing Program IV-68

36.4345 Waivers, Consents, and Approvals; When Effective IV-73

36.4346 Canceled

36.4347 Minimum Property and Construction Requirements IV-74

36.4348 Canceled

36.4349 Canceled

36.4350 Estate of Veteran in Real Property IV-74

36.4351 Loans, First, Second or Unsecured IV-78

36.4352 Tax, Special Assessment and Other Liens IV-79

36.4353 Combination Residential and Business Property IV-79

36.4354 Canceled

36.4355 Supplemental Loans IV-79

36.4356 Condominium Loans-General IV-80

36.4357 Acceptable Ownership Arrangements and Documentation IV-83

36.4358 Rights and Restrictions IV-85

36.4359 Miscellaneous Legal Requirements IV-89

36.4360 Documentation and Related Requirements-Flexible

Condominiums and Condominiums with Offsite Facilities IV-90

36.4360a Appraisal Requirements IV-92

36.4361 Right of the Secretary to Refuse to Appraise Residential

Properties IV-98

36.4362 Requirement of Construction Warranty IV-99

36.4363 Nondiscrimination and Equal Opportunity in Housing

Certification Requirements IV-99

36.4364 Correction of Structural Defects IV-100

36.4365 Canceled

Loans Under 38 U.S.C. 1815

36.4370 Insured Loan and Insurance Account IV-102

36.4372 Transfer of Insured Loans IV-102

36.4373 Debits and Credits to Insurance Account Under 36.4318 IV-103

36.4374 Payment of Insurance IV-103

36.4375 Reports of Insured Institutions IV-103

36.4380 through 36.4389 Canceled

IV-ii

CONTENTS

PART IV. TITLE 38 CFR 36.4300 SERIES

GUARANTY OR INSURANCE OF LOANS TO VETERANS\--Continued

SECTION PAGE

Federally Assisted Construction Contracts -

Nondiscrimination in Employment-Executive Orders

11246 and 11375

36.4390 Purpose IV-104

36.4391 Applicability IV-104

36.4392 Certification Requirements IV-105

36.4393 Complaint and Hearing Procedure IV-107

IV-iii

PART IV. TITLE 38 CFR 36.4300 SERIES

GUARANTY OR INSURANCE OF LOANS TO VETERANS

NOTE: Those requirements, conditions, or limitations which are expressly
set

forth in 38 U.S.C. Chapter 37 are not restated in these regulations and
must

be taken into consideration in conjunction with sections 36.4300 to
36.4393 of

this part, inclusive.

36.4300 APPLICABILITY OF 36.4300 TO 36.4393, INCLUSIVE

\(a\) Sections 36.4300 to 36.4393 of this part, inclusive, shall be

applicable to each loan entitled to an automatic guaranty, or otherwise

guaranteed or insured, on or after the date of publication in the
Federal

Register, and shall be applicable to such loans previously guaranteed or

insured to the extent that no legal rights vested under the regulations
are

impaired.

\(b\) Title 38, United States Code, chapter 37, is a continuation and

restatement of the provisions of title III of the Servicemen\'s
Readjustment

Act of 1944, and may be considered an amendment to such title III.
References

to the sections or chapters of title 38, United States Code, shall,
where

applicable, be deemed to refer to the prior corresponding provisions of
the

law.

(Authority: 38 U.S.C. 210(c), 1803(c), 1819(g))

36.4301 DEFINITIONS

Whenever used in 38 U.S.C., chapter 37 or 36.4300 to 36.4375 of this

part, inclusive, and 36.4390 and 36.4393 of this part, unless the
context

otherwise requires, the terms defined in this section shall have the
following

meaning:

A period of more than 180 days. For the purposes of sections 1807 and

1802(a)(2)(C) of title 38, United States Code, the term \"a period of
more than

180 days\" shall mean 181 or more calendar days of continuous active
duty.

Acquisition and improvement loan. A loan to purchase an existing

property which includes additional funds for the purpose of installing
energy

conservation improvements or making other alterations, improvements, or

repairs.

(Authority: 38 U.S.C. 1803(c)(1), 1810(a)(1), (4), and (7))

Alterations. Any structural changes or additions to existing improved

realty.

Automatic Lender. A lender that may process a loan or assumption

without submitting the credit package to the Department of Veterans
Affairs

for underwriting review. Pursuant to 38 U.S.C. 1802(d) there are two

categories of lenders who may process loans automatically: (1) Entities
such

as banks, savings and loan

IV-1

associations, and mortgage and loan companies that are subject to
examination

by an agency of the United States or any State and (2) lenders approved
by the

Department of Veterans Affairs pursuant to standards established by the

Department of Veterans Affairs.

(Authority: 38 U.S.C. 1802(d))

Condominium. Unless otherwise provided by State law, a condominium is a

form of ownership where the buyer receives title to a three dimensional
air

space containing the individual living unit together with an undivided

interest or share in the ownership of common elements.

Cost. The entire consideration paid or payable for or on account of the

application of materials and labor to tangible property.

Credit Package. Any information, reports or verifications used by a

lender, holder or authorized servicing agent to determine the
creditworthiness

of an applicant for a Department of Veterans Affairs guaranteed loan or
the

assumer of such a loan.

(Authority: 38 U.S.C. 1810 and 1814)

Date of First Uncured Default. The due date of the earliest payment not

fully satisfied by the proper application of available credits or
deposits.

Default. Failure of a borrower to comply with the terms of a loan

agreement.

Designated Appraiser. A person requested by the Secretary to render an

estimate of the reasonable value of a property, or of a specified type
of

property, within a stated area for the purpose of justifying the
extension of

credit to an eligible veteran for any of the purposes stated in 38
U.S.C.,

chapter 37. An appraiser on a fee basis is not an agent of the
Secretary.

Discharge or Release. For purposes of basic eligibility a person will

be considered discharged or released if the veteran was issued a
discharge

certificate under conditions other than dishonorable (38 U.S.C.
1802(c)). The

term \"discharge or release\" includes (1) retirement from the active
military,

naval, or air service, and (2) the satisfactory completion of the period
of

active military, naval, or air service for which a person was obligated
at the

time of entry into such service in the case of a period who, due to
enlistment

or reenlistment, was not awarded a discharge or release from such period
of

service at the time of such completion thereof and who, at such time,
would

otherwise have been eligible for the award of a discharge or release
under

conditions other than dishonorable.

(Authority: 38 U.S.C. 101(18))

IV-2

Dwelling. Any building designed primarily for use as a home consisting

of not more than four family units plus an added unit for each veteran
if more

than one eligible veteran participates in the ownership, except that in
the

case of a condominium housing development or project within the purview
of 38

U.S.C. 1810(a)(6) and § 36.4356 through 36.4360(a) of this part the term
is

limited to a one single-family residential unit. Also, a manufactured
home,

permanently affixed to a lot owned by a veteran and classified as real

property under the laws of the State where it is located.

(Authority: 38 U.S.C. 1810(a)(9) and (f))

Economic Readjustment. Means rearrangement of an eligible veteran\'s

indebtedness in a manner calculated to enable the veteran to meet
obligations

and thereby avoid imminent loss of the property which secures the
delinquent

obligation.

Energy Conservation Improvement. An improvement to an existing dwelling

or farm residence through the installation of a solar heating system, a
solar

heating and cooling system, or a combined solar heating and cooling
system, or

through application of a residential energy conservation measure as
prescribed

in 38 U.S.C. 1810(d) or by the Secretary.

(Authority: 38 U.S.C. 1810(a)(7))

Full Disbursement. Payment by a lender of the entire proceeds of a loan

for the purposes described in the report of the lender in respect of
such loan

to the Secretary either:

\(1\) By payment to those contracting with the borrower for such

purposes, or

\(2\) By payment to the borrower, or

\(3\) By transfer to an account against which the borrower can draw at

will, or

\(4\) By transfer to an escrow account, or

\(5\) By transfer to an earmarked account if

\(i\) The amount is not in excess of 10 percent of the loan, or

\(ii\) The loan is an acquisition and improvement loan pursuant to

36.4301, or

\(iii\) The loan is one submitted by a lender of the class specified in

38 U.S.C. 1802(d) or 1803(a)(2).

(Authority: 38 U.S.C. 1803(c)(1))

IV-3

Graduated Payment Mortgage Loan. A loan for the purpose of acquiring a

single-family dwelling unit involving a plan for repayment in which a
portion

of the interest due is deferred for a period of time. The interest so

deferred is added to the principal balance thus resulting in a principal

amount greater than at loan origination (negative amortization). The
monthly

payments increase on an annual basis (graduate) for a predetermined
period of

time until the payments reach a level which will fully amortize the loan

during the remaining loan term.

(Authority: 38 U.S.C. 1803(c) and (d))

Guaranty. The obligation of the United States, assumed by virtue of 38

U.S.C., chapter 37, to repay a specified percentage of a loan upon the
default

of the primary debtor.

Holder. The lender on any subsequent assignee or transferee of the

guaranteed or insured obligation. For purposes of the assumption review

required by 38 U.S.C. 1814, the term \"holder\" shall also apply to the
servicer

of a loan guaranteed or insured under 38 U.S.C., chapter 37.

(Authority: 38 U.S.C. 1814)

Home. Place of residence.

Improvements. Any alteration that improves the property for the purpose

for which it is occupied.

Indebtedness. The unpaid principal and interest plus any other amounts

allowable under the terms of a loan including those authorized by
statute and

consistent with 36.4300 to 36.4393 of this part, inclusive, which have
been

paid and debited to the loan account as of the applicable date
established

pursuant to paragraph (f) of 36.4319 or 36.4321 of this part.

(Authority: 38 U.S.C. 1832)

Insurance. The obligation assumed by the United States to indemnify a

lender to the extent specified in 36.4300 to 36.4393, inclusive, for any

loss incurred upon any loan insured under 38 U.S.C. 1803(a)(2).

Insurance Account. The record of the amount available to a lender or

purchaser for losses incurred on loans insured under 38 U.S.C. 1815.

Lender. The payee or assignee or transferee of an obligation at the

time it is guaranteed or insured. This term also includes any sole

proprietorship, partnership, or corporation and the owners, officers,
and

employees of a sole proprietorship, partnership, or corporation engaged
in the

origination, procurement, transfer, servicing, or funding or a loan
which is

guaranteed or insured by VA.

(Authority: 38 U.S.C. 1804(d); 1812(g))

IV-4

Lien. Any interest in, or power over, real or personal property,

reserved by the vendor, or created by the parties or by operation of
law,

chiefly or solely for the purpose of assuring the payment of the
purchase

price, or a debt, and irrespective of the identity of the party in whom
title

to the property is vested, including but not limited to mortgages, deeds
with

a defeasance therein or collaterally, deeds of trust, security deeds,

mechanics\' liens, lease-purchase contracts, conditional sales
contracts,

consignments.

Liquidation Sale. Any judicial, contractual or statutory disposition of

real property, under the terms of the loan instruments and applicable
law, to

liquidate a defaulted loan that is secured by such property. This
includes a

voluntary conveyance made to avoid such disposition of the obligation or
of

the security.

(Authority: 38 U.S.C. 1832)

Lot. A parcel of land acceptable to the Secretary as a manufactured

home site.

(Authority: 38 U.S.C. 1810(a)(9))

Manufactured Home. A moveable dwelling unit designed and constructed

for year-round occupancy by a single family, on land, containing
permanent

eating, cooking, sleeping and sanitary facilities. A double-wide
manufactured

home is a moveable dwelling designed for occupancy by one family and

consisting of (1) two or more units intended to be joined together

horizontally when located on a site, but capable of independent movement
or

\(2\) a unit having a section or sections which unfold along the entire
length

of the unit. For the purposes of this section of the VA regulations,

manufactured home/lot loans guaranteed under the purview of 36.4300 to

36.4393, inclusive, must be for units permanently affixed to a lot and

considered to be real property under the laws of the State where it is

located. If the loan is for the purchase of a manufactured home and lot
it

must be considered as one loan.

(Authority: 38 U.S.C. 1810(a)(9))

Net Loss (insured loans). The indebtedness, plus any other charges

authorized under 36.4313, remaining unsatisfied after the liquidation of
all

available security and recourse to all intangible rights of the holder
against

those obligated on the debt.

Net Value. The fair market value of real property, minus the total of

the costs the Secretary estimates would be incurred by VA resulting from
the

acquisition and disposition of the property for property taxes,
assessments,

liens, property maintenance, property improvement, administration, and
resale.

For purposes of determination of net value, \"property improvement\" is
defined

as any repair which must be completed to satisfy minimum property
requirements

for existing construction as described by the Secretary. Costs other
than

property improvement will be estimated as a percentage of the fair
market

value. Each year VA will review the

IV-5

average operating expenses incurred for properties acquired under
36.4320

of this part which were sold during the preceding 3 fiscal years and the

average administrative cost to the government associated with the
property

management activity. The cost items reviewed will be:

(Authority: 38 U.S.C. 1832)

\(1\) Property Operating Expenses. All disbursements made for payment of

taxes, assessments, liens, property maintenance and related repairs,

management broker\'s fees and commissions, and any other charges to the

property account excluding property improvements and selling expenses.

\(2\) Selling Expenses. All disbursements for sales commissions plus any

other costs incurred and paid in connection with the sale of the
property.

\(3\) Administrative Costs. An estimate of the total costs for VA of

personnel compensation and overhead (including all travel,
transportation,

standard level user charges (SLUC), communication, utilities, printing,

supplies, equipment, insurance claims and other services) associated
with the

acquisition, management and disposition of property acquired under
36.4320 of

this part. The average administrative costs will be determined by:

\(i\) Dividing the salary and benefits cost by the average number of

properties on hand and adjusting this figure based on the average
holding time

for properties sold during the preceding fiscal year; then

\(ii\) Dividing part (i) by the VBA ratio of personal services to total

obligations.

The three cost averages will be added and the sum will be divided by the

average fair market value at the time of acquisition for properties
which were

sold during the 3 preceding fiscal years to derive the percentage to be
used

in estimating net value. (The Secretary may, when determining property

management costs, group properties in incremental value brackets.) The

calculation of net value will be based on the actual cost incurred over
the

last 3 years. Based on fiscal year 1989 data, the percentage to be used
when

calculating net value will be 11.45 percent. The fiscal year and the

percentage will be updated annually through a notice in the Federal
Register.

(Authority: 38 U.S.C. 1832)

\(4\) Government Cost of Funds. The estimated interest cost of funds

payable for property acquisition is determined by multiplying the
average

holding time (expressed in years) from property acquisition to resale
for

properties acquired under 36.4320 of this part which were sold during
the

preceding fiscal year by an interest rate equivalent to the yield on
Treasury

obligations with a maturity

IV-6

comparable to such average holding time. This yield is calculated from
the

\"Treasury Market Bid Yields at Constant Maturities: Bills, Notes and
Bonds\"

as prepared by the Department of the Treasury showing the average yields
on

Treasury obligations for selected maturities. Source data for the
calculation

are the average yields during the last month of the preceding fiscal
year for

the next lower and next higher maturities as compared to the average
holding

time. The yield for the average holding time is interpolated from the
yields

for these maturities. Based on fiscal year 1988 data, the percentage of
fair

market value representing the Government\'s cost of funds will be 4.45
percent.

The fiscal year and the percentage will be updated annually through a
notice

in the Federal Register. The first three cost averages will be added and
the

sum will be divided by the average fair market value at the time of

acquisition for properties which were sold during the 3 preceding fiscal

years, and the percentage of fair market value representing the
Government\'s

cost of funds will be added to the quotient, to derive the percentage to
be

used in estimating net value. (The Secretary may, when determining
property

management costs, group properties in incremental value brackets.) The

calculation of net value will be based on the actual cost incurred over
the

last 3 years plus the estimated interest cost to the Government of funds

payable for property acquisition in the current fiscal year. Based on
fiscal

year 1988 data, the percentage to be used when calculating net value
will be

15.08 percent, which consists of 10.63 percent representing estimated
actual

costs plus 4.45 percent representing estimated interest costs. The
fiscal

year and the percentages will be updated annually through a notice in
the

Federal Register.

(Authority: 38 U.S.C. 1832)

Purchase Price. The entire legal consideration paid or payable upon or

on account of the sale of property, exclusive of acquisition costs, or
for the

cost of materials and labor to be applied to the property.

Real Estate Loan. Any obligation incurred for the purchase of real

property or a leasehold estate as limited in 36.4300 to 36.4393,
inclusive,

or for the construction of fixtures or appurtenances thereon or for

alterations, improvements, or repairs thereon required by 36.4300 to

36.4393, inclusive, to be secured by a lien on such property or is so
secured.

Loans for the purpose specified in 38 U.S.C. 1810(a)(5) refinancing of

mortgage loans or other liens on a dwelling or farm residence), loan for
the

purpose specified in 38 U.S.C. 1810(a)(8) (refinancing of a VA
guaranteed,

insured or direct loan to lower the interest rate) loans for the
purposes

specified in 38 U.S.C. 1810(a)(9) (purchase of manufactured homes/lots
or the

refinancing of such loans, in order to reduce the interest rate or
purchase a

lot, in States in which manufactured homes, when permanently affixed to
a lot,

are considered real property), and loans to purchase one-family
residential

units in condominium housing developments or projects within the purview
of 38

U.S.C. 1810(a)(6) and 36.4356 through 36.4360a shall also be considered
real

estate loans.

IV-7

Reasonable Value. That figure which represents the amount a reputable

and qualified appraiser, unaffected by personal interest, bias, or
prejudice,

would recommend to a prospective purchaser as a proper price or cost in
the

light of prevailing conditions.

Registered Mail. The term \"registered mail\" wherever used in the

regulations shall include certified mail.

Repairs. Any alteration of existing improved realty or equipment which

is necessary or advisable for protective, safety or restorative
purposes.

Repossession - Repossessed. Recovery or acquisition of such physical

control of property (pursuant to the provisions of the security
instrument or

as otherwise provided by law) as to make further legal or other action

unnecessary in order to obtain actual possession of the property or to
dispose

of the same by sale or otherwise.

Residential Property (1) Any one-family residential unit in a

condominium housing development within the purview of 38 U.S.C.
1810(a)(6) and

36.4356 through 36.4360a; (2) any manufactured home permanently affixed
to a

lot owned or being purchased by a veteran and considered to be real
property

under the laws of the State where it is located; and (3) any improved
real

property (other than a condominium housing development or a manufactured
home

and/or lot) or leasehold estate therein as limited by 36.4300 to
36.4393,

inclusive, the primary use of which is for occupancy as a home,
consisting of

not more than four family units, plus an added unit for each eligible
veteran

if more than one participates in the ownership thereof, or (4) any land
to be

purchased out of the proceeds of a loan for the construction of a
dwelling,

and on which such dwelling is to be erected.

(Authority: 38 U.S.C. 1810(f)(2))

Secretary. The Secretary of Veterans Affairs, or any employee of VA

authorized to act in the Secretary\'s stead.

Servicing Agent. An agent designated by the loan holder as the entity

to collect installments on the loan and/or perform other functions as

necessary to protect the interests of the holder.

(Authority: 38 U.S.C. 1814)

Specified Amount. A sum, equal to the lesser of the net value of real

property or the total indebtedness secured thereby, which the Secretary

designates as the minimum amount to be credited to the indebtedness
incident

to a liquidation sale.

(Authority: 38 U.S.C. 1832)

IV-8

Unguaranteed Portion of the Indebtedness. The indebtedness computed as

of the applicable date of under paragraph (f) of 36.4319

or 36.4321 of this part minus the amount of the guaranty payable as of
such

date.

(Authority: 38 U.S.C. 1816)

GENERAL PROVISIONS

36.4302 COMPUTATION OF GUARANTIES OR INSURANCE CREDITS

\(a\) With respect to a loan to a veteran guaranteed under 38 U.S.C.
1810

the guaranty shall not exceed the lesser of the dollar amount of
entitlement

available to the veteran; or

\(1\) 50 percent of the original principal loan amount where the loan

amount is not more than \$45,000; or

\(2\) \$22,500 where the original principal loan exceeds \$45,000, but
is

not more than \$56,250; or

\(3\) Except as provided in subparagraph (4), the lesser of \$36,000 or
40

percent of the original principal loan amount where the loan amount
exceeds

\$56,250; or

\(4\) The lesser of \$46,000 or 25 percent of the original principal
loan

amount where the loan amount exceeds \$144,000 and the loan is for the
purchase

or construction of a home or the purchase of a condominium unit.

(Authority: 38 U.S.C. 1803(a))

\(b\) With respect to a loan guaranteed under 38 U.S.C. 1810(a)(8) or

(9)(B)(i) the dollar amount of guaranty may not exceed the original
dollar

amount of guaranty on the loan being refinanced.

(Authority: 38 U.S.C. 1803(a))

\(c\) An amount equal to 15 percent of the original principal amount of

each insured loan shall be credited to the insurance account of the
lender and

shall be charged against the guaranty entitlement of the borrower:
Provided,

That no loan may be insured unless the borrower has sufficient
entitlement

remaining to permit such credit.

\(d\) Subject to the provisions of paragraph (g) of 36.4303, the

following formulas shall govern the computation of the amount of the
guaranty

or insurance entitlement which remains available to an eligible veteran
after

prior use of entitlement:

\(1\) If a veteran previously secured a nonrealty (business) loan, the

amount of nonrealty entitlement used is doubled and subtracted from
\$36,000.

The sum remaining is the amount of available entitlement for use except
that

\(i\) entitlement may be increased by

IV-9

up to \$10,000 if the loan amount exceeds \$144,000 and the loan is for
purchase

or construction of a home or purchase of a condominium, and (ii)
entitlement

for manufactured home loans that are to be guaranteed under 38 U.S.C.
1812 may

not exceed \$20,000.

\(2\) If a veteran previously secured a realty (home) loan, the amount
of

realty (home) loan entitlement used is subtracted from \$36,000. The sum

remaining is the amount of available entitlement for use except that (i)

entitlement may be increased by up to \$10,000 if the loan amount
exceeds

\$144,000 and the loan is for purchase or construction of a home or
purchase of

a condominium, and (ii) entitlement for manufactured home loans that are
to be

guaranteed under 38 U.S.C. 1812 may not exceed \$20,000.

\(3\) If a veteran previously secured a manufactured home loan under 38

U.S.C. 1812; the amount of entitlement used for that loan is subtracted
from

\$36,000. The sum remaining is the amount of available entitlement for
home

loans or manufactured home/lot loans guaranteed under 38 U.S.C. 1810,
except

that entitlement may be increased by up to \$10,000 if the loan amount
exceeds

\$144,000 and the loan is for purchase or construction of a home or
purchase of

a condominium. To determine the amount of entitlement available for

manufactured home loans, processed under 38 U.S.C. 1812, the amount of

entitlement previously used for that purpose is subtracted from
\$20,000. The

sum remaining is the amount of available entitlement for use for
manufactured

home loan purposes under 38 U.S.C. 1812.

(Authority: 38 U.S.C. 1803(a), 1812(c)(4))

\(e\) For the purpose of computing the remaining guaranty or insurance

benefit to which a veteran is entitled, loans guaranteed prior to the

effective date of 36.4300 to 36.4393, inclusive, shall be taken into

consideration as if made subsequent thereto.

\(f\) A loan eligible for insurance may be either guaranteed or insured

at the option of the borrower and the lender: Provided, That if the
Secretary

is not advised of the exercise of such option at the time the loan is
reported

pursuant to 36.4303, such loan will not be eligible for insurance.

\(g\) A guaranty is reduced or increased pro rata with any deduction or

increase in the amount of the guaranteed indebtedness, but in no event
will

the amount payable on a guaranty or the percentage of the indebtedness

corresponding to that of the original guaranty whichever is less.
However, on

a graduated payment mortgage loan, the percentage of guaranty applicable
to

the original loan amount pursuant to paragraph (a) of this section shall
apply

to the loan indebtedness to the extent scheduled deferred interest is
added to

principal during the graduation period without regard to the original
maximum

dollar amount of guaranty.

(Authority: 38 U.S.C. 1803(b) and (d))

IV-10

\(h\) The amount of any guaranty or the amount credited to a lender\'s

insurance account in relation to any insured loan shall be charged
against the

original or remainder of the guaranty benefit of the borrower. Complete
or

partial liquidation, by payment or otherwise, of the veteran\'s
guaranteed or

insured indebtedness does not increase the remainder of the guaranty
benefit,

if any, otherwise available to the veteran. When the maximum amount of

guaranty or insurance legally available to a veteran shall have been
granted,

no further guaranty or insurance is available to the veteran.

\(i\) Notwithstanding the provisions of paragraph (g) of this section,

the Secretary may exclude the amount of guaranty or insurance
entitlement used

for any guaranteed or insured loan provided:

\(1\) The property which served as security for the loan has been

disposed of by the veteran, or has been destroyed by fire or other
natural

hazard; and

\(2\) The loan has been repaid in full, or the Secretary has been

released from liability as to the loan, or if the Secretary has suffered
a

loss on said loan, such loss has been paid in full; or

\(3\) A veteran-transferee has agreed to assume the outstanding balance

on the loan and consented to the use of his or her entitlement to the
extent

the entitlement of the veteran-transferor has been used originally.

\(4\) The loan has been repaid in full, and the loan for which the

veteran seeks to use entitlement is secured by the same property which
secured

the fully repaid loan.

(Authority: 38 U.S.C. 1810(e)(3))

(j)(1) The amount of guaranty entitlement, available and unused, of an

eligible unmarried surviving spouse (whose eligibility does not result
from

his or her own service) is determinable in the same manner as in the
case of

any veteran, and any entitlement which the decedent (who was his or her

spouse) used shall be disregarded. A certificate as to the eligibility
of

such surviving spouse, issued by the Secretary, shall be a condition
precedent

to the guaranty or insurance of any loan made to a surviving spouse in
such

capacity.

(Authority: 38 U.S.C. 1801(a))

\(2\) An unmarried surviving spouse who was a co-obligor under an

existing VA guaranteed, insured or direct loan shall be considered to be
a

veteran eligible for an interest rate reduction refinancing loan
pursuant to

38 U.S.C. 1810(a)(8) or (9)(B)(i).

(Authority: 38 U.S.C. 1810(e)(3))

(Authority: 38 U.S.C. 210(c), 1803(c)(1))

IV-11

36.4303 REPORTING REQUIREMENTS

\(a\) With respect to loans automatically guaranteed under 38 U.S.C.

1803(a)(1) evidence of the guaranty will be issuable to a lender of a
class

described under 38 U.S.C. 1802(d) if the loan is reported to the
Secretary

within 60 days following full disbursement, and upon the certification
of the

lender that:

\(1\) No default exists thereunder which has continued for more than 30

days;

\(2\) Except for acquisition and improvement loans as defined in

36.4301, any construction, repairs, alterations, or improvements
effected

subsequent to the appraisal of reasonable value, and paid for out of the

proceeds of the loan, which have not been inspected and approved upon

completion by a compliance inspector designated by the Secretary have
been

completed properly in full accordance with the plans and specifications
upon

which the original appraisal was based, and any deviations or changes of

identity in said property have been approved as required in 36.4304

concerning guaranty or insurance of loans to veterans;

\(3\) The loan conforms otherwise with the applicable provisions of 38

U.S.C., chapter 37 and of the regulations concerning guaranty or
insurance of

loans to veterans.

(Authority: 38 U.S.C. 1803(c)(1))

\(b\) Loans made pursuant to 38 U.S.C. 1815 although not entitled to

automatic insurance thereunder may, when made by a lender of a class
described

in 38 U.S.C. 1802(d)(1), be reported for issuance of an insurance
credit.

(Authority: 38 U.S.C. 1802(d), 1815)

\(c\) Each loan proposed to be made to an eligible veteran by a lender

not within a class described in 38 U.S.C. 1802(d) shall be submitted to
the

Secretary for approval prior to closing. Lenders described in 38 U.S.C.

1802(d) shall have the optional right to submit any loan for such prior

approval. The Secretary upon determining any loan so submitted to be
eligible

for a guaranty, or for insurance, will issue a certificate of commitment
with

respect thereto.

\(d\) A certificate of commitment shall entitle the holder to the

issuance of the evidence of guaranty or insurance upon the ultimate
actual

payment of the full proceeds of the loan for the purposes described in
the

original report and upon the submission within 60 days thereafter of a

supplemental report showing that fact and:

\(1\) The identity of any property purchased therewith,

\(2\) That all property purchased or acquired with the proceeds of the

loan has been encumbered as required by the regulations concerning
guaranty or

insurance of loans to veterans,

IV-12

\(3\) Except for acquisition and improvement loans as defined in

36.4301, any construction, repairs, alterations, or improvements paid
for out

of the proceeds of the loan which have not been inspected and approved

subsequent to completion by a compliance inspector designated by the
Secretary

have been completed properly in full accordance with the plans and

specifications upon which the original appraisal was based and that any

deviations or changes of identity in said property have been approved as

required by 36.4304;

and

\(4\) That the loan conforms otherwise with the applicable provisions of

38 U.S.C., chapter 37 and the regulations concerning guaranty or
insurance of

loans to veterans.

(Authority: 38 U.S.C. 1803(c)(1))

\(e\) Upon the failure of the lender to report in accordance with the

provisions of paragraph (d) of this section the certificate of
commitment

shall have no further effect, or the amount of guaranty or insurance
shall be

reduced pro rata, as may be appropriate under the facts of the case:

Provided, nevertheless, That if the loan otherwise meets the
requirements of

this section, said certificate of commitment may be given effect by the

Secretary, notwithstanding the report is received after the date
otherwise

required.

\(f\) Evidence of a guaranty will be issued by the Secretary by

appropriate endorsement on the note or other instrument evidencing the

obligation, or by a separate certificate at the option of the lender.
Notice

of credit to an insurance account will be given to the lender. Unused

certificates of eligibility issued prior to March 1, 1946, are void. No

certificate of commitment shall be issued and no loan shall be
guaranteed or

insured unless the lender, the veteran, and the loan are shown to be
eligible.

Evidence of guaranty or insurance will not be issued on any loan for the

purchase or construction of residential property unless the veteran, or
the

veteran\'s spouse in the case of a veteran who cannot occupy the
property

because of active duty status with the Armed Forces, certifies in such
form as

the Secretary shall prescribe, that the veteran, or spouse of the active
duty

veteran, intends to occupy the property as his or her home. Guaranty or

insurance evidence will not be issued on any loan for the alteration,

improvement, or repair of any residential property or on a refinancing
loan

unless the veteran, or spouse of an active duty service member,
certifies that

he or she presently occupies the property as his or her home. An
exception to

this is if the home improvement or refinancing loan is for extensive
changes

to the property which will prevent the veteran or the spouse of the
active

duty veteran from occupying the property while the work is being
completed.

In such case the veteran or spouse of the active duty veteran must
certify

that he or she intends to occupy or to reoccupy the property as his or
her

home upon completion of the substantial improvements or repairs. All of
the

mentioned certifications must make place at the time of loan

IV-13

application and closing except in the case of loans automatically
guaranteed,

in which case veterans or in the case of an active duty veteran, the
veteran\'s

spouse shall make the required certifications only at the time the loan
is

closed.

(Authority: 38 U.S.C. 1804(c))

\(g\) Subject to compliance with the regulations concerning guaranty or

insurance of loans to veterans, the certificate of guaranty or the
evidence of

insurance credit will be issuable within the available entitlement of
the

veteran on the basis of the loan stated in the final loan report or

certification of loan disbursement, except for refinancing loans for
interest

rate reductions. The available entitlement of a veteran will be
determined by

the Secretary as of the date of receipt of an application for guaranty
or

insurance of a loan or of a loan report. Such date of receipt shall be
the

date the application or loan report is date stamped into the Department
of

Veterans Affairs. Eligibility derived from the most recent period of
service.

\(1\) Shall cancel any unused entitlement derived from any earlier
period

of service, and

\(2\) Shall be reduced by the amount by which entitlement from service

during any earlier period has been used to obtain a direct, guaranteed,
or

insured loan.

\(i\) On property which the veteran owns at the time of application, or

\(ii\) As to which the Secretary has incurred actual liability or loss,

unless in the event of loss or the incurrence and payment of such
liability by

the Secretary the resulting indebtedness of the veteran to the United
States

has been paid in full.

Provided, That if the Secretary issues or has issued a certificate of

commitment covering the loan described in the application for guaranty
or

insurance or in the loan report, the amount and percentage of guaranty
or the

amount of the insurance credit contemplated by the certificate of
commitment

shall not be subject to reduction if the loan has been or is closed on a
date

which is not later than the expiration date of the certificate of
commitment,

notwithstanding that the Secretary in the meantime and prior to the
issuance

of the evidence of guaranty or insurance shall have incurred actual
liability

or loss on a direct, guaranteed, or insured loan previously obtained by
the

borrower. For the purposes of this paragraph, the Secretary will be
deemed to

have incurred actual loss on a guaranteed or insured loan if the
Secretary has

paid a guaranty or insurance claim thereon and the veteran\'s resultant

indebtedness to the Government has not been paid in full, and to have
incurred

actual liability on a guaranteed or insured loan if the Secretary is in

receipt of a claim on the guaranty or insurance or is in receipt of a
notice

of default. In the case of a direct loan, the Secretary will be deemed
to

have incurred an actual

IV-14

loss if the loan is in default. A loan, the proceeds of which are to be

disbursed progressively or at intervals, will be deemed to have been
closed

for the purposes of this paragraph if the loan has been completed in all

respects excepting the actual \"pay-out\" of the entire loan proceeds.

(Authority: 38 U.S.C. 1802(a), 1810(c))

\(h\) Any amounts which are disbursed for an ineligible purpose shall be

excluded in computing the amount of guaranty or insurance credit.

\(i\) Notwithstanding the lender has erroneously, but without intent to

misrepresent, made certification with respect to paragraph (a)(1) of
this

section, the guaranty or insurance will become effective upon the curing
of

such default and its continuing current for a period of not less than 60
days

thereafter. For the purpose of this paragraph a loan will be deemed
current

so long as the installment is received within 30 days after its due
date.

\(j\) No guaranty or insurance commitment or evidence of guaranty or

insurance will be issuable in respect to any loan to finance a contract
which:

\(1\) Is for the purchase, construction, repair, alteration, or

improvement of a dwelling or farm residence;

\(2\) Is dated on or after June 4, 1969;

\(3\) Provides for a purchase price or cost to the veteran in excess of

the reasonable value established by the Secretary; and

\(4\) Was signed by the veteran prior to the veteran\'s receipt of
notice

of such reasonable value;

unless such contract includes, or is amended to include, a provision

substantially as follows:

It is expressly agreed that, notwithstanding any other provisions of

this contract, the purchaser shall not incur any penalty by forfeiture
of

earnest money or otherwise or be obligated to complete the purchase of
the

property described herein, if the contract purchase price or cost
exceeds the

reasonable value of the property established by the Department of
Veterans

Affairs. The purchaser shall, however, have the privilege and option of

proceeding with the consummation of this contract without regard to the
amount

of the reasonable value established by the Department of Veterans
Affairs.

(Authority: 38 U.S.C. 210(c), 1803(c)(1))

\(k\) With respect to any loan for which a commitment was made on or

after March 1, 1988, the Secretary must be notified whenever the holder

receives knowledge of disposition of the residential property securing a

Department of Veterans Affairs guaranteed loan.

IV-15

\(1\) If the seller applies for prior approval of the assumption of the

loan, then:

\(i\) A holder (or its authorized servicing agent) who is an automatic

lender must examine the creditworthiness of the purchaser and determine

compliance with the provisions of 38 U.S.C. 1814. The creditworthiness
review

must be performed by the party that has automatic authority. If both the

holder and its servicing agent are automatic lenders, then they must
decide

between themselves which one will make the determination of
creditworthiness,

whether the loan is current and whether there is a contractual
obligation to

assume the loan, as required by 38 U.S.C. 1814. If the actual loan
holder

does not have automatic authority and its servicing agent is an
automatic

lender, then the servicing agent must make the determinations required
by 38

U.S.C. 1814 on behalf of the holder. The actual holder will remain
ultimately

responsible for any failure of its servicing agent to comply with the

applicable law and Department of Veterans Affairs regulations.

\(A\) If the assumption is approved and the transfer of the security is

completed, then the notice required by this paragraph shall consist of
the

credit package (unless previously provided in accordance with paragraph

(k)(1)(i)(B) of this section) and a copy of the executed deed and/or

assumption agreement as required by the Department of Veterans Affairs
office

of jurisdiction. The notice shall be submitted to the Department of
Veterans

Affairs with the Department of Veterans Affairs receipt for the funding
fee

provided for in 36.4312(e)(3) of this part.

\(B\) If the application for assumption is disapproved, the holder shall

notify the seller and the purchaser that the decision may be appealed to
the

Department of Veterans Affairs office of jurisdiction with 30 days. The

holder shall make available to that Department of Veterans Affairs
office all

items used by the holder in making the holder\'s decision in case the
decision

is appealed to the Department of Veterans Affairs. If the application
remains

disapproved after 60 days (to allow time for appeal to and review by the

Department of Veterans Affairs) then the holder must refund \$50 of any
fee

previously collected under the provisions of

36.4312(d)(8) of this part. If the application is subsequently approved
and

the sale is completed, then the holder (or its authorized servicing
agent)

shall provide the notice described in paragraph (k)(1)(i)(A) of this
section.

\(C\) In performing the requirements of paragraphs (k)(1)(i)(A) or

(k)(1)(i)(B) of this section the holder must complete its examination of
the

creditworthiness of the prospective purchaser and advise the seller no
later

than 45 days after the date of receipt by the holder of a complete
application

package for the approval of the assumption. The 45-day period may be
extended

by an interval not to exceed the time caused by delays in processing of
the

application which are documented as beyond the control of the holder,
such as

employers or dispositories not responding to requests for verifications,
which

were timely forwarded, or followups on those requests.

IV-16

\(ii\) If neither the holder nor its authorized servicing agent is an

automatic lender, the notice to the Department of Veterans Affairs shall

include:

\(A\) Advice regarding whether the loan is current or in default;

\(B\) A copy of the purchase contract; and

\(C\) A complete credit package developed by the holder which the

Secretary may use for determining the creditworthiness of the purchaser.

\(D\) The notice and documents required by this section must be
submitted

to the Department of Veterans Affairs office of jurisdiction no later
than 35

days after the date of receipt by the holder of a complete application
package

for the approval of the assumption, subject to the same extensions as
provided

in paragraph (k)(1)(i) of this section. If the assumption is not

automatically approved by the holder or its authorized agent, pursuant
to the

automatic authority provisions, \$50 of any fee collected in accordance
with

36.4312(d)(8) of this part must be refunded. If the Department of
Veterans

Affairs does not approve the assumption, the holder will be notified and
an

additional \$50 of any fee collected under 36.4312(d)(8) of this section
must

be refunded following the expiration of the 30-day appeal period set out
in

paragraph (k)(1)(i)(B) of this section. If such an appeal is made to the

Department of Veterans Affairs, then the review will be conducted at the

Department of Veterans Affairs office of jurisdiction by an individual
who was

not involved in the original disapproval decision. If the application
for

assumption is approved and the transfer of security is completed, then
the

holder (or its authorized servicing agent) shall provide the notice
required

in paragraph (k)(1)(i)(A) of this section.

\(2\) If the seller fails to notify the holder before disposing of

property securing the loan, the holder shall notify the Secretary within
60

days after learning of the transfer. Such notice shall advise whether or
not

the holder intends to exercise its option to immediately accelerate the
loan

and whether or not an opportunity will be extended to the transferor and

transferee to apply for retroactive approval of the assumption under the
terms

of this paragraph.

(Authority: 38 U.S.C. 1814)

36.4304 DEVIATIONS, CHANGES OF IDENTITY

A deviation of more than 5 percent between the estimates upon which a

certificate of commitment has been issued and the report of final
payment of

the proceeds of the loan, or a change in the identity of the property
upon

which the original appraisal was based, will invalidate the certificate
of

commitment unless such deviation or change be approved by the Secretary.
Any

deviation in excess of 5 percent or change in the identity of the
property

upon

IV-17

which the original appraisal was based must be supported by a new or

supplemental appraisal of reasonable value: Provided, That substitution
of

materials of equal or better quality and value approved by the veteran
and the

designated appraiser shall not be deemed a \"change in the identify of
the

property\" within the purview of this section. A deviation not in excess
of 5

percent will not require the prior approval of the Secretary.

36.4305 PARTIAL DISBURSEMENT

In cases where intervening circumstances make it impracticable to

complete the actual paying out of the loan originally proposed, or
justify the

lender in declining to make further disbursements on a construction
loan,

evidence of guaranty or of insurance of the loan or the proper pro rata
part

thereof will be issuable if the loan is otherwise eligible for automatic

guaranty or a certificate of commitment was issued thereon, Provided:

\(a\) A report of the loan is submitted to the Secretary within a

reasonable time subsequent to the last disbursement, but in no event
more than

90 days thereafter, unless report of the facts and circumstances is made
and

an extension of time obtained from the Secretary.

\(b\) There has been no default on the loan, except that the existence
of

a default shall not preclude issuance of a guaranty certificate or
insurance

advice if a certificate of commitment was issued with respect to the
loan.

\(c\) The Secretary determines that a person of reasonable prudence

similarly situated would not make further disbursements in the situation

presented.

\(d\) There has been full compliance with the provisions of 38 U.S.C.,

chapter 37 and of the applicable regulations up to the time of the last

disbursement.

\(e\) In the case of a construction loan when the construction is not

fully completed, the amount and percentage of the guaranty and the
amount of

the loan for the purposes of insurance or accounting to the Secretary
shall be

based upon such portion of the amount disbursed out of the proceeds of
the

loan which, when added to any other payments made by or on behalf of the

veteran to the builder or the contractor, does not exceed 80 percent of
the

value of that portion of the construction performed (basing value on the

contract price) plus the sum, if any, disbursed by the lender out of the

proceeds of the loan for the land on which the construction is situated:
And

provided further, That the lender shall certify as follows:

\(1\) Any amount advanced for land is protected by title or lien as

provided in the regulations concerning guaranty or insurance of loans to

veterans; and

IV-18

\(2\) No enforceable liens, for any work done or material furnished for

that part of the construction completed and for which payment has been
made

out of the proceeds of the loan, exist or can come into existence.

36.4306 REFINANCING OF MORTGAGE OR OTHER LIEN INDEBTEDNESS

\(a\) Any loan for the purpose of refinancing (38 U.S.C. 1810(a)(5)) an

existing mortgage loan or other indebtedness secured by a lien of record
on a

dwelling or farm residence owned and occupied or to be reoccupied if the

refinancing loan is for the completion of major alterations, repairs, or

improvements to the property, by an eligible veteran as the veteran\'s
home, or

in the case of an eligible veteran unable to occupy the property because
of

active duty status in the Armed Forces, occupied or to be reoccupied by
the

veteran\'s spouse as the spouse\'s home, shall be eligible for guaranty
in an

amount as computed under 36.4302(a) provided that \--

\(1\) The amount of the loan may not exceed an amount equal to 90
percent

of the reasonable value of the dwelling or farm residence which will
secure

the loan, as determined by the Secretary.

(Authority: 38 U.S.C. 1810(e)(1) and 1810(h))

\(2\) The dollar amount of discount, if any, to be paid by the veteran
is

reasonable in amount as determined by the Secretary in accordance with

36.4312(d)(7)(i),

\(3\) The loan is otherwise eligible for guaranty.

\(b\) Reserved.

\(c\) Nothing shall preclude guaranty of a loan to an eligible veteran

having home loan guaranty entitlement to refinance under the provisions
of 38

U.S.C. 1810(a)(5) a VA guaranteed or insured (or direct) mortgage loan
made to

him or her which is outstanding on the dwelling or farm residence owned
and

occupied or to be reoccupied after the completion of major alterations,

repairs, or improvements to the property, by the veteran as a home, or
in the

case of an eligible veteran unable to occupy the property because of
active

duty status in the Armed Forces, occupied or to be reoccupied by the
veteran\'s

spouse as the spouse\'s home.

(Authority: 38 U.S.C. 1810(e)(1))

\(d\) A refinancing loan may include contractual prepayment penalties,
if

any, due the holder of the mortgage or other lien indebtedness to be

refinanced.

\(e\) Reserved.

IV-19

\(f\) Nothing in this section shall preclude the refinancing of the

balance due for the purchase of land on which new construction is to be

financed through the proceeds of the loan, or the refinancing of the
balance

due on an existing land sale contract relating to a veteran\'s dwelling
or farm

residence.

\(g\) A veteran may refinance (38 U.S.C. 1810(a)(9)(B)(ii)) an existing

loan that was for the purchase of, and is secured by, a manufactured
home in

order to purchase the lot on which the manufactured home is or will be

permanently affixed, provided the following requirements are met:

\(1\) The refinancing of a manufactured home and the purchase of a lot

must be considered as one loan;

\(2\) The manufactured home upon being permanently affixed to the lot

will be considered to be real property under the laws of the State where
it is

located;

\(3\) The loan must be secured by the same manufactured home which is

being refinanced and the real property on which the manufactured home is
or

will be located;

\(4\) The amount of the loan may not exceed an amount equal to the sum
of

the balance of the loan being refinanced; the purchase price, not to
exceed

the reasonable value of the lot; the costs of the necessary site
preparation

of the lot as determined by the Secretary; a reasonable discount as
authorized

in 36.4312(d)(6) with respect to that portion of the loan used to
refinance

the existing purchase money lien on the manufactured home, and closing
costs

as authorized in 36.4312.

\(5\) If the loan being refinanced was guaranteed by VA, the portion of

the loan made for the purpose of refinancing an existing purchase money

manufactured home loan may be guaranteed without regard to the
outstanding

guaranty entitlement available for use by the veteran, and the
veteran\'s

guaranty entitlement shall not be charged as a result of any guaranty
provided

for the refinancing portion of the loan. For the purposes enumerated in
38

U.S.C. 1802(b) the refinancing portion of the loan shall be considered
to have

been obtained with the guaranty entitlement used to obtain the
VA-guaranteed

loan being refinanced. The total guaranty for the new loan shall be the
sum

of the guaranty entitlement used to obtain the VA-guaranteed loan being

refinanced and any additional guaranty entitlement available to the
veteran.

However, the total guaranty may not exceed the guaranty amount as
calculated

under 36.4302(a) of this part.

36.4306a INTEREST RATE REDUCTION REFINANCING LOAN

\(a\) Pursuant to 38 U.S.C. 1810(a)(8) and (9)(B)(i), a veteran may

refinance an existing VA guaranteed, insured or direct loan to reduce
the

interest rate payable on the existing loan provided the following
requirements

are met:

IV-20

\(1\) The loan must be secured by the same dwelling or farm residence as

the loan being refinanced; and

\(2\) The veteran must own the dwelling or farm residence securing the

loan; and

\(i\) Must occupy the dwelling or residence as his or her home; or

\(ii\) Must have previously occupied the dwelling or residence as his or

her home and must certify, in such form as the Secretary shall require,
that

he or she has previously occupied the dwelling or residence; or

\(iii\) In any case in which the veteran is on, or was on, active duty

status as a member of the Armed Forces and is unable, or was unable, to
occupy

the residence or dwelling as a home because of such active duty status,
the

spouse of the veteran must occupy, or must have previously occupied,
such

dwelling or residence as the spouse\'s home and must certify to that
occupancy

in such form as the Secretary shall require.

(Authority: 38 U.S.C. 1810(e)(1))

\(3\) The amount of the refinancing loan may not exceed an amount equal

to the sum of the balance of the loan being refinanced and such closing
costs

as authorized by 36.4312(d) and a discount not to exceed a dollar amount

determined in accordance with

36.4312(d)(7)(i);

\(4\) The dollar amount of the guaranty of the 38 U.S.C. 1810(a)(8) or

(9)(B)(i) loan may not exceed the original dollar amount of guaranty

applicable to the loan being refinanced, less any dollar amount of
guaranty

previously paid as a claim on the loan being refinanced; and

\(5\) The term of the refinancing loan (38 U.S.C. 1810(a)(8)) may not

exceed the original term of the loan being financed plus ten years or
the

maximum loan term allowed under 38 U.S.C. 1803(d)(1), whichever is less.
For

manufactured home loans that were previously guaranteed under 38 U.S.C.
1812

the loan term, if being refinanced under 38 U.S.C. 1810(a)(9)(B)(i), may

exceed the original term of the loan but may not exceed the maximum loan
term

allowed under 38 U.S.C. 1803(d)(1).

(Authority: 38 U.S.C. 1810(e)(1))

\(b\) Notwithstanding any other regulatory provision, the interest rate

reduction refinancing loan may be guaranteed without regard to the
amount of

guaranty entitlement available for use by the veteran, and the amount of
the

veteran\'s remaining guaranty entitlement, if any, shall not be charged
for an

interest rate reduction refinancing loan. The interest rate reduction

refinancing loan will be guaranteed with the lesser of the entitlement
used by

the veteran to obtain the loan being refinanced or the amount of the
guaranty

as calculated under 36.4302(a) of this part. The veteran\'s loan

IV-21

guaranty entitlement originally used for the purpose as enumerated in 38

U.S.C. 1810(a)(1) through (7) and (9)(A)(i) and (ii) and subsequently

transferred to an interest rate reduction refinancing loan (38 U.S.C.

1810(a)(8) or (9)(B)(i)) shall be eligible for restoration when the
interest

rate reduction refinancing loan or subsequent interest rate reduction

refinancing loans on the same property meets the requirements of
36.4302(h).

(Authority: 38 U.S.C. 1803(a))

\(c\) Title to the estate which is refinanced for the purpose of an

interest rate reduction must be in conformity with 36.4350.

(Authority: 38 U.S.C. 1810(a)(8), (9)(B)(i) and (e))

36.4307 JOINT LOANS

\(a\) Except as provided in paragraph (b) of this section, the prior

approval of the Secretary is required in respect to any loan to be made
to two

or more borrowers who become jointly and severally liable, or jointly
liable

therefor, and who will acquire an undivided interest in the property to
be

purchased or who will otherwise share in the proceeds of the loan, or in

respect to any loan to be made to an eligible veteran whose interest in
the

property owned, or to be acquired with the loan proceeds, is an
undivided

interest only, unless such interest is at least a 50 percent interest in
a

partnership. The amount of the guaranty or insurance credit shall be
computed

in such cases only on that portion of the loan allocable to the eligible

veteran which, taking into consideration all relevant factors,
represents the

proper contribution of the veteran to the transaction. Such loans shall
be

secured to the extent required by 38 U.S.C., chapter 37 and the
regulations

concerning guaranty or insurance of loans to veterans.

\(b\) Notwithstanding the provisions of paragraph (a) of this section,

the joinder of the spouse of a veteran-borrower in the ownership of

residential property shall not require prior approval or preclude the
issuance

of a guaranty or insurance credit based upon the entire amount of the
loan.

If both spouses be eligible veterans, either or both may, within
permissible

maxima, utilize available guaranty or insurance entitlement.

\(c\) For the purpose of determining the rights and the liabilities of

the Secretary with respect to a loan subject to paragraph (a) of this
section,

credits legally applicable to the entire loan shall be applied as
follows:

\(1\) Prepayments made expressly for credit to that portion of the

indebtedness allocable to the veteran (including the gratuity paid
pursuant to

former provisions of law), shall be applied to such portion of the

indebtedness. All other payments shall be applied ratably to those
portions

of the loan allocable respectively to the veteran and to the other
debtors.

IV-22

\(2\) Proceeds of the sale or other liquidation of the security shall be

applied ratably to the respective portions of the loan, such portion of
the

proceeds as represents the interest of the veteran being applied to that

portion of the loan allocable to such veteran.

36.4308 TRANSFER OF TITLE BY BORROWER OR MATURITY BY DEMAND OR

ACCELERATION

\(a\) Except as provided by paragraph (b) or (c) of this section the

conveyance of or other transfer of title to property by operation of law
or

otherwise, after the creation of a lien thereon to secure a loan which
is

guaranteed or insured in whole or in part by the Secretary, shall not

constitute an event of default, or acceleration of maturity, elective or

otherwise, and shall not of itself terminate or otherwise affect the
guaranty

or insurance.

(b)(1) The Secretary may issue guaranty on loans in which a State,

Territorial, or local governmental agency provides assistance to a
veteran for

the acquisition of a dwelling. Such loans will not be considered
ineligible

for guaranty if the State, Territorial, or local authority, by virtue of
its

laws or regulations or by virtue of Federal law, requires the
acceleration of

maturity of the loan upon the sale or conveyance of the security
property to a

person ineligible for assistance from such authority.

\(2\) At the time of application for a loan assisted by a State,

Territorial, or local governmental agency, the veteran-applicant must be
fully

informed and consent in writing to the housing authority restrictions. A
copy

of the veteran\'s consent statement must be forwarded with the loan
application

or the report of a loan processed on the automatic basis.

(Authority: 38 U.S.C. 1803(c))

\(c\) Any housing loan which is financed under 38 U.S.C., chapter 37,
and

to which section 1814 of that chapter applies, shall include a provision
in

the security instrument that the holder may declare the loan immediately
due

and payable upon transfer of the property securing such loan to any
transferee

unless the acceptability of the assumption of the loan is established
pursuant

to section 1814.

\(1\) A holder may not exercise its option to accelerate a loan upon:

\(i\) The creation of a lien or other encumbrance subordinate to the

lender\'s security instrument which does not relate to the transfer of
rights

of occupancy in the property;

\(ii\) The creation of a purchase money security interest for household

appliances;

\(iii\) A transfer by devise, descent, or operation of law on the death

of a joint tenant or tenant by the entirety;

IV-23

\(iv\) The granting of a leasehold interest of three years or less not

containing an option to purchase;

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

\(vi\) A transfer where the spouse or children of the borrower become

joint owners of the property with the borrower;

\(vii\) A transfer resulting from a decree of a dissolution of marriage,

legal separation agreement, or from an incidental property settlement

agreement by which the spouse of the borrower becomes the sole owner of
the

property. In such a case the borrower shall have the option of applying

directly to the Department of Veterans Affairs regional office of
jurisdiction

for a release of liability in accordance with 36.4323 of this part; or

\(viii\) A transfer into an inter vivos trust in which the borrower is

and remains a beneficiary and which does not relate to a transfer of
rights of

occupancy in the property.

\(2\) The mortgage or deed of trust and the promissory note or bond

evidencing a loan to which this paragraph applies shall bear in a
conspicuous

position in capital letters on the first page of the document in type at
least

2 1/2 times larger than the regular type on such page the following
warning:

\"THIS LOAN IS NOT ASSUMABLE WITHOUT THE APPROVAL OF THE DEPARTMENT OF
VETERANS

AFFAIRS OR ITS AUTHORIZED AGENT.\" Due to the difficulty in obtaining
some

commercial type sizes which are exactly 2 1/2 times larger in height
than

other sizes, minor deviations in size will be permitted based on
commercially

available type sizes nearest to 2 1/2 times the size of the print on the

document. A similar warning in regular size type must appear on every

assumption statement provided on a loan to which this paragraph applies.

(Authority: 38 U.S.C. 1804 and 1814)

\(d\) The term of payment of any guaranteed or insured obligation shall

bear a proper relation to the borrower\'s present and anticipated income
and

expenses (except loans pursuant to 38 U.S.C. 1810(a)(8) or (9)(B)(i)).
In

addition the terms of payment of any guaranteed or insured obligation
shall

provide for discharge of the obligation at a definite date or dates or

intervals, in amounts specified on or computable from the face of the

instrument. A loan which is payable on demand, or at sight, or on

presentation, or at a time not specified or computable from the language
in

the note, mortgage, or other loan instrument, or which contemplates
periodic

renewals at the option of the holder to satisfy the repayment
requirements of

this section, is not eligible for guaranty or insurance, except as
provided in

paragraph (f) of this section.

\(e\) No guaranteed or insured obligation shall contain a provision to

the effect that the holder shall have the right to declare the
indebtedness

due, or to pursue one or more legal or equitable remedies, if holder
\"shall

feel insecure,\" or upon the

IV-24

occurrence of one or more such conditions optional to the holder,
without

regard to an act or omission by the debtor, which condition by the terms
of

the note, mortgage, or other loan instrument would at the option of the
holder

afford a basis for declaring a default.

\(f\) Notwithstanding the inclusion in the guaranteed or insured

obligation of a provision contrary to the provisions of this section,
the

right of the holder to payment of the guaranty or insurance shall not be

thereby impaired, Provided:

\(1\) Default was declared or maturity was accelerated under some other

provision of the note, mortgage, or other loan instrument, or

\(2\) Activation or enforcement of such provision is warranted under

36.4317(a), or

\(3\) The prior approval of the Secretary was obtained.

\(g\) The holder of any guaranteed or insured obligation shall have the

right, notwithstanding the absence of express provision therefor in the

instruments evidencing the indebtedness, to accelerate the maturity or
such

obligation at any time after the continuance of any default for the
period

specified in 36.4316.

\(h\) If sufficient funds are tendered to bring a delinquency current at

any time prior to a judicial or statutory sale or other public sale
under

power of sale provisions contained in the loan instruments to liquidate
any

security for a guaranteed loan, the holder shall be obligated to accept
the

funds in payment of the delinquency unless

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

\(2\) Reinstatement of the loan would adversely affect the dignity of
the

lien or be otherwise precluded by law.

A delinquency will include all installment payments (principal,
interest,

taxes, insurance, advances, etc.) due and unpaid and any accumulated
late

charges, plus any reasonable expenses incurred and paid by the holder if

termination proceedings have begun (e.g., advertising costs, foreclosure

costs, attorney or trustee fees, recording fees, etc.).

36.4309 AMORTIZATION

\(a\) All loans, the maturity date of which is beyond 5 years from date

of loan or date of assumption by the veteran, shall be amortized. Except
as

provided in paragraph (e) of this section, the schedule of payments
thereon

shall be in accordance with any generally recognized plan of
amortization

requiring approximately equal periodic payments and shall require a
principal

reduction not less often than annually during the life of the loan. The
final

installment on any loan shall not be in excess of two times the

IV-25

average of the preceding installments, except that on a construction
loan such

installment may be for an amount not in excess of 5 per centum of the
original

principal amount of the loan. The limitations imposed herein on the
amount of

the final installment shall not apply in the case of any loan extended

pursuant to 36.4314(a).

\(b\) Any plan of repayment on loans required to be amortized which does

not provide for approximately equal periodic payments shall not be
eligible

unless the plan conforms with the provisions of paragraph (e) of this
section,

or is otherwise approved by the Secretary.

\(c\) Every guaranteed or insured loan shall be repayable within the

estimated economic life of the property securing the loan.

\(d\) Subject to paragraph (a) of this section, any amounts which under

the terms of a loan do not become due and payable on or before the last

maturity date permissible for loans of its class under the limitations

contained in 38 U.S.C., chapter 37 shall automatically fall due on such
date.

(See 36.4334.)

\(e\) A graduated payment mortgage loan, providing for deferrals of

interest during the first 5 years of the loan and addition of the
deferred

amounts to principal shall be eligible, provided:

\(1\) The loan is for the purpose of acquiring a single-family dwelling

unit, including a condominium unit or simultaneously acquiring and
improving a

previously occupied, existing single-family dwelling unit.

(2)(i) For proposed construction or existing homes not previously

occupied (new homes), the maximum loan amount cannot exceed 97.5 percent
of

the lesser of the reasonable value of the property as of the time the
loan is

made or the purchase price.

\(ii\) For previously occupied, existing homes the maximum loan amount

must be computed to assure that the principal amount of the loan,
including

all interest scheduled to be deferred and added to the loan principal,
will

not exceed the purchase price or reasonable value of the property,
whichever

is less, as of the time the loan is made;

\(3\) The increases in the monthly periodic payment amount occur
annually

on each of the first five annual anniversary dates of the first loan

installment due date, at a rate of 7.5 percent over the preceding
year\'s

monthly payment amount;

\(4\) Beginning with the payment due on the fifth annual anniversary
date

of the first loan installment due date, all remaining monthly periodic

payments are approximately equal in amount and amortize the loan fully
in

accordance with the requirements of this section, and

IV-26

\(5\) The plan is otherwise acceptable to the Secretary.

(Authority: 38 U.S.C. 210(c), 1803(c)(1) and (d))

36.4310 PREPAYMENT

The debtor shall have the right to prepay at any time, without premium

or fee, the entire indebtedness or any part thereof not less than the
amount

of one installment, or \$100, whichever is less. Any prepayment in full
of the

indebtedness shall be credited on the date received, and no interest may
be

charged thereafter. Any partial prepayment made on other than an
installment

due date need not be credited until the next following installment due
date or

30 days after such prepayment, whichever is earlier. The holder and the

debtor may agree at any time that any prepayment not previously applied
in

satisfaction of matured installments shall be reapplied for the purpose
of

curing or preventing any subsequent default.

36.4311 INTEREST RATES

\(a\) Excepting loans guaranteed or insured pursuant to guaranty or

insurance commitments issued by VA which specify an interest rate in
excess of

9-1/2 per centum per annum, effective November 19, 1990, the interest
rate on

any home or condominium loan, other than a graduated payment mortgage
loan,

guaranteed or insured wholly or in part on or after such date may not
exceed

9-1/2 per centum per annum on the unpaid principal balance.

\(b\) Excepting loans guaranteed or insured pursuant to guaranty or

insurance commitments issued by VA which specify an interest rate in
excess of

9-3/4 per centum per annum, effective November 19, 1990, the interest
rate of

any graduated payment mortgage loan guaranteed or insured wholly or in
part on

or after such date may not exceed 9-3/4 per centum per annum.

(Authority: 38 U.S.C. 1803(c)(1))

\(c\) Effective November 19, 1990, the interest rate on any loan solely

for energy conservation improvements or other alterations, improvements
or

repairs which is guaranteed or insured wholly or in part on or after
such date

may not exceed 11 per centum per annum on the unpaid principal balance.

(Authority: 38 U.S.C. 1803(c)(1))

\(d\) Interest in excess of the rate reported by the lender when

requesting evidence of guaranty or insurance shall not be payable on any

advance, or in the event of any delinquency or default: Provided, That a
late

charge not in excess of an amount equal to 4 percent on any installment
paid

more than 15 days after due date shall not be considered a violation of
this

limitation.

IV-27

\(e\) Refinancing loans for the purpose of an interest rate reduction
(38

U.S.C. 1810(a)(8) or (9)(B)(i)) may specify an interest rate in excess
of the

rate specified in paragraph (a), (b) and (c) of this section provided
the

interest rate of the refinancing loan is less than the interest rate of
the

current VA loan being refinanced.

(Authority: 38 U.S.C. 1803(c)(1) and 1810(c))

36.4312 CHARGES AND FEES

\(a\) No charge shall be made against, or paid by, the borrower incident

to the making of a guaranteed or insured loan other than those expressly

permitted under paragraph (d) or (e) of this section, and no loan shall
be

guaranteed or insured unless the lender certifies to the Secretary that
it has

not imposed and will not impose any charges or fees against the borrower
in

excess of those permissible under paragraph (d) or (e) of this section.
Any

charge which is proper to make against the borrower under the provisions
of

this paragraph may be paid out of the proceeds of the loan: Provided,
That if

the purpose of the loan is to finance the purchase or construction of

residential property the costs of closing the loan including the pro
rata

portion of the ground rents, hazard insurance premiums, current year\'s
taxes,

and other prepaid items normally involved in financing such transaction
may

not be included in the loan.

\(b\) Except as provided in the regulations concerning the guaranty or

insurance of loans to veterans, no brokerage or service charge or their

equivalent may be charged against the debtor or the proceeds of the loan

either initially, periodically, or otherwise.

\(c\) Brokerage or other charges shall not be made against the veteran

for obtaining any guaranty or insurance under 38 U.S.C., chapter 37, nor
shall

any premiums for insurance on the life of the borrower be paid out of
the

proceeds of a loan.

\(d\) The following schedule of permissible fees and charges shall be

applicable to all VA guaranteed or insured loans:

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

following items:

\(i\) Fees of VA appraiser and of compliance inspectors designated by VA

except appraisal fees incurred for the predetermination of reasonable
value

requested by others than veteran or lender.

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

recordation.

\(iii\) Credit report.

\(iv\) That portion of taxes, assessments, and other similar items for

the current year chargeable to the borrower and an initial deposit
(lump-sum

payment) for the tax and insurance account.

IV-28

\(v\) Hazard insurance required by 36.4326.

\(vi\) Survey, if required by lender or veteran; except that any charge

for a survey in connection with a loan under 36.4356 through 36.4360a

(condominium loans) must have the prior approval of the Secretary.

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

\(viii\) Such other items as may be authorized in advance by the Chief

Benefits Director as appropriate for inclusion under this paragraph as
proper

local variances.

\(2\) A lender may charge and the veteran may pay a flat charge not

exceeding 1 percent of the amount of the loan, provided that such flat
charge

shall be in lieu of all other charges relating to costs of origination
not

expressly specified and allowed in this schedule.

\(3\) In cases where a lender makes advances to a veteran during the

progress of construction, alteration, improvement, or repair, either
under a

commitment of the Department of Veterans Affairs to issue a guaranty

certificate or insurance credit upon completion, or where the lender
would be

entitled to guaranty or insurance on such advances when reported under

automatic procedure, the lender may make a charge against the veteran of
not

exceeding 2 percent of the amount of the loan for its services in
supervising

the making of advances and the progress of construction notwithstanding
that

the \"holdback\" or final advance is not actually paid out until after
the

construction, alteration, improvement, or repair is fully completed:

Provided, That the major portion (51 percent or more) of the loan
proceeds is

paid out during the actual progress of the construction, alteration,

improvement, or repair. Such charge may be in addition to the 1 percent

charge allowed under paragraph (d)(2) of this section.

\(4\) In construction, alteration, improvement or repair loans,
including

supplemental loans made pursuant to 36.4355, where no charge is
permissible

under the provisions of paragraph (d)(3) of this section the lender may
charge

and the veteran may pay a flat sum not exceeding 1 percent of the amount
of

the loan. Such charge may be in addition to the 1 percent allowed under

paragraph (d)(2) of this section.

\(5\) The fees and charges permitted under this paragraph are maximums

and are not intended to preclude a lender from making alternative
charges

against the veteran which are not specifically authorized in the
schedule

provided the imposition of such alternative charges would not result in
an

aggregate charge or payment in excess of the prescribed maximum.

\(6\) Allowable Discounts. The veteran borrower subject to the

limitations set forth in paragraphs (d)(6) and (7) of this section may
pay a

discount required by a lender when the proceeds of the loan will be used
for

any of the following purposes:

IV-29

\(i\) To refinance existing indebtedness pursuant to 38 U.S.C.

1810(a)(5), (8), or (9)(B)(i), or (ii);

\(ii\) To repair, alter or improve a dwelling owned by the veteran

pursuant to 38 U.S.C. 1810(a)(4) or (7) if such loan is to be secured by
a

first lien;

\(iii\) To construct a dwelling or farm residence on land already owned

or to be acquired by the veteran, provided that the veteran did not or
will

not acquire the land directly or indirectly from a builder or developer
who

will be constructing such dwelling or farm residence;

\(iv\) To purchase a dwelling from a class of sellers which the
Secretary

determines are legally precluded under all circumstances from paying
such a

discount if the best interest of the veteran would be so served.

\(7\) Computation of Discounts

\(i\) Computation of Discount - Loans Secured by a First Lien. Unless

otherwise approved by the Secretary, the discount, if any, to be paid by
the

borrower may not exceed the difference between the bid price, rounded to
the

lower whole number, and par value for GNMA (Government National Mortgage

Association) 90-day forward bid closing price for pass through
securities 1/2

percent less than the face note rate of the loan. Unless the lender and

borrower negotiate a firm written commitment for a maximum amount of
discount

to be paid, the bid price to be used in the computation must be the GNMA

90-day forward bid closing quote for any day 1 to 4 business days prior
to

loan closing. \"Loan closing\" is defined for this purpose as the date
on which

the borrower\'s 3-day right of rescission commences pursuant to the
Truth in

Lending Act. If the lender and borrower choose to negotiate a firm
discount

commitment for a maximum amount of discount to be paid, the bid price to
be

used in establishing the maximum discount must be the closing quote for
the

business day prior to the date of the commitment. Lenders negotiating
firm

commitments must close that loan at a discount no higher than the firm

commitment regardless of changes in the maximum allowable VA interest
rate.

If a lender\'s commitment expires prior to loan closing, the lender and

borrower may negotiate a new firm commitment based on the procedure
outlined

in this paragraph (d)(7)(i) or may use the procedure for determining the

discount based on the GNMA 90-day forward bid closing quote for any day
1 to 4

business days prior to loan closing.

\(ii\) Computation of Discount - Unsecured Loans or Loans Secured by
Less

than a First Lien. The borrower, subject to the limitations set forth in

paragraph (d)(6) and (7) of this section, may pay a discount required by
the

lender when the proceeds of the loan will be used to repair, alter, or
improve

a dwelling owned by the veteran pursuant to 38 U.S.C. 1810(a)(4) or (7)
if

such loan is unsecured or secured by less than a first lien. No such
discount

may be charged unless:

IV-30

\(A\) The loan is submitted to the Secretary for prior approval;

\(B\) The dollar amount of the discount is disclosed to the Secretary
and

the veteran prior to the issuance by the Secretary of the certificate of

commitment. Said certificate of commitment shall specify the discount to
be

paid by the veteran, and this discount may not be increased once the

commitment is issued without the approval of the Secretary;

\(C\) The discount has been determined by the Secretary to be reasonable

in amount.

\(iii\) A veteran may pay the discount on an acquisition and improvement

loan (as defined in 36.4301) provided:

\(A\) The veteran pays no discount on the acquisition portion of the
loan

except in accordance with paragraph (d)(6)(iv) of this section; and

\(B\) The discount paid on the improvements portion of the loan does not

exceed the percentage of discount paid on the acquisition portion of the
loan.

Acquisition and improvement loans may be closed either on the automatic

or prior approval basis.

\(iv\) Unless the Chief Benefits Director otherwise directs, all powers

of the Secretary under paragraph (d)(6) and (7) of this section are
hereby

delegated to the officials designated by 36.4342(b).

(Authority: 38 U.S.C. 1803(c)(1) and (3), 1810(a))

\(8\) On any loan to which section 1814 of 38 U.S.C., chapter 37
applies,

the holder may charge a reasonable fee, not to exceed the lesser of (i)
\$300

and the actual cost of any credit report required, or (ii) any maximum

prescribed by applicable State law, for processing an application for

assumption and changing its records.

(Authority: 38 U.S.C. 1814)

(e)(1) Subject to the limitations set out in paragraphs (e)(4) and

(e)(5) of this section, a fee must be paid to the Secretary. The fee
shall be

1.25 percent of the total loan amount on all refinancing loans and for
all

loans for the purchase or construction of a home on which the veteran
does not

make a downpayment. On purchase or construction loans on which the
veteran

makes a downpayment of 5 percent or more, but less than 10 percent, the
amount

of the funding fee shall be 0.75 percent of the total loan amount. On

purchase or construction loans on which the veteran makes a downpayment
of 10

percent or more, the amount of the funding fee shall be 0.5 percent of
the

total loan amount. All or part of such fee may be paid in cash at loan

closing or all or part of the

IV-31

fee may be included in the loan without regard to the reasonable value
of the

property or the computed maximum loan amount, as appropriate. In
computing

the fee, the lender will disregard any amount included in the loan to
enable

the borrower to pay such fee.

(Authority: 38 U.S C. 1829(a))

\(2\) Subject to the limitations set out in this section, a fee of

one-half of one percent of the loan balance must be paid to the
Secretary in a

manner prescribed by the Secretary by a person assuming a loan to which

section 1814 of title 38 U.S.C. applies. The instrument securing such a
loan

shall contain a provision describing the right of the holder to collect
this

fee as trustee for the Department of Veterans Affairs. The loan holder
shall

list the amount of this fee in every assumption statement provided and
include

a notice that the fee must be paid to the holder immediately following
loan

settlement. The fee must be transmitted to the Secretary within 15 days
of

the receipt by the holder of the notice of transfer.

(Authority: 38 U.S.C. 1814, 1829(d))

\(3\) The lender is required to pay to the Secretary the fee described
in

paragraph (e)(1) of this section within 15 days after loan closing. Any

lender closing a loan, subject to the limitations set out in paragraphs
(e)(4)

and (e)(5) of this section who fails to submit timely payment of this
fee will

be subject to a late charge equal to 4 percent of the total fee due. If

payment of the fee described in paragraph (e)(1) of this section is made
more

than 30 days after loan closing, interest will be assessed at a rate set
in

conformity with the Department of Treasury\'s Fiscal Requirements
Manual. This

interest charge is in addition to the 4 percent late charge, but the
late

charge is not included in the amount on which interest is computed. This

interest charge is to be calculated on a daily basis beginning on the
date of

closing, although the interest will be assessed only on funding fee
payments

received more than 30 days after closing.

\(4\) The fee described in paragraph (e)(1) and (e)(2) of this section

shall not be collected from a veteran who is receiving compensation (or
who

but for the receipt of retirement pay would be entitled to receive

compensation) or from a surviving spouse described in section 1801(b) of
title

38, United States Code.

(Authority: 38 U.S.C. 1829(b))

\(5\) Collection of the loan fee in this paragraph does to apply to
loans

closed prior to August 17, 1984, between October 1 and October 15, 1987,

inclusive, between November 16 and December 20, 1987, inclusive, nor to
loans

closed after September 30, 1989.

(Authority: 38 U.S.C. 1829(c))

IV-32

36.4313 ADVANCES AND OTHER CHARGES

\(a\) A holder may advance any amount reasonably necessary and proper
for

the maintenance or repair of the security, or for the payment of accrued

taxes, special assessments, ground or water rents, or premiums on fire
or

other casualty insurance against loss of or damage to such property and
any

such advance so made may be added to the guaranteed or insured
indebtedness.

A holder may also advance the one-half of one percent funding fee due on
a

transfer under 38 U.S.C. 1814 when this is not paid at the time of
transfer.

All security instruments for loans to which 38 U.S.C. 1814 applies must

include a clause authorizing the collection of an assumption funding fee
and

an advance for this fee if it is not paid at the time of transfer.

(Authority: 38 U.S.C. 1814)

\(b\) In addition to advances allowable under paragraph (a) of this

section, the holder may charge against the proceeds of the sale of the

security; against gross amounts collected; in any accounting to the
Secretary

after payment of a claim under the guaranty in the computation of a
claim

under the guaranty, if lawfully authorized by the loan agreement and
subject

to 36.4321(a) or, in the computation of an insurance loss, any of the

following items actually paid:

\(1\) Any expense which is reasonably necessary for preservation of the

security,

\(2\) Court costs in a foreclosure or other prior judicial proceeding

involving the security,

\(3\) Other expenses reasonably necessary for collecting the debt, or

repossession or liquidation of the security,

\(4\) Reasonable trustee\'s fees or commissions not in excess of those

allowed by statute and in no event in excess of 5 percent of the unpaid

indebtedness,

\(5\) Reasonable amount for legal services actually performed not to

exceed 10 percent of the unpaid indebtedness as of the date of the first

uncured default, or \$700, whichever is less,

\(6\) The cost of a credit report(s) on the debtor(s), which is (are) to

be forwarded to the Secretary in connection with the claim,

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

Secretary.

(Authority: 38 U.S.C. 1820(a)(3))

In no event may the combined total of the amounts claimed for trustee\'s
fees

and legal services (par. (b)(4) and (5) of this section) exceed \$700.

(Authority: 38 U.S.C. 1812(g), 1820(a)(3))

IV-33

\(c\) Any advances or charges enumerated in paragraph (a) or (b) of this

section may be included as specified in the holder\'s accounting to the

Secretary, but they are not chargeable to the debtor unless he or she

otherwise be liable therefor.

\(d\) Advances of the type enumerated in paragraph (a) of this section

and any other advances determined to be necessary and proper in order to

preserve or protect the security may be authorized by employees
designated in

36.4342(b) in the case of any property constituting the security for a
loan

acquired by the Secretary or constituting the security for the unpaid
balance

of the purchase price owing to the Secretary on account of the sale of
such

property. Such advances shall be secured to the extent legal and
practicable

by a lien on the property.

\(e\) Notwithstanding the provisions of paragraph (a) and (b) of this

section, holders of condominium loans guaranteed or insured under 38
U.S.C.

1810(a)(6) shall not pay those assessments or charges allocable to the

condominium unit which are provided for in the instruments establishing
the

condominium form of ownership in the absence of the prior approval of
the

Secretary.

36.4314 EXTENSIONS AND REAMORTIZATIONS

\(a\) Provided the debtor(s) is (are) a reasonable credit risk(s), as

determined by the holder based upon review of the debtor\'s(s\')

creditworthiness, including a review of a current credit report(s) on
the

debtor(s), the terms of repayment of any loan may, by written agreement

between the holder and the debtor(s), be extended in the event of
default, to

avoid imminent default, or in any other case where the prior approval of
the

Secretary is obtained. Except with the prior approval of the Secretary,
no

such extension shall set a rate of amortization less than that
sufficient to

fully amortize at least 80 percent of the loan balance so extended
within the

maximum maturity prescribed for loans of its class.

\(b\) In the event of a partial prepayment pursuant to 36.4310 the

balance of the indebtedness may, by written agreement between the holder
the

debtor(s), be reamortized, provided the reamortization schedule will
result in

full repayment of the loan within the original maturity, and provided
the

debtor(s) is (are) reasonable credit risk(s), as determined by the
holder

based upon review of the debtor\'s(s\') creditworthiness, including a
review of

a current credit report(s) on the debtor(s).

\(c\) In the event an additional loan is proposed to be made pursuant to

36.4351 for the repair, alteration, or improvement of real property on
which

there is an existing loan guaranteed or insured under 38 U.S.C., chapter
37,

the terms of repayment of the prior loan may, by written agreement
between the

holder and the debtor, be recast to combine the schedule of repayments
on the

two loans, provided the entire indebtedness is repayable within the

permissible maximum maturity of the original loan.

IV-34

\(d\) Unless the prior approval of the Secretary has been obtained, any

extension or reamortization agreed to by a holder which relieves any
obligor

from liability will release the liability of the Secretary under the
guaranty

or insurance on the entire loan. However, if such release of liability
of an

obligor results through operation of law by reason of an extension or
other

act of forbearance, the liability of the Secretary as guarantor or
insurer

will not be affected thereby, provided the required lien is maintained
and the

title holder is and will remain liable for the payment of the
indebtedness:

And further provided, That if such extension or act of forbearance will
result

in the release of the veteran, all delinquent installments, plus any

foreclosure expenses which may have been incurred, shall have been fully
paid.

\(e\) The holder shall promptly forward to the Secretary an advice of
the

terms of any agreement effecting a reamortization or extension of a
guaranteed

or insured loan, together with a cop(y)(ies) of the credit report(s)
obtained

on the debtor(s).

(Authority: 38 U.S.C. 1803(c)(1))

36.4315 NOTICE OF DEFAULT AND ACCEPTABILITY OF PARTIAL PAYMENTS

\(a\) Reporting of Defaults. The holder of any guaranteed or insured

loan shall give notice to the Secretary within 45 days after any debtor:

\(1\) Is in default by reason of nonpayment of any installment for a

period of 60 days from the date of first uncured default (see
36.4301(f)); or

\(2\) Is in default by failing to comply with any other covenant or

obligation of such guaranteed or insured loan which failure persists for
a

continuing period of 90 days after demand for compliance therewith has
been

made, except that if the default is due to nonpayment of real estate
taxes,

the notice shall not be required until the failure to pay when due has

persisted for a continuing period of 180 days.

\(b\) Partial Payments. A partial payment is a remittance on a loan in

default (as defined in 36.4301(g)) of any amount less than the full
amount

due under the terms of the loan and security instruments at the time the

remittance is tendered.

\(1\) Except as provided in paragraph (b)(2) of this section, or upon
the

express waiver of the Secretary, the mortgage holder shall accept any
partial

payment and either apply it to the mortgagor\'s account or identify it
with the

mortgagor\'s account and hold it in a special account pending
disposition.

When partial payments held for disposition aggregate a full monthly

installment, including escrow, they shall be applied to the mortgagor\'s

account.

IV-35

\(2\) A partial payment may be returned to the mortgagor, within 10

calendar days from date of receipt of such payment, with a letter of

explanation only if one or more of the following conditions exist:

\(i\) The property is wholly or partially tenant-occupied and rental

payments are not being remitted to the holder for application to the
loan

account;

\(ii\) The payment is less than one full monthly installment, including

escrows and late charge, if applicable, unless the lesser payment amount
has

been agreed to under a written repayment plan;

\(iii\) The payment is less than 50 percent of the total amount then
due,

unless the lesser payment amount has been agreed to under a written
repayment

plan;

\(iv\) The payment is less than the amount agreed to in a written

repayment plan;

\(v\) The amount tendered is in the form of a personal check and the

holder has previously notified the mortgagor in writing that only cash
or

certified remittances are acceptable;

\(vi\) A delinquency of any amount has continued for at least 6 months

since the account first became delinquent and no written repayment plan
has

been arranged;

\(vii\) Foreclosure has been commenced by the taking of the first action

required for foreclosure under local law;

\(viii\) The holder\'s lien position would be jeopardized by acceptance
of

the partial payment.

\(3\) A failure by the holder to comply with the provisions of this

paragraph may result in a partial or total loss of guaranty or insurance

pursuant to 36.4325(b), but such failure shall not constitute a defense
to

any legal action to terminate the loan.

36.4316 CONTINUED DEFAULT

\(a\) In the event any failure of the debtor to discharge the debtor\'s

obligations under the loan continues for a period of 3 months, or for
more

than 1 month on an extended loan or on a term loan, the holder may at
the

holder\'s option then or thereafter, submit a claim for payment of the

guaranty. The holder may also then or thereafter give the notice
prescribed

in 36.4317.

\(b\) A claim for the guaranty, or the notice prescribed in

36.4317 may be submitted prior to the time prescribed in paragraph (a)
of

this section in any case where any material prejudice to the rights of
the

holder or to the Secretary or hazard to the security warrants more
prompt

action.

IV-36

\(c\) A claim for the guaranty must include a copy(ies) or a current

credit report(s) on the debtor(s).

(Authority: 38 U.S.C. 1832)

(Information collection requirements contained in paragraph (c) were
approved

by the Office of Management and Budget under control number 2900-0480.)

36.4317 NOTICE OF INTENTION TO FORECLOSE

(See also 36.4319.) Except upon the express waiver of the Secretary, a

holder shall not begin proceedings in court or give notice of sale under
power

of sale, other otherwise take steps to terminate the debtor\'s rights in
the

security until the expiration of 30 days after delivery by registered
mail to

the Secretary of a notice of intention to take such action: Provided,
That

\(a\) immediate action may be taken if the property to be affected
thereby has

been abandoned by the debtor, or has been or may be otherwise subjected
to

extraordinary waste or hazard, or if there exist conditions justifying
the

appointment of a receiver for the property (without reference to any

contractual provisions for such appointment), and (b) any right of a
holder to

repossess personal property may be exercised without prior notice to the

Secretary; but notice of any such action taken shall be given by
registered

mail to the Secretary within 10 days thereafter.

36.4318 REFUNDING OF LOANS IN DEFAULT

\(a\) Upon receiving a notice of default or a claim for a guaranty or a

notice under 36.4317, the Secretary may within 30 days thereafter
require the

holder upon penalty of otherwise losing the guaranty or insurance to
transfer

and assign the loan and the security therefor to the Secretary or to
another

designated by the Secretary upon receipt of payment in full of the
balance of

the indebtedness remaining unpaid to the date of such assignment. Such

assignment may be made without recourse but the transferor shall not
thereby

be relieved from the provisions of 36.4325.

\(b\) If the obligation is assigned or transferred to a third party

pursuant to paragraph (a) of this section, the Secretary may continue in

effect the guaranty or insurance issued with respect to the previous
loan in

such manner as to cover the assignee or transferee.

36.4319 LEGAL PROCEEDINGS

\(a\) When the holder institutes suit or otherwise becomes a party in
any

legal or equitable proceeding brought on or in connection with the
guaranteed

or insured indebtedness, or involving title to, or other lien on, the

security, such holder, within the time that would be required if the
Secretary

were a party to the proceeding, shall deliver to the Secretary, by mail
or

otherwise, by making such delivery to the Loan Guaranty Officer, at the
office

which granted

IV-37

the guaranty or the insurance, or other office to which the holder has
been

notified the file is transferred, a copy of every procedural paper filed
on

behalf of holder, and shall also so deliver, as promptly as possible, a
copy

of each similar pleading served on holder or filed in the cause by any
other

party thereto. Notice of, or motion for, continuance and orders thereon
are

excepted from the foregoing.

\(b\) A copy of a notice of sale shall be similarly delivered by the

holder, or the holder\'s agent or trustee, to the Secretary at the VA
Regional

Office of jurisdiction at least 30 days prior to the schedule
liquidation

sale, or within 5 days after the date of first publication of the
notice,

whichever is later. A copy of any other notice of sale or acquisition of
the

property served on the holder or advice of any sale of which the holder
has

knowledge shall be similarly delivered to the Secretary, including any
such

notice of a tax sale or other superior lien or judicial sale. Such
notice

shall be accompanied by a statement of the account indebtedness and a
copy of

the liquidation appraisal request, if not previously delivered.

(Authority: 38 U.S.C. 1832)

\(c\) The procedure prescribed in paragraph (a) and (b) of this section

shall not be applicable in any proceeding to which the Secretary is a
party,

after the Secretary\'s appearance shall have been entered therein by a
duly

authorized attorney.

\(d\) In any legal or equitable proceeding (including probate and

bankruptcy proceedings) to which the Secretary is a party, original
process

and any other process prior to appearance, proper to be served on the

Secretary, shall be delivered to the Loan Guaranty Officer of the
regional

office of the VA having jurisdiction of the area in which the court is

situated. Within the time required by applicable law, or rule of court,
the

Secretary will cause appropriate special or general appearance to be
entered

in the case by an authorized attorney.

(Authority: 38 U.S.C. 1832)

\(e\) After appearance of the Secretary by attorney all process and

notice otherwise proper to serve on the Secretary before or after
judgment, if

served on the attorney of record, shall have the same effect as if the

Secretary were personally served within the jurisdiction of the court.

(Authority: 38 U.S.C. 1832)

\(f\) If following a default, the holder does not bring appropriate

action within 30 days after requested in writing by the Secretary to do
so, or

does not prosecute such action with reasonable diligence, the Secretary
may at

the Secretary\'s option fix a date beyond which no further charges may
be

included in the computation of the indebtedness for the purposes of
accounting

IV-38

between the holder and the Secretary. The Secretary may also intervene
in, or

begin and prosecute to completion any action or proceeding, in the
Secretary\'s

name or in the name of the holder, which the Secretary deems necessary
or

appropriate. The Secretary shall pay, in advance if necessary, any court

costs or other expenses incurred by the Secretary or properly taxed
against

the Secretary in any such action to which the Secretary is a party, but
may

charge the same, and also a reasonable amount for legal services,
against the

guaranteed or insured indebtedness, or the proceeds of the sale of the

security to the same extent as the holder (see 36.4313 of this part), or

otherwise collect from the holder any such expenses incurred by the
Secretary

because of the neglect or failure of the holder to take or complete
proper

action. The rights and remedies herein reserved are without prejudice to
any

other rights, remedies, or defenses, in law or in equity, available to
the

Secretary.

(Authority: 38 U.S.C. 1832)

36.4320 SALE OF SECURITY

\(a\) Upon receipt by the Secretary of notice of a liquidation sale of

any security for a guaranteed or insured loan, the Secretary shall
determine

the net value of the security and shall notify the holder of the net
value and

of the regulatory provision which will govern the disposition of the
security.

\(1\) If the net value of the real property securing a guaranteed or

insured loan exceeds the unguaranteed portion of the indebtedness, the

Secretary shall specify in advance of the liquidation sale the minimum
amount

which shall be credited to the indebtedness of the borrower on account
of the

value of the security to be sold, subject to the following:

\(i\) The specified amount in such cases shall be the lesser of the net

value of the property or the total indebtedness,

\(ii\) If a minimum amount for credit to the indebtedness has been

specified in relation to a liquidation sale of real property, and:

\(A\) The holder acquires the property, or the rights to the property,
at

the sale for an amount not in excess of such specified amount, the
holder

shall credit to the indebtedness the amount specified. The holder then
may

retain the property or, not later than 15 days after the date of sale,
advise

the Secretary of the holder\'s election to convey or transfer the
property, or

the rights to the property, to the Secretary;

\(B\) The holder acquires the property, or the rights to the property,
at

the liquidation sale for an amount in excess of the specified amount,
the

indebtedness shall be credited with the proceeds of the sale. The holder

shall not have the option to convey the property to the Secretary unless
a bid

in excess of the specified amount was made pursuant to paragraph (a)(3)
of

this section;

IV-39

\(C\) A third party acquires the property, or the rights to the
property,

at the liquidation sale for an amount equal to or in excess of that
specified,

the holder shall credit to the indebtedness the net proceeds of the
sale;

\(D\) A third party acquires the property, or the rights to the
property,

at the liquidation sale for an amount less than that specified, the
holder

shall credit to the indebtedness the amount specified.

\(iii\) If a minimum amount has been specified by the Secretary, the

Secretary\'s liability under loan guaranty shall be the total
indebtedness less

the amount credited to the indebtedness under paragraph (a)(1)(ii) of
this

section, not to exceed the Secretary\'s maximum liability as computed
under

36.4321 of this part.

\(2\) If the net value of the real property securing a guaranteed or

insured loan does not exceed the unguaranteed portion of the
indebtedness:

\(i\) The Secretary shall notify the holder that no minimum amount will

be specified for credit to the indebtedness on account of the value of
the

security to be sold;

\(ii\) The Secretary may not accept conveyance or transfer of the

property;

\(iii\) The holder shall credit against the indebtedness the net
proceeds

of the sale, and the Secretary\'s liability under loan guaranty shall be

limited to the total indebtedness less the amount credited to the
indebtedness

not to exceed the Secretary\'s maximum liability as computed under
36.432l of

this part; and

\(iv\) The liability of the Secretary shall not be subject to adjustment

by reason of any subsequent disposition of the property by the holder.

\(3\) If a minimum bid is required under applicable State law, or decree

of foreclosure or order of sale, or other lawful order or decree, and:

\(i\) Such minimum bid exceeds an amount which has been specified by the

Secretary under paragraph (a)(1) of this section; and

\(ii\) The holder acquires the property at the liquidation sale for an

amount not exceeding the amount legally required; the holder may elect
to

convey the property to the Secretary pursuant to paragraph (a)(1)(ii)(A)
of

this section. The amount bid at the sale or the total indebtedness,
whichever

is less, shall govern instead of the specified amount and for the
purpose of

determining the Secretary\'s liability under loan guaranty.

(Authority: 38 U.S.C. 1832)

IV-40

\(b\) The holder should not carry out a liquidation sale until the

Secretary has furnished the notice required under paragraph (a) of this

section. In the event the holder carries out a liquidation sale prior to

receiving such notice, the holder shall credit against the indebtedness
the

greater of:

\(1\) The net proceeds of the sale; or

\(2\) The amount of the indebtedness or the net value of the property,

whichever is less.

The provisions of paragraph (a)(1)(ii)(A) of this section, which extends
to

the holder the option of conveying or transferring the property to the

Secretary, shall not be applicable, and the Secretary\'s liability under
the

loan guaranty shall be the total indebtedness less the amount credited
to the

indebtedness under paragraph (b)(1) or (2) of this section, not to
exceed the

Secretary\'s maximum liability as computed under 36.4321 of this part.

(Authority: 38 U.S.C. 1832)

\(c\) When a debtor proposes to convey or transfer any real property to
a

holder to avoid foreclosure or other judicial, contractual, or statutory

disposition of the obligation or of the security, the consent of the
Secretary

to the terms of such proposal shall be obtained in advance of such
conveyance

or transfer. In consenting to the terms of the debtor\'s proposal the

Secretary shall furnish the notice required under paragraph (a) of this

section.

(Authority: 38 U.S.C. 1832)

\(d\) Upon receipt by the Secretary of notice of a judicial or statutory

sale, or other public sale under power of sale contained in the loan

instruments, to liquidate any personal property which is security for a

guaranteed or insured loan, the Secretary may specify in advance of such
sale

the minimum amount which shall be credited to the indebtedness of the
borrower

on account of the value of the security to be sold.

\(1\) If a minimum amount has been specified by the Secretary, and

\(i\) The holder is the successful bidder at the sale for an amount not

in excess of such minimum amount, the holder shall sell the property
pursuant

to paragraph (d)(3) of this section and the amount realized from the
resale of

the property shall govern, instead of the specified minimum amount, in
the

final accounting for determining the rights and liabilities of the
holder and

the Secretary,

\(ii\) A third party is the successful bidder at the sale for an amount

equal to or in excess of that specified, the holder shall credit to the

indebtedness the net proceeds of the sale,

IV-41

\(iii\) A third party is the successful bidder at the sale for an amount

less than that specified, the holder shall credit to the indebtedness
the

amount specified,

\(iv\) The holder is the successful bidder at the sale for an amount in

excess of the specified amount, the indebtedness shall be credited with
the

proceeds of the sale or the amount realized from the resale of the
property

pursuant to paragraph (d)(3) of this section, whichever is the greater,
unless

the bid in excess of the specified amount was made pursuant to paragraph

(d)(4) of this section.

\(2\) If a minimum amount has not been specified by the Secretary under

paragraph (d)(1) of this section, the holder shall credit against the

indebtedness the net proceeds of the sale except as provided in
paragraph

(d)(4) of this section.

\(3\) If personal property has been repossessed or otherwise acquired by

a holder and no public sale is proposed or required to be held to
entitle the

holder to effect a further disposition of such property, or if the
holder is

the successful bidder at the sale of personal property as provided in

paragraph (d)(1) of this section, the holder shall sell the property
within a

reasonable time. The holder shall submit to the Secretary a written
advice

setting forth the price, terms, conditions and the expenses of the
proposed

sale at least 10 days in advance, and the Secretary shall either assent
to

such sale in which event the holder shall credit against the
indebtedness the

net proceeds of the sale or, upon agreement to indemnify the holder to
the

extent of any increased or resultant loss, the Secretary may specify the

minimum net price for which the security may be sold. If such amount has
been

specified, the holder shall sell the personal property within a
reasonable

time in the open market for the best price obtainable: Provided, that
the

prior approval of the Secretary shall be obtained if the property is to
be

sold for a net amount less than the specified amount, or if the property
is to

be sold on terms other than all cash. The ultimate net amount realized
by the

holder from such sale shall be reported by the holder to the Secretary
in an

accounting which will determine their respective rights and liabilities.

\(4\) If a minimum bid is required under applicable State law, or decree

of foreclosure or order of sale, or other lawful order or decree, the
holder

may bid an amount not exceeding such amount legally required. If an
amount

has been specified by the Secretary and the holder is the successful
bidder

for an amount not exceeding the amount legally required, such specified
amount

shall govern for the purposes of this paragraph and for the purpose of

computing the ultimate loss under the guaranty or insurance. In the
event no

amount is specified and the holder is the successful bidder for an
amount not

exceeding the amount legally required, the amount paid or payable by the

Secretary under the guaranty shall not be subject to any adjustment by
reason

of such bid.

(Authority: 38 U.S.C. 1832)

IV-42

\(e\) If the Secretary has specified an amount as provided in this

section, and the holder learns of any material damage to the property

occurring prior to the foreclosure sale or to the acceptance of a deed
in lieu

of foreclosure or prior to any other event to which such specified
amount is

applicable, the holder shall promptly advise the Secretary of such
damage.

\(f\) The holder in accounting to the Secretary in connection with the

disposition of any property in accordance with paragraph (a), (b), or
(d) of

this section, may include as a part of the indebtedness all actual
expenses or

costs of the proceedings, paid by the holder, within the limits defined
in

36.4313 of this part. In connection with the conveyance or transfer of

property to the Secretary the holder may include in accounting to the

Secretary the following expense items if actually paid by the holder, in

addition to the consideration payable for the property under paragraph
(g) of

this section:

(Authority: 38 U.S.C. 1832)

\(1\) State and documentary stamp taxes as may be required.

\(2\) The customary cost of obtaining evidence of title in favor of the

Secretary as specified in paragraph (h)(5) of this section but not
including

title evidence obtained incident to the making of the loan or any
expenses

incurred to clear title defects.

\(3\) Amount expended for taxes, special assessments, including such

payments which are specified in paragraph (h)(4) of this section.

\(4\) Recording fees.

\(5\) Any other expenditures in connection with the property which are

approved by the Secretary.

\(g\) In the event a holder elects to convey or transfer the property to

the Secretary pursuant to paragraph (a), (b), or (c) of this section,
the

consideration to be paid by the Secretary in return for the property
shall be

the specified amount: Provided, that if a claim under the guaranty was

previously paid, the consideration payable for the property shall be an
amount

equal to the indebtedness (less the amount previously paid on the
guaranty) or

the specified amount, whichever is less. If no claim under the guaranty
was

previously paid, the holder may, pursuant to 36.4321(b)

submit a claim within the maximum guaranty liability for the difference

between the specified amount and an amount equal to the indebtedness. In
the

case of an insured loan, the holder may submit a claim for the
difference

between an amount equal to the indebtedness and the specified amount
pursuant

to 36.4374.

\(h\) The conveyance or transfer of any property to the Secretary

pursuant to paragraphs (a), (b), or (c) of this section shall be subject
to

the following provisions:

IV-43

\(1\) If the holder\'s notice to the Secretary electing to convey or

transfer the property precedes the acquisition of the property by the
holder

and the holder then acquires the property, the holder shall promptly
after

such acquisition advise the Secretary of the acquisition. Such advice,
or the

notice of election if given subsequent to acquisition, shall state the
amount

of the successful bid (if the property was acquired by the holder at
public

sale) and shall state the insurance coverage then in force, specifying
for

each policy, the name of the insurance company, the hazard covered, the

amount, and the expiration date.

\(2\) The holder shall not cancel any insurance in force when the holder

acquires the property. Coincident with the notice of election to convey
or

transfer the property to the Secretary or with the acquisition of the
property

by the holder, following such notice, whichever is later, the holder
shall

obtain endorsements on all such insurance policies naming the Secretary
as an

assured, as his/her interest may appear. Such insurance policies shall
be

forwarded to the Secretary at the time of the conveyance or transfer of
the

property to the Secretary or as soon after that time as feasible.

\(3\) Occupancy of the property by anyone properly in possession by

virtue of and during a period of redemption, or by any one else unless
under a

claim of title which makes the title sought to be conveyed by the holder
of

less dignity or quality than that required by this section, shall not
preclude

the holder from conveying or transferring the property to the Secretary.

Except with the prior approval of the Secretary, the holder shall not
rent the

property to a new tenant, nor extend the term of an existing tenancy on
other

than a month-to-month basis.

\(4\) Any taxes, special assessments or ground rents due and payable

within 30 days after date of conveyance or transfer to the Secretary
shall be

paid by the holder if bills therefor are obtainable before such
conveyance or

transfer.

\(5\) Each conveyance or transfer of real property to the Secretary

pursuant to this section shall be acceptable if the holder thereby
covenants

or warrants against the acts of the holder and those claiming under the
holder

(e.g., by special warranty deed) and if it vests in the Secretary or
will

entitle the Secretary to such title as is or would be acceptable to
prudent

lending institutions, informed buyers, title companies, and attorneys,

generally in the community in which the property is situated. Any title
so

acceptable will not be unacceptable to the Secretary by reason of any of
the

limitations on the quantum or quality of the property or title stated in

36.4350(b) of this part: Provided, that

\(i\) At the time of conveyance or transfer to the Secretary there has

been no breach of any conditions affording a right to the exercise of
any

reverter, except that title will not be unacceptable

IV-44

to the Secretary by reason of a violation of a restriction based on
race,

color, creed, or national origin, whether or not such restriction
provides for

reversion or forfeiture of title or a lien for liquidated damages in the
event

of a breach.

\(ii\) With respect to any such limitations which came into existence

subsequent to the making of the loan, full compliance was had with the

requirements of 36.4324 of this part. The acceptability of a conveyance
or

transfer pursuant to the requirements of this paragraph will be
established by

delivery to the Secretary of any of the following evidence of title
issued by

an institution or person satisfactory to the Secretary, in form
satisfactory

to him/her showing that title to the property of the quality specified
in this

paragraph is or will be vested in the Secretary:

\(A\) A title policy insuring the Secretary in an amount approximately

equal to the consideration for the property, or a commitment for such
title

policy; or

\(B\) A certificate of record title; or

\(C\) An abstract of title accompanied by a legal opinion as to the

quality of such title of record; or

\(D\) A Torrens or similar title certificate; or

\(E\) Such other evidence of title as the Secretary may approve.

In lieu of such title evidence, the Secretary will accept a conveyance
or

transfer with general warranty with respect to the title from a holder

described in 38 U.S.C. 1802(d) or from a holder of financial
responsibility

satisfactory to the Secretary. In any case where the holder does not
deliver

evidence of title of the character specified in this paragraph, the
holder to

aid the Secretary in determination of acceptability of title shall
without

expense to the Secretary furnish such evidence of title, including
survey, if

any, as may have been obtained by the holder incident to the making of
the

loan or attendant to the foreclosure.

\(6\) Except with respect to matters covered by any covenants or

warranties of the holder, the acceptance by the Secretary of a
conveyance or

transfer by the holder shall conclude the responsibility of the holder
to the

Secretary under the regulations of this subpart with respect to the
title and

in the event of the subsequent discovery of title defects, the Secretary
shall

have no recourse against the holder with respect to such title other
than by

reason of such covenants or warranties.

\(7\) As between the holder and the Secretary, the responsibility for
any

loss due to damage to or destruction of the property or due to personal
injury

sustained in respect to such property shall be governed by the
provisions of

this paragraph and paragraph (h)(10)

IV-45

of this section. Ordinary wear and tear excepted, the holder shall bear
such

risk of loss from the date of acquisition by the holder to the date such
risk

of loss is assumed by the Secretary. Such risk of loss is assumed by the

Secretary from the date of receipt to the holder\'s election to convey
or

transfer the property to the Secretary or, in the event of receipt of
notice

of such election prior to acquisition, from the date of the Secretary\'s

receipt of notice of acquisition by the holder: Provided that if custody
over

the property has not been delivered by the holder to the Secretary on
the date

when the Secretary otherwise would have assumed the risk of loss, the

Secretary\'s assumption of the risk of loss will be deferred until such
custody

over the property is delivered, or until the property has been conveyed
or

transferred to the Secretary. The amount of any loss chargeable to the
holder

may be deducted from the amount payable by the Secretary at the time the

property is transferred. In any case where pursuant to the VA
regulations

rejection of the title is legally proper, the Secretary may surrender
custody

of the property as of the date specified in the Secretary\'s notice to
the

holder. The Secretary\'s assumption of such risk shall terminate upon
such

surrender.

\(8\) The holder shall not be liable to the Secretary for any portion of

the paid or unpaid taxes, special assessments, ground rents, insurance

premiums, or other similar items.

\(9\) The Secretary shall be entitled to all rentals and other income

collected from the property and to any insurance proceeds or refunds

subsequent to the date of acquisition by the holder.

\(10\) In respect to a property which was the security for a condominium

loan guaranteed or insured under 38 U.S.C. 1810(a)(6) the responsibility
for

any loss due to damage to or destruction of the property or due to
personal

injury sustained in respect to such property shall in no event pass to
the

Secretary until the Secretary expressly assumes such responsibility or
until

conveyance of the property to the Secretary, whichever first occurs. The

holder shall have the right to convey such property to the Secretary
only if

the property (including elements of the development or project owned in
common

with other unit owners) is undamaged by fire, earthquake, windstorm,
flooding

or boiler explosion. The absence of a right in the holder to convey such

property which is so damaged shall not preclude a conveyance, if the
Secretary

agrees in a given case to such a conveyance upon completion of repairs
within

a specified period of time and such repairs are so completed and the

conveyance is otherwise in order.

(i)(1) The terms \"date of sale\" or \"date of acquisition\" as used in

this section are defined as the date of the event (e.g., sale,
confirmation of

sale when required under local practice, delivery of deed in case of
voluntary

conveyance, etc.) which fixes the rights of the parties in the property.

IV-46

\(2\) The term \"property\" or \"real property\" as used in this section

shall include

\(i\) A leasehold estate which at the time of closing the loan was not

less duration than prescribed by 36.4350(a)(2) of this part, and

\(ii\) The rights derived by the holder through a foreclosure sale of

real estate whether or not such rights constitute an estate in real
property

under local law.

\(j\) Except as provided in paragraph (h)(6) of this section, the

provisions of this section shall not be in derogation of any rights
which the

Secretary may have under 36.4325 of this part. The Chief Benefits
Director,

or the Director, Loan Guaranty Service, may authorize any deviation from
the

provisions of this section, within the limitations prescribed in 38
U.S.C.,

chapter 37, which may be necessary or desirable to accomplish the
objectives

of this section if such deviation is made necessary by reason of any
laws or

practice in any State or Territory or the District of Columbia:
Provided,

that no such deviation shall impair the rights of any holder not
consenting to

the deviation with respect to loans made or approved prior to the date
the

holder is notified of such action.

36.4321 COMPUTATION OF GUARANTY CLAIMS; SUBSEQUENT ACCOUNTING

\(a\) Subject to the limitation that the total amounts payable shall in

no event exceed the amount originally guaranteed, the amount payable on
a

claim for the guaranty shall be the percentage of the loan originally

guaranteed applied to the indebtedness computed as of the earliest of
the

following dates:

\(1\) The date of the liquidation sale; or,

\(2\) The cutoff date established under paragraph (f) of 36.4319 of this

part; or,

\(3\) The cutoff date established under paragraph (b) of this section.

Deposits or other credits or setoffs legally applicable to the
indebtedness on

the date of computation shall be applied in reduction of the
indebtedness on

which the claim is based. Any escrowed or earmarked funds not subject to

superior claims of third persons must likewise be so applied.

\(b\) In any case in which there is a delay in the liquidation sale

caused by:

\(1\) The holder of the loan extending forbearance in excess of 30 days

at the request of the Secretary, the cutoff date for computation of the

indebtedness shall be 30 days after the date the Secretary determines
the

liquidation sale would have taken place if

IV-47

there had been no such delay, provided: the net value of the real
property

securing the loan does not exceed the unguaranteed portion of the
indebtedness

as of the actual liquidation sale date and such net value will exceed
the

unguaranteed portion of the indebtedness as of the cutoff date;

\(2\) The Secretary, including the Secretary\'s failure to provide the

holder with advice as to the net value of the security within two
working days

prior to a scheduled liquidation sale but excluding forbearance
exercised at

the request of the Secretary, with respect to a holder which has
complied with

the provisions of 36.4319(b) of this part, the cutoff date for
computation of

the indebtedness shall be the date the liquidation sale would have taken
place

if there had been no such delay;

\(3\) A voluntary case commenced under Title 11, United States Code

(relating to bankruptcy), the cutoff date for computation of the
indebtedness

shall be 30 days after the date the Secretary determines the liquidation
sale

would have taken place if there had been no such delay, provided: the
net

value of the real property securing the loan does not exceed the
unguaranteed

portion of the indebtedness as of the actual liquidation sale date and
such

net value will exceed the unguaranteed portion of the indebtedness as of
the

cutoff date.

\(c\) Adjustment of cutoff dates:

\(1\) Any cutoff date established under 36.4319(f) of this part or

paragraph (b) of this section will be adjusted by a period of months

corresponding to the number of installment payments, if any, received by
the

holder and credited to the indebtedness after the cutoff date is
established.

\(2\) When a cutoff date is established under paragraph (b)(2) of this

section, the actual liquidation sale date will be used for purposes of

computing the indebtedness in any subsequent accounting between the
holder and

the Secretary; if an earlier cutoff date is in effect at the time delay
in

liquidation sale is caused by the Secretary, such date will not be
modified by

application of the provisions of paragraph (b)(2) of this section, but
will be

extended by an interval corresponding to the delay in the liquidation
sale

caused by the Secretary for purposes of computing the indebtedness in
any

subsequent accounting between the holder and the Secretary.

\(3\) Any cutoff date established under 36.4319 of this part or

paragraph (b) of this section will be considered to be the liquidation
sale

date. Such date will be modified in accordance with paragraph (b) of
this

section of the provisions of that paragraph are applicable after such
date has

been established.

(Authority: 38 U.S.C. 210(c))

IV-48

\(d\) Credits accruing from the proceeds of a sale or other disposition

of the security subsequent to the date of computation, and prior to the

submission of this claim, shall be reported to the Secretary incident to
such

submission, and the amount payable on the claim shall in no event exceed
the

remaining balance of the indebtedness.

(Authority: 38 U.S.C. 210(c))

\(e\) The claimant shall be deemed to have received as trustee for the

benefit of the United States any amounts received on account of the

indebtedness after the date of the claim, from the proceeds of a sale of
the

security or otherwise, to the extent such credits exceed the balance of
the

indebtedness unsatisfied by the payment of the guaranty. The claimant
shall

immediately pay such amounts to the Secretary to the extent of the
debtor\'s

liability to the Secretary as guarantor.

(Authority: 38 U.S.C. 210(c))

36.4322 COMPUTATION OF INDEBTEDNESS

In computing the indebtedness for the purpose of filing a claim for

payment of a guaranty, or for payment of an insured loss, or in the
event of a

transfer of the loan under 36.4318(a), or other accounting to the
Secretary,

the holder shall not be entitled to treat repayments theretofore made as

liquidated damages, or rentals, or otherwise than as payments on the

indebtedness, notwithstanding any provision in the note, or mortgage, or

otherwise, to the contrary.

36.4323 SUBROGATION AND INDEMNITY

\(a\) The Secretary shall be subrogated to the contract and the lien or

other rights of the holder to the extent of any sum paid on a guaranty
or on

account of an insured loss, which right shall be junior to the holder\'s
rights

as against the debtor or the encumbered property until the holder shall
have

received the full amount payable under the contract with the debtor. No

partial or complete release by a creditor shall impair the rights of the

Secretary with respect to the debtor\'s obligation.

\(b\) The holder, upon request, shall execute, acknowledge and deliver
an

appropriate instrument tendered for that purpose, evidencing any payment

received from the Secretary and the Secretary\'s resulting right of

subrogation.

\(c\) The Secretary shall cause the instrument required by paragraph (b)

of this section to be filed for record in the office of the recorder of
deeds,

or other appropriate office of the proper county, town or State, in
accordance

with the applicable State law. The filing or failure to file such
instrument

for record shall have the legal results prescribed by the applicable law
of

the State where the real or personal property is situated, with respect
to

IV-49

filing or failure to so file mortgages and other lien instruments and

assignments thereof. The references herein to \"filing for record\"
include

\"registration\" or any similar transaction, by whatever name designated
when

title to the encumbered property has been \"registered\" pursuant to a
Torrens

or other similar title registration system provided by law.

\(d\) As a condition to paying a claim for an insured loss the Secretary

may require that the loan, including any security or judgment held
therefor,

be assigned to the extent of such payment, and if any claim has been
filed in

bankruptcy, insolvency, probate, or similar proceedings such claim may

likewise be required to be so assigned.

\(e\) Any amounts paid by the Secretary on account of the liabilities of

any veteran guaranteed or insured under the provisions of 38 U.S.C.,
chapter

37 shall constitute a debt owing to the United States by such veteran.

(Authority: 38 U.S.C. 1832)

\(1\) Prior to a liquidation sale, an official authorized to act for the

Secretary under provisions of 36.4342 of this part may approve a
complete

release of the Secretary\'s right to collect a debt owing to the United
States

under this paragraph and/or under paragraph (a) of this section provided
such

official determines:

\(i\) The loan default was caused by circumstances beyond the control of

the obligor;

\(ii\) There are no indications of fraud, misrepresentation or bad faith

on the part of the obligor in obtaining the loan or in connection with
the

loan default;

\(iii\) The obligor cooperated with VA in exploring all realistic

alternatives to termination of the loan through foreclosure; and, either

\(iv\) Review of the obligor\'s current financial situation and

prospective earning potential and obligations indicates there are no
realistic

prospects that the obligor could repay all or part of the anticipated
debt

within six years of the liquidation sale while providing the necessities
of

life for himself or herself and his or her family; or,

\(v\) In consideration for a release of the Secretary\'s collection
rights

the obligor completes, or VA is enabled to authorize, an action which
reduces

the Government\'s claim liability sufficiently to offset the amount of
the

anticipated indebtedness which would otherwise be established pursuant
to this

paragraph and likely be collectable by VA after foreclosure in view of
the

obligor\'s financial situation; such actions would include termination
of the

loan by means of a deed in lieu of foreclosure, private sale of the

IV-50

property for less than the indebtedness with a reduced claim paid by VA
for

the balance due the loan holder or enabling VA to authorize the holder
to

elect a more expeditious foreclosure procedure when such an election
would

result in the legal release of the obligor\'s liability.

\(2\) Prior to a liquidation sale, an official authorized to act for the

Secretary under provisions of 36.4342 of this part may approve a partial

release of the Secretary\'s right to collect a debt owing to the United
States

under this paragraph and/or under paragraph (a) of this section provided
such

official determines:

\(i\) The loan default was caused by circumstances beyond the control of

the obligor:

\(ii\) There are no indications of fraud, misrepresentation or bad faith

on the part of the obligor in obtaining the loan or in connection with
the

loan default;

\(iii\) The obligor cooperated with VA in exploring all realistic

alternatives to termination of the loan through foreclosure;

\(iv\) Review of the obligor\'s current financial situation and

prospective earning potential and obligations indicates there are no
realistic

prospects that the obligor could repay all of the anticipated debt
within six

years of the liquidation sale while providing the necessities of life
for

himself or herself and his or her family; and,

\(v\) The obligor executes a written agreement acknowledging his or her

liability to VA under this paragraph and executes a promissory note
which

provides for regular amortized monthly payments of an amount determined
by VA

in accordance with paragraph (e)(3) of this section including interest
on the

total amount payable at the rate in effect for Loan Guaranty liability

accounts at the time of execution, or, the obligor agrees to other terms
of

repayment acceptable to VA including payment of a lump sum in settlement
of

his or her obligation under this paragraph;

\(3\) For purposes of this paragraph a review of an obligor\'s financial

situation will take into consideration:

\(i\) The obligor\'s current and anticipated family income based on

employment skills and experience;

\(ii\) The obligor\'s current short-term and long-term financial

obligations, including the obligation to repay the Government which must
be

afforded consideration at least equal to his or her consumer debt
obligations;

\(iii\) A current credit report on the obligor;

\(iv\) The obligor\'s assets and net worth; and,

IV-51

\(v\) The required balance available for family support used in

underwriting VA guaranteed loans in the area.

The amount of indebtedness established will be such that the obligor\'s

financial situation permits repayment of the debt to the Government in
regular

monthly installments of principal plus interest over a five year period

commencing within one year after the date the promissory note is
executed,

except in those cases in which a lump sum settlement appears to be in
the best

interest of the Government or in which it appears the obligor may
reasonably

expect significant changes in his or her financial situation which would

permit higher payments to be made during later periods of the life of
the

note.

\(4\) Determinations made under paragraphs (e)(2) and (e)(3) of this

section are intended for the benefit of the Government in reducing the
amount

of claim payable by VA and/or avoiding the establishment of
uncollectable

debts owing to the United States. Such determinations are discretionary
on

the part of VA and shall not constitute a defense to any legal action to

terminate the loan nor vest any appellate right in an obligor which
would

require further review of the case.

(Authority: 38 U.S.C. 210(c), 1803(c)(1))

\(f\) Whenever any veteran disposes of residential property securing a

guaranteed or insured loan obtained by him or her under 38 U.S.C.,
chapter 37,

and for which the commitment to make the loan was made prior to March 1,
1988,

the Secretary, upon application made by such veteran, shall issue to the

veteran a release relieving him or her of all further liability to the

Secretary on account of such loan (including liability for any loss
resulting

from any default of the transferee or any subsequent purchaser of such

property) if the Secretary has determined, after such investigation as
may be

deemed appropriate, that there has been compliance with the conditions

prescribed in 38 U.S.C. 1813. The assumption of full liability for
repayment

of the loan by the transferee of the property must be evidenced by an

agreement in writing in such form as the Secretary may require. Release
of

the veteran from liability to the Secretary will not impair or otherwise

affect the Secretary\'s guaranty or insurance liability on the loan, or
the

liability of the veteran to the holder. Any release of liability granted
to a

veteran by the Secretary shall inure to the spouse of such veteran. The

release of the veteran from liability to the Secretary will constitute
the

Secretary\'s prior approval to a release of the veteran from liability
on the

loan by the holder thereof.

(Authority: 38 U.S.C. 1813)

\(g\) If, on or after July 1, 1972, any veteran disposes of residential

property securing a guaranteed or insured loan obtained under 38 U.S.C.,

chapter 37, without receiving a release from liability with respect to
such

loan under 38 U.S.C. 1813 and a default subsequently occurs which
results in

liability of the veteran to the Secretary on account of the loan, the

Secretary may relieve the veteran of such liability if it is determined
that:

IV-52

\(1\) A transferee either immediate or remote is legally liable to the

Secretary for the debt of the original veteran-borrower established
after the

termination of the loan, and

\(2\) The original loan was current at the time such transferee acquired

the property, and

\(3\) The transferee who is liable to the Secretary is found to have
been

a satisfactory credit risk at the time he or she acquired the property.

\(h\) If a veteran or any other person disposes of residential property

securing a guaranteed or insured loan for which a commitment was made on
or

after March 1, 1988, and the veteran or other person notifies the loan
holder

in writing before disposing of the property, the veteran or other person
shall

be relieved of all further liability to the Secretary with respect to
the loan

(including liability for any loss resulting from any default of the
purchaser

or any subsequent owner of the property) and the application for
assumption

shall be approved if the holder determines that:

\(1\) The proposed purchaser is creditworthy;

\(2\) The proposed purchaser is contractually obligated to assume the

loan and the liability to indemnify the Department of Veterans Affairs
for the

amount of any claim paid under the guaranty as a result of a default on
the

loan, or has already done so; and,

\(3\) The payments on the loan are current.

Should these requirements be satisfied, the holder may also release the

veteran or other person from liability on the loan. This does not apply
if

the approval for the assumption is granted upon special appeal to avoid

immediate foreclosure.

(Authority: 38 U.S.C. 1814)

36.4324 RELEASE OF SECURITY

\(a\) Except upon full payment of the indebtedness the holder shall not

release a lien or other right in or to real property held as security
for a

guaranteed or insured loan, or grant a fee or other interest in such
property,

without the prior approval of the Secretary, unless in the opinion of
the

holder such release does not involve a decrease in the value of the
security

in excess of \$2,500: Provided, that the aggregate of the reduction in
the

original value of the security resultant from such releases without the

Secretary\'s prior approval does not exceed \$2,500.

\(b\) Holder may release from the lien personal property including crops

without the prior approval of the Secretary.

IV-53

\(c\) Except upon full payment of the indebtedness or upon the prior

approval of the Secretary, the holder shall not release a lien under
paragraph

\(a\) or (b) of this section unless the consideration received for the
release

is commensurate with the fair market value of the property released and
the

entire consideration is applied to the indebtedness, or if encumbrance
on

other property is accepted in lieu of that released it shall be the
holder\'s

duty to acquire such lien on property of substantially equal value which
is

reasonably capable of serving the purpose for which the property
released was

utilized.

\(d\) Failure of the holder to comply with the provisions of this
section

shall not in itself affect the validity of the title of a purchaser to
the

property released.

\(e\) The holder shall notify the Secretary of any such release or

substitution of security within 30 days after completion of such
transaction.

\(f\) The release of the personal liability of any obligor on a

guaranteed or insured obligation resultant from the act or omission of
any

holder without the prior approval of the Secretary shall release the

obligation of the Secretary as guarantor or insurer, except when such
act or

omission consists of (1) failure to establish the debt as a valid claim

against the assets of the estate of any deceased obligor, provided no
lien for

the guaranteed or insured debt is thereby impaired or destroyed; or (2)
an

election and appropriate prosecution of legally available effective
remedies

with respect to the repossession or the liquidation of the security in
any

case, irrespective of the identity or the survival of the original or of
any

subsequent debtor, if holder shall have given such notice as required by

36.4317 of this part and if, after receiving such notice, the Secretary
shall

have failed to notify the holder within 15 days to proceed in such
manner as

to effectively preserve the personal liability of the parties liable, or
such

of them as the Secretary indicates in such notice to the holder; or (3)
the

release of an obligor, or obligors, from liability on an obligation
secured by

a lien on property, which release is an incident of and contemporaneous
with

the sale of such property to an eligible veteran who assumed such
obligation,

which assumed obligation is guaranteed on the assuming veteran\'s
account

pursuant to 38 U.S.C., chapter 37; or (4) the release of an obligor or

obligors as provided in 36.4314(d) of this part; or, the release of an

obligor, or obligors, incident to the sale of property securing the loan
which

the holder is authorized to approve under the provisions of 38 U.S.C.
1814.

(Authority: 38 U.S.C. 1814)

36.4325 PARTIAL OR TOTAL LOSS OF GUARANTY OR INSURANCE

\(a\) Subject to the incontestable provisions of 38 U.S.C. 1821 as to

loans guaranteed or insured on or subsequent to July 1, 1948, there
shall be

no liability on account of a guaranty or insurance, or any certificate
or

other evidence thereof, with respect to a

IV-54

transaction in which a signature to the note, the mortgage, or any other
loan

papers, or the application for guaranty or insurance is a forgery; or in
which

the certificate of discharge or the certificate of eligibility is

counterfeited, or falsified, or is not issued by the Government.

\(l\) Except as to a holder who acquired the loan instrument before

maturity, for value, and without notice, and who has not directly or by
agent

participated in the fraud, or in the misrepresentation hereinafter
specified,

any willful and material misrepresentation or fraud by the lender, or by
a

holder, or the agent of either, in procuring the guaranty or the
insurance

credit, shall relieve the Secretary of liability, or, as to loans
guaranteed

or insured on or subsequent to July 1, 1948, shall constitute a defense

against liability on account of the guaranty or insurance of the loan in

respect to which the willful misrepresentation, or the fraud, is
practiced:

Provided, That if a misrepresentation, although material, is not made

willfully, or with fraudulent intent, it shall have only the
consequences

prescribed in paragraphs (b) and (c) of this section.

\(b\) In taking security required by 38 U.S.C., chapter 37 and the

regulations concerning guaranty or insurance of loans to veterans, a
holder

shall obtain the required lien on property the title to which is such as
to be

acceptable to prudent lending institutions, informed buyers, title
companies,

and attorneys, generally, in the community in which the property is
situated:

Provided, That a title will not be unacceptable by reason of any of the

limitations on the quantum or quality of the property or title stated in

36.4350(b) and if such holder fails in this respect or fails to comply
with 38

U.S.C., chapter 37 and the regulations concerning guaranty or insurance
of

loans to veterans with respect to:

\(1\) Obtaining and retaining a lien of the dignity prescribed on all

property upon which a lien is required by 38 U.S.C., chapter 37 or the

regulations concerning guaranty or insurance of loans to veterans,

\(2\) Inclusion of power to substitute trustees ( 36.4327),

\(3\) The procurement and maintenance of insurance coverage

( 36.4326),

\(4\) Advice to Secretary as to default ( 36.4315),

\(5\) Notice of intention to begin action ( 36.4317),

\(6\) Notice to the Secretary in any suit or action, or notice of sale (

36.4319),

\(7\) The release, conveyance, substitution, or exchange of security (

36.4324),

IV-55

\(8\) Lack of legal capacity of a party to the transaction incident to

which the guaranty or the insurance is granted

( 36.4328),

\(9\) Failure of the lender to see that any escrowed or earmarked
account

is expended in accordance with the agreement,

\(10\) The taking into consideration of limitations upon the quantum or

quality of the estate or property ( 36.4350(b)),

\(11\) Any other requirement of 38 U.S.C., chapter 37 or the regulations

concerning guaranty or insurance of loans to veterans which does not by
the

terms of said chapter or the regulations concerning guaranty or
insurance of

loans to veterans result in relieving the Secretary of all liability
with

respect to the loan, no claim on the guaranty or insurance shall be paid
on

account of the loan with respect to which such failure occurred, or in
respect

to which an unwillful misrepresentation occurred, until the amount by
which

the ultimate liability of the Secretary would thereby be increased has
been

ascertained. The burden of proof shall be upon the holder to establish
that

no increase of ultimate liability is attributable to such failure or

misrepresentation. The amount of increased liability of the Secretary
shall

be offset by deduction from the amount of the guaranty or insurance
otherwise

payable, or if consequent upon loss of security shall be offset by
crediting

to the indebtedness the amount of the impairment as proceeds of the sale
of

security in the final accounting to the Secretary. To the extent the
loss

resultant from the failure or misrepresentation prejudices the
Secretary\'s

right of subrogation acceptance by the holder of the guaranty or
insurance

payment shall subordinate the holder\'s right to those of the Secretary.

\(c\) If after the payment of a guaranty or an insurance loss, or after
a

loan is transferred pursuant to 36.4318(a), the fraud, misrepresentation
or

failure to comply with the regulations in this subpart as provided in
this

section is discovered and the Secretary determines that an increased
loss to

the Government resulted therefrom, the transferor or person to whom such

payment was made shall be liable to the Secretary for the amount of the
loss

caused by such misrepresentation or failure.

36.4326 HAZARD INSURANCE

The holder shall require insurance policies to be procured and

maintained in an amount sufficient to protect the security against the
risks

or hazards to which it may be subject to the extent customary in the
locality.

Flood insurance will be required in respect to any loan closed on and
after

March 2, 1974, if the security is located in an area identified by the

Secretary of Housing and Urban Development as having special flood
hazards and

in which the sale of flood insurance is available under the National
Flood

Insurance Program. The amount of flood insurance required will be equal
to

the outstanding balance of the loan or the maximum limit of coverage
available

for the particular type of property

IV-56

under the National Flood Insurance Program, whichever is less. All
moneys

received under such policies covering payment of insured losses shall be

applied to restoration of the security or to the loan balance.

36.4327 SUBSTITUTION OF TRUSTEES

In jurisdictions in which valid, any deed of trust or mortgage securing

a guaranteed or insured loan, if it names trustees, or confers a power
of sale

otherwise, shall contain a provision empowering any holder of the
indebtedness

to appoint substitute trustees, or other person with such power to sell,
who

shall succeed to all the rights, powers, and duties of the trustees, or
other

person, originally designated.

36.4328 CAPACITY OF PARTIES TO CONTRACT

Nothing in 36.4300 to 36.4375, inclusive, shall be construed to relieve

any lender of responsibility otherwise existing, for any loss caused by
the

lack of legal capacity of any person to contract, convey, or encumber,
or

caused by the existence of other legal disability or defects
invalidating, or

rendering unenforceable in whole or in part, either the loan obligation
or the

security therefor.

36.4329 GEOGRAPHICAL LIMITS

Any real property purchased, constructed, altered, improved, or repaired

with the proceeds of a guaranteed or insured loan shall be situated
within the

United States which for purposes of 38 U.S.C., chapter 37 is here
defined as

the several States, Territories and possessions, and the District of
Columbia,

the Commonwealth of Puerto Rico, and the Commonwealth of the Northern
Mariana

Islands.

36.4330 ACCOUNTING RECORDS

\(a\) The holder shall maintain a record of the amounts of payments

received on the obligation and disbursements chargeable thereto and the
dates

thereof. This record shall be maintained until the Secretary ceases to
be

liable as guarantor or insurer of the loan. For the purpose of any
accounting

with the Secretary or computation of a claim any holder who fails to
maintain

such record shall be presumed to have received on the dates due all sums
which

by the terms of the contract are payable prior to date of claim for
default,

and the burden of going forward with evidence and of ultimate proof of
the

contrary shall be on such holder.

\(b\) The lender shall retain copies of all loan origination records on
a

VA guaranteed loan for at least one year from the date of loan closing.
Loan

origination records include the loan application, including any
preliminary

application, verifications of employment and deposit, all credit
reports,

including preliminary credit reports, copies of each sales contract and

addendums, letters of explanation for adverse credit items,
discrepancies and

the like,

IV-57

direct references from creditors, correspondence with employers,
appraisal and

compliance inspection reports, reports on termite and other inspections
of the

property, builder change orders, and all closing papers and documents.

(Authority: 38 U.S.C. 210(c), 1803(c)(1))

\(c\) The Secretary has the right to inspect, examine, or audit, at a

reasonable time and place, the records or accounts of a holder
pertaining to

loans guaranteed or insured by the Secretary.

36.4331 DISQUALIFICATION OF LENDERS

\(a\) A lender or holder may be suspended from obtaining guaranty or

insurance of loans or from the right to the guaranty or insurance in
respect

to any loan made or purchased after the date of its suspension, except
as

provided in paragraph (h) of this section, whenever any of the employees

designated in 36.4342(b) finds that the lender or holder (hereinafter

referred to as lender) has failed to maintain adequate loan accounting

records, or to demonstrate proper ability to service loans adequately,
or to

exercise proper credit judgment, or has declined to make a guaranteed or

insured home loan to an eligible veteran because of the applicant\'s
race,

color, religion, sex, or national origin, or has willfully or
negligently

engaged in practices otherwise detrimental to the interests of veterans
or of

the Government, or has been refused the benefits of participation under
the

National Housing Act pursuant to a determination of the Secretary of
Housing

and Urban Development. Suspension of a lender shall be effected only
when

specifically authorized by the Secretary, the Assistant Secretary, or by
the

Chief Benefits Director, Veterans Benefits Administration. In any case
in

which suspension has been so authorized and (1) an indictment has been
secured

or a criminal information has been filed against the lender in
connection with

a transaction involving 38 U.S.C., chapter 37, or (2) is based upon
action

taken by the Secretary of Housing and Urban Development, an immediate

suspension may be effected. A lender may also be suspended under this
section

if it is owned by, or employs as an officer, loan solicitor, loan
processor,

loan servicer, loan supervisor, office manager, or in any other
position, a

person who engages in or is responsible for the processing or servicing
of VA

guaranteed or insured loans if that person has been previously suspended
by VA

under this section. In any other case in which the Director of a
regional

office has obtained Central Office authorization to initiate suspension

proceedings, prior written notice of intention to apply the suspension

sanction shall be furnished to the lender concerned.

(Authority: 38 U.S.C. 1804(d); 1812(g))

\(b\) Where notice of intention to suspend is furnished a lender, the

notice shall state the charges against the lender and the specifications
on

which the charges are based. Such notice shall also advise the lender
that no

later than 20 days from the date of the receipt of the notice it may
file

written answer to the charges with the Director and, if desired, may
also file

a written request

IV-58

that lender be permitted to appear before the Department of Veterans
Affairs

and state why suspension should not be effected. In the event the lender
does

not file written answer to the charges against it and does not make or
request

permission to make an appearance before the Department of Veterans
Affairs

within the time specified, suspension may be effected immediately,
without

further authorization, by the Director who will advise the Chief
Benefits

Director of the action taken.

\(c\) If an appearance before the Department of Veterans Affairs is

requested by the lender, the Director will arrange for and notify the
lender

of the time and place thereof and will appoint a committee of three the

Department of Veterans Affairs employees to hear the lender\'s
statement. The

District Counsel or designee will represent the Department of Veterans
Affairs

at such appearance. The proceedings of the committee will be informal.
The

lender will be informed of the charges and specifications which
constitute the

basis of the contemplated suspension and will be afforded an opportunity
to

state either orally or in writing why suspension should not be effected.

Written or oral statements of the lender, or its officers, agents, or

representatives other than counsel may be required by said District
Counsel or

designee to be made under oath if in the discretion of said District
Counsel

or designee the nature of the statement is such as to make that
procedure

advisable. In the event an oral statement is made under oath, a verbatim

transcript of such statement will be made. Authority is hereby delegated
to

the District Counsel or designee to administer oaths to each party
making the

statement under oath.

\(d\) If within the specified time written answer is filed with the

Director or the lender makes an appearance, the Director will hold the

suspension in abeyance and submit a full report to the Chief Benefits
Director

including recommendations as to the action to be taken in the case and
will

await instructions of the Chief Benefits Director before proceeding
further.

\(e\) Where suspension is effected, the lender will be advised in
writing

of the effective date of the suspension and, unless such was previously

furnished, will be given written notice of the charges against the
lender and

the specifications on which such charges are based. Any lender who is

suspended shall have the right to apply to the Chief Benefits Director
for

termination or modification of the suspension and, except when the
suspension

is based upon action taken by the Secretary of Housing and Urban
Development,

shall also have the right to apply to the Chief Benefits Director for a
formal

hearing at which opportunity shall be afforded to show why suspension
should

be modified or terminated. The Chief Benefits Director may postpone the

holding of a hearing for a reasonable period in any case in which the

Department of Justice or U.S. attorney advises or requests postponement

pending the trial of a criminal or civil case or the institution of
criminal

or civil proceedings against the lender. In the absence of such request,
the

Chief Benefits Director, as soon as it is feasible to do so, shall

IV-59

designate such time and place as may be deemed appropriate for such
hearing,

shall notify the lender thereof, and shall appoint no fewer than three

persons, who shall constitute the board, to conduct the hearing. The
District

Counsel or designee shall represent the Department of Veterans Affairs.

Authority is hereby delegated to the presiding officer of the board
designated

to conduct such hearing to administer oaths to witnesses. The Director
may

issue subpoenas for witnesses or records as provided in 38 U.S.C. 3311.
The

lender shall have the right to appear at such hearing in person or by

attorney, or both, and to introduce evidence showing why such suspension

should be modified or terminated. If the Department of Veterans Affairs
has

knowledge of a pending or contemplated civil or criminal action by the
United

States against the lender, arising from the facts on which the
suspension of

the lender was based, the District Counsel of the regional office
concerned

will inform the responsible U.S. attorney of the date and place of
hearing and

keep said U.S. attorney advised of all developments.

\(f\) As soon as is practicable after the conclusion of the hearing, the

board will make findings of fact and recommendations in writing to the
Chief

Benefits Director. The lender will be furnished with a transcript of the

hearing and with a statement of the board\'s findings of fact. The
lender

shall have the right within 14 days after receipt of such transcript and

statement to file with the Chief Benefits Director a brief of either, or
both,

facts and law.

\(g\) Upon receipt of the transcript of the hearing, the findings and

recommendations of the board, and the brief of the lender, if one is
filed,

the Chief Benefits Director shall make a determination in the case,
basing

such action on such record. Written notice of such determination shall
be

given to the lender. The lender shall have the right to appeal such
decision

to the Secretary by giving notice in writing to the Chief Benefits
Director

within 10 days after the receipt of notice of such determination. In the

event of such appeal, the Secretary will decide the matter finally on
the

record and will notify the lender of the decision in writing. If the
lender

does not appeal to the Secretary within the period specified, the

determination by the Chief Benefits Director shall be final.

\(h\) Except where acquisition is pursuant to a binding contract

antedating the suspension, the purchase of a guaranteed or insured loan
by a

lender after the date of its suspension shall cancel the guaranty or
insurance

on such loan: Provided, the notice to the lender of the suspension
expressly

bars such lender from acquiring by purchase loans guaranteed or insured
by the

Secretary.

\(i\) If after determination by the Chief Benefits Director or the

Secretary, as provided in paragraph (g) of this section, the suspension
is

terminated, all rights and interest of the lender shall be restored.
However,

any lender suspended by reason of action taken by the Secretary of
Housing and

Urban Development is not afforded the rights under paragraph (g) of this

section and the

IV-60

suspension in any case will be terminated by the Chief Benefits Director
only

if the lender furnishes satisfactory evidence of his or her
reinstatement by

the Secretary of Housing and Urban Development.

36.4332 DELIVERY OF NOTICE

Any notice required by 36.4300 to 36.4375, inclusive, to be given the

Secretary must be in writing, and delivered, by mail or otherwise, to
the

Department of Veterans Affairs office at which the guaranty or insurance
was

issued, or to any changed address of which the holder has been given
notice.

Such notice must plainly identify the case by setting forth the name of
the

original veteran-obligor and the file number assigned to the case by the

Secretary, if available, or otherwise the name and serial number of the

veteran. If mailed, the notice shall be by registered mail when so
provided

by 36.4300 to 36.4375, inclusive. This section does not apply to legal

process. (See 36.4319).

36.4333 SATISFACTION OF INDEBTEDNESS

Upon full satisfaction of a guaranteed loan by payment or otherwise it

shall be the duty of the holder to cancel the endorsement, if any, of
the

Secretary; and forthwith inform the Secretary of such cancellation. In
the

event the Secretary\'s liability thereon is evidenced by an instrument
separate

from the instrument evidencing the debtor\'s obligation, the instrument

evidencing the obligation of the Secretary shall be returned to the
Department

of Veterans Affairs office issuing same, or to the Central Office, with
the

holder\'s cancellation or endorsement of release thereon.

36.4334 INCORPORATION BY REFERENCE

Regulations issued under 38 U.S.C., chapter 37, and in effect on the

date of any loan which is submitted and accepted or approved for a
guaranty or

for insurance thereunder, shall govern the rights, duties, and
liabilities of

the parties to such loan and any provisions of the loan instruments

inconsistent with such regulations are hereby amended and supplemented
to

conform thereto.

36.4335 SUPPLEMENTARY ADMINISTRATIVE ACTION

Notwithstanding any requirement, condition, or limitation stated in or

imposed by the regulations concerning the guaranty or insurance of loans
to

veterans, the Chief Benefits Director, or the Director, Loan Guaranty
Service,

within the limitations and conditions prescribed by the Secretary, is
hereby

authorized, if he or she finds the interests of the Government are not

adversely affected, to relieve undue prejudice to a debtor, holder, or
other

person, which might otherwise result, provided no such action may be
taken

which would impair the vested rights of any person affected thereby. If
such

requirement, condition, or limitation is of an administrative or
procedural

(not substantive) nature, any employee

IV-61

designated in 36.4342 is hereby authorized to grant similar relief if he
or

she finds the failure or error of the lender was due to misunderstanding
or

mistake and that the interests of the Government are not adversely
affected.

Provisions of the regulations considered to be of an administrative or

procedural (nonsubstantive) nature are limited to the following:

\(a\) The requirement in 36.4303(a) that a lender of a class described

under 38 U.S.C. 1802(d) originating a loan under the automatic (nonprior

approval) procedure report such loan for issuance of guaranty or
insurance

evidence within 60 days following full disbursement. Waiver of the
lender\'s

failure to report the loan within the 60-day period shall be confined to
cases

where the loan is not in default.

\(b\) The requirement in 36.4303(d) that a lender originating a loan

under a certificate of commitment report the loan for issuance of
guaranty or

insurance evidence within 60 days following actual payment of the full

proceeds of the loan. In such cases it is not necessary that a finding
be

made that the loan is not in default.

\(c\) The requirement in 36.4314(e) that a holder promptly forward an

advice of the terms of any agreement effecting a reamortization or
extension

of a loan.

\(d\) The 45-day requirement in 36.4315(a) concerning the giving of

notice of default.

\(e\) The requirement in 36.4317 that a holder give 30 days advance

notice of its intention to foreclose.

\(f\) The requirement in 36.4317(b) that a holder give notice of

repossession of personal property within 10 days after such repossession
has

occurred.

\(g\) The requirement in 36.4307(a) that a lender obtain the prior

approval of the Secretary before closing a joint loan if the lender or
class

of lenders is eligible or has been approved by the Secretary to close
loans on

the automatic basis pursuant to 38 U.S.C. 1802(d).

(Authority: 38 U.S.C. 1803(c)(1))

\(h\) The requirements in 36.4303(k) of this part concerning the giving

of notice in assumption cases under 38 U.S.C. 1814.

(Authority: 38 U.S.C. 1814 and 1820)

36.4336 ELIGIBILITY OF LOANS; REASONABLE VALUE REQUIREMENTS

\(a\) Evidence of guaranty or insurance shall be issued in respect to a

loan for any of the purposes specified in 38 U.S.C. 1810(a) only if:

IV-62

\(1\) The proceeds of such loan have been used to pay for the property

purchased, constructed, repaired, refinanced, altered, or improved and;

(2)(i) Except as to refinancing loans pursuant to 38 U.S.C. 1810(a)(8)

or (9)(B)(i), the loan including any scheduled deferred interest added
to

principal, does not exceed the reasonable value of the property or
projected

reasonable value of a new home which is security for a Graduated Payment

Mortgage loan, as appropriate, as determined by the Secretary, and

\(ii\) For the purpose of determining the reasonable value of a
Graduated

Payment Mortgage loan to purchase a new home, the reasonable value of
the

property as of the time the loan is made shall be calculated to increase
at a

rate not in excess of 2.5 percent per year, but in no event may the
projected

value of the property exceed 115 percent of the initially established

reasonable value, and

(Authority: 38 U.S.C. 1803(d)(2))

\(3\) The veteran has certified, in such form as the Secretary may

prescribe, that the veteran has paid in cash from his or her own
resources on

account of such purchase, construction, alteration, repair, or
improvement a

sum equal to the difference, if any, between the purchase price or cost
of the

property and its reasonable value.

\(b\) Notwithstanding that the aggregate of the loan amount in the case

of loans for the purposes specified in paragraph (a) of this section,
and the

amount remaining unpaid on taxes, special assessments, prior mortgage

indebtedness, or other obligations of any character secured by
enforceable

superior liens or a right to such lien existing as of the date the loan
is

closed exceeds the reasonable value of such property as of said date and
that

evidence of guaranty or insurance credit is issued in respect thereof,
as

between the holder and Secretary (for the purpose of computing the claim
on

the guaranty or insurance and for the purposes of 36.4320, and all

accountings), the indebtedness which is the subject of the guaranty or

insurance shall be deemed to have been reduced as of the date of the
loan by a

sum equal to such excess, less any amounts secured by liens released or
paid

on the obligations secured by such superior liens or rights by a holder
or

others without expense to or obligation on the debtor resulting from
such

payment, or release of lien or right; and all payments made on the loan
shall

be applied to the indebtedness as so reduced. Nothing in this paragraph

affects any right or liability resulting from fraud or willful

misrepresentation.

36.4337 Canceled.

IV-63

36.4338 DEATH OR INSOLVENCY OF HOLDER

\(a\) Immediately upon the death of the holder and without the necessity

of request or other action by the debtor or the Secretary, all sums then

standing as a credit balance in a trust, or deposit, other account to
cover

taxes, insurance accruals, or other items in connection with the loan
secured

by the encumbered property, whether stated to be such or otherwise
designated,

and which have not been credited on the note shall, nevertheless, be
treated

as a setoff and shall be deemed to have been credited thereon as of the
date

of the last debit to such account, so that the unpaid balance of the
note as

of that date will be reduced by the amount of such credit balance:
Provided,

That any unpaid taxes, insurance premiums, ground rents, or advances may
be

paid by the holder of the indebtedness, at the holder\'s option, and the
amount

which otherwise would have been deemed to have been credited on the note

reduced accordingly. This paragraph shall be applicable whether the
estate of

the deceased holder is solvent or insolvent.

\(b\) The provisions of paragraph (a) of this section shall also be

applicable in the event of:

\(1\) Insolvency of holder;

\(2\) Initiation of any bankruptcy or reorganization, or liquidation

proceedings as to the holder, whether voluntary or involuntary;

\(3\) Appointment of a general or ancillary receiver for the holder\'s

property; or in any case

\(4\) Upon the written request of the debtor if all secured and due

insurance premiums, taxes, and ground rents have been paid, and
appropriate

provisions made for future accruals.

\(c\) Upon the occurrence of any of the events enumerated in paragraph

\(a\) or (b) of this section, interest on the note and on the credit
balance of

the deposits mentioned in paragraph (a) shall be set off against each
other at

the rate payable on the principal of the note, as of the date of last
debit to

the deposit account. Any excess credit of interest shall be treated as a

setoff against the unpaid advances, if any, and the unpaid balance of
the

note.

\(d\) The provisions of paragraphs (a), (b) and (c) of this section
shall

apply also to corporations. The dissolution thereof by expiration of
charter,

by forfeiture, or otherwise shall be treated as is the death of an
individual

as provided in paragraph (a).

36.4339 QUALIFICATION FOR DESIGNATED FEE APPRAISER

To qualify for approval as a designated fee appraiser, an applicant must

show to the satisfaction of the Secretary that his or her character,

experience, and the type of work in which he or she

IV-64

has had experience for at least 5 years qualifies the applicant to
competently

appraise and value within a prescribed area the type of property to
which the

approval relates.

36.4340 RESTRICTION ON DESIGNATED FEE APPRAISERS

\(a\) A designated fee appraiser shall not make an appraisal, excepting

of alterations, improvements, or repairs to real property entailing a
cost of

not more than \$3,500; if such appraiser is an officer, director,
trustee,

employer, or employee of the lender, contractor, or vendor.

\(b\) An appraisal made by a designated fee appraiser shall be subject
to

review and adjustment by the Secretary. The amount determined to be
proper

upon any such review or adjustment shall constitute the \"reasonable
value\" for

the purpose of determining the eligibility of the related loan.

36.4341 SUSPENSION OR REMOVAL OF APPRAISERS

Upon it appearing that an appraiser designated by the Secretary is not

qualified to make appraisals of the type for which appointed or has
engaged in

any practice detrimental to the interests of the veteran, the lender, or
the

Government, the appraiser may be suspended or removed by the Secretary:

Provided, That such action shall not prejudice the guaranty or insurance
right

of a lender who has in good faith acted in reliance upon a designation
of such

appraiser prior to receiving notice of such suspension or removal.

36.4342 DELEGATION OF AUTHORITY

\(a\) Except as hereinafter provided, each employee of the Department of

Veterans Affairs heretofore or hereafter appointed to, or lawfully
filling,

any position designated in paragraph (b) of this section is hereby
delegated

authority, within the limitations and conditions prescribed by law, to

exercise the powers and functions of the Secretary with respect to the

guaranty or insurance of loans and the rights and liabilities arising

therefrom, including but not limited to the adjudication and allowance,

disallowance, and compromise of claims; the collection or compromise of

amounts due, in money or other property; the extension, rearrangement,
or

acquisition of loans; the management and disposition of secured and
unsecured

notes and other property; and those functions expressly or impliedly
embraced

within paragraphs (2) to (6), inclusive, of 38 U.S.C. 1820(a).
Incidental to

the exercise and performance of the powers and functions hereby
delegated,

each such employee is authorized to execute and deliver (with or without

acknowledgment) for, and on behalf of, the Secretary, evidence of
guaranty or

of insurance credits and such certificates, forms, conveyances, and
other

instruments as may be appropriate in connection with the acquisition,

ownership, management, sale, transfer, assignment, encumbrance, rental,
or

other disposition of real or personal property or of any right, title,
or

interest therein, including, but

IV-65

not limited to, contracts of sale, installment contracts, deeds, leases,
bills

of sale, assignments, and releases; and to approve disbursements to be
made

for any purpose authorized by 38 U.S.C., chapter 37.

\(b\) Designated positions:

Chief Benefits Director

Director, Loan Guaranty Service

Director, Medical and Regional Office Center

Director, Regional Office and Insurance Center

Director, VA Regional Office

Loan Guaranty Officer

Assistant Loan Guaranty Officer

The authority hereby delegated to employees of the positions designated
in

this paragraph may, with the approval of the Chief Benefits Director, be

redelegated.

\(c\) Nothing in this section shall be construed (1) to authorize any

such employee to exercise the authority vested in the Secretary under 38

U.S.C. 210(c) or 1803(a)(2) or to sue, or enter appearance for and on
behalf

of the Secretary, or confess judgment against the Secretary in any court

without the Secretary\'s prior authorization; or (2) to include the
authority

to exercise those powers delegated to the Chief Benefits Director, or
the

Director, Loan Guaranty Service, under 36.4320(j), 36.4335, or 36.4343:

Provided, That, anything in the regulations concerning guaranty or
insurance

of loans to veterans to the contrary notwithstanding, any evidence of
guaranty

or insurance issued on or after July 1, 1948, by any of the employees

designated in paragraph (b) of this section or by any employee
designated an

authorized agent or a loan guaranty agent shall be deemed to have been
issued

by the Secretary, subject to the defenses reserved in 38 U.S.C. 1821.

\(d\) Each regional office, regional office and insurance center, and

medical and regional office center shall maintain and keep current a

cumulative list of all employees of the office or center who, since May
1,

1980, have occupied the positions of Director, Loan Guaranty Officer,
and

Assistant Loan Guaranty Officer. This list will include each employee\'s
name,

title, date the employee assumed the position, and the termination date,
if

applicable, of the employee\'s tenure in such position. The list shall
be

available for public inspection and copying at the regional office, or
center,

during normal business hours.

(Authority: 38 U.S.C. 210(c)(1), 1820(a)(5))

36.4343 COOPERATIVE LOANS

\(a\) Any loan, which is (1) related to an enterprise in which more than

10 individuals will participate; or (2) to be made for the purchase or

construction of residential units in any housing development,
cooperative or

otherwise, the title to which development or to the individual units
therein

is not to be held

IV-66

directly by the veteran-participants, or which contemplates the
ownership or

maintenance of more than three units or of their major appurtenances in

common, to be eligible for guaranty or insurance shall require prior
approval

of the Chief Benefits Director, or the Director, Loan Guaranty Service,
who

may issue such approval upon such conditions and limitations deemed

appropriate, not inconsistent with the provisions of 38 U.S.C., chapter
37 and

regulations concerning guaranty or insurance of loans to veterans.

\(b\) The issuance of such approval with respect to residential

development under paragraph (a)(2) of this section also shall be subject
to

such conditions and stipulation as in the judgment of the approving
officer

are possible and proper to (1) afford reasonable and feasible protection
to

the rights of the Government as guarantor or insurer, and as subrogee,
and to

each veteran-participant against loss of his or her respective equity

consequent upon the failure of other participants to discharge their

obligations; (2) provide for a reasonable and workable plan for the
operation

and management of the project; (3) limit the personal liability of each

veteran-participant to those sums allocable on a proper ratable basis to
the

purchase, cost, and maintenance of his or her individual unit or
participating

interest; (4) limit commercial features to those reasonably calculated
to

promote the economic soundness of the project and the living convenience
of

the participants, retaining the essential character of a residential
project.

\(c\) No such project, development, or enterprise may be approved which

involves an initial grouping of more then 500 veterans, or a cost of
more than

five million dollars, unless it is conclusively shown to the
satisfaction of

the approving officer that a greater number of veterans or dollar amount
will

assure substantial advantages to the veteran-participants which could
not be

achieved in a smaller project.

\(d\) When approved as in this section provided, and upon performance of

the conditions indicated in the prior approval, proper guaranty
certificate or

certificates may be issued in connection with the loan or loans to be

guaranteed on behalf of eligible veterans participating in the project,

development or enterprise not to exceed in total amount the sum of the

guaranties applied for by the individual participants and for which
guaranty

each participant is then eligible.

\(e\) In lieu of guaranty as authorized in paragraph (d) of this
section,

insurance shall be available on application by the lender and all
veterans

concerned. In such case the insurance credit shall be limited to 15
percent

of the obligation of the veteran-applicant (subject to available
eligibility)

and the total insurance credit in respect to the veterans\' loans
involved in

the project shall not exceed 15 percent of the aggregate of the
principal sums

of the individual indebtedness incurred by the veterans participating in
the

project for the purpose of acquiring their respective interests therein.

IV-67

36.4344 LENDER APPRAISAL PROCESSING PROGRAM

\(a\) Delegation of Authority to Lenders to Review Appraisals and

Determine Reasonable Value

\(1\) To be eligible for delegation of authority to review VA appraisals

and determine the reasonable value of properties to be purchased with VA

guaranteed loans, a lender must (i) have automatic processing authority
under

38 U.S.C. 1802(d), and (ii) employ one or more staff appraisal reviewers

acceptable to the Secretary.

\(2\) To qualify as a lender\'s staff appraisal reviewer an applicant
must

be a full-time member of the lender\'s permanent staff and may not be
employed

by, or perform services for, any other mortgagee. The individual must
not

engage in any private pursuits in which there will be, or appear to be,
any

conflict of interest between those pursuits and his/her duties,

responsibilities, and performance as a Lender Appraisal Processing
Program

(LAPP) staff appraisal reviewer. Three years of experience is necessary
to

qualify as a lender\'s staff appraisal reviewer. That experience must

demonstrate a knowledge of, and the ability to apply industry-accepted

principles, methods, practices and techniques of appraising, and the
ability

to competently determine the value of property within a prescribed

geographical area. The individual must demonstrate the ability to review
the

work of others and to recognize deviations from accepted appraisal
principles,

practices, and techniques, errors in computations, and unjustifiable and

unsupportable conclusions.

\(3\) Lenders that meet the requirements of 38 U.S.C. 1802(d), and have
a

staff appraisal reviewer determined acceptable by VA, will be authorized
to

review appraisals and make reasonable value determinations on properties
that

will be security for VA guaranteed loans. The lender\'s authorization
will be

subject to a one-year probationary period. Additionally, lenders must
satisfy

initial and subsequent VA office case review requirements prior to being

allowed to determine reasonable value without VA involvement. The
initial

office case review requirement must be satisfied in the VA regional
office in

whose jurisdiction the lender\'s staff appraisal reviewer is located
before the

LAPP authority may be utilized by that lender in any other VA office\'s

jurisdiction. To satisfy the initial office case review requirement, the

first five cases of each lender staff appraisal reviewer involving
properties

in the regional office location where the staff appraisal reviewer is
located

will be processed by him or her up to the point where he or she has made
a

reasonable value determination and fully drafted, but not issued, the
lender\'s

notification of reasonable value letter to the veteran. At that point,
and

prior to loan closing, each of the five cases will be submitted to the
local

VA office. After a staff review of each case, VA will issue a
Certificate of

Reasonable Value, which the lender may use in closing the loan
automatically

if it meets all other requirements of the VA. If these five cases are
found

to be acceptable by VA, the lender\'s staff appraisal reviewer

IV-68

will be allowed to fully process subsequent appraisals for properties
located

in that VA office\'s jurisdiction without prior submission to VA and
issuance

by VA of a Certificate of Reasonable Value. Lenders must also satisfy a

subsequent VA office case review requirement in each additional VA
office

location in which they desire to extend and utilize this authority.
Under

this requirement, the lender must have first satisfied the initial
office case

review requirement and then must submit to the additional VA office(s)
the

first case each staff appraisal reviewer processes in the jurisdiction
of that

office. As provided under the initial office case review requirement, VA

office personnel will issue a Certificate of Reasonable value for this
case

and subsequently determine the acceptability of the lender\'s staff
appraisal

reviewer\'s processing. If VA finds this first case to be acceptable,
the

lender\'s staff appraisal reviewer will be allowed to fully process
subsequent

cases in that additional VA office\'s jurisdiction without prior
submission to

VA. The initial and subsequent office case review requirements may be

expanded by VA if acceptable performance has not been demonstrated.
After

satisfaction of the initial and subsequent office case review
requirements,

routine reviews of LAPP cases will be made by VA staff based upon
quality

control procedures established by the Chief Benefits Director. Such
review

will be made on a random sampling or performance related basis. During
the

probationary period a high percentage of reviews will be made by VA
staff.

\(4\) The following certification by the lender\'s nominated staff

appraisal reviewer must be provided with the lender\'s application for

delegation of LAPP authority:

I hereby acknowledge and represent that by signing the Uniform

Residential Appraisal Report
([URAR](https://www.efanniemae.com/sf/formsdocs/forms/1004.jsp)), FHLMC
(Federal Home Loan Mortgage

Corporation) Form 70/FNMA (Federal Notice Mortgage Association) Form
1004, I

am certifying, in all cases, that I have personally reviewed the
appraisal

report. In doing so I have considered and utilized recognized
professional

appraisal techniques, have found the appraisal report to have been
prepared in

compliance with applicable VA requirements, and concur with the

recommendations of the fee appraiser, who was assigned by VA to the
case.

Furthermore, in those cases where clarifications or corrections have
been

requested from the VA fee appraiser there has been no pressure or
influence

exerted on that appraiser to remove or change information that might be

considered detrimental to the subject property, or VA\'s interests, or
to reach

a predetermined value for that property. Signature of Staff Appraisal

Reviewer.

\(5\) Other certifications required from the lender will be specified

with particularity in the separate instructions issued by the Secretary,
as

noted in 36.4344(b).

\(b\) Instructions for LAPP Procedures. The Secretary will publish

separate instructions for processing appraisals under the Lenders
Appraisal

Processing Program. Compliance with these regulations and the separate

instructions issued by the Secretary is

IV-69

deemed by VA to be the minimum exercise of due diligence in processing
LAPP

cases. Due diligence is considered by VA to represent that care, as is
to be

properly expected from, and ordinarily exercised by, reasonable and
prudent

lenders who would be dependent on the property as security to protect
its

investment.

\(c\) VA Minimum Property Requirements. Lenders are responsible for

determining that the property meets VA minimum property requirements.
The

separate instructions issued by the Secretary will set forth the
lender\'s

ability to adjust, remove, or alter the fee appraiser\'s or fee
compliance

inspector\'s recommendations concerning VA minimum property
requirements.

Condominiums, planned-unit developments and leasehold estates must have
been

determined acceptable by VA. A condominium or planned-unit development
which

is acceptable to the Department of Housing and Urban Development or the

Department of Agriculture may also be acceptable to VA.

\(d\) Adjustment of Value Recommendations. The amount of authority to

upwardly adjust the fee appraiser\'s estimated market value during the
lender

staff appraisal reviewer\'s initial review of the appraisal report or to

subsequently process an appeal of the lender\'s established reasonable
value

will be specified in the separate instructions issued by VA as noted in

36.4344(b). The amount specified must not in any way be considered an

administrative adjustment figure which may be applied indiscriminately
and

without valid basis or justification with the sole purpose of reaching
an

amount necessary to complete the sale or mortgage transaction.

\(1\) Adjustment During Initial Review. Any adjustment during the staff

appraisal reviewer\'s initial review of the appraisal report must be
fully and

clearly justified in writing on the appraisal report form or, if
necessary, on

an addendum. The basis for the adjustment must be adequate and
reasonable by

professional appraisal standards. If real estate market or other valid
data

was utilized in arriving at the decision to make the adjustment, such
data

must be attached to the appraisal report. All adjustments, comments,

corrections, justifications, etc., to the appraisal report must be made
in a

contrasting color, be clearly legible, and signed and dated by the staff

appraisal reviewer.

\(2\) Processing Appeals. The authority provided under 38 U.S.C. 1831(d)

which permits a lender to obtain a VA fee panel appraiser\'s report
which VA is

obligated to consider in an appeal of the established reasonable value
shall

not apply to cases processed under the authority provided by this
section.

All appeals of VA fee appraisers\' estimated market values or lenders\'

reasonable value determinations above the amount specified in the
separate

instructions issued by VA must be submitted, along with the lender\'s

recommendations, if any, to VA for processing and final determination.
Unless

otherwise authorized in the separate instructions lenders must also
submit

appeals, regardless of the amount, to VA in all cases where the staff

appraisal reviewer has made an adjustment during their initial review of
the

appraisal

IV-70

report to the fee appraiser\'s market value estimate. The fee
appraiser\'s

estimated market value or lender\'s reasonable value determination may
be

increased only when such increase is clearly warranted and fully
supported by

real estate market or other valid data considered adequate and
reasonable by

professional appraisal standards and the lender\'s staff appraisal
reviewer

clearly and fully justifies the reasoning and basis for the increase in

writing on the appraisal report form or an addendum. The staff appraisal

reviewer must date and sign the written justification and must cite
within it

the data used in arriving at the decision to make the increase. All such
data

shall be attached to the appraisal report form and any addendum.

\(e\) Notification. It will be the responsibility of the lender to

notify the veteran borrower in writing of the determination of
reasonable

value and related conditions specific to the property and to provide the

veteran with a copy of the appraisal report. Any delay in processing the

notification of value must be documented. Any delay of more than five
work

days between the date of the lender\'s receipt of the fee appraiser\'s
report

and date of the notification of value to the veteran, without reasonable
and

documented extenuating circumstances, will not be acceptable. A copy of
the

lender notification letter to the veteran and the appraisal report must
be

forwarded to the VA office of jurisdiction at the same time the veteran
is

notified. In addition, the original appraisal report, related appraisal

documentation, and a copy of the reasonable value determination
notification

to the veteran must be submitted to the VA with the request for loan
guaranty.

\(f\) Indemnification. When the Secretary has incurred a loss as a

result of a payment of claim under guaranty and in which the Secretary

determines an increase made by the lender under 36.4344(d)

or (f) was unwarranted, or arbitrary and capricious, the lender shall

indemnify the Secretary to the extent the Secretary determines such loss
was

caused, or increased, by the increase in value.

\(g\) Affiliations. A lender affiliated with a real estate firm builder,

land developer or escrow agent as a subsidiary division, investment or
any

other entity in which it has a financial interest or which it owns may
not use

this authority for any cases involving the affiliate unless the lender

demonstrates to the Secretary\'s satisfaction that the lender and its

affiliate(s) are essentially separate entities that operate
independently of

each other, free of all cross-influences (e.g., a formal corporate
agreement

exists which specifically sets forth this fact).

\(h\) Quality Control Plans. The lender must have an effective

self-policing or quality control system to ensure the adequacy and
quality of

their LAPP staff appraisal reviewer\'s processing and, that its
activities do

not deviate from high standards of integrity. The quality control system
must

include frequent, periodic audits that specifically address the
appraisal

review activity. These audits may be performed by an independent party,
or

IV-71

by the lender\'s independent internal audit division which reports
directly to

the firm\'s chief executive officer. The lender must agree to furnish
findings

and information under this system to VA on demand. While the quality
control

personnel need not be appraisers, they should have basic familiarity
with

appraisal theory and techniques and the ability to prescribe appropriate

corrective action(s) in the appraisal review process when discrepancies
or

problems are identified. The basic elements of the system will be
described

in separate instructions issued by the Secretary. Copies of the
lender\'s

quality control plan or self-policing system evidencing appraisal
related

matters must be provided to the VA office of jurisdiction with the
lender\'s

application for LAPP authority.

\(i\) Fees. The Secretary may require mortgagees to pay an application

fee and/or annual fees, including additional fees for each branch office

authorized to process cases under the authority delegated under this
section,

in such amounts and at such times as the Secretary may require.

\(j\) Withdrawal of Lender Authority. The authority for a lender to

determine reasonable value may be withdrawn by the Loan Guaranty Officer
when

proper cause exists. A lender\'s authority to make reasonable value

determinations shall be withdrawn when the lender no longer meets the
basic

requirements for delegating the authority, or when it can be shown that
the

lender\'s reasonable value determinations have not been made in
accordance with

VA regulations, requirements, guidelines, instructions or applicable
laws, or

when there is adequate evidence to support reasonable belief by VA that
a

particular unacceptable act, practice, or performance by the lender or
the

lender\'s staff has occurred. Such acts, practices or performance
include, but

are not limited to: Demonstrated technical incompetence (i.e., conduct
which

demonstrates an insufficient knowledge of industry accepted appraisal

principles, techniques and practices; or the lack of technical
competence to

review appraisal reports and make value determinations in accordance
with

those requirements); substantive or repetitive errors (i.e., any
error(s) of a

nature that would materially or significantly affect the determination
of

reasonable value or condition of the property; or a number or series of
errors

that, considered individually, may not significantly impact the
determination

of reasonable value or property condition, but which when considered in
the

aggregate would establish that appraisal reviews or LAPP case processing
are

being performed in a careless or negligent manner), or continued
instances of

disregard for VA requirements after they have been called to the
lender\'s

attention.

\(1\) Withdrawal of authority by the Loan Guaranty Officer may be either

for an indefinite or a specified period of time. For any withdrawal
longer

than 90 days a reapplication for lender authority to process appraisals
under

these regulations will be required. Written notice will be provided at
least

30 days in advance of withdrawal unless the Government\'s interests are
exposed

to immediate risk from the lender\'s activities in which case the

IV-72

withdrawal will be effected immediately. The notice will clearly and

specifically set forth the basis and grounds for the action. There is no

right to a formal hearing to contest the withdrawal of LAPP processing

privileges. However, if within 15 days after receiving notice the lender

requests an opportunity to contest the withdrawal, the lender may
submit, in

person, in writing, or through a representative, information and
argument to

the Loan Guaranty Officer in opposition to the withdrawal. The Loan
Guaranty

Officer will make a recommendation to the Regional Office Director who
shall

make the determination as to whether the action should be sustained,
modified

or rescinded. The lender will be informed in writing of the decision.

\(2\) The lender has the right to appeal the Regional Office Director\'s

decision to the Chief Benefits Director. In the event of such an appeal,
the

Chief Benefits Director will review all relevant material concerning the

matter and make a determination that shall constitute final agency
action. If

the lender\'s submission of opposition raises a genuine dispute over
facts

material to the withdrawal of LAPP authority, the lender will be
afforded an

opportunity to appear with a representative, submit documentary
evidence,

present witnesses and confront any witness the Veterans Benefits

Administration presents. The Chief Benefits Director will appoint a
hearing

officer or panel to conduct the hearing. When such additional
proceedings are

necessary, the Chief Benefits Director shall base the determination on
the

facts as found, together with any information and argument submitted by
the

lender.

\(3\) In actions based upon a conviction or civil judgment, or in which

there is no genuine dispute over material facts, the Chief Benefits
Director

shall make a decision on the basis of all the information in the

administrative record, including any submission made by the lender.

\(4\) Withdrawal of the LAPP authority will require that VA make

subsequent determinations of reasonable value for the lender.
Consequently,

VA staff will review each appraisal report and issue a Certificate of

Reasonable Value which can then be used by the lender to close loans on
either

the prior VA approval or automatic basis.

\(5\) Withdrawal by VA of the lender\'s LAPP authority does not prevent
VA

from also withdrawing automatic processing authority or taking debarment
or

suspension action based upon the same conduct by the lender.

(Authority: 38 U.S.C. 1831)

36.4345 WAIVERS, CONSENTS, AND APPROVALS; WHEN EFFECTIVE

No waiver, consent, or approval required or authorized by the

regulations concerning guaranty or insurance of loans to veterans shall
be

valid unless in writing signed by the Secretary or the subordinate
officer to

whom authority has been delegated by the Secretary.

IV-73

36.4346 Canceled.

36.4347 MINIMUM PROPERTY AND CONSTRUCTION REQUIREMENTS

No loan for the purchase or construction or residential property shall

be eligible for guaranty or insurance unless such property complies or

conforms with those standards of planning, construction, and general

acceptability that may be applicable thereto and prescribed by the
Secretary

pursuant to 38 U.S.C. 1804(a).

36.4348 - 36.4349 Canceled.

36.4350 ESTATE OF VETERAN IN REAL PROPERTY

\(a\) The estate in the realty acquired by the veteran, wholly or partly

with the proceeds of a guaranteed or insured loan, or owned by him or
her and

on which construction, or repairs, or alterations or improvements are to
be

made, shall be not less than:

\(1\) A fee simple estate therein, legal or equitable; or

\(2\) A leasehold estate running or renewable at the option of the
lessee

for a period of not less than 14 years from the maturity of the loan, or
to

any earlier date at which the fee simple title will vest in the lessee,
which

is assignable or transferable, if the same be subjected to the lien;
however,

a leasehold estate which is not freely assignable and transferable will
be

considered an acceptable estate if it is determined by the Chief
Benefits

Director, or the Director, Loan Guaranty Service, (i) that such type of

leasehold is customary in the area where the property is located, (ii)
that a

veteran or veterans will be prejudiced if the requirement for free

assignability is adhered to and, (iii) that the assignability and other

provisions applicable to the leasehold estate are sufficient to protect
the

interests of the veteran and the Government and are otherwise
acceptable; or

\(3\) A life estate, provided that the remainder and reversionary

interests are subjected to the lien.

The title to such estate shall be such as is acceptable to informed
buyers,

title companies, and attorneys, generally, in the community in which the

property is situated, except as modified by paragraph (b) of this
section.

\(b\) Any such property or estate will not fail to comply with the

requirements of paragraph (a) of this section by reason of the
following:

\(1\) Encroachments;

\(2\) Easements;

\(3\) Servitudes;

IV-74

\(4\) Reservations for water, timber, or subsurface rights;

\(5\) Sale and lease restrictions:

\(i\) Except as to condominiums, the right in any grantor or cotenant in

the chain title, or a successor of either, to purchase for cash, which
right

was established by an instrument recorded prior to December 1, 1976, and
by

the terms thereof is exercisable only if:

\(A\) An owner elects to sell,

\(B\) The option price is not less than the price at which the then
owner

is willing to sell to another, and

\(C\) Exercised within 30 days after notice is mailed by registered mail

to the address of optionee last known to the then owner of the then
owner\'s

election to sell, stating the price and the identity of the proposed
vendee;

\(ii\) A condominium estate established by the filing for record of the

Master Deed, or other enabling document before December 1, 1976, will
not fail

to comply with the requirements of paragraph (a) of this section by
reason of:

\(A\) Prohibition against leasing a unit for a period of less than 6

months.

\(B\) The existence of a right of first option to purchase or right to

provide a substitute buyer reserved to the condominium association
provided

such option or right is exercisable only if:

\(1\) An owner elects to sell;

\(2\) The option price is not less than the price at which the then
owner

is willing to sell to another,

\(3\) The terms and conditions under which the option price is to be
paid

are identical to or are not less favorable to the owner than the terms
and

conditions under which the owner was willing to sell to the owner\'s

prospective buyer, and

\(4\) Notice of the association\'s decision to exercise the option must
be

mailed to the owner by registered or certified mail within 30 days after

notice is mailed by registered or certified mail to the address of the

association last known to the owner of the owner\'s election to sell,
stating

the price, terms of sale, and the identity of the proposed vendee;

\(iii\) Any property subject to a restriction on the owner\'s right to

convey to any party of the owner\'s choice, which restriction is
established by

a document recorded on or after December 1, 1976, will not qualify as
security

for a guaranteed or insured loan. A

IV-75

prohibition or restriction on leasing an individual unit in a
condominium will

not cause the condominium estate to fail to qualify as security for such
loan,

provided the restriction is in accordance with 36.4358(c);

\(iv\) Notwithstanding the provisions of paragraph (b), (5)(i), (ii),
and

\(iii\) of this section, a property shall not be considered ineligible
pursuant

to paragraph (a) of this section if:

\(A\) The veteran obtained the property under a State or local political

subdivision program designed to assist low- or moderate-income
purchasers, and

as a condition the purchaser must agree to one or more of the following

restrictions:

\(1\) If the property is resold within a time period as established by

local law or ordinance, after the purchaser acquires title, the
purchaser must

first offer the property to the Government housing agency, or a low- or

moderate-income purchaser designated by such agency, provided the option
to

purchase is exercised within 90 days after notice by the purchaser to
the

agency of intention to sell;

\(2\) If the property is resold within a time period as established by

local law or ordinance after the purchaser acquires title, a
governmental

agency may specify a maximum price which the veteran may receive for the

property upon resale; or

\(3\) Such other restriction approved by the Secretary designed to
insure

either that a property acquired under such program again be made
available to

low- or moderate-income purchasers, or to prevent a private purchaser
from

obtaining a windfall profit on the resale of such property, while
assuring

that the purchaser has a reasonable opportunity to dispose of the
property

without undue difficulty at a reasonable price.

The sale price of a property under any of the restrictions of paragraph

(b)(5)(iv)(A) of this section shall not be less than the lowest of the

following: The price designated by the owner as the asking price; the

appraised value of the property; or the original purchase price of the

property, increased by a factor reflecting all or a reasonable portion
of the

increased costs of housing or the percentage increase in median income
in the

area between the date of original purchase and resale, plus the
reasonable

value or actual costs of any capital improvements made by the owner plus
a

reasonable real estate commission less the cost of necessary repairs
required

to place the property in saleable condition; or other reasonable formula

approved by the Secretary. The veteran must be fully informed and
consent in

writing to the housing restrictions. A copy of the veteran\'s consent

statement must be forwarded with the application for home loan guaranty
or the

report of a home loan processed on the automatic basis; or

(Authority: 38 U.S.C. 1803(c))

IV-76

\(B\) A recorded restriction on title designed to provide housing for

older persons, provided that the restriction is acceptable under the

provisions of the Fair Housing Act, title VIII of the Civil Rights Act
of

1968, as amended by the Fair Housing Amendments Act of 1988, [42 U.S.C.
3601](http://www.gpoaccess.gov/uscode/index.html) et

seq. The veteran must be fully informed and consent in writing to the

restrictions. A copy of the veteran\'s consent statement must be
forwarded

with the application for home loan guaranty or the report of a home loan

processed on the automatic basis;

(Authority: 38 U.S.C. 210(c), 1803(c)(1))

\(6\) Building and use restrictions whether or not enforceable by a

reverter clause if there has been no breach of the conditions affording
a

right to an exercise of the reverter;

\(7\) Violation of a restriction based on race, color, creed, or
national

origin, whether or not such restriction provides for reversion or
forfeiture

of title or a lien for liquidated damages in the event of a breach;

\(8\) Any other covenant, condition, restriction, or limitation approved

by the Secretary in the particular case. Such approval shall be a
condition

precedent to the guaranty or insurance of the loan;

Provided, that the limitations on the quantum or quality of the estate
or

property that are indicated in this paragraph, insofar as they may
materially

affect the value of the property for the purpose for which it is used,
are

taken into account in the appraisal of reasonable value required by 38
U.S.C.,

chapter 37.

\(c\) The following limitations on the quantum or quality of the estate

or property shall be deemed for the purposes of paragraph (b) of this
section

to have been taken into account in the appraisal of residential property
and

determined by the Secretary as not materially affecting the reasonable
value

of such property:

\(1\) Building or Use Restrictions. Provided, (i) no violation exists,

\(ii\) the proposed use by a veteran does not presage a violation of a
condition

affording a right of reverter, and (iii) any right of future
modification

contained in the building or use restrictions is not exercisable, by its
own

terms, until at least 10 years following the date of the loan.

\(2\) Violations of Racial and Creed Restrictions. Violations of a

restriction based on race, color, creed or national origin, whether or
not

such restriction provides for reversion or forfeiture of title or a lien
for

liquidated damages in the event of a breach.

\(3\) Violations of Building or Use Restrictions of Record. Violations

of building or use restrictions of record which have existed for more
than 1

year, are not the subject of pending or

IV-77

threatened litigation, and which do not provide for a reversion or
termination

of title, or condemnation by municipal authorities, or, a lien for
liquidated

damages which may be superior to the lien of the guaranteed or insured

mortgage.

\(4\) Easements

\(i\) Easements for public utilities along one or more of the property

lines and easements for drainage or irrigation ditches, provided the
exercise

of the rights thereof do not interfere with the use of any of the
buildings or

improvements located on the subject property.

\(ii\) Mutual easements for joint driveways located partly on the
subject

property and partly on adjoining property, provided the agreement is
recorded

in the public records.

\(iii\) Easements for underground conduits which are in place and which

do not extend under any buildings in the subject property.

\(5\) Encroachments

\(i\) On the subject property by improvements on the adjoining property

where such encroachments do not exceed 1 foot within the subject
boundaries,

provided such encroachments do not touch any buildings or interfere with
the

use or enjoyment of any building or improvement on the subject property.

\(ii\) By hedges or removable fences belonging to subject or adjoining

property.

\(iii\) Not exceeding 1 foot on adjoining property by driveways
belonging

to subject property, provided there exists a clearance of at least 8
feet

between the buildings on the subject property and the property line
affected

by the encroachment.

\(6\) Variations of Lot Lines. Variations between the length of the

subject property lines as shown on the plot plan or other exhibits
submitted

to the Department of Veterans Affairs and as shown by the record or
possession

lines, provided such variations do not interfere with the current use of
any

of the improvements on the subject property and do not involve a
deficiency of

more then 2 percent with respect to the length of the front line or more
than

5 percent with respect to the length of any other line.

(Authority: 38 U.S.C. 210(c), 1803(c), 1812(g))

36.4351 LOANS, FIRST, SECOND OR UNSECURED

Loans for the purchase of real property or a leasehold estate as limited

in the regulations concerning guaranty or insurance of loans to
veterans, or

for the alteration, improvement, or repair thereof, and for more than
\$1,500

and more than 40 percent of the reasonable value of such property or
estate

prior thereto shall be secured by a first lien on the property or
estate.

Loans for such alteration,

IV-78

improvement, or repairs for more than \$1,500 but 40 percent or less of
the

prior reasonable value of the property shall be secured by a lien
reasonable

and customary in the community for the type of alteration, improvement,
or

repair financed. Those for \$1,500 or less need not be secured, and in
lieu of

the title examination, the lender may accept a statement from the
borrower

that he or she has an interest in the property not less than that
prescribed

in

36.4350(a).

36.4352 TAX, SPECIAL ASSESSMENT AND OTHER LIENS

Tax liens, special assessment liens, and ground rents shall be

disregarded with respect to any requirement that loans shall be secured
by a

lien of specified dignity. With the prior approval of the Secretary,
Chief

Benefits Director, or Director, Loan Guaranty Service, liens retained by

nongovernmental entities to secure assessments or charges for municipal
type

services and facilities clearly within the public purpose doctrine may
be

disregarded. In determining whether a loan for the purchase or
construction

of a home is secured by a first lien the Secretary may also disregard a

superior lien created by a duly recorded covenant running with the
realty in

favor of a private entity to secure an obligation to such entity for the

homeowner\'s share of the costs of the management, operation, or
maintenance of

property, services or programs within and for the benefit of the
development

or community in which the veteran\'s realty is located, if the Secretary

determines that the interests of the veteran-borrower and of the
Government

will not be prejudiced by the operation of such covenant. In respect to
any

such superior lien to be created after June 6, 1969, the Secretary\'s

determination must have been made prior to the recordation of the
covenant.

36.4353 COMBINATION RESIDENTIAL AND BUSINESS PROPERTY

If otherwise eligible, a loan for the purchase or construction of a

combination of residential property and business property which the
veteran

proposes to occupy in part as a home will be eligible under 38 U.S.C.
1810, if

the property is primarily for residential purposes and no more than one

business unit is included in the property.

36.4354 Canceled

36.4355 SUPPLEMENTAL LOANS

\(a\) Any loan for the alteration, repair, improvement, extension,

replacement, or expansion of a home, with respect to which a guaranteed
or

insured obligation of the borrower is currently outstanding, may be
reported

for guaranty or insurance coverage, if such loan is made by the holder
of the

currently outstanding obligation, notwithstanding the fact no guaranty

entitlement remains available to the borrower: Provided, that if no

entitlement remains available the maximum amount payable on the revised

guaranty shall not exceed the amount payable on the original guaranty on
the

date

IV-79

of closing the supplemental loan, and the percentage of guaranty shall
be

based upon the proportion the said maximum amount bears to the aggregate

indebtedness, or, in the case of an insured loan, no additional credit
to the

holder\'s insurance account may be made: Provided further, that the
prior

approval of the Secretary shall be required if

\(1\) The loan will be made by a lender who is not the holder of the

currently guaranteed or insured obligation; or

\(2\) The loan will be made by a lender not of a class specified in 38

U.S.C. 1802(d); or

\(3\) An obligor liable on the currently outstanding obligation will be

released from personal liability.

In any case in which the unpaid balance of the prior loan currently

outstanding is combined or consolidated with the amount of the
supplemental

loan, the entire aggregate indebtedness shall be repayable in full
within the

maximum maturity currently prescribed by statute for the original loan.
No

supplemental loan for the repair, alteration, or improvement of
residential

property will be eligible for guaranty or insurance unless such repair,

alteration, or improvement substantially protects or improves the basic

livability or utility of the property involved.

\(b\) Such loan shall be secured as required in 36.4351: Provided, that

a lien of lesser dignity than therein specified will suffice if the lien

obtained is immediately junior to the lien of the original guaranteed or

insured obligation: Provided further, the liens of successive
supplemental

loans may be of lesser dignity so long as they are immediately junior to
the

lien of the last previous guaranteed or insured obligation having a lien
of

required dignity.

\(c\) Upon providing or extending guaranty or insurance coverage in

respect to any such supplemental loan, the rights of the Secretary to
the

proceeds of the sale of security shall be subordinate to the right of
the

holder to satisfy therefrom the indebtedness outstanding on the original
and

supplemental loans.

36.4356 CONDOMINIUM LOANS-GENERAL

\(a\) Authority-Applicability of Other Loan Guaranty Regulations 38 CFR,

Part 36. A loan to an eligible veteran to purchase a one-family
residential

unit in a condominium housing development or project shall be eligible
for

guaranty or insurance to the same extent and on the same terms as other
loans

under 38 U.S.C. 1810 provided the loan conforms to the provisions of
chapter

37, title 38, United States Code, except for sections 1811 (direct
loans), and

1827 (structural defects). The loan must also conform to the otherwise

applicable provisions of the regulations concerning the guaranty or
insurance

of loans to veterans. Sections 36.4353, 36.4355, and 36.4364 shall not
be

applicable.

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\(b\) Definitions. On and after July 1, 1979, the following definitions

shall be applicable to each condominium loan entitled to be guaranteed
or

insured, and shall be applicable to such loans previously guaranteed or

insured to the extent that no legal rights vested thereunder are
impaired.

Whenever used in 38 U.S.C., chapter 37 or the 36.4300 series, unless the

context otherwise requires, the terms defined in this paragraph shall
have the

meaning stated.

\(1\) Affiliate of Declarant. Affiliate of declarant means any person or

entity which controls, is controlled by, or is under common control
with, a

declarant.

\(i\) A person or entity shall be considered to control a declarant if

that person or entity is a general partner, officer, director, or
employee of

the declarant who:

\(A\) Directly or indirectly or acting in concert with one or more

persons, or through one or more subsidiaries, owns, controls, or holds
with

power to vote, or holds proxies representing, more than 20 percent of
the

voting shares of the declarant;

\(B\) Controls in any manner the election of a majority of the directors

of the declarant; or

\(C\) Has contributed more than 20 percent of the capital of the

declarant.

\(ii\) A person or entity shall be considered to be controlled by a

declarant if the declarant is a general partner, officer, director, or

employee of that person or entity who:

\(a\) Directly or indirectly or acting in concert with one or more

persons or through one or more subsidiaries, owns, controls, or holds
with

power to vote, or holds proxies representing, more than 20 percent of
the

voting shares of that person or entity;

\(b\) Controls in any manner the election of a majority of the directors

of that person or entity; or

\(c\) Has contributed more than 20 percent of the capital of that person

or entity.

\(2\) Condominium. Unless otherwise provided by State law, a condominium

is a form of ownership in which the buyer receives title to a three

dimensional air space containing the individual living unit together
with an

undivided interest or share in the ownership of common elements
(restatement

of 36.4301, Condominium.)

\(3\) Conversion Condominium. Condominium projects not originally built

and sold as condominiums but subsequently converted to condominium form
of

ownership.

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\(4\) Declarant. Any person who has executed a declaration or an

amendment to a declaration to add additional real estate to the project,
or

any successors or assigns of the declarant who offers to sell or sells
units

in the condominium project and who assumes declarant rights in the
project

including the right to: add, convert or withdraw real estate from the

condominium project; maintain sales offices, management offices and
rental

units; exercise easements through the common elements for the purpose of

making improvements within the condominium; or exercise control of the
owners\'

association. Declarant is further defined as any sponsor of a project or

affiliate of the declarant who is acting on behalf of or exercising the
rights

of the declarant.

\(5\) Existing-Declarant in Control or Marketing Units. A condominium in

which all onsite or offsite improvements were completed or the
conversion was

completed prior to appraisal by the Department of Veterans Affairs, but
the

declarant is in control of the owners\' association and/or is currently

marketing units for initial transfer to individual unit owners.

\(6\) Existing-Resale. A condominium in which all onsite or offsite

improvements were completed or the conversion was completed prior to
appraisal

by the Department of Veterans Affairs, and the declarant is no longer in

control of the owners\' association and/or marketing units for initial
transfer

to individual unit owners.

\(7\) Expandable Condominium. A project which may be increased in size

by the declarant. An expandable condominium is constructed in phases (or

stages). After each phase is completed and constituted, the common
estates

are merged. Each unit owner, thereby, gains an individual interest in
all of

the facilities of the common estate.

\(8\) Foreclosure. Foreclosure shall mean the termination of a lien by

either judicial or nonjudicial procedures in accordance with local law
or the

voluntary transfer of property by a deed-in-lieu of foreclosure or
similar

procedures.

\(9\) High Rise Condominium. A condominium project which is a

multi-story elevator building.

\(10\) Horizontal Condominium. A condominium project in which generally

no part of a living unit extends over and under another living unit.

\(11\) Low Rise Condominium. A condominium project in which all or a

part of a living unit extends over or under another living unit; e.g.,
garden

apartment or walk-up project.

\(12\) Proposed Condominium. A condominium project that is to be

constructed or is under construction. In the case of a condominium

conversion, the declarant proposes to convert a building or buildings to
the

condominium form of ownership, or the declarant is in the process of

converting the building or buildings to the condominium form of
ownership.

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\(13\) Series Condominium. A number of adjoining but separately

constituted condominiums. As association of owners is established for
each

project, and each association is responsible for maintenance and upkeep
of the

common elements in its own project. Cross-easements between the separate

condominiums may be created to permit members of the separate
condominiums to

use the common areas of the other condominiums.

\(c\) Project Approval. Prior to the Department of Veterans Affairs

guaranty of an individual unit loan in a condominium, the legal
documentation

establishing the condominium project or development must be approved by
the

Secretary.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

36.4357 ACCEPTABLE OWNERSHIP ARRANGEMENTS AND DOCUMENTATION

\(a\) Types of Condominium Ownership. The following types of basic

ownership arrangements are generally acceptable provided they are
established

in compliance with the applicable condominium law of the jurisdiction(s)
in

which the condominium is located:

\(1\) Ownership of units by individual owners coupled with an undivided

interest in all common elements.

\(2\) Ownership of units by individual owners coupled with an undivided

interest in general common elements and specified limited common
elements.

\(3\) Individual ownership of units coupled with an undivided interest
in

the general common elements and/or limited common elements, with title
to

additional property for common use vested in an association of unit
owners,

with mandatory membership by unit owners or owners\' associations. Any
such

arrangement must not be precluded by applicable State law.

(Authority: 38 U.S.C. 210(c)(1), 1810(a)(6))

\(b\) Estate of Unit Owner. The legal estate of each unit owner must

comply with the provisions of 36.4350. The declaration or equivalent

document shall allocate an undivided interest in the common elements to
each

unit. Such interest may be allocated equally to each unit, may be

proportionate to that unit\'s relative size or value, or may be
allocated

according to any other specified criteria provided that the method
chosen is

equitable and reasonable for the condominium.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), (d)(3), 1810(a)(6))

\(c\) Condominium Documentation

\(1\) Compliance with Applicable Law. The declaration, bylaws and other

enabling documentation shall conform to the laws governing the
establishment

and maintenance of condominium regimes within the

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jurisdiction in which the condominium is located, and to all other laws
which

apply to the condominium.

\(2\) Recordation. The declaration and all amendments or modifications

thereof shall be placed of record in the manner prescribed by the
appropriate

jurisdiction. If recording of plats, plans, or bylaws or equivalent
documents

and all amendments or modifications thereof is the prevailing practice
or is

required by law within the jurisdiction where the project is located,
then

such documents shall be placed of record. If the bylaws are not
recorded,

then covenants, restrictions and other matters requiring record notice
should

be contained in the declaration or equivalent document.

\(3\) Availability. The owners\' association shall be required to make

available to unit owners, lenders and the holders, insurers and
guarantors of

the first mortgage on any unit, current copies of the declaration,
bylaws and

other rules governing the condominium, and other books, records and
financial

statements of the owners\' association. The owners\' association also
shall be

required to make available to prospective purchasers current copies of
the

declaration, bylaws, other rules governing the condominium, and the most

recent annual audited financial statement, if such is prepared.
\"Available\"

as used in this paragraph (c)(3) shall at least mean available for
inspection,

upon request, during normal business hours or under other reasonable

circumstances.

\(4\) Amendments to Documents After Department of Veterans Affairs

Project Approval. While the declarant is in control of the owners\'

association, amendments to the declaration, bylaws or other enabling

documentation must be approved by the Secretary. The declarant should
have

proposed amendments reviewed prior to recordation. This provision does
not

apply to amendments which annex additional phases to the condominium
regime in

accordance with a general plan of development. (See 36.4360(a)(3) and

36.4360a(b)(6).)

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

\(d\) Real Property Descriptions in the Declaration

\(1\) Clarity-Conformity with the Law of the Jurisdiction. The

description of the units, common elements, any recreational facilities
and

other related amenities, and any limited common elements shall be clear
and in

conformity with the law of the jurisdiction where the project is
located.

Responsibility for maintenance and repair of all portions of the
condominium

shall be set forth clearly.

\(2\) Developmental Plan-Proposed Condominiums. The declaration or other

legally enforceable and binding document must state in a reasonable
manner the

overall development plan of the condominium, including building types,

architectural style and the size of the units for those phases of the

condominium which are required to be built. Under the applicable
provisions

of the declaration or such

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other legally enforceable and binding document, the development of the

required portion of the condominium must be consistent with the overall
plan,

except that the declarant may reserve the right to change the overall
plan or

decide not to construct planned units or improvements to the common
elements

if the declaration sets forth the conditions required to be satisfied
prior to

the exercise of that right, the time within which the right may be
exercised,

and any other limitations and criteria that would be necessary or
appropriate

under the particular circumstances. Such conditions, time restraints and

other limitations must be reasonable in light of the overall plan for
the

condominium. In an expandable project, additional phases which are not

required to be built may be described in the development plan in very
general

terms, or the declaration may provide that the declarant makes no
assurances

concerning the construction, building types, architectural style and
size of

the units, etc., of these phases. However, the minimum number of units
to be

built should be that which would be adequate to reasonably support the
common

elements. (See 36.4360(a)(6).)

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

36.4358 RIGHTS AND RESTRICTIONS

\(a\) Declarant\'s Rights and Restrictions

\(1\) Disclosure and Reasonableness of Reserved Rights. Any right

reserved by the declarant must be reasonable and set forth in the
declaration.

\(2\) Examples of Reserved Rights of Declarant, Sponsor, or Affiliate of

Declarant which are Usually Unacceptable. Binding the owners\'
association

either directly or indirectly to any of the following agreements is not

acceptable unless the owners\' association shall have a right of
termination

thereof which is exercisable without penalty at any time after transfer
of

control, upon not more than 90 days\' notice to the other party thereto:

\(i\) Any management contract, employment contract or lease of

recreational or parking areas or facilities;

\(ii\) Any contract or lease, including franchises and licenses, to
which

a declarant is a party.

The requirements of paragraphs (a)(2)(i) and (ii) of this section do not
apply

to acceptable ground leases.

\(3\) Examples of Reserved Rights which are Usually Acceptable. The

following rights in the common elements may usually be reserved by the

declarant for a reasonable period of time, subject to a concomitant
obligation

to restore:

\(i\) Easement over and upon the common elements and upon lands

appurtenant to the condominium for the purpose of completing
improvements for

which provision is made in the declaration, but only if access thereto
is

otherwise not reasonably available.

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\(ii\) Easement over and upon the common elements for the purpose of

making repairs required pursuant to the declaration or contracts of sale
made

with unit purchasers.

\(iii\) Right to maintain facilities in the common areas which are

identified in the declaration and which are reasonably necessary to
market the

units. These may include sales and management offices, model units,
parking

areas, and advertising signs.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

\(b\) Owners\' Association\'s Rights and Restrictions

\(1\) Right of Entry Upon Units and Limited Common Elements. The
owners\'

association shall be granted a right of entry upon unit premises and any

limited common elements to effect emergency repairs, and a reasonable
right of

entry thereupon to effect other repairs, improvements, replacement or

maintenance as necessary.

\(2\) Power to Grant Rights and Restrictions in Common Elements. The

owners\' association should be granted other rights, such as the right
to grant

utility easements under, through or over the common elements, which are

reasonably necessary to the ongoing development and operation of the
project.

\(3\) Responsibility for Damage to Common Elements and Units. A

provision may be made in the declaration or bylaws for allocation of

responsibility for damages resulting from the exercise of any of the
above

rights.

\(4\) Assessments

\(i\) Levy and Collection. The declaration or its equivalent shall

describe the authority of the owners\' association to levy and enforce
the

collection of general and special assessments for common expenses and
shall

describe adequate remedies for failure to pay such common expenses. The

common expenses assessed against any unit, with interest, late charges,
costs

and a reasonable attorney\'s fee shall be a lien upon such unit in
accordance

with applicable law. Each such assessment, together with interest, late

charges, costs, and attorney\'s fee, shall also be the personal
obligation of

the person who was the owner of such unit at the time the assessment
fell due.

The personal obligation for delinquent assessments shall not pass to

successors in title or interest unless assumed by them, or required by

applicable law.

Common expenses as used in this subdivision shall mean expenditures made
or

liabilities incurred by or on behalf of the owners\' association,
together with

any assessments for the creation and maintenance of reserves.

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\(ii\) Reserves and Working Capital. There shall be in new or proposed

condominium projects (including conversions) a provision for an adequate

reserve fund for the periodic maintenance, repair and replacement of the

common elements, which fund shall be maintained out of regular
assessments for

common expenses. Additionally, a working capital fund must be
established for

the initial months of the project operations equal to at least 2
months\'

estimated common area charge for each unit.

\(iii\) Priority of Lien. Any assessment lien must be subordinate to any

Department of Veterans Affairs guaranteed mortgage except as provided in

36.4352. A lien for common expense charges and assessments shall not be

affected by any sale or transfer of a unit except that a sale or
transfer

pursuant to a foreclosure of a first mortgage shall extinguish a
subordinate

lien for common expense charges and assessments which became payable
prior to

such sale or transfer. Any such sale or transfer pursuant to a
foreclosure

shall not relieve the purchaser or transferee of a unit from liability
for,

nor the unit so sold or transferred from the lien of, any common expense

charges thereafter becoming due.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), (d)(3), 1810(a)(6))

\(c\) Unit Owners\' Rights and Restrictions.

\(1\) Obligation to Pay Expenses. The declaration or equivalent document

shall establish a duty on each unit owner, including the declarant, to
pay a

proportionate share of common expenses upon being assessed therefor by
the

owners\' association. Such share may be allocated equally to each unit,
may be

proportionate to that unit\'s common element interest, relative size or
value,

or may be allocated according to any other specified criteria provided
that

the method chosen is equitable and reasonable for that condominium.

\(2\) Voting Rights. The declaration or equivalent document shall

allocate a portion of the votes in the association to each unit. Such
portion

may be allocated equally to each unit, may be proportionate to that
unit\'s

common expense liability, common element interest, relative size or
value, or

may be allocated according to any other specified criteria provided that
the

method is equitable and reasonable for the condominium. The declaration
may

provide different criteria for allocations of votes to the units on
particular

specified matters and may also provide different percentages of required
unit

owner approvals for such particular specified matters.

\(3\) Ingress and Egress of Unit Owners. There may not be any

restriction upon any unit owner\'s right of ingress and egress to his or
her

unit.

\(4\) Encroachment - Units and Common Elements

\(i\) Easements for Encroachments. In the event any portion of the

common elements encroaches upon any unit or any unit encroaches upon the

common elements or another unit as a result of the

IV-87

construction, reconstruction, repair, shifting, settlement, or movement
of any

portion of the improvements, a valid easement for the encroachment and
for the

maintenance of the same shall exist so long as the encroachment exists.
The

declaration may provide, however, reasonable limits on the extent of any

easement created by the overlap of units, common elements, and limited
common

elements resulting from such encroachments; or

\(ii\) Monuments as Boundaries. If permitted by the governing law within

the jurisdiction where the project is located, the existing physical

boundaries of a unit or a common element of the physical boundaries of a
unit

or a common element reconstructed in substantial accordance with the
original

plats and plans thereof become its boundaries rather than the metes and
bounds

expressed in the deed, plat or plan, regardless of settling or lateral

movement of the building, or minor variance between boundaries should on
the

plats, plans or in the deed and those of the building. The declaration
should

provide reasonable limits on the extent of any such revised
boundary(ies)

created by the overlap of units, common elements, and limited common
elements

resulting from such encroachments.

\(5\) Right of First Refusal. The right of a unit owner to sell,

transfer, or otherwise convey his or her unit in a condominium shall not
be

subject to any right of first refusal or similar restriction if the

declaration or similar document is recorded on or after December 1,
1976. If

the declaration was recorded prior to December 1, 1976, the right of
first

refusal must comply with

36.4350(b)(5)(ii); Provided, however, restrictions on the basis of age
or

restrictions established by a State, Territorial, or local government
agency

as part of a program for providing assistance to low- and
moderate-income

purchasers shall be governed by

36.4350(b)(5)(iv).

(Authority: 38 U.S.C. 1803(c))

\(6\) Leasing Restrictions. Except as provided in this paragraph, there

shall be no prohibition or restriction on a condominium unit owner\'s
right to

lease his or her unit. The following restrictions are acceptable:

\(i\) A requirement that leases have a minimum initial term of up to 1

year, or

\(ii\) Age restrictions or restrictions imposed by State or local
housing

authorities which are allowable under 36.4308(e) or

36.4350(b)(5)(iv).

\(d\) Rights of Action. The owners\' association and any aggrieved unit

owner should be granted a right of action against unit owners for
failure to

comply with the provisions of the declaration, bylaws, or equivalent

documents, or with decisions of the owners\'

IV-88

association which are made pursuant to authority granted the owners\'

association in such documents. Unit owners should have similar rights of

action against the owners\' association.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

36.4359 MISCELLANEOUS LEGAL REQUIREMENTS

\(a\) Declarant Transfer of Control of Owners\' Association

\(1\) Standards for Transfer of Control. The declarant shall relinquish

all special rights, expressed or implied, through which the declarant
may

directly or indirectly control, direct, modify, or veto any action of
the

owners\' association, its executive board, or a majority of unit owners,
and

control of the owners\' association shall pass to the owners of units
within

the project, not later than the earlier of the following:

\(i\) 120 days after the date by which 75 percent of the units have been

conveyed to unit purchasers, or

\(ii\) The last date of a specified period of time following the first

conveyance to a unit purchaser; such period of time is to be reasonable
for

the particular project. The maximum acceptable period usually will be
from 3

to 5 years for single-phased condominium regimes and 5 to 7 years for

expandable condominiums.

\(iii\) On a case basis, modifications or variations of the requirements

of paragraphs (a)(i) and (ii) of this section (a)(1) will be acceptable,

particularly in circumstances involving very large condominium
developments.

\(2\) Declarant\'s Unit Votes after Transfer of Control. The
requirements

of paragraph (a)(1) of this section shall not affect the declarant\'s
rights,

as a unit owner, to exercise the votes allocated to units which
declarant

owns.

\(3\) Unit Owners\' Participation in Management. Declarants should

provide for and foster early participation of unit owners in the
management of

the project.

\(b\) Taxes. Unless otherwise provided by State law, real estate taxes

must be assessed and be lienable only against the individual units,
together

with their undivided interests in the common elements, and not against
the

multifamily structure. The owners\' association usually owns no real
estate,

so it has no obligation concerning ad valorem taxes. Unless taxes are

assessed only against the individual units, a tax lien could amount to
more

than the value of any particular unit in the structure.

\(c\) Canceled.

IV-89

\(d\) Policies for Bylaws. The bylaws of the condominium should be

sufficiently detailed for the successful governance of the condominium
by unit

owners. Among other things, such documents should contain adequate
provisions

for the election and removal of directors and officers.

\(e\) Insurance and Related Requirements

\(1\) Insurance. The holder shall require hazard and flood insurance

policies to be procured and maintained in accordance with

36.4326. Because of the nature of condominiums, additional types of

insurance coverages-such as tort liability insurance for injuries
sustained on

the premises, personal liability insurance for directors and officers
managing

association affairs, boiler insurance, etc. should be considered in

appropriate circumstances.

\(2\) Fidelity Bond Coverage. The securing of appropriate fidelity bond

coverage is recommended but not required, for any person or entity
handling

funds of the owners\' association, including, but not limited to,
employees of

the professional managers. Such fidelity bonds should name the
association as

an obligee, and be written in an amount equal to at least the estimated

maximum of funds, including reserve funds, in the custody of the
owners\'

association or the management agent at any given time during the term of
the

fidelity bond. However, the bond should not be less than a sum equal to
3

months\' aggregate assessments on all units plus reserve funds.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

36.4360 DOCUMENTATION AND RELATED REQUIREMENTS-FLEXIBLE

CONDOMINIUMS AND CONDOMINIUMS WITH OFFSITE FACILITIES

\(a\) Expandable Condominiums. The following policies apply to

condominium regimes which may be increased in size by the declarant:

\(1\) The declarant\'s right to expand the regime must be fully
described

in the declaration. The declaration must contain provisions adequate to

ensure that future improvements to the condominium will be consistent
with

initial improvements in terms of quality of construction. The declarant
must

build each phase in accordance with an approved general plan for the
total

development ( 36.4357(d)(2)) supported by detailed plats and plans of
each

phase prior to the construction of the particular phase.

\(2\) The reservation of a right to expand the condominium regime, the

method of expansion and the result of an expansion must not affect the

statutory validity of the condominium regime or the validity of title to
the

units.

\(3\) The declaration or equivalent document must contain a covenant
that

the condominium regime may not be amended or merged with a successor

condominium regime without prior written approval

IV-90

of the Secretary. The declarant may have the proposed legal
documentation to

accomplish the merger reviewed prior to recordation. However, the
Secretary\'s

final approval of the merger will not be granted until the successor

condominium has been legally established and construction completed. The

declarant may add phases to an expandable condominium regime without the
prior

approval of the Secretary if the phasing implements a previously
approved

general plan for the total development. A copy of the amendment to the

declaration or other annexation document which adds each phase must be

submitted to the Secretary in accordance with

36.4360a(b)(6).

\(4\) Liens arising in connection with the declarant\'s ownership of,
and

construction of improvements upon, the property to be added must not
adversely

affect the rights of existing unit owners, or the priority of first
mortgages

on units in the existing condominium property. All taxes, assessments,

mechanic\'s liens, and other charges affecting such property, covering
any

period prior to the addition of the property, must be paid or otherwise

satisfactorily provided for by the declarant.

\(5\) The declarant must purchase (at declarant\'s own expense) a
general

liability insurance policy in an amount not less than \$1 million for
each

occurrence, to cover any liability which owners of previously sold units
are

exposed to as a result of further condominium development.

\(6\) Each expandable project shall have a specified maximum number of

units which will give each unit owner a minimum percentage of interest
in the

common elements. Each project shall also have a specified minimum number
of

units which will give each unit owner a maximum percentage of interest
in the

common elements. The minimum number of units to be built should be that
which

would be adequate to reasonably support the common elements. The maximum

number of units to be built should be that which would not overload the

capacity of the common facilities. The maximum possible percentage(s)
and the

minimum possible percentage(s) of undivided interest in the common
elements

for each type of unit must be stated in the declaration or equivalent

document.

\(7\) The declaration or equivalent document shall set forth clearly the

basis for reallocation of unit owner\'s ownership interests, common
expense

liabilities and voting rights in the event the number of units in the

condominium is increased. Such reallocation shall be according to the

applicable criteria set forth in 36.4357(b) and 36.4358(c)(1) and (2).

\(8\) The declarant\'s right to expand the condominium must be for a

reasonable period of time with a specific ending date. The maximum
acceptable

period will usually be from 5 to 7 years after the date of recording the

declaration. On a case bases, longer periods of expansion rights will be

acceptable, particularly in circumstances involving sizable condominium

developments.

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\(b\) Series Projects

\(1\) Each phase in the series approach is to be considered as a
separate

project. A separate set of legal documents must be filed for each phase
or

project that relates to the condominium within its own boundary. The

declaration for each phase must describe the particular project as a
part of

the whole development area, but subject only the one phase to the
condominium

regime. A separate unit ratio must be established that would relate each
unit

to all units of the particular condominium for purposes of ownership in
the

common areas, voting rights and assessment liability. A separate
association

may be created to govern the affairs of each condominium. Each phase is

subject to a separate presale requirement.

\(2\) In the case of proposed projects, or projects under construction,

the declaration should state the number of total units that the
developer

intends to build on other sections of the development area.

\(c\) Other Flexible Condominiums. Condominiums containing withdrawable

real estate (contractable condominiums) and condominiums containing

convertible real estate (portions of the condominium within which
additional

units or limited common elements, or both, may be created) will be
considered

acceptable provided the flexible condominium complies with the 36.4300

series.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

36.4360a APPRAISAL REQUIREMENTS

\(a\) Existing Resale Condominiums. Upon acceptance by the local office

of the organizational documents, the project and unit(s) proposed as
security

for guaranteed financing shall be appraised to ensure that they meet
MPR\'s

(Minimum Property Requirements) and are safe, sanitary, and structurally

sound. The Department of Veterans Affairs MPR\'s for existing
construction

apply to all existing resale condominiums including conversions, except
that

water, heating, ventilating, air-conditioning and sewer service may be

supplied from a central source.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6), (b)(5))

\(b\) Proposed Condominiums or Existing Condominiums with Declarant in

Control or Marketing Units

\(1\) Low Rise and High Rise Condominiums. Low rise and high rise

condominiums shall comply with local building codes. Only the
alterations,

improvements or repairs to low rise and high rise buildings proposed to
be

converted to the condominium form of ownership must comply with current
local

building codes, unless local authorities require total code compliance
on the

entire structure when a building is being converted to the condominium
form of

ownership. In those areas where local standards are nonexistent,

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inferior to, or in conflict with the Department of Veterans Affairs

objectives, a certification will be required from a registered
professional

architect and/or registered engineer certifying that the plans and

specifications conform to one of the national building codes which is
typical

of similar construction methods and standards for condominiums used in
the

area. Those portions of the condominium conversion which are not being

altered, improved or repaired must be appraised in accordance with
paragraph

\(a\) of this section.

\(2\) Horizontal Condominiums. Department of Veterans Affairs policies

and procedures applicable to single-family residential construction
shall also

apply to horizontal condominiums. Proposed or existing (declarant in
control

or marketing units) horizontal condominium conversions shall comply with

current local building codes for alterations and improvements or repairs
made

to convert the building to the condominium form of ownership unless
local

authorities require total code compliance on the entire structure when a

building is being converted to the condominium form of ownership. In
those

areas where local standards are nonexistent, inferior to, or in conflict
with

Department of Veterans Affairs objectives, a certification will be
required

from a professional architect and/or registered engineer certifying that
the

plans and specifications conform to one of the national building codes
which

is typical of similar construction methods and standards for
condominiums used

in the area. Those portions of the condominium conversion which are not
being

altered, improved or repaired must be appraised in accordance with
paragraph

\(a\) of this section.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1))

\(3\) Unit Completion. All units in the individual project or phase must

be substantially completed except for customer preference items, such as

interior finishes, appliances or equipments.

\(4\) Common Element Completion. All amenities of the condominium (to

include offsite community facilities), that are to be considered in the
unit

value, must be bound legally to the condominium regime. All such
amenities as

well as the common elements of the project, must be substantially
completed

and available for use by the unit owners. In large multi-phase projects,
the

declarant should construct common elements in a manner consistent with
the

addition of units to support the entire development. The Secretary, in

appropriate cases, may approve the placement of adequate funds by the

declarant in an escrow or otherwise earmarked account or accept a letter
of

credit or surety bond to assure completion of amenities and allow
closing of

VA-guaranteed (or insured) loans. Such funds must be adequate to assure

completion of the amenities free and clear of all liens.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

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\(5\) Information Brochure/Public Offering Statement. When units are

being sold by the declarant (not applicable to resales), and information

brochure/public offering statement must be given to veteran buyers prior
to

the time a downpayment is received and an agreement is signed, unless
State

law authorized receipt of the downpayment and delivery of the
information

brochure followed by a period in which purchasers may cancel the
purchase

agreement without penalty for a specified number of days. Information

brochures must be written in simple terms to inform buyers that the

association does not provide owner\'s contents and personal liability
policies

which are the owner\'s responsibility. In the event the development is

expandable, series, etc., there must be full disclosure of the impact of
the

total development plan. In expandable, series or other projects with
more

than one phase, the information brochure must disclose fully later
development

rights, and the general plans of the declarant for additional phases. If
the

declarant makes no assurance concerning phases which are not required to
be

built, the declarant should state that no assurances are given
concerning

construction, unit sizes, building types, architectural styles, etc. In

condominium conversions, the information brochure must list the major

structural and mechanical components and the estimated remaining useful
life

of the components. A brief explanation must be furnished in the brochure

explaining that certain major structural or mechanical components may
require

replacement within a specified time period. If the declarant has elected
to

place funds into a condominium reserve fund for replacement of a major

component under the provisions of 36.4360a(b)(7), the amount of the

contribution into the reserve fund must be specified in the information

brochure.

\(6\) Evidence of Proper Phasing. In an expandable or flexible

condominium, evidence of the addition of each phase in accordance with a

previously approved general plan of development must be submitted to the

Secretary prior to the guaranty of the first loan in the added area.

\(7\) Additional Condominium Conversion Requirements

\(i\) The declarant of a condominium project, which is (A) proposed, (B)

under construction, or (C) an existing project with a declarant in
control or

marketing units not previously occupied, must furnish structural and

mechanical common element component statements on the present condition
of all

accessible structural and mechanical components material to the use and

enjoyment of the condominium. These statements must be completed by a

registered professional engineer and/or architect prior to the guaranty
of the

first unit loan in the project. Each statement must also give an
estimate of

the expected useful life of the roof, elevators, heating and cooling,
plumbing

and electrical systems assuming normal maintenance. A minimum of 10
years

estimated remaining useful life is required on all structural and
mechanical

components. In the alternative, the declarant may contribute an amount
of

funds to the condominium reserve fund equal to a minimum

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of 1/10 (one-tenth) of the estimated costs of replacement of a major

structural or mechanical component (as determined by an independent
registered

professional architect or engineer) for each year of estimated remaining

useful life less than 10 years; e.g., 7 years remaining useful life
equals a

3/10 required declarant contribution to the reserve fund of the
component\'s

estimated replacement cost. The noted statements and remaining useful
life

requirement are not applicable to existing resale conversion projects
when the

declarant is no longer marketing units and/or in control of the
association.

Expandable or series condominium conversions require engineering and

architectural statements on each stage or phase.

\(ii\) In declarant controlled projects, a statement(s) by the local

authority(ies) of the adequacy of offsite utilities servicing the site
(e.g.,

sanitary or water) is required. If a local authority(ies) declines to
issue

such a statement(s), a statement(s) may be obtained from a registered

professional engineer.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

\(c\) Presale Requirements

\(1\) Proposed Construction or Existing Declarant in Control. Bona fide

agreements of sale must have been executed by purchasers other than the

declarant (who are obligated contractually to complete the purchase) of
70

percent of the total number of units in the project. Lenders shall
certify as

to satisfaction of the presale requirement prior to VA guaranty of the
first

unit loan. When a declarant can demonstrate that a lower percentage
would be

justified, the Secretary, on an individual case basis, may approve a
presale

requirement of less than 70 percent. Reduction of the 70 percent presale

requirement will be considered when:

\(i\) Strong initial sales demonstrate a ready market, or

\(ii\) The declarant will provide cash assets or acceptable bonds for

payment of full common area assessments to the owners\' association
until such

assessments are assumed by unit purchasers, or

\(iii\) Subsequent phases of an overall development are being undertaken

in a proven market area, or

\(iv\) Previous experience in similar projects in the same market area

indicates strong market acceptance, or

\(v\) The development is in a market area that has repeatedly indicated

acceptance of such projects.

\(2\) Multiphase-Proposed or Existing Declarant in Control. The

requirements of paragraph (c)(1) of this section shall apply to each

individual phase of a multiphase development, taking into consideration
that

each individual phase must be capable of self-support in the event that
the

developer does not complete all planned phases.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

IV-95

\(d\) Warranty. Except in condominium conversion projects, each CRV

(certificate of reasonable value) issued by the Secretary relating to a

proposed or existing not previously occupied dwelling unit in a
condominium

project shall be subject to the express condition that the builder,
seller, or

the real party in interest in the transaction shall deliver to the
veteran

purchasing the dwelling unit with the aid of a guaranteed or insured
loan a

warranty against defects for the unit and common elements. The unit
shall be

warranted for 1 year from the date of settlement or the date of
occupancy

(whichever first occurs). The common elements shall be warranted for 2
years

from the date each of the common elements is completed and available for
use

by the unit owners, or 2 years from the date the first unit is conveyed
to a

unit owner other than the declarant, whichever is later, in the
particular

phase of the condominium containing the common element. For these
purposes,

defects shall be those items reasonably requiring the repair,
renovation,

restoration, or replacement of any of the components constituting the
unit or

common elements. Items of maintenance relating to the unit or common
elements

are not covered by the warranty. No certificate of guaranty or insurance

credit shall be issued unless a copy of such warranty, duly receipted by
the

purchaser, is submitted with the loan papers.

\(e\) Ownership and Operation of Offsite Facilities

\(1\) Title Requirements. Evidence must be presented that the offsite

facility owned by an owners\' association with mandatory membership by

condominium unit owners or condominium unit owners\' associations has
been

completed and conveyed free of encumbrances by the declarant for the
benefit

of the unit owners with title insured by an owner\'s title policy or
other

acceptable title evidence. Offsite facilities conveyed to a nonprofit

corporation are the preferred method of offsite facilities ownership;
however,

the Secretary will consider other forms of ownership on an individual
case

basis.

\(2\) Mandatory Membership. The declaration of the condominium (each

condominium in a series development) and the legal documentation of the

corporation or association which owns the offsite facility must provide
the

following:

\(i\) The owner of a condominium unit is automatically a member of the

offsite facility corporation or association and that upon the sale of
the

unit, membership is transferred automatically to the new
owner/purchaser. It

is also acceptable if each condominium owners\' association (in lieu of
each

individual unit owner) is automatically a member of the offsite facility

corporation or association coupled with use rights for each of the unit
owners

or residents. If membership in an offsite owners\' association is
voluntary,

no credit in the CRV valuation may be given for such offsite amenities.

\(ii\) Each member of the offsite facility corporation or association

must be entitled to a representative vote at meetings of the offsite
facility

corporation or association. If the individual condominium owners\'
association

is a member of the offsite facility

IV-96

corporation or association, each condominium owners\' association must
be

entitled to a representative vote at meetings of the offsite facility

corporation or association.

\(iii\) Each member must agree by acceptance of the unit deed to pay a

share of the expenses of the offsite facility corporation or association
as

assessed by the corporation or association for upkeep, insurance,
reserve fund

for replacements, maintenance and operation of the offsite facility. The

share of said expenses shall be determined equitably. Failure to pay
such

assessment must result in a lien against the individual unit in the same

manner as unpaid assessments by the owners\' association of the
condominium if

each condominium owners\' association is a member of the offsite
facility in

lieu of individual unit owners, failure of the condominium owners\'
association

to pay its equitable assessment to the offsite facility must result in
an

enforceable lien.

\(3\) Declarant Payment of Offsite Facility in a Series Project. Until

the declarant has completed all of the intended condominium phases in a
total

condominium development or established each condominium regime by filing
a

separate declaration in a series development, the balance of the total
sum of

the expenses of the offsite facility not covered by the assessment
against the

unit owners should be assessed against and be payable by the declarant

commencing on the first day of the first month after the first unit is

conveyed to a homeowner in the first phase. If this balance is not paid,
it

must become a lien against those parcels of land in the development area
which

are owned by the declarant. The collection of such debt and enforcement
of

such lien may be by foreclosure or such other remedies afforded the

corporation or association under local law.

\(f\) Professional Management. Many condominiums are small enough and

their common areas so minimal that professional management is not
necessary.

VA does not have a requirement for professional management of
condominiums.

The powers given to the owners\' association by the declaration and
bylaws are

fundamentally for \"use control\" and maintenance of the undivided
interest all

of the owners have in the common areas. These powers normally include

management which may, if desired, be delegated to a professional
manager.

However, if the board of directors wants professional management, the

management agreement must be terminable for cause upon 30 days\' notice,
and

run for a reasonable period of from 1 to 3 years and be renewable by
consent

of the association and management. (Management contracts negotiated by
the

declarant should not exceed 2 years.)

\(g\) Commercial Areas. With respect to existing and proposed

condominiums, commercial areas within condominium developments are
acceptable,

but such interests will be considered in value.

(Authority: 38 U.S.C. 210(c)(1), 1803(c)(1), 1810(a)(6))

IV-97

36.4361 RIGHT OF THE SECRETARY TO REFUSE TO APPRAISE

RESIDENTIAL PROPERTIES

\(a\) The Secretary may refuse to appraise dwellings to which a request

for appraisal relates if the Secretary determines that any party or
parties

involved or financially interested in the construction or sale of such
units

\(1\) have theretofore participated in the construction or sale of units
sold to

veterans which involved (i) substantial deficiencies in the
construction, or

\(ii\) a failure or indicated inability to discharge contractual
obligations to

the veterans who contracted for the construction or purchase of such
units, or

\(iii\) the use of a contract of sale or of methods or practices in
marketing

such units of a type which under standards promulgated by the Secretary
was

unfair or unduly prejudicial to the veterans concerned, or (2) have been

refused the benefits of participation under the National Housing Act
pursuant

to a determination of the Secretary of Housing and Urban Development, or
(3)

have declined to sell residential property to an eligible veteran
because of

race, color, religion, sex, or national origin. Upon any such refusal to

appraise, the Secretary shall give written notice thereof to the person
or

firm submitting the appraisal request and shall state the basis for such

refusal.

\(b\) Except when the refusal to appraise is based upon action taken by

the Secretary of Housing and Urban Development, any person or persons
affected

by such refusal to appraise shall have the right within 10 days after
receipt

of written notice of such refusal to file with the Secretary, by
registered

mail, a request for a hearing. Upon receipt of such request, the Chief

Benefits Director shall, as promptly as may be deemed feasible to do so,

designate a time and place as may be deemed appropriate for such hearing
and

shall appoint one or more persons who shall constitute a board to
conduct the

hearing. The person or persons requesting such hearing shall be afforded
full

opportunity to appear at the hearing in person, or by counsel, or both,
and to

introduce evidence showing why the sanction should be terminated or
modified.

Authority is hereby granted to the persons designated to conduct the
hearing

to administer oaths to witnesses.

\(c\) As soon as is practicable after conclusion of the hearing, the

board will make findings of fact and recommendations in writing to the
Chief

Benefits Director. The builder or other person requesting the hearing
will be

furnished with a transcript of the hearing and with a statement of the
board\'s

findings of fact. Such builder or other person shall have the right
within 14

days after receipt of such copy to file with the Chief Benefits Director
a

brief of either, or both, facts and law.

\(d\) Upon receipt of the findings and recommendations of the hearing

board and the brief of the builder or other person requesting the
hearing, if

a brief is filed, the Chief Benefits Director shall make a determination
in

the case; i.e., whether the refusal to appraise as imposed originally is

continued, modified, or terminated, and what terms or conditions, if
any, are

imposed for termination or modification of the refusal to appraise.
Notice of

IV-98

such determination shall be given to the person requesting the hearing.
Such

person shall have the right to appeal such decision to the Secretary
within 30

days after the date of receipt of such notice. In the event of an
appeal, the

Secretary will decide the matter finally and will notify the person who
filed

the appeal of the decision.

\(e\) When the refusal to appraise is based solely on action taken by
the

Secretary of Housing and Urban Development the sanction will be lifted
upon

presentation to the Department of Veterans Affairs by the builder
concerned of

satisfactory evidence of his or her reinstatement as a participant in
the

programs administered by the Federal Housing Administration.

36.4362 REQUIREMENT OF CONSTRUCTION WARRANTY

Each certificate of reasonable value issued by the Secretary relating to

a proposed or newly constructed dwelling unit, except those covering

one-family residential units in condominium housing developments or
projects

within the purview of 36.4356 through 36.4360a, shall be subject to the

express condition that the builder, seller, or the real party in
interest in

the transaction shall deliver to the veteran constructing or purchasing
such

dwelling with the aid of a guaranteed or insured loan a warranty, in the
form

prescribed by the Secretary, that the property has been completed in

substantial conformity with the plans and specifications upon which the

Secretary based the valuation of the property, including any
modifications

thereof, or changes or variations therein, approved in writing by the

Secretary, and no certificate of guaranty or insurance credit shall be
issued

unless a copy of such warranty duly receipted by the purchaser is
submitted

with the loan papers.

36.4363 NONDISCRIMINATION AND EQUAL OPPORTUNITY IN HOUSING

CERTIFICATION REQUIREMENTS

\(a\) Any request for a master certificate of reasonable value on

proposed or existing construction, and any request for appraisal of
individual

existing housing not previously occupied, which is received on or after

November 21, 1962, will not be assigned for appraisal prior to receipt
of a

certification from the builder, sponsor or other seller, in the form

prescribed by the Secretary, that neither it nor anyone authorized to
act for

it will decline to sell any property included in such request to a
prospective

purchaser because of his or her race, color, religion, sex or national
origin.

\(b\) On requests for appraisal of individual proposed construction

received on or after November 21, 1962, the prescribed nondiscrimination

certification will be required if the builder is to sell the veteran the
lot

on which the dwelling is to be constructed, but will not be required if:

IV-99

\(1\) The veteran owns the lot; or

\(2\) The lot is being acquired by the veteran from a seller other than

the builder and there is no identity of interest between the builder and
the

seller of the lot.

\(c\) Each builder, sponsor or other seller requesting approval of site

and subdivision planning shall be required to furnish a certification,
in the

form prescribed by the Secretary, that neither it nor anyone authorized
to act

for it will decline to sell any property included in such request to a

prospective purchaser because of his or her race, color, religion, sex
or

national origin. Site and subdivision analysis will not be commenced by
the

Department of Veterans Affairs prior to receipt of such certification.

\(d\) No commitment shall be issued and no loan shall be guaranteed or

insured under 38 U.S.C. Chapter 37 unless the veteran certifies, in such
form

as the Secretary shall prescribe, that

\(1\) Neither he/she, nor anyone authorized to act for him/her, will

refuse to sell or rent, after the making of a bona fide offer, or refuse
to

negotiate for the sale or rental of, or otherwise make unavailable or
deny the

dwelling or property covered by this loan to any person because of race,

color, religion, sex, or national origin;

\(2\) He/she recognizes that any restrictive covenant on the property

relating to race, color, religion, sex or national origin is illegal and
void

and any such covenant is specifically disclaimed; and

\(3\) He/she understands that civil action for preventive relief may be

brought by the Attorney General of the United States in any appropriate
U.S.

District Court against any person responsible for a violation of the

applicable law.

36.4364 CORRECTION OF STRUCTURAL DEFECTS

\(a\) The purpose of this section is to specify the types of assistance

that the Secretary may render pursuant to 38 U.S.C. 1827 to an eligible

borrower who has been unable to secure satisfactory correction of
structural

defects in a dwelling encumbered by a mortgage securing a guaranteed,
insured

or direct loan, and the terms and conditions under which such assistance
will

be rendered.

\(b\) A written application for assistance in the correction of

structural defects shall be filed by a borrower under a guaranteed,
insured or

direct loan with the Director of the Department of Veterans Affairs
office

having loan jurisdiction over the area in which the dwelling is located.
The

application must be filed not later than 4 years after the date on which
the

first direct, guaranteed or insured mortgage loan on the dwelling was
made,

guaranteed or insured by the Secretary. A borrower under a direct,
guaranteed

or insured mortgage loan on the same dwelling which was

IV-100

made, guaranteed or insured subsequent to the first such loan shall be

entitled to file an application if it is filed within 4 years of the
date on

which such first loan was made, guaranteed or insured by the Secretary.

\(c\) An applicant for assistance under this section must establish
that:

\(1\) The applicant is the owner of a one- to four-family dwelling which

was inspected during construction by the Department of Veterans Affairs
or the

Federal Housing Administration.

\(2\) The applicant is an original veteran-borrower on an outstanding

guaranteed, insured or direct loan secured by a mortgage on such
dwelling

which was made, guaranteed or insured on or after May 8, 1968. The
Secretary

may, however, recognize an applicant who is not the original
veteran-borrower

but who contracted to assume such borrower\'s personal obligation
thereunder,

if the Secretary determines that such recognition would be in the best

interests of the Government in the particular case.

\(3\) There exists in such dwelling structural defect, not the result of

fire, earthquake, flood, windstorm, or waste, which seriously affects
the

livability of the dwelling.

\(4\) The applicant has made reasonable efforts to obtain correction of

such structural defect by the builder, seller, or other person or firm

responsible for the construction of the dwelling.

\(d\) In those instances in which the Secretary determines that

assistance under this section is appropriate and necessary the Secretary
may

take any of the following actions:

\(1\) Pay such amount as is reasonably necessary to correct the defect,
or

\(2\) Pay the claim of the borrower for reimbursement of the borrower\'s

expenses for correcting or obtaining correction of the defect, or

\(3\) Acquire title to the property upon terms acceptable to the
borrower

and the holder of the guaranteed or insured loan.

\(e\) To the extent of any expenditure made by the Secretary pursuant to

paragraph (d) of this section the Secretary shall be subrogated to any
legal

rights the borrower or applicant described in paragraph (c)(2) of this
section

may have against the builder, seller, or other persons arising out of
the

structural defect or defects.

\(f\) The borrower shall not be entitled, as a matter of right, to

receive the assistance in the correction of structural defects provided
in

this section. Any determination made by the Secretary in connection with
a

borrower\'s application for assistance shall be

IV-101

final and conclusive and shall not be subject to judicial or other
review.

Authority to act for the Secretary under this section is delegated to
the

Chief Benefits Director.

\(g\) For the purpose of this section the term \"structural defects

seriously affecting livability\" shall in no event be deemed to include
(1)

defects of any nature in a dwelling in respect to which the applicant
for

assistance under this section was the builder or general contractor, or
(2)

structural features, improvements, amenities, or equipment which were
not

taken into account in the Secretary\'s determination of reasonable
value.

36.4365 Canceled.

LOANS UNDER 38 U.S.C. 1815

36.4370 INSURED LOAN AND INSURANCE ACCOUNT

\(a\) Loans otherwise eligible may be insured when purchased by a lender

eligible under 38 U.S.C. 1815 if the purchaser (lender) submits with the
loan

report evidence of an agreement, general or special, made prior to the
closing

of the loan, to purchase such loan subject to its being insured.

\(b\) A current account shall be maintained in the name of each insured

lender or purchaser. The account shall be credited with the appropriate

amounts available for the payment of losses on insured loans made or

purchased. The account shall be debited with appropriate amounts on
account

of transfers, purchases under

36.4318, or payment of losses. The Secretary may on 6 months\' notice,
close

any lender\'s insurance account. Such account after expiration of the
6-month

period shall be available only as to loans embraced therein.

\(c\) Amounts received or recovered by the Secretary or the holder with

respect to a loan after payment of an insured claim thereon will not
restore

any amount to the holder\'s insurance account.

36.4372 TRANSFER OF INSURED LOANS

\(a\) In cases involving the transfer from one insured financial

institution to another insured institution of loans which are
transferred

without recourse, guaranty, or repurchase agreement, if no payment on
any loan

included in the transfer is past due more than 1 calendar month at the
time of

transfer, there shall be transferred from the insurance account of the

transferor to the insurance account of the transferee an amount equal to
the

original percentage credited to the insurance account in respect to each
loan

being transferred, applied to the unpaid balance of such loans, or to
the

purchase price, whichever is the lesser.

\(b\) Transfers between insurance accounts in a manner or under

conditions not provided in paragraph (a) of this section must have prior

approval of the Secretary.

IV-102

\(c\) Where loans are transferred with recourse or under a guaranty or

repurchase agreement, no insurance credit will be transferred or
insurance

account affected, and no reports will be required.

\(d\) In all cases of transfer of loans from one insured financial

institution to another insured institution, except as provided in
paragraph

\(c\) of this section, a report on a prescribed form executed by the
parties and

showing their agreement with regard to the transfer of insurance credits
shall

be made to the Secretary.

36.4373 DEBITS AND CREDITS TO INSURANCE ACCOUNT UNDER 36.4318

In the event that an insured loan is transferred under the provisions of

36.4318, there shall be charged to the insurance account of the
transferor a

sum equal to the amount paid transferor on account of the indebtedness,
less

the current market value of the property transferred as security
therefor as

determined by an appraiser designated by the Secretary, or the amount

chargeable to such insurance account in the event of a transfer under

36.4372, whichever sum is the greater. The credit to the insurance
account of

the transferee will be computed in accordance with 36.4372(a).

36.4374 PAYMENT OF INSURANCE

\(a\) Upon the continuance of a default for the period specified in

36.4316, the holder may proceed to establish the net loss, after giving
the

notice prescribed in 36.4317, if security is available. The net loss
shall

be reported to the Secretary with proper claim, whereupon the holder
shall be

entitled to payment of the claim within the amount then available for
such

payment under the payee\'s related insurance account. Subject to the

provisions of the paragraph (b) of this section and to 36.4370(b), a

supplemental claim for any balance of an insurance loss may be filed at
any

time within 5 years after the date of the original claim.

\(b\) The basis of the claim for an insured loss shall consist in the

unrealized principal or the amount paid for the obligation, if less,
plus

unrealized interest to the date of claim or the date of sale, whichever
is

earlier, and those expenses, if any, allowable under 36.4313, but
subject to

proper credits because of payments, setoff, proceeds of security, or

otherwise: Provided, That if there is no liquidation of security the
claim

shall not include an accrual of interest for a period in excess of 6
months

from the date of the first uncured default.

36.4375 REPORTS OF INSURED INSTITUTION

An insured financial institution shall make such reports respecting its

insurance accounts as the Secretary may from time to time require, not
more

frequently than semiannually.

36.4380 through 36.4389 Canceled.

IV-103

FEDERALLY ASSISTED CONSTRUCTION CONTRACTS-NONDISCRIMINATION

IN EMPLOYMENT-EXECUTIVE ORDERS 11246 and 11375

36.4390 PURPOSE

Sections 36.4390 through 36.4393 are promulgated to achieve the aims of

the applicable provisions of Executive Orders 11246 and 11375 and the

regulations of the Secretary of Labor with respect to Federally assisted

construction contracts.

36.4391 APPLICABILITY

\(a\) For the purposes of the home loan guaranty and insurance and
direct

loan programs of the VA, the term \"applicant for Federal assistance\"
or

\"applicant\" in part III of Executive Order 11246 shall mean the
builder,

sponsor or developer of land to be improved by such builder, sponsor or

developer for the purpose of constructing housing thereon for sale to
eligible

veterans with financing which is to be guaranteed or insured or made
under the

provisions of 38 U.S.C. Chapter 37, or the builder, sponsor or developer
of

housing to be constructed for sale to eligible veterans with financing
which

is to be guaranteed or insured or made under the provisions of 38 U.S.C.

Chapter 37.

\(b\) The provisions of Executive Orders 11246 and 11375 and the rules

and regulations of the Secretary of Labor are applicable to:

\(1\) Each master certificate of reasonable value or extension or

modification thereof relating to proposed construction issued on or
after July

22, 1963;

\(2\) Each individual certificate of reasonable value or extension or

modification thereof relating to proposed construction issued on or
after July

22, 1963, except as provided in paragraph (c)(2) of this section;

\(3\) Each special conditions letter or modification thereof issued on
or

after July 22, 1963, in respect to site approval of land to be improved
by a

builder, sponsor or developer for the construction of housing thereon;

\(4\) Each direct loan fund reservation commitment or extension thereof

issued to builders on or after July 22, 1963.

\(c\) The provisions of Executive Orders 11246 and 11375 and the rules

and regulations of the Secretary of Labor are not applicable to:

\(1\) Grants under 38 U.S.C. Chapter 21;

\(2\) Individual certificates of reasonable value issued on or after
July

22, 1963, if:

\(i\) The certificate relates to existing properties, either previously

occupied or unoccupied; or

IV-104

\(ii\) The certificate relates to proposed construction and

\(A\) A veteran was named in the request for appraisal, or

\(B\) A veteran contracted for the construction or purchase of the home

prior to issuance of the certificate, or

\(C\) The property was listed in the schedule of reasonable values on an

outstanding master certificate of reasonable value issued prior to July
22,

1963;

\(3\) Any contract or subcontract for construction work not exceeding

\$10,000;

\(4\) Any other contract or subcontract which is exempted or excepted by

the regulations of the Secretary of Labor.

36.4392 CERTIFICATION REQUIREMENTS

In any case in which 36.4390 through 36.4393 are applicable, as set

forth in 36.4391, no action will be taken by the Department of Veterans

Affairs on any request for appraisal relating to proposed construction,
site

approval of land to be improved by a builder, sponsor or developer for
the

construction of housing thereon, or for a direct loan fund reservation

commitment unless the builder, sponsor or developer has furnished the

Department of Veterans Affairs a signed certification in form as
follows:

To induce the Department of Veterans Affairs to act on any request

submitted by or on behalf of the undersigned for site approval of land
to be

improved for the construction of housing thereon to be financed with
loans

guaranteed, insured or made by the Department of Veterans Affairs, or
for

establishment by the Department of Veterans Affairs of reasonable value

relating to proposed construction or for direct loan fund reservation

commitments, the undersigned hereby agrees that it will incorporate or
cause

to be incorporated into any contract for construction work or
modification

thereof, as defined in the rules and regulations of the Secretary of
Labor

relating to the land or housing included in its request to the
Department of

Veterans Affairs the following equal opportunity clause:

\"During the performance of this contract the contractor agrees as

follows:

\"(1) The contractor will not discriminate against any employee or

applicant for employment because of race, color, religion, sex or
national

origin. The contractor will take affirmative action to ensure that
applicants

are employed, and that employees are treated during employment without
regard

to their race, color, religion, sex or national origin. Such action
shall

include, but not be limited to the following: employment, upgrading,
demotion

or transfer; recruitment or recruitment advertising; layoff or
termination;

rates of pay or other forms of compensation; and selection for training,

IV-105

including apprenticeship. The contractor agrees to post in conspicuous

places, available to employees and applicants for employment, notices to
be

provided setting forth the provisions of this nondiscrimination clause.

\"(2) The contractor will, in all solicitations or advertisements for

employees placed by or on behalf of the contractor, state that all
qualified

applicants will receive consideration for employment without regard to
race,

color, religion, sex or national origin.

\"(3) The contractor will send to each labor union or representative of

workers with which he has a collective bargaining agreement or other
contract

or understanding, a notice to be provided advising the said labor union
or

workers\' representative of the contractor\'s commitments under section
202 of

Executive Order 11246 of September 24, 1965, and shall post copies of
the

notice in conspicuous places available to employees and applicants for

employment.

\"(4) The contractor will comply with all provisions of Executive Order

11246 of September 24, 1965, and of the rules, regulations and relevant
orders

of the Secretary of Labor.

\"(5) The contractor will furnish all information and reports required

by Executive Order 11246 of September 24, 1965, and by the rules,
regulations

and orders of the Secretary of Labor, or pursuant thereto, and will
permit

access to his books, records and accounts by the administering agency
and the

Secretary of Labor for purposes of investigation to ascertain compliance
with

such rules, regulations and orders.

\"(6) In the event of the contractor\'s noncompliance with the

nondiscrimination clauses of this contract or with any of the said
rules,

regulations or orders, this contract may be canceled, terminated or
suspended

in whole or in part and the contractor may be declared ineligible for
further

Government contracts or federally assisted construction contracts in

accordance with procedures authorized in Executive Order 11246 of
September

24, 1965, and such other sanctions may be imposed and remedies invoked
as

provided in Executive Order 11246 of September 24, 1965, or by rule,

regulation or order of the Secretary of Labor, or as otherwise provided
by

law.

\"(7) The contractor will include the provisions of paragraphs (1)

through (7) in every subcontract or purchase order unless exempted by
rules,

regulations or orders of the Secretary of Labor issued pursuant to
section 204

of Executive Order 11246 of September 24, 1965, so that such provisions
will

be binding upon each subcontractor or vendor. The contractor will take
such

action with respect to any subcontract or purchase order as the
administering

agency may direct as a means of enforcing such provisions, including
sanctions

for noncompliance: Provided, however, That in the event a contractor
becomes

involved in, or is threatened with, litigation with a subcontractor or
vendor

as a result of such direction by the agency, the contractor may request
the

United States to enter into such litigation to protect the interests of
the

United States.\"

IV-106

Except in special cases and in subcontracts for the performance of

construction work at the site of construction, the clause is not
required to

be inserted in subcontracts below the second tier. Subcontracts may

incorporate by reference the equal opportunity clause.

The undersigned further agrees that it will be bound by the above equal

opportunity clause in any federally assisted construction work which it

performs itself other than through the permanent work force directly
employed

by an agency of Government.

The undersigned agrees that it will cooperate actively with the

administering agency and the Secretary of Labor in obtaining the
compliance of

contractors and subcontractors with the equal opportunity clause and the

rules, regulations and relevant orders of the Secretary of Labor, that
it will

furnish the administering agency and the Secretary of Labor such
information

as they may require for the supervision of such compliance, and that it
will

otherwise assist the administering agency in the discharge of the
agency\'s

primary responsibility for securing compliance. The undersigned further

agrees that it will refrain from entering into any contract or contract

modification subject to Executive Order 11246 with a contractor debarred
from,

or who has not demonstrated eligibility for, Government contracts and

federally assisted construction contracts pursuant to part II, subpart D
of

Executive Order 11246 and will carry out such sanctions and penalties
for

violation of the equal opportunity clause as may be imposed upon the

contractors and subcontractors by the administering agency or the
Secretary of

Labor pursuant to part II, subpart D of Executive Order 11246.

In addition, the undersigned agrees that if it fails or refuses to

comply with these undertakings such failure or refusal shall be a proper
basis

for cancellation by the Department of Veterans Affairs of any
outstanding

master certificates of reasonable value or individual certificates of

reasonable value relating to proposed construction, except in respect to
cases

in which an eligible veteran has contracted to purchase a property
included on

such certificates, and for the rejection of future requests submitted by
the

undersigned or on his or her behalf for site approval, appraisal
services, and

direct loan fund reservation commitments until satisfactory assurance of

future compliance has been received from the undersigned, and for
referral of

the case to the Department of Justice for appropriate legal proceedings.

36.4393 COMPLAINT AND HEARING PROCEDURE

\(a\) Upon receipt of a written complaint signed by the complainant to

the effect that any person, firm or entity has violated the undertakings

referred to in 36.4392, such person, firm or other entity shall be
invited to

discuss the matter in an informal hearing with the Director of the
Department

of Veterans Affairs regional office or center.

IV-107

\(b\) If the existence of a violation is denied by the person, firm or

other entity against which a complaint has been made, the Director or
designee

shall conduct such inquiries and hearings as may be deemed appropriate
for the

purpose of ascertaining the facts.

\(c\) If it is found that the person, firm or other entity against which

a complaint has been made has not violated the undertakings referred to
in

36.4392, the parties shall be so notified.

\(d\) If it is found that there has been a violation of the undertakings

referred to in 36.4392, the person, firm, or other entity in violation
shall

be requested to attend a conference for the purpose of discussing the
matter.

Failure or refusal to attend such a conference shall be proper basis for
the

application of sanctions.

\(e\) The conference arranged for discussing a violation shall be

conducted in an informal manner and shall have as its primary objective
the

elimination of the violation. If the violation is eliminated and
satisfactory

assurances are received that the person, firm or other entity in
violation

will comply with the undertakings pursuant to 36.4392 in the future, the

parties concerned shall be so notified.

\(f\) Failure or refusal to comply and give satisfactory assurances of

future compliance with the equal employment opportunity requirements
shall be

proper basis for applying sanctions. The sanctions shall be applied in

accordance with the provisions of Executive Order 11246 as amended and
the

regulations of the Secretary of Labor.

\(g\) Upon written application, a complainant or a person, firm or other

entity against which a complaint has been filed may apply to the Chief

Benefits Director for a review of the action taken by a Director. Upon

receiving such application, the Chief Benefits Director may designate a

representative or representatives to conduct an informal hearing and to
make a

report of findings. The Chief Benefits Director may, after a review of
such

report, modify or reverse an action taken by a Director.

\(h\) Reinstatement of restricted persons, firms or other entities shall

be within the discretion of the Chief Benefits Director and under such
terms

as the Chief Benefits Director may prescribe.

IV-108