Federal Register / Vol. 83, No. 241 / Monday, December 17, 2018 / Rules and Regulations 64459 

under section 6695(g) of the Internal 

Revenue Code. 

Need for Correction 

As published November 7, 2018 (83 

FR 55632), the final regulations (TD 

9842) contain an error that needs to be 

corrected. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Correction of Publication 

Accordingly, 26 CFR part 1 is 

corrected by making the following 

correcting amendment: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

§ 1.6695–2 [Amended] 

■ Par. 2. Section 1.6695–2 is amended 

by redesignating the second occurrence 

of paragraph (b)(3)(ii)(D) as paragraph 

(b)(3)(ii)(E). 

Martin V. Franks, 

Chief, Publications and Regulations Branch, 

Legal Processing Division, Associate Chief 

Counsel (Procedure and Administration). 

[FR Doc. 2018–26969 Filed 12–14–18; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Part 36 

RIN 2900–AQ42 

Loan Guaranty: Revisions to VAGuaranteed or Insured Cash-Out Home 

Refinance Loans 

AGENCY: Department of Veterans Affairs. 

ACTION: Interim final rule. 

SUMMARY: The Department of Veterans 

Affairs (VA) is amending its rules on 

VA-guaranteed or insured cash-out 

refinance loans. The Economic Growth, 

Regulatory Relief, and Consumer 

Protection Act requires VA to 

promulgate regulations governing cashout refinance loans. This interim final 

rule defines the parameters of when VA 

will permit cash-out refinance loans, to 

include defining net tangible benefit, 

recoupment, and seasoning 

requirements. 

DATES: Effective Date: This rule is 

effective February 15, 2019. 

Comment date: Comments are due on 

or before February 15, 2019. 

ADDRESSES: Written comments may be 

submitted by email through http://

www.regulations.gov; by mail or handdelivery to Director, Regulations 

Management (00REG), Department of 

Veterans Affairs, 810 Vermont Avenue 

NW, Room 1063B, Washington, DC 

20420; or by fax to (202) 273–9026. 

(This is not a toll-free number.) 

Comments should indicate that they are 

submitted in response to ‘‘RIN 2900– 

AQ42, Loan Guaranty: Revisions to VAGuaranteed or Insured Cash-out Home 

Refinance Loans.’’ Copies of comments 

received will be available for public 

inspection in the Office of Regulation 

Policy and Management, Room 1063B, 

between the hours of 8:00 a.m. and 4:30 

p.m. Monday through Friday (except 

holidays). Please call (202) 461–4902 for 

an appointment. (This is not a toll-free 

number.) In addition, during the 

comment period, comments may be 

viewed online through the Federal 

Docket Management System (FDMS) at 

http://www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: Greg 

Nelms, Assistant Director for Loan 

Policy & Valuation, Loan Guaranty 

Service (26), Veterans Benefits 

Administration, Department of Veterans 

Affairs, 810 Vermont Avenue NW, 

Washington, DC 20420, (202) 632–8978. 

(This is not a toll-free number.) 

SUPPLEMENTARY INFORMATION: On May 

24, 2018, the President signed into law 

the Economic Growth, Regulatory 

Relief, and Consumer Protection Act 

(the Act), Public Law 115–174, 132 Stat. 

1296. Section 309 of the Act, codified at 

38 U.S.C. 3709, provides new statutory 

criteria for determining when, in 

general, VA may guarantee a refinance 

loan. The Act also requires VA to 

promulgate regulations for cash-out 

refinance loans within 180 days after 

the date of the enactment of the Act, 

specifically for loans where the 

principal of the new loan to be VAguaranteed or insured is larger than the 

payoff amount of the loan being 

refinanced. Public Law 115–174, 132 

Stat. 1296. 

VA’s current regulation concerning 

cash-out refinance loans is found at 38 

CFR 36.4306. VA is revising § 36.4306 

in this rulemaking, and planning 

additional rulemakings to implement 

other provisions of the Act. 

I. VA’s Refinance Program and New 

Section 3709 

A. Two Types of Cash-Out Refinance 

Loans Under Section 3709 

Refinancing loans guaranteed or 

insured by VA have historically fallen 

into two broad categories: (i) Cash-out 

refinance loans (cash-outs) offered 

under 38 U.S.C. 3710(a)(5) and (a)(9) 

and (ii) interest rate reduction 

refinancing loans (IRRRLs) authorized 

under 38 U.S.C. 3710(a)(8) and (a)(11). 

VA has not, until the enactment of the 

Act, seen any reason to delineate in 

VA’s cash-out refinance rule, 38 CFR 

36.4306, between cash-out refinance 

loans where the principal amount of the 

new loan is either: (a) Higher than, or (b) 

less than or equal to, the payoff amount 

of the loan being refinanced. The Act, 

however, bifurcates cash-out refinance 

loans relative to payoff amounts of the 

loan being refinanced, effectively 

requiring VA to treat the cash-out 

refinance loans differently, 

notwithstanding the fact that they are 

both authorized under the same 

statutory authority. 

Subsections (a), (b), and (c) of 38 

U.S.C. 3709 set forth standards for fee 

recoupment, net tangible benefits, and 

loan seasoning, respectively, related to 

the refinancing of loans guaranteed or 

insured by VA. Subsections (a) through 

(c) all contain similar introductory text, 

providing that when a borrower 

refinances a loan initially made for a 

purpose under VA’s enabling statute in 

38 U.S.C. 3710, the new refinance loan 

must meet the respective requirements 

of subsections (a), (b), and (c). 

Subsections (a) through (c) do not 

expressly distinguish among the 

statutory types of refinancing loans that 

VA can guarantee or insure. While 

subsections (a) through (c) of section 

3709 do not refer specifically to IRRRLs 

or cash-out refinance loans, subsection 

(d), which is identified under the 

statutory heading of ‘‘Cash-out 

refinances’’, explicitly states that 

subsections (a) through (c) do not apply 

to refinancing loans where the amount 

of the new loan is larger than the payoff 

amount of the loan being refinanced. 

The explicit delineation provided in 

subsection (d), i.e., the distinction 

between loan refinance amounts relative 

to loan payoff amounts, requires VA to 

consider cash-out refinances separately. 

Based on the way Congress structured 

section 3709, VA-guaranteed or insured 

refinance loans are now effectively 

grouped into three categories: (i) 

IRRRLs, (ii) cash-outs in which the 

amount of the principal for the new loan 

is equal to or less than the payoff 

amount on the refinanced loan (Type I 

Cash-Outs), and (iii) cash-outs in which 

the amount of the principal for the new 

loan is larger than the payoff amount of 

the refinanced loan (Type II Cash-Outs). 

(For ease of reference, VA is referring in 

this preamble to the types of refinancing 

loans as IRRRLs, Type I Cash-Outs, and 

Type II Cash-Outs, respectively. VA is 

not using these terms in the rule text.) 


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It could be understood that, because 

the text of section 3709(d) does not 

make any specific reference to Type I 

Cash-Outs, such loans fall outside the 

scope of section 3709 altogether. In 

other words, it could be suggested that 

subsections (a) through (c) apply solely 

to IRRRLs and subsection (d) applies to 

cash-out refinance loans, generally, both 

Type I and Type II. Had Congress 

specified that section 3709(a)–(c) 

applied to loans made for the purpose 

authorized in 38 U.S.C. 3710(a)(8) or 

solely to streamline refinance loans, or 

had Congress not been explicit in 

making subsection (d) apply solely to 

Type II Cash-Outs, VA would have 

understood the statute this way. 

Nevertheless, the text of subsection 

3709(d) omits Type I Cash-Outs. In 

addition, the introductory provisions of 

subsections (a) through (c) are 

substantially similar. They refer 

generally to 38 U.S.C. 3710, without 

distinction, requiring that if a loan is 

made for a purpose authorized under 

section 3710 and is then to be 

refinanced and guaranteed or insured by 

VA, the new refinancing loan is subject 

to the requirements of subsections (a) 

through (c). On the plain text of 

subsections (a) through (d), then, the 

statute requires VA to apply subsections 

(a) through (c) to all refinances not 

expressly excepted under subsection 

(d). Thus, VA understands subsections 

(a) through (c) to apply to IRRRLs and 

Type I Cash-Outs and subsection (d) to 

apply to Type II Cash-Outs. 

VA is revising its cash-out refinance 

rule at 38 CFR 36.4306 to address the 

new statutory bifurcation. The rule will 

outline the common characteristics 

required for the guaranty or insurance of 

Type I and Type II Cash-Outs. It will 

also set apart each type of cash-out 

refinancing to address their unique 

aspects. VA is further making some 

technical changes for ease of reading. 

All the changes are explained in-depth, 

later in this preamble. VA is not 

addressing section 3709’s impact on 

IRRRLs, but plans to do so in a separate 

rulemaking. 

B. The Structure of Section 3709(b) and 

(d) and How It Affects Type I and Type 

II Cash-Outs 

As explained, section 3709 bifurcates 

cash-out refinance loans into two types. 

Type I Cash-Outs are subject to 38 

U.S.C. 3709(a) through (c). Type II CashOuts are subject to subsection (d). 

Subsections (a) through (c) provide 

specific criteria before a Type I CashOut may be guaranteed or insured. 

Subsection (a) imposes requirements 

related to recoupment of fees and 

expenses when refinancing a VAguaranteed or insured loan into a Type 

I Cash-Out. In this rule, VA is simply 

restating the statutory criteria Congress 

prescribed in 38 U.S.C. 3709(a). 

Likewise, VA is simply restating in this 

rule the statutory criteria found in 

subsection (c), which imposes a 

seasoning period before a VAguaranteed or insured loan may be 

refinanced into a Type I Cash-Out. To 

the extent any changes are made, they 

are solely for ease of reading and should 

not imply a substantive effect. VA is 

required to follow the statute. 

Subsection (b) requires that a 

refinance loan provide a net tangible 

benefit to a veteran. To that end, the 

lender must provide a veteran with a net 

tangible benefit test to ensure that the 

refinance is in the financial interests of 

the veteran. Congress required the test, 

but did not define its parameters. To 

clarify statutory ambiguity, VA is, 

therefore, providing the parameters, as 

described later in this preamble. 

VA considered various interpretations 

in dealing with section 3709(b). As 

discussed above, one question was 

whether the section applies only to 

IRRRLs, excluding Type I Cash-Outs 

altogether. This would be untenable, 

however, as the plain text of the 

introductory paragraph states 

unambiguously that it applies broadly to 

VA-guaranteed or insured refinances of 

VA-guaranteed loans—IRRRLs and cashouts—except for those Type II CashOuts expressly excepted. The reading 

also would not make sense in 

application, as it would create a 

loophole for Type I Cash-Outs, making 

it easy for unscrupulous lenders to 

exploit veterans by inflating interest 

rates and discount points, without 

regard to net tangible benefits or the 

recoupment of fees and expenses. Such 

a loophole is inconsistent with the 

statute, as such lenders could render the 

whole of (a) through (c) meaningless. 

VA also considered whether the net 

tangible benefit test described in (b)(1) 

was introductory to the criteria set forth 

in (b)(2) through (4). In other words, VA 

analyzed whether the required interest 

rate reductions, restricted discount 

points, and capped loan-to-value 

ceilings of paragraphs (2) through (4) 

comprise, in total, the net tangible 

benefit test mentioned in paragraph (1). 

This reading also was untenable, 

however, due to the way Congress 

structured the plain text of subsection 

(b). Subsection (b) contains four 

paragraphs, not three. Had Congress 

intended for paragraphs (2) through (4) 

to comprise the net tangible benefit test, 

Congress would have made the net 

tangible benefit test part of the 

introductory text as an overarching 

requirement, leading into the list of 

various elements necessary for passing 

the test. Yet the equal paragraph 

structure of the law clearly sets the net 

tangible benefit test as one criterion of 

equal weight among others necessary to 

be met for guaranty or insurance. 

VA further considered the placement 

of the conjunction ‘‘and’’ between 

paragraphs (3) and (4). Generally, when 

Congress enacts a statute that lists 

multiple standards, utilizing serial 

commas and conjoining such discrete 

standards with the word ‘‘and’’ at the 

end, each discrete provision must be 

applied to the subject of the statute. U.S. 

House of Representatives Office of the 

Legislative Counsel, House Legislative 

Counsel’s Manual on Drafting Style, No. 

HLC 104–1, sec. 351 at 58 (1995). The 

problem with accepting this principle 

across the board is that ‘‘and’’ is often 

ambiguous. It can be used jointly or 

severally. See R. Dickerson, The 

Fundamentals of Legal Drafting, 76–85 

(1965). When courts deviate from the 

generally accepted principle, the 

outcome is largely dependent on facts 

and context. See, e.g., Shaw v. Nat’l 

Union Fire Ins. Co., 605 F.3d 1250 (11th 

Cir. 2010), which catalogs several cases 

where ‘‘and’’ proved difficult to 

understand. 

One rationale for departing from the 

generally accepted principle is when 

courts must reconcile the understanding 

between two mutually exclusive 

concepts. Id. The rationale applies here. 

The statutory use of the term ‘‘and’’ 

cannot apply as it generally would, 

because two of section 309(b)’s criteria 

are mutually exclusive. Of the four 

paragraphs in subsection (b), there is 

one that can apply in every case and 

two that cannot apply simultaneously. 

The fourth is dependent. Paragraph (1) 

provides that refinances of alreadyguaranteed loans cannot be guaranteed 

by VA unless ‘‘the issuer of the . . . 

loan provides the borrower with a net 

tangible benefit test . . .’’ This 

paragraph is broad enough to apply in 

the case of all covered loans. Paragraph 

(2) describes a case where the 

underlying loan and the refinancing 

loan both have a fixed interest rate. 

Paragraph (3) defines a case where the 

underlying loan has a fixed interest rate 

and the refinancing loan will have an 

adjustable interest rate. It follows that 

paragraph (2) can never apply in the 

case of a loan described in paragraph 

(3), and vice versa. They are mutually 

exclusive, which indicates that the 

‘‘and’’ between paragraph (3) and (4) 

cannot mean that a single refinancing 

loan must meet all of subsection (b)’s 

requirements. 


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Since the ‘‘and’’ between paragraph 

(3) and (4) could not mean that all 

paragraphs (1) through (4) must be 

applied and satisfied in every single 

refinance, VA had to determine the 

meaning. Put another way, VA had to 

analyze whether the discount points 

requirement would apply only when 

refinancing from a loan with a fixed rate 

to a loan with an adjustable rate 

(paragraph 3), or if it would also apply 

when refinancing from a fixed rate loan 

to a fixed rate loan (paragraph 2). 

VA found no legislative history to 

help clarify the term’s meaning. For the 

reasons explained below, VA interprets 

the ‘‘and’’ to link only paragraphs (3) 

and (4). 

A common usage of the term ‘‘and’’ is 

one that indicates an order of sequence. 

Even if not the preferred legal 

understanding (see explanation above), 

it offers an alternative that resolves the 

apparent ambiguity. 

Accepting this understanding of 

‘‘and’’, the discount points requirement 

described in paragraph (4) would clearly 

follow in sequence the condition 

prescribed in paragraph (3). The first 

step of moving from a fixed interest rate 

mortgage to an adjustable interest rate 

mortgage would parallel the example of 

the President signing a bill into law. The 

next step in the sequence, i.e., 

compliance with discount points 

requirements, would be analogous to the 

rulemaking in the example. 

One could argue that the same 

rationale could apply to paragraphs (2) 

and (4). If a veteran obtains a loan 

described in paragraph (2), the next step 

in the sequence would be to apply 

paragraph (4). The problem is that 

paragraph (3) intervenes, and 

paragraphs (2) and (3) are sequential in 

number only. 

Paragraphs (2) and (3) present 

different classes of loans entirely, 

carrying with them different risks. 

Again, they are mutually exclusive to 

one another. This exclusivity seems to 

interrupt the consequential element 

necessary for continuation of the 

sequence. If paragraphs (2) and (3) were 

reconcilable, meaning they could either 

occur simultaneously or follow one 

another, one could look to paragraph (4) 

to complete the sequence. But the 

differences must be given meaning, and 

VA interprets that meaning as severing 

the relationship between paragraphs (2) 

and (4), limiting to paragraph (3) the 

relationship with paragraph (4). 

VA recognizes other conclusions 

might be possible. However, VA’s 

interpretation implements the text, on 

its face, as a coherent and consistent 

framework, without having to consider 

whether Congress made a structural 

error. 

The coherent and consistent 

framework mirrors VA’s understanding 

of the lending market. A refinance loan 

should meet a net tangible benefit test 

to ensure that imprudent lenders do not 

take advantage of veterans and the 

investors who provide liquidity for VAguaranteed loans. Additional 

requirements are tacked on as the risk 

profile increases. In VA’s 

understanding, Congress addressed the 

risky aspects of moving from one type 

of interest rate to another, setting an 

additional threshold regarding interest 

rates, depending on what sort of interest 

rate (fixed versus adjustable) a veteran 

chooses. Congress addressed the least 

risky type of loan first, meaning a 

refinance from a fixed interest rate to a 

fixed interest rate. The required interest 

rate shift (50 basis points) is drastically 

less than that required when refinancing 

from a fixed interest rate to an 

adjustable interest rate (200 basis 

points). VA understands that, although 

there can be benefits in moving from a 

fixed interest rate to an adjustable rate, 

such a move is inherently risky. One 

reason is that the crossover to a different 

category of mortgage makes it more 

difficult for the average borrower to 

conduct an informed cost-benefit 

analysis when comparing the two types 

of mortgages. Where moving from a 

fixed interest rate mortgage to another 

fixed rate is like comparing apples to 

apples, comparing a fixed interest rate 

mortgage and an adjustable rate 

mortgage is more like comparing apples 

to pears. They are simply different, and 

as a result, borrowers could have a more 

difficult time calculating an accurate 

cost-benefit analysis. Also, the 

adjustable rate means that the monthly 

payment is essentially out of the 

borrower’s hands, particularly in a time 

when interest rates are increasing. Thus, 

the adjustable rate carries with it more 

risk of payment shock (when the rate is 

adjusted and a higher payment amount 

is established) and more chance that a 

veteran would later opt to refinance 

again, increasing the risk of serial 

refinancing and equity stripping. VA 

understands the more significant 

interest rate reduction for an adjustable 

interest rate mortgage, along with the 

additional discount point and loan to 

value requirements, as Congress’s 

attempt to counter the potential 

downsides of the riskier type of loans. 

Before moving to the next point, it 

should be noted, as well, that linking 

paragraph (4) to both paragraphs (2) and 

(3) is a restrictive approach. It would 

result in VA establishing a larger 

regulatory footprint than if VA were to 

link paragraph (4) only to paragraph (3). 

VA is reluctant to take the more 

restrictive interpretation for this aspect 

of the rule. VA does not have data, at 

least at the moment, to demonstrate how 

linking the additional restrictions of 

paragraph (4) to paragraph (2) would 

provide veterans additional advantages. 

VA also cannot point to data showing a 

clear market-based reason to impose the 

larger regulatory footprint. VA does not 

have other evidence that the more 

restrictive approach reflects the 

meaning of the ambiguously structured 

statute. Nevertheless, VA specifically 

invites comments on its interpretation 

of subsection (b), as VA believes it 

would be helpful to receive public 

feedback on this important issue. 

Finally, VA considered whether a 

Type I Cash-Out would need to pass a 

net tangible benefit test to comply with 

the law or whether the net tangible 

benefit test is merely a disclosure for 

informational purposes. The meaning of 

a word must be ascertained in the 

context of achieving particular 

objectives. See Chevron, U.S.A., Inc. v. 

NRDC, Inc., 467 U.S. 837, 861 (1984). 

VA first reviewed the Act to determine 

whether another section could provide 

additional context. The term ‘‘net 

tangible benefit test’’ is not used 

elsewhere in the Act. Neither is the term 

‘‘test’’. The nearest analog VA could 

find in the Act was in section 401, 

referring to ‘‘supervisory stress tests.’’ 

Under section 401, the Board of 

Governors of the Federal Reserve 

System is required to conduct 

supervisory stress tests of certain bank 

holding companies ‘‘to evaluate whether 

such bank holding companies have the 

capital, on a total consolidated basis, 

necessary to absorb losses as a result of 

adverse economic conditions.’’ 

VA does not believe the section 401 

supervisory stress test is a valid 

comparison to section 309’s net tangible 

benefit test. A supervisory stress test 

based on estimates and forecasts of 

economies seems a completely different 

character from a test to show whether a 

lender is preying upon an individual 

borrower. The objectives are entirely 

different. ‘‘Context Counts.’’ Envtl. Def. 

v. Duke Energy Corp. 549 U.S. 561 

(2007) (explaining that ‘‘There is, then, 

no ‘effectively irrebuttable’ presumption 

that the same defined term in different 

provisions of the same statute must be 

‘interpreted identically.’’’ 

Guaranteeing a loan when VA and 

others know it would cause a veteran 

financial harm would be inconsistent 

with the statutory context of section 

309. In paragraph (2) of subsection (b), 

Congress required that a fixed rate 

refinance loan must meet certain 


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interest rate requirements, or the 

Secretary is not authorized to guarantee 

the loan. In paragraphs (3) and (4), 

Congress required that an adjustable rate 

refinance loan must meet certain 

interest rate and discount point 

requirements, or the Secretary is not 

authorized to guarantee the loan. If each 

of these other provisions in subsection 

(b) sets forth a pass/fail standard that 

must be met, not just disclosed, VA 

finds it difficult to conclude that merely 

disclosing the fact that a loan is harmful 

would be sufficient to satisfy the net 

tangible benefit test of paragraph (1). It 

would be inconsistent to do so. 

The consistency in the legislative 

scheme is not limited to the 

requirements of subsection (b). The 

same pass/fail sort of standard applies 

to the recoupment requirements of 

subsection (a). If one of the recoupment 

requirements is not met, the refinance 

loan cannot be guaranteed. The same 

pass/fail sort of standard also applies to 

the seasoning requirements of 

subsection (c). If the requirement is not 

met, the loan cannot be guaranteed. 

Again, VA interprets the law within 

the coherent and consistent framework 

that Congress prescribed. At each step, 

in every provision in section 309, 

Congress identified an issue, imposed a 

requirement, and prohibited a VA 

guaranty as the consequence of 

noncompliance with one of the section’s 

requirements. It would be inconsistent 

with this coherent statutory scheme if 

the consequence of noncompliance with 

the net tangible benefit test of 

subsection (b)(1) would be wholly 

different. To infer the term ‘‘net tangible 

benefit disclosure’’ within this context 

when Congress selected the term ‘‘net 

tangible benefit test,’’ would not only 

fail to give the proper weight to the 

word selection, but would also require 

an inference, without evidence, that 

Congress had departed from the 

coherent framework it had designed. VA 

believes it would run counter to the 

purpose of a statute entitled the 

‘‘Protecting Veterans from Predatory 

Lending Act’’ for VA to guarantee or 

insure a loan when all parties 

involved—lender, veteran, VA, 

secondary market investors, and 

Congress—know a loan fails a net 

tangible benefit test, meaning that the 

loan is predatory and indeed will cause 

financial harm. See INS v. National Ctr. 

for Immigrants’ Rights, 502 U.S. 183, 

189–90 (1991) (acknowledging that title 

of statute can aid in resolving ambiguity 

in text). 

Furthermore, for additional context in 

interpreting the meaning of the term 

‘‘test’’, VA looked at other Governmentbacked lending programs: HUD, the 

Federal National Mortgage Association 

(Fannie Mae), the Federal Home Loan 

Mortgage Corporation (Freddie Mac), 

and the Department of Agriculture’s 

Rural Development program. The 

consensus approach is that, absent a net 

tangible benefit to a borrower, the loan 

should not be made. 

Accordingly, VA is interpreting 

section 309’s net tangible benefit test as 

one that must be passed. VA believes 

that, by selecting the word ‘‘test’’, 

Congress has imposed a requirement to 

establish the fitness of the loan, as 

opposed to a requirement only to 

disclose the characteristics of the loan 

for the veteran’s understanding. 

In this rule, VA is defining the 

parameters of the net tangible benefit 

test for Type I Cash-Outs. VA is also 

establishing a net tangible benefit test 

for Type II Cash-Outs to comply with 

section 3709(d). The net tangible benefit 

test for both types of cash-outs overlaps 

in some ways, but also differs in a few 

major respects. The full explanation is 

provided later in this preamble. VA will 

address the net tangible benefit test for 

IRRRLs in a future rulemaking. 

II. Explanation of Specific Changes to 

38 CFR 36.4306 

A. Section 36.4306(a) 

For ease of reading, VA is revising 

§ 36.4306(a) to discuss the criteria that 

will apply to both types of cash-out 

refinance loans. In § 36.4306(a), VA will 

provide that a refinancing loan made 

pursuant to 38 U.S.C. 3710(a)(5) 

qualifies for guaranty in an amount as 

computed under 38 U.S.C. 3703, 

provided five conditions are met. 

1. Reasonable Value 

VA will require that the amount of the 

new loan must not exceed an amount 

equal to 100 percent of the reasonable 

value, as determined by the Secretary, of 

the dwelling or farm residence which 

will secure the loan. The Secretary 

makes determinations of reasonable 

value pursuant to requirements found in 

38 U.S.C. 3731. VA’s implementing 

regulations are found at 38 CFR 36.4301 

and 36.4343, and VA’s website provides 

additional resources for fee appraisers. 

See https://www.benefits.va.gov/ 

homeloans/appraiser.asp. The current 

§ 36.4306(a) authorizes a loan in an 

amount that does not exceed 90 percent 

of the reasonable value of the dwelling 

securing the VA-guaranteed loan. 38 

CFR 36.4306(a)(1). In 1989, Congress 

established a 90 percent loan-to-value 

ratio limit for cash-outs. See Public Law 

101–237 sec. 309(b)(3), 103 Stat. 2062. 

In 2008, Congress enacted Public Law 

110–389, which increased the loan-tovalue ratio limit for cash-outs to 100 

percent. See Public Law 110–389 sec. 

504(b); 122 Stat. 4145. The 100-percent 

loan-to-value ratio remains intact in the 

statute, and VA has been complying 

with this amendment. Yet VA has not 

changed its rule to reflect the 2008 

change. VA is, therefore, aligning its 

rule with the statutory text to ensure 

that veterans have full access to their 

home loan benefits as authorized by 

Congress. This regulatory change has no 

substantive impact as VA has applied 

the statutory 100 percent ratio via its 

policy and procedural guidance to 

lenders since Congress enacted section 

504 of Public Law 110–389, the 

Veterans’ Benefits Improvement Act of 

2008, 122 Stat. 4145. See also Lenders 

Handbook, VA Pamphlet 26–7, 

Chapter 3, Topic 3, Page 3–8. 

2. Funding Fee 

VA will require that the funding fee 

as prescribed by 38 U.S.C. 3729 may be 

included in the new loan amount, 

except that any portion of the funding 

fee that would cause the new loan 

amount to exceed 100 percent of the 

reasonable value of the property must be 

paid in cash at the loan closing. The 

statute at 38 U.S.C. 3729(a)(2) authorizes 

borrowers to finance the funding fee. 

However, as stated in connection with 

the reasonable value requirement, 38 

U.S.C. 3710 requires that cash-out 

refinance loan amounts not exceed 100 

percent of the reasonable value of the 

property securing the loan. 38 U.S.C. 

3710(b)(7)–(8). Therefore, VA is 

clarifying that, while a funding fee may 

be financed, it must not increase the 

loan to value ratio such that the loan 

would violate 38 U.S.C. 3710. For any 

overage, a veteran must bring the funds 

to pay at loan closing. 

3. Net Tangible Benefit 

For the reasons explained above, VA 

will require that the new loan must 

provide a net tangible benefit to the 

borrower. For the purposes of § 36.4306, 

net tangible benefit means that the new 

loan is in the financial interest of the 

borrower. The lender of the new loan 

must provide the borrower with a net 

tangible benefit test and that test must 

be satisfied. 

First, the new loan must meet one or 

more of the following: The new loan 

eliminates monthly mortgage insurance, 

whether public or private, or monthly 

guaranty insurance; the term of the new 

loan is shorter than the term of the loan 

being refinanced; the interest rate on the 

new loan is lower than the interest rate 

on the loan being refinanced; the 

payment on the new loan is lower than 

the payment on the loan being 


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refinanced; the new loan results in an 

increase in the borrower’s monthly 

residual income as explained by 

§ 36.4340(e); the new loan refinances an 

interim loan to construct, alter, or repair 

the home; the new loan amount is equal 

to or less than 90 percent of the 

reasonable value of the home; or the 

new loan refinances an adjustable rate 

loan to a fixed rate loan. 

VA has chosen these eight criteria 

because VA believes a loan that meets 

at least one of these criteria helps 

demonstrate that the loan is in the 

financial interest of the borrower. For 

example, a lower interest rate, a lower 

payment, or elimination of monthly 

mortgage insurance will be in the 

financial interest of the borrower by 

reducing the debt service the borrower 

must cover each month. In many cases, 

lowering the interest rate or reducing 

the monthly payment through 

elimination of monthly mortgage 

insurance will also decrease the overall 

cost to the borrower over the life of the 

loan. In cases where the monthly 

payment is lowered but the overall cost 

of the loan will increase (e.g., borrower 

refinances an existing loan with five 

years’ worth of payments remaining into 

a new 15-year loan, takes $20,000 in 

cash out, and realizes a reduction of 

only 50 basis points), VA believes that 

the refinance loan may still be in the 

borrower’s financial interest, as the 

veteran might need access to cash for 

certain expenses (e.g., home repair for 

livability, medical bills, or educational 

expenses). Additionally, VA notes that 

the loan comparison disclosure 

mandated by this rule, and discussed in 

more detail below, will provide the 

borrower with upfront information 

about the overall cost of a loan, thereby 

helping the borrower make an informed 

decision about whether to proceed with 

the refinance loan. 

A shorter-term loan will be in the 

borrower’s financial interest as the 

borrower will be paying off the loan in 

a shorter amount of time. Given that all 

cash-out refinance loans must be fully 

underwritten and the borrower must 

demonstrate an ability to repay, VA sees 

little downside to a borrower who 

chooses to refinance his or her loan to 

a shorter term, as a borrower will most 

likely end up paying less interest over 

the life of the loan. 

VA also finds that a new loan 

resulting in an increase in the 

borrower’s monthly residual income as 

explained by § 36.4340(e) will be in the 

financial interest of the borrower by 

providing additional liquidity to the 

borrower. For example, in cases where 

borrowers use a cash-out refinance to 

pay down higher interest rate consumer 

debts (e.g., credit cards and automobile 

loans), borrowers use the equity in their 

home to consolidate debts at a lower 

interest rate, which results in a lower 

monthly debt-to-income ratio. 

A new loan that refinances an interim 

loan to construct, alter, or repair the 

home will provide a financial benefit to 

the borrower by refinancing out of a 

loan that is costly to maintain, if it can 

be maintained at all. Generally, this 

criterion would apply to borrowers who 

have obtained a conventional interim 

construction loan (i.e., one not 

guaranteed by VA) and who plan to 

refinance into a permanent 

VA-guaranteed loan. Such refinancings 

enable veterans to avoid costly mortgage 

insurance. In addition, if the reasonable 

value of a completed construction 

project exceeds the amount of the 

original construction loan, a veteran 

could recoup certain out-of-pocket 

expenses the veteran incurred during 

construction. For example, if a veteran 

obtained an original construction loan 

in the amount of $200,000 and the 

reasonable value of the completed 

project was $210,000, the veteran could 

recoup, by refinancing into a new loan, 

up to $10,000 of any personal funds 

expended during the construction 

process. 

A new loan that is equal to or less 

than 90 percent of the home’s 

reasonable value will also provide a 

financial interest to the borrower 

because at least 10 percent of home 

equity is maintained. Such equity can, 

for example, leave some room for a 

future loan modification if the borrower 

experiences a temporary reduction in 

income. Also, maintaining and building 

home equity is in any homeowner’s 

interest as such equity represents an 

investment and reduces the likelihood 

that, when property values fall, a 

homeowner will be left with a mortgage 

that exceeds the value of the home (i.e., 

an ‘‘underwater mortgage’’). 

VA acknowledges that under 38 

U.S.C. 3710 VA is authorized to 

guarantee certain housing loans with 

balances equal to 100 percent of the 

reasonable value of a property. 

However, VA views 10 percent equity 

preservation as one criterion out of 

many that can evidence that a refinance 

loan provides a net tangible benefit to a 

borrower. Accordingly, VA is 

incorporating the 90 percent loan to 

value criterion into the net tangible 

benefit test. 

VA finds that refinancing from an 

adjustable rate loan to a fixed rate loan 

will provide a financial benefit to the 

borrower by providing a stable interest 

rate over the life the loan. Generally, 

borrowers obtain adjustable rate loans to 

aid in affording a home for a short 

period (i.e., three to five years). 

However, when circumstances change 

(e.g., a change in employment, an 

increase in benchmark interest rates, or 

a decision to stay in a home longer) a 

fixed rate may be more affordable and 

may provide more certainty in the long 

term. Enabling borrowers to refinance to 

a fixed rate, even if such rate is higher 

than the introductory adjustable rate, 

can be in a veteran’s financial interest. 

Second, the lender must provide a 

borrower with a comparison of the 

following: The loan payoff amount of 

the new loan, with a comparison to the 

loan payoff amount of the loan being 

refinanced; the new type of loan, with 

a comparison to type of the loan being 

refinanced; the interest rate of the new 

loan, with a comparison to the interest 

rate of the loan being refinanced; the 

term of the new loan, with a comparison 

to the term remaining on the loan being 

refinanced; the total the borrower will 

have paid after making all payments of 

principal, interest, and mortgage or 

guaranty insurance (if applicable), as 

scheduled, for both the new loan and 

the loan being refinanced; and the loan 

to value ratio of the new loan, with a 

comparison to the loan to value ratio 

under the loan being refinanced. 

Third, the lender must provide the 

borrower with an estimate of the dollar 

amount of home equity that, by 

refinancing into a new loan, is being 

removed from the reasonable value of 

the home, and explain that removal of 

this home equity may affect the 

borrower’s ability to sell the home at a 

later date. 

VA will require the lender to provide 

the above information in a standardized 

format on two separate occasions: Not 

later than 3 business days from the date 

of the loan application and again at loan 

closing. The borrower must certify that 

the borrower received this information 

on both occasions. 

Requiring lenders to provide 

borrowers with the above information 

on two separate occasions will enable 

borrowers to better understand their 

cash-out refinance loan transaction and, 

therefore, make a sound financial 

decision. VA believes this information 

will help borrowers avoid costly 

mistakes that may strip their home 

equity or make it difficult to sell or 

refinance their home in the future. 

4. Reasonable Discount 

VA will require that the dollar 

amount of discount, if any, to be paid 

by the borrower must be reasonable in 

amount as determined by the Secretary 

in accordance with § 36.4313(d)(7)(i). 

This requirement is found in current 


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§ 36.4306(a) and is revised for clarity 

only. 

5. Otherwise Eligible 

VA will require that the loan must 

otherwise be eligible for guaranty. This 

requirement is found in current 

§ 36.4306(a). 

B. Section 36.4306(b) 

VA is revising § 36.4306(b) to discuss 

the additional criteria the Act provided 

for Type I Cash-Outs. Again, Type I 

Cash-Outs are cash-out refinance loans 

where the loan being refinanced is 

already guaranteed or insured by VA 

and the new loan amount is equal to or 

less than the payoff amount of the loan 

being refinanced. Section 3709 set out 

specific criteria for recoupment and 

seasoning for these types of loans. VA 

is adopting those criteria. 

For recoupment, there are three 

criteria. First, the lender of the 

refinanced loan must provide the 

Secretary with a certification of the 

recoupment period for fees, closing 

costs, and any expenses (other than 

taxes, amounts held in escrow, and fees 

paid under 38 U.S.C. chapter 37) that 

would be incurred by the borrower in 

the refinancing of the loan. Second, all 

the fees and incurred costs must be 

scheduled to be recouped on or before 

the date that is 36 months after the date 

of loan issuance. Finally, the 

recoupment must be calculated through 

lower regular monthly payments (other 

than taxes, amounts held in escrow, and 

fees paid under 38 U.S.C. chapter 37) as 

a result of the refinancing loan. 

For seasoning, the new loan may not 

be guaranteed or insured until the date 

that is the later of 210 days from the 

date of the first monthly payment made 

by the borrower and the date on which 

the sixth monthly payment is made on 

the loan. 

In addition to requiring that the 

lender of the refinanced loan provide 

the borrower with a net tangible benefit 

test, section 3709 also prescribes three 

net tangible benefit criteria for Type I 

Cash-Outs. VA is adopting those 

criteria. First, in a case in which the 

loan being refinanced has a fixed 

interest rate and the new loan will also 

have a fixed interest rate, the interest 

rate on the new loan must not be less 

than 50 basis points less than the loan 

being refinanced. Second, in a case in 

which the loan being refinanced has a 

fixed interest rate and the new loan will 

have an adjustable rate, the interest rate 

on the new loan must not be less than 

200 basis points less than the previous 

loan. Also, when a borrower is 

refinancing from a fixed interest rate 

loan to an adjustable rate loan, the lower 

interest rate must not be produced 

solely from discount points, unless such 

points are paid at closing and such 

points are not added to the principal 

loan amount. Such points may be added 

to the principal loan amount, however, 

when they are paid at closing and: (i) 

The discount point amounts are less 

than or equal to one discount point, and 

the resulting loan balance after any fees 

and expenses allows the property with 

respect to which the loan was issued to 

maintain a loan to value ratio of 100 

percent or less, and (ii) the discount 

point amounts are greater than one 

discount point, and the resulting loan 

balance after any fees and expenses 

allows the property with respect to 

which the loan was issued to maintain 

a loan to value ratio of 90 percent or 

less. 

C. Section 36.4306(c) 

VA is redesignating § 36.4306(c) and 

(d) as § 36.4306(d) and (e) and adding a 

new § 36.4306(c). In new § 36.4306(c), 

VA is adding the criteria for Type II 

Cash-Outs, meaning those cash-out 

refinance loans where the new loan 

amount is greater than the payoff 

amount of the loan being refinanced. 

For recoupment, VA is stating that 

meeting the requirements of paragraph 

(a) is sufficient. This is because it is 

impossible for VA to determine how to 

quantify recoupment for veterans who 

obtain this type of refinance. For 

example, a veteran may choose to 

refinance so that the veteran may use 

home equity to pay for a child’s college 

tuition or help pay for nursing services 

for a loved one. The reasons veterans 

may choose to tap into their home 

equity are countless. VA is concerned 

that, if VA attempted to establish a 

recoupment period for this type of loan, 

VA would put a veteran in a worse 

financial position than a non-veteran, 

and that is not VA’s intention. 

For proper seasoning of the VAguaranteed loan, VA is adopting the 

same criteria found in § 36.4306(b)(2) 

for Type I Cash-Outs, just stated in a 

different way. The difference is in form 

only. Where it made sense structurally 

for § 36.4306(b) to include the 

requirement in the introductory text, it 

did not make sense structurally in 

§ 36.4306(c). Accordingly, VA is 

spelling out that the seasoning period is 

the later of 210 days from the date of the 

first monthly payment made by the 

borrower and the date on which the 

sixth monthly payment is made on the 

loan; however, this requirement applies 

only when the loan being refinanced is 

a VA-guaranteed or insured loan. 

VA is applying the same seasoning 

standards for Type II Cash-Outs that 

Congress explicitly set forth for IRRRLs 

and Type I Cash-Outs because the 210- 

day/6-monthly payment seasoning 

requirement is consistent with other 

federal seasoning requirements for cashouts and is a viable standard in 

protecting veterans from predatory 

lending and safeguarding the financial 

interest of the United States. For 

example, housing loans insured by the 

Federal Housing Administration (FHA) 

with fewer than six months’ worth of 

payment history are not eligible for 

cash-out refinances. See U.S. 

Department of Housing and Urban 

Development (HUD), Mortgage Credit 

Analysis for Mortgage Insurance on 

One- to Four-Unit Mortgage Loans 

Handbook (4155.1), Chapter 3, Section 

B.2.b., available at https://www.hud.gov/ 

sites/documents/4155-1_3_SECB.PDF 

(last visited Nov. 20, 2018). 

VA’s analysis does not suggest a 

compelling reason to establish a novel 

seasoning standard for Type II CashOuts. In completing its regulatory 

impact analysis for this interim final 

rule, VA reviewed Type II Cash-Outs 

closed in fiscal years 2016, 2017, and 

2018 (through July 2018). The vast 

majority of these refinance loans (96.8 

percent) would have passed the 210-day 

seasoning requirement adopted in this 

rule, which indicates that VA’s Type II 

Cash-Out portfolio is already achieving 

the Type I Cash-Out statutory seasoning 

requirement, as well as those now fairly 

well-accepted as industry standard for 

refinances generally (as explained 

above). VA does not believe that 

extending the seasoning period would 

provide substantially more protection to 

the financial interests of veterans. 

Rather, VA’s analysis demonstrates that 

a net tangible benefit test would be more 

effective in preventing riskier Type II 

Cash-Outs. 

D. Section 36.4306(d) 

VA is revising paragraph (d) to 

delimit the scope of the provision. The 

purpose of paragraph (d) is to explain 

the calculation of entitlement for nonstreamlined refinances. It ensures that a 

veteran is not precluded from 

refinancing solely because entitlement 

has already been used on the loan being 

refinanced. Where the current rule 

states, ‘‘nothing shall preclude . . .’’ 

guaranty, however, VA is concerned 

that it might be easily misunderstood as 

superseding provisions related to 

seasoning, recoupment, etc. Therefore, 

VA is clarifying that paragraph (d) is for 

the limited purpose of calculating 

entitlement. No substantive change is 

intended. 


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E. Section 36.4306(f) 

Similarly, VA is revising paragraph (f) 

to clarify its scope of application. 

Paragraph (f) states that ‘‘[n]othing in 

this section shall preclude the 

refinancing . . .’’ of a land purchase 

related to new construction. The 

purpose of the rule is to ensure 

stakeholders understand that, if a loan 

was originally made for a land purchase 

only, refinancing for the home 

construction is acceptable under 38 

U.S.C. 3710. The current rule, however, 

is overly broad, in that it could easily be 

misunderstood as an attempt to 

supersede other provisions of the 

section, including those sections that, as 

a matter of statutory law, could not be 

superseded by rule. Accordingly, VA is 

revising the paragraph to state that 

nothing in this section shall preclude 

the determination that a loan is being 

made for a purpose authorized under 38 

U.S.C. 3710, if the purpose of such loan 

is 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 

borrower’s dwelling or farm residence. 

This is a technical change only, and VA 

intends no substantive impact. 

F. Section 36.4306(g) 

As with paragraph (f), paragraph (g) is 

overly broad. It could be interpreted as 

the sole provision within § 36.4306 

related to manufactured homes. VA 

does not intend for paragraph (g) to be 

deemed a standalone provision, 

rendering the remainder of § 36.4306 

inapplicable to manufactured homes. 

Instead, VA intends for paragraph (g) to 

be subject to the other relevant 

requirements (e.g., seasoning, 

recoupment, etc.) set forth in the 

section. Therefore, VA is inserting a 

new subparagraph (6), along with 

making the necessary grammatical edits 

to accommodate this addition, as a 

catch-all, to ensure that stakeholders 

understand ‘‘[a]ll other requirements of 

this section are met . . .’’ before VA 

will guarantee or insure the refinance of 

a manufactured home loan. VA intends 

this revision as a clarifying amendment 

only, without substantive impact. 

G. Section 36.4306(h) 

Section 3709 mentions VA’s statutory 

authority to insure refinancing loans. 

VA’s cash-out refinance rule has not 

specified how insurance works for cashout refinances. Although lenders almost 

always opt for guaranty, rather than 

insurance, the insurance of loans 

remains an option. Therefore, VA is 

adding § 36.4306(h) explaining that any 

refinancing loan that might be 

guaranteed under this section, when 

made or purchased by any financial 

institution subject to examination and 

supervision by any agency of the United 

States or of any State may, in lieu of 

such guaranty, be insured by the 

Secretary under an agreement whereby 

the Secretary will reimburse any such 

institution for losses incurred on such 

loan up to 15 percent of the aggregate 

of loans so made or purchased by it. 

This provision is a restatement of the 

law at 38 U.S.C. 3703(a)(2)(A). 

III. Defining Home Equity 

In § 36.4306, VA uses the term home 

equity and is therefore adding a 

definition of this term to § 36.4301. VA 

will define home equity as the 

difference between the home’s 

reasonable value and the outstanding 

balance of all liens on the property. This 

definition is generally accepted in the 

financial industry and is modified to 

refer to VA’s specific program 

terminology. See Home Equity, 

Investopedia, https://

www.investopedia.com/terms/h/home_

equity.asp (last visited Aug. 30, 2018). 

Administrative Procedure Act 

Section 309(a)(2) of the Act provides 

express authority for the Secretary to 

waive the requirements of 5 U.S.C. 551 

through 559, e.g., advance notice and 

public comment requirements, if the 

Secretary determines that urgent or 

compelling circumstances make 

compliance with such requirements 

impracticable or contrary to the public 

interest. See Public Law 115–174, 

section 309(a)(2)(A). VA believes that, 

for the reasons explained below, 

delaying implementation of this rule 

until after VA could provide advance 

notice, solicit comment, and address 

public comments would be contrary to 

the public interest. In short, VA has 

determined that urgent and compelling 

circumstances exist to warrant the 

implementation of these regulatory 

amendments through an interim final 

rule. 

It is important to note that the Act 

establishes a new standard, specific to 

the implementation of section 309 of the 

Act, for dispensing with advance notice 

and comment. The standard Congress 

created is separate and apart from the 

more generally applicable ‘‘good cause’’ 

exception under the Administrative 

Procedure Act, 5 U.S.C. 553(b)(B). 

VA believes there are several urgent 

and compelling circumstances that 

make advance notice and comment on 

this rule contrary to the public interest. 

First, VA is concerned about a small 

group of lenders who continue to 

exploit legislative and regulatory gaps 

related to seasoning, recoupment, and 

net tangible benefit standards, despite 

anti-predatory lending actions that VA 

and Congress have already taken. VA’s 

regulatory impact analysis for this rule 

indicates that perhaps more than 50 

percent of Type II Cash-Out refinances 

remain vulnerable to predatory terms 

and conditions until this rule goes into 

effect. VA believes that VA must 

immediately seal these gaps to fulfill its 

obligation to veterans, responsible 

lenders, and investors. 

VA is also gravely concerned about 

constraints in the availability of 

program liquidity if VA does not act 

quickly to address early pre-payment 

speeds for VA-guaranteed cash-out 

refinance loans. In large part, cash flows 

derived from investors in mortgagebacked securities (MBS) provide 

liquidity for lenders that originate VAguaranteed refinance loans. When 

pricing MBS, investors rely on prepayment models to estimate the level of 

pre-payments, and any resultant 

potential losses of revenue, expected to 

occur in a set period, given possible 

changes in interest rates. These prepayment models tend to drive, at least 

in significant part, the valuation of such 

MBS. Buyers of VA-guaranteed loans, 

and other industry stakeholders have 

expressed serious concerns that early 

pre-payments of VA-guaranteed loans 

are devaluing these investments. See 

‘‘Slowing Down VA Refi Churn Proving 

More Difficult Than Expected’’, 

National Mortgage News (November 12, 

2018), https://www.national

mortgagenews.com/news/slowing-downva-refi-churn-proving-more-difficultthan-expected (last visited Nov. 20, 

2018). If such stakeholders view MBS 

investments that include VA-guaranteed 

refinance loans as less desirable, 

prudent lenders could be deprived of 

the cash flows, i.e. liquidity, necessary 

to make new VA-guaranteed loans to 

veterans. 

Exacerbating the issue is the lending 

industry’s varied interpretation of the 

Act, which has led to lender uncertainty 

in how to implement a responsible cashout refinance program. VA believes this 

uncertainty has caused responsible 

lenders to employ a high degree of 

caution, (e.g., refraining from providing 

veterans with crucial refinance loans 

that are not predatory or risky). Absent 

swift implementation of clear regulatory 

standards, cautious lenders are less 

likely to make cash-out refinance loans, 

which means that veterans do not enjoy 

the widest range of competitive, 

responsible credit options that can, 

when used properly, result in placing 


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the veteran in a better financial position 

than the veteran’s current circumstances 

afford. Unfortunately, such caution has 

the potential to compound the risk of 

predatory lending, as irresponsible 

lenders have more opportunity to prey 

upon veterans. 

At the same time, VA is concerned 

that certain lenders are exploiting cashout refinancing as a loophole to the 

responsible refinancing Congress 

envisioned when enacting section 309 

of the Act. VA recognizes there are 

certain advantages to a veteran who 

wants to obtain a cash-out refinance, 

and VA has no intention of unduly 

curtailing veterans’ access to the equity 

they have earned in their homes. 

Nevertheless, some lenders are 

pressuring veterans to increase 

artificially their home loan amounts 

when refinancing, without regard to the 

long-term costs to the veteran and 

without adequately advising the veteran 

of the veteran’s loss of home equity. In 

doing so, veterans are placed at a higher 

financial risk, and the lender avoids 

compliance with the more stringent 

requirements Congress mandated for 

less risky refinance loans. Essentially, 

the lender revives the period of 

subprime lending under a new name. 

Lender uncertainty and the potential 

loophole may also cause investors to 

devalue VA refinance loans until VA 

steps in to resolve the issues. Thus, VA 

believes that, unless VA promulgates 

rules quickly, a loss of investor 

optimism in the VA product could 

further restrict veterans from being able 

to utilize their earned VA benefits. 

VA does not plan to dispense with the 

notice and comment requirements 

altogether. Section 309(a)(2)(A)(ii) and 

(iii) of the Act requires VA, 10 days 

before publication of the rule, to submit 

a notice of the waiver to the House and 

Senate Committees on Veterans’ Affairs 

and publish the notice in the Federal 

Register. Public Law 115–174, 132 Stat. 

1296. VA has complied with these 

requirements. Section 309(a)(2)(B) 

further requires VA to seek public 

notice and comment on this regulation 

if the regulation will be in effect for a 

period exceeding one year. Public Law 

115–174, 132 Stat. 1296. VA anticipates 

the regulation will be in effect past the 

one-year mark. Therefore, VA is seeking 

public comment on this rulemaking. 

Executive Orders 12866, 13563, and 

13771 

Executive Orders 12866 and 13563 

direct agencies to assess the costs and 

benefits of available regulatory 

alternatives and, when regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, and other advantages; 

distributive impacts; and equity). 

Executive Order 13563 (Improving 

Regulation and Regulatory Review) 

emphasizes the importance of 

quantifying both costs and benefits, 

reducing costs, harmonizing rules, and 

promoting flexibility. Executive Order 

12866 (Regulatory Planning and 

Review) defines a ‘‘significant 

regulatory action’’ requiring review by 

the Office of Management and Budget 

(OMB), unless OMB waives such 

review, as ‘‘any regulatory action that is 

likely to result in a rule that may: (1) 

Have an annual effect on the economy 

of $100 million or more or adversely 

affect in a material way the economy, a 

sector of the economy, productivity, 

competition, jobs, the environment, 

public health or safety, or State, local, 

or tribal governments or communities; 

(2) Create a serious inconsistency or 

otherwise interfere with an action taken 

or planned by another agency; (3) 

Materially alter the budgetary impact of 

entitlements, grants, user fees, or loan 

programs or the rights and obligations of 

recipients thereof; or (4) Raise novel 

legal or policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in this Executive 

Order.’’ 

The economic, interagency, 

budgetary, legal, and policy 

implications of this regulatory action 

have been examined, and it has been 

determined to be an economically 

significant regulatory action under 

Executive Order 12866. VA’s impact 

analysis can be found as a supporting 

document at http://

www.regulations.gov, usually within 48 

hours after the rulemaking document is 

published. Additionally, a copy of the 

rulemaking and its impact analysis are 

available on VA’s website at http://

www.va.gov/orpm/, by following the 

link for ‘‘VA Regulations Published 

From FY 2004 Through Fiscal Year to 

Date.’’ This interim final rule is 

considered an E.O. 13771 regulatory 

action. Details on the estimated costs of 

this interim final rule can be found in 

the rule’s economic analysis. 

Congressional Review Act 

This regulatory action is a major rule 

under the Congressional Review Act, 5 

U.S.C. 801–08, because it may result in 

an annual effect on the economy of $100 

million or more. Therefore, in 

accordance with 5 U.S.C. 801(a)(1), VA 

will submit to the Comptroller General 

and to Congress a copy of this regulatory 

action and VA’s Regulatory Impact 

Analysis. Provided Congress does not 

adopt a joint resolution of disapproval, 

this rule will become effective the later 

of the date occurring 60 days after the 

date on which Congress receives the 

report, or the date the rule is published 

in the Federal Register. 5 U.S.C. 

801(a)(3)(A). 

Unfunded Mandates 

The Unfunded Mandates Reform Act 

of 1995 requires, at 2 U.S.C. 1532, that 

agencies prepare an assessment of 

anticipated costs and benefits before 

issuing any rule that may result in the 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

(adjusted annually for inflation) in any 

one year. This interim final rule will 

have no such effect on State, local, and 

tribal governments, or on the private 

sector. 

Paperwork Reduction Act 

This interim final rule includes 

provisions constituting collections of 

information under the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3501– 

3521) that require approval by OMB. 

Accordingly, under 44 U.S.C. 3507(d), 

VA has submitted a copy of this 

rulemaking action to OMB for review 

with a request for emergency 

processing. 

OMB assigns control numbers to 

collections of information it approves. 

VA may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid OMB control 

number. Section 36.4306 contains a 

collection of information under the 

Paperwork Reduction Act of 1995. If 

OMB does not approve the collection of 

information as requested, VA will 

immediately remove the provisions 

containing a collection of information or 

take such other action as is directed by 

OMB. 

Comments on the collections of 

information contained in this interim 

final rule should be submitted to the 

Office of Management and Budget, 

Attention: Desk Officer for the 

Department of Veterans Affairs, Office 

of Information and Regulatory Affairs, 

Washington, DC 20503 or emailed to 

OIRA_Submission@omb.eop.gov, with 

copies sent by mail or hand delivery to 

the Director, Regulation Policy and 

Management (00REG), Department of 

Veterans Affairs, 810 Vermont Avenue 

NW, Room 1068, Washington, DC 

20420; fax to (202) 273–9026; or 

submitted through 

www.Regulations.gov. Comments 

should indicate that they are submitted 

in response to ‘‘RIN 2900–AQ42—Loan 

Guaranty: Revisions to VA-Guaranteed 


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or Insured Cash-out Home Refinance 

Loans.’’ 

OMB is required to make a decision 

concerning the collections of 

information contained in this interim 

final rule between 30 and 60 days after 

publication of this document in the 

Federal Register. Therefore, a comment 

to OMB is best assured of having its full 

effect if OMB receives it within 30 days 

of publication. Notice of OMB approval 

for this information collection will be 

published in a future Federal Register 

document. 

The Department considers comments 

by the public on proposed collections of 

information in— 

• Evaluating whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Department, including 

whether the information will have 

practical utility; 

• Evaluating the accuracy of the 

Department’s estimate of the burden of 

the proposed collections of information, 

including the validity of the 

methodology and assumptions used; 

• Enhancing the quality, usefulness, 

and clarity of the information to be 

collected; and 

• Minimizing the burden of the 

collections of information on those who 

are to respond, including through the 

use of appropriate automated, 

electronic, mechanical, or other 

technological collection techniques or 

other forms of information technology, 

e.g., permitting electronic submission of 

responses. 

The collection of information 

contained in 38 CFR 36.4306 is 

described immediately following this 

paragraph. 

Title: VA-Guaranteed Home Loan 

Cash-out Refinance Loan Comparison 

Disclosure. 

• Summary of collection of 

information: The new collection of 

information in 38 CFR 36.4306(a)(3) 

requires lenders to provide borrowers 

with a net tangible benefit test. To 

satisfy the net tangible benefit test, the 

new loan must meet certain loan 

criteria; the lender must provide a 

comparison of the terms of the 

borrower’s current loan to the terms of 

the new loan; and the lender must 

provide the borrower a statement 

concerning the effects of refinancing on 

the borrower’s home equity. This 

information must be provided to the 

borrower by the lender in a 

standardized format not later than 3 

business days of the refinance 

application and again at closing. The 

borrower must acknowledge receipt of 

this information on both occasions by 

signing the certification. 

VA notes that it will not require 

lenders to complete a specific form. 

Instead, lenders will generate their own 

certification from their loan origination 

software. Additionally, any information 

and response to yes/no questions could 

be answered automatically by the 

information that the lender is inputting 

as they underwrite the loan. VA created 

a sample certification as an example, 

but this is not a required document or 

format. VA is only asking the lender to 

take the information they already collect 

from and provide to veterans, and 

display and provide that information 

into an easy to read format for the 

veteran. 

• Description of need for information 

and proposed use of information: The 

information will be used by VA to 

ensure that the new loan meets the net 

tangible benefit test. 

• Description of likely respondents: 

Lenders refinancing an existing loan 

product through a cash-out refinance 

loan. 

• Estimated number of respondents: 

VA anticipates the annual estimated 

number of respondents to be 156,000 

per year, which is based on a 3-year 

average of VA cash-out refinance loans. 

VA also estimates a one-time burden to 

the 16,000 loan officers who will require 

training on the new disclosure 

requirements. 

The training estimate was derived 

from the 2017 Nationwide Mortgage 

Licensing System & Registry (NMLS) 

Industry Report showing 158,199 

mortgage loan originators and the July 

2018 Ellie Mae Origination Insight 

Report indicating that VA represents 10 

percent of the national mortgage market. 

VA assumes that loan officers will learn 

about this new disclosure through 

annual NMLS TRID/TILA training. 

• Estimated frequency of responses: 

Two times per loan for generating and 

disclosing the information to the 

borrower. One time for training 

purposes. 

• Estimated average burden per 

response: 5 minutes (total for both 

instances of generation and disclosure). 

5 minutes (for training). 

• Estimated total annual reporting 

and recordkeeping burden: The total 

annual burden is 12,906 hours. This 

represents the ongoing annual burden of 

12,480 hours to generate and provide 

the disclosure plus the one-time hour 

burden from training (1,280 hours) that 

has been annualized to 426 hours per 

year for the first three years. The total 

estimated annualized cost to 

respondents is $483,458.76 (12,906 

burden hours × $37.46 per hour). 

• VA also estimates a one-time 

technology cost associated with this 

information collection of $1,266,366 

(annualized to $422,122 per year for the 

first three years). To derive this 

estimate, VA generated a high/low 

estimate of the one-time technology 

costs associated with this information 

collection. The low estimate assumes 

that 80 percent of affected lending 

entities (i.e., 960 of the 1,200 active VA 

lenders who make cash-out refinance 

loans) will not be required to complete 

any technology upgrades as the software 

companies who supply their loan 

origination software (LOS) systems will 

update their products in time to enable 

these lenders to comply with the 

regulatory requirements. The costs 

therefore represent the costs to the 

remaining 20 percent of lenders (i.e., 

240 lenders) that will need to complete 

a technology upgrade to generate the 

disclosure in their LOS. The high 

estimate assumes that no LOS product 

updates will be in place on time and all 

1,200 lenders will be required to assume 

the costs of completing a technology 

upgrade to generate their disclosure. 

VA calculated the one-time 

technology costs utilizing the amount of 

time estimated to develop a custom 

disclosure form (either through existing 

LOS software or via a third-party 

contract). VA assumed 40 hours of 

planning, development, testing, and 

deployment to add the disclosure form 

to a lender’s existing LOS. The wage 

burden was calculated as a composite 

wage, with weighting based on 

information provided by various 

industry professionals. Mean values 

from the BLS Occupational Employment 

and Wages data were used to estimate 

a composite wage as 5% Compliance 

Officer (occupation code 13–1041) at 

$34.39/hour, 5% Lawyer (occupation 

code 23–1011) at $68.22/hour, and 90% 

Computer Occupations (occupation 

code 15–1100) at $43.16/hour, for a 

composite wage of $43.97. 

VA estimated a high annualized cost 

of $703,520 and a low annualized cost 

of $140,704. VA therefore estimates that 

the average cost to be $422,122. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act, 5 

U.S.C. 601 et seq. (RFA), imposes 

certain requirements on Federal agency 

rules that are subject to the notice and 

comment requirements of the 

Administrative Procedure Act (APA), 5 

U.S.C. 553(b). This interim final rule is 

exempt from the notice and comment 

requirements of the APA because the 

Act permitted VA to waive those 

requirements if the Secretary 

determined that urgent or compelling 

circumstances make compliance with 

such requirements impracticable or 


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1Fiscal year (FY) 2017 data shows that 1,467 

lenders participated in VA loans in FY2017. See 

VBA Lender Loan Volume Reports, ‘‘FY 2017,’’ 

https://www.benefits.va.gov/HOMELOANS/Lender_

Statistics.asp. VA first eliminated those whose total 

VA loan volume for FY2017 was greater than $38.5 

million (425 lenders). Of those remaining, VA 

removed any lenders who were part of a depository 

institution (i.e., a bank) as they would not fall 

within SBA’s definition of a small business for 

NAICS code 522292, which specifically applies to 

non-depository credit. See 13 CFR 121.201. Of those 

remaining, VA consulted financial information 

provided by lenders to VA in 2017 for purposes of 

qualifying for automatic closing authority. If no 

annual financial data was available, VA assumed 

the lender was a small business. Of all VA lenders, 

data showed 324 lenders (22%) met the small 

business definition. For lenders who made VA 

cash-out loans in FY2017, 238 (19.8%) met the 

small business definition. 

contrary to the public interest. As 

previously discussed, VA has found 

urgent and compelling circumstances to 

waive those requirements do exist. 

Therefore, the requirements of the RFA 

applicable to notice and comment 

rulemaking do not apply to this rule. 

Nevertheless, VA does not anticipate 

that this interim final rule will have a 

significant impact on small business 

lenders. The Small Business 

Administration (SBA) states that a 

mortgage lending business (NAICS code 

522292) is small if annual receipts are 

less than $38,500,000. See 13 CFR 

121.201. Utilizing FY2017 annual 

lender data and financial information, 

VA estimates approximately 22 percent 

(or 324) of its lenders qualify as a small 

business; of those who participate in VA 

cash-out loans, VA estimates 20 percent 

(or 238) of its lenders qualify as a small 

business.1 Of the 238 small business 

lenders who participate in VA cash-out 

loans, VA notes that 90 percent (216 

lenders) completed no more than 20 VA 

cash-out loans in FY2017, suggesting 

that the impact of the statute and this 

regulation on their lending business will 

be minimal. In that regard, given that 

VA represents only 10 percent of the 

national mortgage market, it would be 

difficult for a small business to rely 

solely on VA loans in its portfolio. In 

fact, a sampling of VA small business 

lenders’ websites shows that they all 

offer the full range of conventional, 

FHA, and VA loan products. 

Relying on its industry knowledge, 

VA assumes that average loan volume 

for a one-person lending shop would be 

approximately 120 loans per year (or 10 

loans per month). As such, even if such 

a lender were to no longer make any VA 

cash-out loans, it is likely this would 

represent no more than 20 percent of 

portfolio for the year. VA believes this 

is even too conservative of an estimate 

as its own lender statistics show that for 

most of its small business lenders (213 

out of 238 lenders), VA cash-out loans 

represent less than half of their VA 

portfolio. For those whose VA portfolio 

is majority cash-out refinances, only six 

lenders completed more than 20 VA 

cash-outs in FY2017. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance number and title for the 

program affected by this document is 

64.114, Veterans Housing—Guaranteed 

and Insured Loans. 

List of Subjects in 38 CFR Part 36 

Condominiums, Housing, Individuals 

with disabilities, Loan programs— 

housing and community development, 

Loan programs—veterans, Manufactured 

homes, Mortgage insurance, Reporting 

and recordkeeping requirements, 

Veterans. 

Signing Authority 

The Secretary of Veterans Affairs 

approved this document and authorized 

the undersigned to sign and submit the 

document to the Office of the Federal 

Register for publication electronically as 

an official document of the Department 

of Veterans Affairs. Robert L. Wilkie, 

Secretary, Department of Veterans 

Affairs, approved this document on 

September 12, 2018, for publication. 

Dated: December 12, 2018. 

Jeffrey M. Martin, 

Assistant Director, Office of Regulation Policy 

& Management, Office of the Secretary, 

Department of Veterans Affairs. 

For the reasons stated in the 

preamble, the Department of Veterans 

Affairs amends 38 CFR part 36 as set 

forth below: 

PART 36—LOAN GUARANTY 

■ 1. The authority citation for part 36 

continues to read as follows: 

Authority: 38 U.S.C. 501 and 3720. 

Subpart B—Guaranty or Insurance of 

Loans to Veterans With Electronic 

Reporting 

■ 2. Amend § 36.4301 by adding a 

definition of home equity in 

alphabetical order to read as follows: 

§ 36.4301 Definitions. 

* * * * * 

Home equity. Home equity is the 

difference between the home’s 

reasonable value and the outstanding 

balance of all liens on the property. 

* * * * * 

■ 3. Amend § 36.4306 by: 

■ a. Revising paragraphs (a) and (b). 

■ b. Redesignating paragraphs (c) and 

(d) as new paragraphs (d) and (e). 

■ c. Adding new paragraph (c). 

■ d. Revising newly redesignated 

paragraph (d) and paragraphs (f) and 

(g)(4) and (5). 

■ e. Adding paragraphs (g)(6) and (h). 

■ f. Revising the authority citation at the 

end of the section. 

The revisions and addition read as 

follows: 

§ 36.4306 Refinancing of mortgage or 

other lien indebtedness. 

(a) A refinancing loan made pursuant 

to 38 U.S.C. 3710(a)(5) qualifies for 

guaranty in an amount as computed 

under 38 U.S.C. 3703, provided— 

(1) The amount of the new loan must 

not exceed an amount equal to 100 

percent of the reasonable value, as 

determined by the Secretary, of the 

dwelling or farm residence which will 

secure the loan. 

(2) The funding fee as prescribed by 

38 U.S.C. 3729 may be included in the 

new loan amount, except that any 

portion of the funding fee that would 

cause the new loan amount to exceed 

100 percent of the reasonable value of 

the property must be paid in cash at the 

loan closing. 

(3) The new loan must provide a net 

tangible benefit to the borrower. For the 

purposes of this section, net tangible 

benefit means that the new loan is in the 

financial interest of the borrower. The 

lender of the new loan must provide the 

borrower with a net tangible benefit test. 

The net tangible benefit test must be 

satisfied. The net tangible benefit test is 

defined as follows: 

(i) The new loan must meet one or 

more of the following: 

(A) The new loan eliminates monthly 

mortgage insurance, whether public or 

private, or monthly guaranty insurance; 

(B) The term of the new loan is 

shorter than the term of the loan being 

refinanced; 

(C) The interest rate on the new loan 

is lower than the interest rate on the 

loan being refinanced; 

(D) The payment on the new loan is 

lower than the payment on the loan 

being refinanced; 

(E) The new loan results in an 

increase in the borrower’s monthly 

residual income as explained by 

§ 36.4340(e); 

(F) The new loan refinances an 

interim loan to construct, alter, or repair 

the primary home; 

(G) The new loan amount is equal to 

or less than 90 percent of the reasonable 

value of the home; or 

(H) The new loan refinances an 

adjustable rate mortgage to a fixed rate 

loan. 

(ii) The lender must provide a 

borrower with a comparison of the 

following: 


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(A) The loan payoff amount of the 

new loan, with a comparison to the loan 

payoff amount of the loan being 

refinanced; 

(B) The new type of loan, with a 

comparison to the type of the loan being 

refinanced; 

(C) The interest rate of the new loan, 

with a comparison to the interest rate of 

the loan being refinanced; 

(D) The term of the new loan, with a 

comparison to the term remaining on 

the loan being refinanced; 

(E) The total the borrower will have 

paid after making all payments of 

principal, interest, and mortgage or 

guaranty insurance (if applicable), as 

scheduled, for both the loan being 

refinanced and the new loan; and 

(F) The loan to value ratio of the loan 

being refinanced compared to the loan 

to value ratio under the new loan. 

(iii) The lender must provide the 

borrower with an estimate of the dollar 

amount of home equity that, by 

refinancing into a new loan, is being 

removed from the reasonable value of 

the home, and explain that removal of 

this home equity may affect the 

borrower’s ability to sell the home at a 

later date. 

(iv) The lender must provide the 

information required under paragraphs 

(a)(3)(i) through (iii) of this section in a 

standardized format and on two 

separate occasions: Not later than 3 

business days from the date of the loan 

application and again at loan closing. 

The borrower must certify that the 

borrower received the information 

required under paragraphs (a)(3)(i) 

through (iii) on both occasions. 

(4) The dollar amount of discount, if 

any, to be paid by the borrower must be 

reasonable in amount as determined by 

the Secretary in accordance with 

§ 36.4313(d)(7)(i). 

(5) The loan must otherwise be 

eligible for guaranty. 

(b) If the loan being refinanced is a 

VA-guaranteed or insured loan, and the 

new loan amount is equal to or less than 

the payoff amount of the loan being 

refinanced, the following requirements 

must also be met— 

(1)(i) The lender of the refinanced 

loan must provide the Secretary with a 

certification of the recoupment period 

for fees, closing costs, and any expenses 

(other than taxes, amounts held in 

escrow, and fees paid under 38 U.S.C. 

chapter 37) that would be incurred by 

the borrower in the refinancing of the 

loan; 

(ii) All of the fees and incurred costs 

must be scheduled to be recouped on or 

before the date that is 36 months after 

the date of loan issuance; and 

(iii) The recoupment must be 

calculated through lower regular 

monthly payments (other than taxes, 

amounts held in escrow, and fees paid 

under 38 U.S.C. chapter 37) as a result 

of the refinanced loan. 

(2) The new loan may not be 

guaranteed or insured until the date that 

is the later of 210 days from the date of 

the first monthly payment made by the 

borrower and the date on which the 

sixth monthly payment is made on the 

loan. 

(3) In a case in which the loan being 

refinanced has a fixed interest rate and 

the new loan will also have a fixed 

interest rate, the interest rate on the new 

loan must not be less than 50 basis 

points less than the loan being 

refinanced. 

(4) In a case in which the loan being 

refinanced has a fixed interest rate and 

the new loan will have an adjustable 

rate, the interest rate on the new loan 

must not be less than 200 basis points 

less than the previous loan. In 

addition— 

(i) The lower interest rate must not be 

produced solely from discount points, 

unless such points are paid at closing; 

and 

(ii) Such points are not added to the 

principal loan amount, unless— 

(A) For discount point amounts that 

are less than or equal to one discount 

point, the resulting loan balance after 

any fees and expenses allows the 

property with respect to which the loan 

was issued to maintain a loan to value 

ratio of 100 percent or less; and 

(B) For discount point amounts that 

are greater than one discount point, the 

resulting loan balance after any fees and 

expenses allows the property with 

respect to which the loan was issued to 

maintain a loan to value ratio of 90 

percent or less. 

(c) If the new loan amount exceeds 

the payoff amount of the loan being 

refinanced— 

(1) The borrower is deemed to have 

recouped the costs of the refinancing if 

the requirements prescribed in 

paragraph (a) are met. 

(2) The new loan may not be 

guaranteed or insured until the date that 

is the later of 210 days from the date of 

the first monthly payment made by the 

borrower and the date on which the 

sixth monthly payment is made on the 

loan; however, this requirement applies 

only when the loan being refinanced is 

a VA-guaranteed or insured loan. 

(d) For the limited purpose of 

calculating entitlement, nothing shall 

preclude guaranty of a loan to an 

eligible veteran having home loan 

guaranty entitlement to refinance under 

the provisions of 38 U.S.C. 3710(a)(5) a 

VA-guaranteed or insured (or direct) 

mortgage loan made to him or her which 

is outstanding on the dwelling or farm 

residence owned and occupied or to be 

reoccupied after the completion of 

major alterations, repairs, or 

improvements to the property, by the 

veteran as a home, or in the case of an 

eligible veteran unable to occupy the 

property because of active duty status in 

the Armed Forces, occupied or to be 

reoccupied by the veteran’s spouse as 

the spouse’s home. 

* * * * * 

(f) Nothing in this section shall 

preclude the determination that a loan 

is being made for a purpose authorized 

under 38 U.S.C. 3710, if the purpose of 

such loan is 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 borrower’s dwelling or farm 

residence. 

(g) * * * 

(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 

§ 36.4313(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 § 36.4313. 

(5) If the loan being refinanced was 

guaranteed by VA, the portion of the 

loan made for the purpose of 

refinancing an existing purchase money 

manufactured home loan may be, 

guaranteed without regard to the 

outstanding guaranty entitlement 

available for use by the veteran, and the 

veteran’s guaranty entitlement shall not 

be charged as a result of any guaranty 

provided for the refinancing portion of 

the loan. For the purposes enumerated 

in 38 U.S.C. 3702(b), the refinancing 

portion of the loan shall be considered 

to have been obtained with the guaranty 

entitlement used to obtain VAguaranteed loan being refinanced. The 

total guaranty for the new loan shall be 

the sum of the guaranty entitlement 

used to obtain VA-guaranteed loan 

being refinanced and any additional 

guaranty entitlement available to the 

veteran. However, the total guaranty 

may not exceed the guaranty amount as 

calculated under § 36.4302(a); and 

(6) All other requirements of this 

section are met. 

(h) Any refinancing loan that might be 

guaranteed under this section, when 


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64470 Federal Register / Vol. 83, No. 241 / Monday, December 17, 2018 / Rules and Regulations 

made or purchased by any financial 

institution subject to examination and 

supervision by any agency of the United 

States or of any State may, in lieu of 

such guaranty, be insured by the 

Secretary under an agreement whereby 

the Secretary will reimburse any such 

institution for losses incurred on such 

loan up to 15 percent of the aggregate 

of loans so made or purchased by it. 

(Authority: 38 U.S.C. 3703, 3709, 3710) 

[FR Doc. 2018–27263 Filed 12–14–18; 8:45 am] 

BILLING CODE 8320–01–P 

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 52 

[EPA–R01–OAR–2017–0595; FRL–9987–69– 

Region 1] 

Air Plan Approval; New Hampshire; 

Transport Element for the 2010 Sulfur 

Dioxide National Ambient Air Quality 

Standard 

AGENCY: Environmental Protection 

Agency (EPA). 

ACTION: Final rule. 

SUMMARY: The Environmental Protection 

Agency (EPA) is approving a State 

Implementation Plan (SIP) revision 

submitted by the State of New 

Hampshire. This revision addresses the 

interstate transport requirements of the 

Clean Air Act (CAA), referred to as the 

good neighbor provision, with respect to 

the 2010 sulfur dioxide (SO2) national 

ambient air quality standard (NAAQS). 

This action approves New Hampshire’s 

demonstration that the State is meeting 

its obligations regarding the transport of 

SO2 emissions into other states. 

DATES: This rule is effective on January 

16, 2019. 

ADDRESSES: The EPA has established a 

docket for this action under Docket 

Identification No. EPA–R01–OAR– 

2017–0595. All documents in the docket 

are listed on the https://

www.regulations.gov website. Although 

listed in the index, some information is 

not publicly available, i.e., CBI or other 

information whose disclosure is 

restricted by statute. Certain other 

material, such as copyrighted material, 

is not placed on the internet and will be 

publicly available only in hard copy 

form. Publicly available docket 

materials are available at https://

www.regulations.gov or at the U.S. 

Environmental Protection Agency, EPA 

Region 1 Regional Office, Office of 

Ecosystem Protection, Air Permits, 

Toxics and Indoor Programs Unit, 5 Post 

Office Square—Suite 100, Boston, MA. 

The EPA requests that if at all possible, 

you contact the contact listed in the FOR

FURTHER INFORMATION CONTACT section to 

schedule your inspection. The Regional 

Office’s official hours of business are 

Monday through Friday, 8:30 a.m. to 

4:30 p.m., excluding legal holidays. 

FOR FURTHER INFORMATION CONTACT: 

Leiran Biton, Air Permits, Toxics, and 

Indoor Programs Unit, U.S. 

Environmental Protection Agency, EPA 

Region 1, 5 Post Office Square—Suite 

100, (Mail code OEP05–2), Boston, MA 

02109–3912, tel. (617) 918–1267, email 

biton.leiran@epa.gov. 

SUPPLEMENTARY INFORMATION: 

Throughout this document whenever 

‘‘we,’’ ‘‘us,’’ or ‘‘our’’ is used, we mean 

EPA. 

Table of Contents 

I. Background and Purpose 

II. Response to Comments 

III. Final Action 

IV. Statutory and Executive Order Reviews 

I. Background and Purpose 

On September 27, 2018 (83 FR 48765), 

the EPA published a Notice of Proposed 

Rulemaking (NPRM) to approve the June 

16, 2017 submittal from the State of 

New Hampshire as meeting the 

interstate transport requirements of 

CAA section 110(a)(2)(D)(i)(I) for the 

2010 SO2 NAAQS. An explanation of 

the CAA requirements, a detailed 

analysis of the State’s submittal, and the 

EPA’s rationale for approval of the 

submittal were provided in the NPRM, 

and will not be restated here. The public 

comment period for this proposed 

rulemaking ended on October 29, 2018. 

The EPA received one comment from an 

anonymous commenter. The 

anonymous comment lacked specificity 

to New Hampshire’s SIP submittal and 

the interstate transport requirements of 

CAA section 110(a)(2)(D)(i)(I) as they 

relate to the 2010 SO2 NAAQS. A 

response to the anonymous comment is 

provided in the Response to Comments 

section. 

II. Response to Comments 

Comment: The commenter stated that 

emissions of SO2 can undergo chemical 

reactions in the atmosphere to form fine 

particle matter, and that fine particulate 

matter can travel great distances 

affecting regional air quality and public 

health. The commenter stated that the 

transport of SO2 and fine particulate 

matter across state borders, referred to 

as ‘‘interstate air pollution transport,’’ 

makes it difficult for downwind states to 

meet health-based air quality standards. 

The commenter stated the CAA’s ‘‘good 

neighbor’’ provision requires the EPA 

and states to address, through state 

implementation plans (SIPs), interstate 

transport of air pollution that 

significantly contributes to 

nonattainment or interferes with 

maintenance of a NAAQS in a 

downwind area in another state. The 

commenter asserted that New 

Hampshire must prove this SIP revision 

addresses and meets the obligations of 

the interstate transport requirements of 

the CAA respective to the 2010 SO2

NAAQS. The commenter concluded, 

‘‘To meet these obligations they must 

prove that the interstate transport 

requirements for all NAAQS pollutants 

prohibit any state from emitting any air 

pollutant in amounts that will 

contribute significantly to 

nonattainment, or interfere with 

maintenance, of the NAAQS in another 

state.’’ 

Response: The commenter did 

provide some general information about 

the formation of fine particulate matter 

from SO2, but did not provide specific 

information to support not approving 

New Hampshire’s June 16, 2017 

submittal. Fine particulate matter, 

generally referring to particulate matter 

(PM) with aerodynamic diameter less 

than or equal to 2.5 micrometers (PM2.5), 

can travel great distances. PM2.5 can be 

emitted directly or formed secondarily 

through chemical transformation in the 

atmosphere involving a variety of 

precursor pollutants, including SO2. 

The EPA has addressed interstate 

transport of PM2.5, including 

secondarily-formed PM2.5, through a 

separate action related to New 

Hampshire’s SIP submittal for the 2012 

PM2.5 infrastructure SIP. The EPA 

proposed to approve a revision to the 

New Hampshire SIP that included the 

provisions related to transport for the 

2012 PM2.5 NAAQS on April 10, 2018 

(83 FR 15343); EPA took action in a 

final rule to approve the New 

Hampshire SIP provisions related to 

interstate transport and other elements 

for the 2012 PM2.5 NAAQS on December 

4, 2018 (83 FR 62464). 

It is unclear what the commenter 

intended in the quoted final sentence of 

the comment. If the commenter meant to 

note that the CAA generally imposes an 

obligation that the state’s interstate 

transport SIP for a new or revised 

NAAQS adequately meets the good 

neighbor provision for that NAAQS, we 

agree and believe that the New 

Hampshire SO2 interstate transport SIP 

submittal meets these CAA obligations, 

as stated in our NPRM. Alternatively, if 

the commenter meant that this SO2

interstate transport SIP must address 

transport for all NAAQS, we disagree. 

The EPA interprets the CAA to 

require each state to demonstrate that it 


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