Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations 53963

disciplinary committee, appointed by

the facility Director, must review that

decision to ensure it is consistent with

the patient’s wishes or in his or her best

interest. The committee functions as the

patient’s advocate and may not include

members of the treatment team. The

committee must submit its findings and

recommendations in a written report to

the facility Director. The Director may

authorize treatment consistent with the

surrogate’s decision or request that a

special guardian for health care be

appointed to make the treatment

decision.

(2) Administration of psychotropic

medication to an involuntarily

committed patient against his or her

will must meet the following

requirements. The patient or surrogate

must be allowed to consult with

independent specialists, legal counsel or

other interested parties concerning the

treatment with psychotropic

medication. Any recommendation to

administer or continue medication

against the patient’s or surrogate’s will

must be reviewed by a multidisciplinary committee appointed by

the facility Director for this purpose.

This committee must include a

psychiatrist or a physician who has

psychopharmacology privileges. The

facility Director must concur with the

committee’s recommendation to

administer psychotropic medications

contrary to the patient’s or surrogate’s

wishes. Continued therapy with

psychotropic medication must be

reviewed every 30 days. The patient (or

a representative on the patient’s behalf)

may appeal the treatment decision to a

court of appropriate jurisdiction.

(3) If a proposed course of treatment

or procedure involves approved medical

research in whole or in part, the patient

or representative shall be advised of

this. Informed consent shall be obtained

specifically for the administration or

performance of that aspect of the

treatment or procedure that involves

research. Such consent shall be in

addition to that obtained for the

administration or performance of the

nonresearch aspect of the treatment or

procedure and must meet the

requirements for informed consent set

forth in 38 CFR Part 16, Protection of

Human Subjects.

(4) Testing for Human

Immunodeficiency Virus (HIV) must be

voluntary and must be conducted only

with the prior informed and (written)

signature consent of the patient or

surrogate. Patients who consent to

testing for HIV must sign VA form 10–

012, ‘‘Consent for HIV Antibody

Testing.’’ This form must be filed in the

patient’s medical record. Testing must

be accompanied by pre-test and posttest counseling.

(The information collection requirements in

this section have been approved by the Office

of Management and Budget under control

number 2900–0583)

(Authority: 38 U.S.C. 7331, 7332, 7333)

[FR Doc. 97–27565 Filed 10–16–97; 8:45 am]

BILLING CODE 8320–01–P

DEPARTMENT OF VETERANS

AFFAIRS

38 CFR Part 36

RIN 2900–AI16

Loan Guaranty: Credit Standards

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

SUMMARY: This document amends the

Department of Veterans Affairs (VA)

loan guaranty regulations regarding

credit standards used by lenders to

evaluate the creditworthiness of

veteran-borrowers for home loans. VA is

committed to regular review and

revision of the standards used to

determine the creditworthiness of

veteran-applicants as issues arise and as

the mortgage industry changes. These

changes are designed to keep VA in step

with the rest of the home mortgage

industry, at least to an extent

appropriate for a Government benefitrelated mortgage program.

DATES: Effective Date: November 17,

1997.

FOR FURTHER INFORMATION CONTACT: Ms.

Judith Caden, Assistant Director for

Loan Policy (264), Loan Guaranty

Service, Veterans Benefits

Administration, Department of Veterans

Affairs, 810 Vermont Avenue, NW,

Washington, DC 20420, (202) 273–7368.

SUPPLEMENTARY INFORMATION: In a

document published in the Federal

Register on May 7, 1997 (62 FR 24874),

VA proposed to amend its loan guaranty

credit standards, set forth at 38 CFR

36.4337, used by lenders to evaluate the

creditworthiness of veteran-borrowers

for home loans. Based on the rationale

set forth in the proposed rule and this

document the proposed changes are

adopted, with differences explained

below.

Please refer to the May 7, 1997,

Federal Register for a complete

discussion of the proposed

amendments. Interested persons were

given 60 days to submit comments. The

comment period ended July 7, 1997. VA

received three comments regarding the

proposed changes.

The first commenter, an association

which represents mortgage lenders,

supported adoption of the proposed

rule.

The second commenter, an

association representing home builders,

suggested that the language of proposed

paragraph 36.4337(c)(5)(xii) be changed

to accept other forms of tax credits in

addition to those for child care as

compensating factors. This was

intended to cover child care tax credits

of a continuing nature. VA agrees that

there is no basis for distinguishing child

care tax credits from other forms of tax

credits of a continuing nature. The final

rule at paragraph 36.4337(c)(5)(xii) is

changed accordingly.

The third commenter, a lender who

actively participates in the VA

Guaranteed Home Loan Program,

expressed general support for the

proposed rule, but raised several

concerns. The first concern related to

proposed paragraphs 36.4337 (d) and (f),

which would allow lenders to ‘‘gross

up’’ income to account for the impact of

tax-free income on the debt-to-incomeratio when underwriting a loan. The

commenter observed that the ‘‘grossingup’’ calculations should be kept simple

and suggested that it would be helpful

if VA could provide an example or

formula of how ‘‘grossing up’’

calculations are performed. We agree

that the ‘‘grossing up’’ calculation needs

to be simple and understandable and

believe that the revised regulations on

this point are simple and

understandable. Also, we note that the

term ‘‘grossing up’’ is well understood

by the mortgage industry. The mortgage

industry has been ‘‘grossing up’’ income

on conventional loans for many years.

Under paragraph 36.4337(f)(4), the

adjustment may be made by using

current income tax tables. The lender

need only determine what amount of

income, when taxed at the proper

combination of State and Federal rates,

would yield an after-tax income

equivalent to the tax-free income the

veteran actually receives. The purpose

of allowing lenders to ‘‘gross up’’

income is to enable the lender to

calculate the debt-to-income ratio as if

the veteran’s tax-free income were

‘‘after-tax’’ income. The arithmetic will

vary by State, depending on various

State and local tax rates. The lender

would then use this amount to calculate

the veteran’s debt-to-income ratio, while

using the actual tax-free income to

calculate the residual income.

For example, in a State with no

income tax, the lender could simply

show that, for a veteran in the 15

percent Federal income tax bracket,

$1,000 of tax-free income is equivalent
53964 Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations

to 85 percent of taxable income. Thus,

by dividing $1,000 by .85, it is possible

to calculate that the ‘‘grossed up’’

income is $1,176.50. In a State with a

5 percent income tax, the ‘‘grossed up’’

income would be calculated by

combining the State and Federal tax

rates, 20 percent. Thus in the same

example, $1,000 of tax-free income

would be ‘‘grossed up’’ by dividing it by

.80 and the ‘‘grossed up’’ income is

$1,250.

Note: This amount is a close estimate if the

veteran itemizes deductions, since the State

income tax is deductible in calculating

federal income tax. No particular form is

prescribed for this material (see paragraph

36.4337(f)(4)). It can be on a separate sheet

of paper, or simply explained on the loan

analysis form, so long as the explanation is

one that would be understandable to a VA or

other agency loan specialist trained in

reviewing loan applications, or can be made

understandable with any further information

the lender wishes to submit.

The commenter questioned whether

the change to VA’s residual income

guidelines in paragraph 36.4337(e) is a

one-time adjustment or whether VA was

providing for automatic future annual

adjustments. The answer is that this is

a one-time increase. Paragraph

36.4337(e) is being changed by

increasing the amount of residual

income required for family support by 4

percent for all categories. The

computation of the Residual Income

tables is based upon cost-of-living and

expenditure data compiled by the U.S.

Bureau of Labor Statistics. These tables

have not been increased since 1992.

This amendment increases the Residual

Income amounts by 4 percent across the

board. Any future adjustments will be

made by separate regulatory actions.

This commenter also raised an issue

regarding the inclusion of all household

members in the residual income

calculations set forth in paragraph

36.4337(e). More specifically, the

commenter questioned whether lenders

would be required to verbally confirm

that there are no additional non-claimed

dependents in the veteran’s household.

No changes are made based on this

comment. Prudent lenders clearly

would discuss the information provided

by the veteran and a lender would need

to ask sufficient questions to ensure the

completeness and accuracy of the

information provided for a loan.

In its comments, this commenter

stated that imposing the same

documentation requirements for Reserve

and National Guard applicants that are

currently required for active military

personnel within 12 months of release

is somewhat burdensome. Currently,

under paragraph 36.4337(f)(2)(ii), active

duty military personnel who are within

12 months of release must provide one

of the following: (1) Documentation that

the servicemember has in fact already

reenlisted or extended his/her period of

active duty to a date beyond the 12-

month period following the projected

closing of the loan; (2) Verification of a

valid offer of local civilian employment

following release from active duty,

which includes all data pertinent to

sound underwriting procedures such as

date employment will begin, earnings,

etc.; (3) A statement from the

servicemember that he/she intends to

reenlist or extend his/her period of

active duty to a date beyond the 12

month period following the projected

loan closing date, and a statement from

the servicemember’s commanding

officer confirming that the

servicemember is eligible to reenlist or

extend his/her active duty as indicated

and that the commanding officer has no

reason to believe that such reenlistment

or extension of active duty will not be

granted; or (4) Other unusually strong

positive underwriting factors, such as a

downpayment of at least 10 percent,

significant cash reserves, or clear

evidence of strong ties to the

community coupled with a nonmilitary

spouse’s income so high that only a

minimal income from the active duty

servicemember is needed to qualify.

In light of the fact that members of the

Selected Reserves are subject to the

same downsizing as the regular military,

we believe that if the income from

service in the Reserves is necessary to

qualify it must likewise be subject to the

same stability criteria. For this reason,

VA does not believe any substantive

change to this paragraph of the

proposed regulatory amendments is

warranted.

Finally, this commenter has requested

further clarification regarding the

treatment of employment history and

the probability of the veteran’s

continued employment. If a veteran has

a short-term employment history or has

recently changed to a new career, it very

well may not be possible to determine

that the veteran’s income is stable. The

purpose of the change is to remove the

burden of trying to follow up with an

employer when the employer declines

to verify the probability of continued

employment. Instead, reliability will be

determined based on the duration of the

borrower’s current employment together

with his or her overall documented

employment history.

Nonsubstantive changes have been

made for purposes of clarification.

Paperwork Reduction Act

Information collection and

recordkeeping requirements in 38 CFR

36.4337 have been approved by the

Office of Management and Budget

(OMB) under the provisions of the

Paperwork Reduction Act of 1995 (44

U.S.C. 3501–3520) and have been

assigned OMB control number 2900–

0521. The information collection subject

to this rulemaking concerns the

information to be submitted for

approval of a VA loan guaranty and

contains material which further

explains the quality of the information

needed for approval.

OMB assigns a control number for

each collection 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. The valid OMB control

number assigned to the collection of

information in this final rule is

displayed at the end of the affected

section of the regulations.

Interested persons were invited to

submit comments on the collection of

information. All comments received are

discussed above.

The Secretary hereby certifies that

this final rule will not have a significant

economic impact on a substantial

number of small entities as they are

defined in the Regulatory Flexibility

Act, 5 U.S.C. 601–612. Industry norms

for other lending programs already

require lenders to comply with most of

the standards set forth in this final rule.

Further, activities concerning loans

subject to the VA Loan Guaranty

Program do not constitute a significant

portion of activities of small businesses.

Therefore, pursuant to 5 U.S.C. 605(b),

this final rule is exempt from the initial

and final regulatory flexibility analysis

requirements of §§ 603 and 604.

The Catalog of Federal Domestic

Assistance Program numbers are 64.106,

64.114, 64.118 and 64.119.

List of Subjects in 38 CFR Part 36

Condominiums, Handicapped,

Housing, Loan programs—housing and

community development, Reporting and

recordkeeping requirements, Veterans.

Approved: September 5, 1997.

Hershel W. Gober,

Acting Secretary of Veterans Affairs.

For the reasons set out in the

preamble, 38 CFR part 36 is amended as

set forth below.

PART 36—LOAN GUARANTY

1. The authority citation for part 36

continues to read as follows:
Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations 53965

Authority: 38 U.S.C. 501, 3701–3704, 3707,

3710–3714, 3719, 3720, 3729, 3762, unless

otherwise noted.

2. In § 36.4337, the section heading;

paragraphs (c) through (h), (j ) through

(l), and (n); and the section authority

citation are revised to read as follows:

§ 36.4337 Underwriting standards,

processing procedures, lender

responsibility, and lender certification.

* * * * *

(c) Methods. The two primary

underwriting tools that will be used in

determining the adequacy of the

veteran’s present and anticipated

income are debt-to-income ratio and

residual income analysis. They are

described in paragraphs (d) through (f)

of this section. Ordinarily, to qualify for

a loan, the veteran must meet both

standards. Failure to meet one standard,

however, will not automatically

disqualify a veteran. The following shall

apply to cases where a veteran does not

meet both standards:

(1) If the debt-to-income ratio is 41

percent or less, and the veteran does not

meet the residual income standard, the

loan may be approved with justification,

by the underwriter’s supervisor, as set

out in paragraph (c)(4) of this section.

(2) If the debt-to-income ratio is

greater than 41 percent (unless it is

larger due solely to the existence of taxfree income which should be noted in

the loan file), the loan may be approved

with justification, by the underwriter’s

supervisor, as set out in paragraph (c)(4)

of this section.

(3) If the ratio is greater than 41

percent and the residual income

exceeds the guidelines by at least 20

percent, the second level review and

statement of justification are not

required.

(4) In any case described by

paragraphs (c)(1) and (c)(2) of this

section, the lender must fully justify the

decision to approve the loan or submit

the loan to the Secretary for prior

approval in writing. The lender’s

statement must not be perfunctory, but

should address the specific

compensating factors, as set forth in

paragraph (c)(5) of this section,

justifying the approval of the loan. The

statement must be signed by the

underwriter’s supervisor. It must be

stressed that the statute requires not

only consideration of a veteran’s present

and anticipated income and expenses,

but also that the veteran be a satisfactory

credit risk. Therefore, meeting both the

debt-to-income ratio and residual

income standards does not mean that

the loan is automatically approved. It is

the lender’s responsibility to base the

loan approval or disapproval on all the

factors present for any individual

veteran. The veteran’s credit must be

evaluated based on the criteria set forth

in paragraph (g) of this section as well

as a variety of compensating factors that

should be evaluated.

(5) The following are examples of

acceptable compensating factors to be

considered in the course of

underwriting a loan:

(i) Excellent long-term credit;

(ii) Conservative use of consumer

credit;

(iii) Minimal consumer debt;

(iv) Long-term employment;

(v) Significant liquid assets;

(vi) Downpayment or the existence of

equity in refinancing loans;

(vii) Little or no increase in shelter

expense;

(viii) Military benefits;

(ix) Satisfactory homeownership

experience;

(x) High residual income;

(xi) Low debt-to-income ratio;

(xii) Tax credits of a continuing

nature, such as tax credits for child care;

and

(xiii) Tax benefits of home ownership.

(6) The list in paragraph (c)(5) of this

section is not exhaustive and the items

are not in any priority order. Valid

compensating factors should represent

unusual strengths rather than mere

satisfaction of basic program

requirements. Compensating factors

must be relevant to the marginality or

weakness.

(d) Debt-to-income ratio. A debt-toincome ratio that compares the veteran’s

anticipated monthly housing expense

and total monthly obligations to his or

her stable monthly income will be

computed to assist in the assessment of

the potential risk of the loan. The ratio

will be determined by taking the sum of

the monthly Principal, Interest, Taxes

and Insurance (PITI) of the loan being

applied for, homeowners and other

assessments such as special

assessments, condominium fees,

homeowners association fees, etc., and

any long-term obligations divided by the

total of gross salary or earnings and

other compensation or income. The

ratio should be rounded to the nearest

two digits; e.g., 35.6 percent would be

rounded to 36 percent. The standard is

41 percent or less. If the ratio is greater

than 41 percent, the steps cited in

paragraphs (c)(1) through (c)(6) of this

section apply.

(e) Residual income guidelines. The

guidelines provided in this paragraph

for residual income will be used to

determine whether the veteran’s

monthly residual income will be

adequate to meet living expenses after

estimated monthly shelter expenses

have been paid and other monthly

obligations have been met. All members

of the household must be included in

determining if the residual income is

sufficient. They must be counted even if

the veteran’s spouse is not joining in

title or on the note, or if there are any

other individuals depending on the

veteran for support, such as children

from a spouse’s prior marriage who are

not the veteran’s legal dependents. It is

appropriate, however, to reduce the

number of members of a household to

be counted for residual income

purposes if there is sufficient verified

income not otherwise included in the

loan analysis, such as child support

being regularly received as discussed in

paragraph (e)(4) of this section. In the

case of a spouse not to be obligated on

the note, verification that he/she has

stable and reliable employment as

discussed in paragraph (f)(3) of this

section would allow not counting the

spouse in determining the sufficiency of

the residual income. The guidelines for

residual income are based on data

supplied in the Consumer Expenditure

Survey (CES) published by the

Department of Labor’s Bureau of Labor

Statistics. Regional minimum incomes

have been developed for loan amounts

up to $79,999 and for loan amounts of

$80,000 and above. It is recognized that

the purchase price of the property may

affect family expenditure levels in

individual cases. This factor may be

given consideration in the final

determination in individual loan

analyses. For example, a family

purchasing in a higher-priced

neighborhood may feel a need to incur

higher-than-average expenses to support

a lifestyle comparable to that in their

environment, whereas a substantially

lower-priced home purchase may not

compel such expenditures. It should

also be clearly understood from this

information that no single factor is a

final determinant in any applicant’s

qualification for a VA-guaranteed loan.

Once the residual income has been

established, other important factors

must be examined. One such

consideration is the amount being paid

currently for rental or housing expenses.

If the proposed shelter expense is

materially in excess of what is currently

being paid, the case may require closer

scrutiny. In such cases, consideration

should be given to the ability of the

borrower and spouse to accumulate

liquid assets, such as cash and bonds,

and to the amount of debts incurred

while paying a lesser amount for shelter.

For example, if an application indicates

little or no capital reserves and

excessive obligations, it may not be
53966 Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations

reasonable to conclude that a substantial

increase in shelter expenses can be

absorbed. Another factor of prime

importance is the applicant’s manner of

meeting obligations. A poor credit

history alone is a basis for disapproving

a loan, as is an obviously inadequate

income. When one or the other is

marginal, however, the remaining aspect

must be closely examined to assure that

the loan applied for will not exceed the

applicant’s ability or capacity to repay.

Therefore, it is important to remember

that the figures provided below for

residual income are to be used as a

guide and should be used in

conjunction with the steps outlined in

paragraphs (c) through (j) of this section.

The residual income guidelines are as

follows:

(1) Table of residual incomes by

region (for loan amounts of $79,999 and

below):

TABLE OF RESIDUAL INCOMES BY

REGION

[For loan amounts of $79,999 and below]

Family

size *

NortheastMidwest South West

1 ............... 390 382 382 425

2 ............... 654 641 641 713

3 ............... 788 772 772 859

4 ............... 888 868 868 967

5 ............... 921 902 902 1,004

* For families with more than five members,

add $75 for each additional member up to a

family of seven. ‘‘Family’’ includes all members of the household.

(2) Table of residual incomes by

region (for loan amounts of $80,000 and

above):

TABLE OF RESIDUAL INCOMES BY

REGION

[For loan amounts of $80,000 and above]

Family

size *

NortheastMidwest South West

1 ............... 450 441 441 491

2 ............... 755 738 738 823

3 ............... 909 889 889 990

4 ............... 1,025 1,003 1,003 1,117

5 ............... 1,062 1,039 1,039 1,158

* For families with more than five members,

add $80 for each additional member up to a

family of seven. ‘‘Family’’ includes all members of the household.

(3) Geographic regions for residual

income guidelines: Northeast—

Connecticut, Maine, Massachusetts,

New Hampshire, New Jersey, New York,

Pennsylvania, Rhode Island and

Vermont; Midwest—Illinois, Indiana,

Iowa, Kansas, Michigan, Minnesota,

Missouri, Nebraska, North Dakota, Ohio,

South Dakota and Wisconsin; South—

Alabama, Arkansas, Delaware, District

of Columbia, Florida, Georgia,

Kentucky, Louisiana, Maryland,

Mississippi, North Carolina, Oklahoma,

Puerto Rico, South Carolina, Tennessee,

Texas, Virginia, West Virginia; West—

Alaska, Arizona, California, Colorado,

Hawaii, Idaho, Montana, Nevada, New

Mexico, Oregon, Utah, Washington and

Wyoming.

(4) Military adjustments. For loan

applications involving an active-duty

servicemember or military retiree, the

residual income figures will be reduced

by a minimum of 5 percent if there is

a clear indication that the borrower or

spouse will continue to receive the

benefits resulting from the use of

facilities on a nearby military base.

(This reduction applies to tables in

paragraph (e) of this section.)

(f) Stability and reliability of income.

Only stable and reliable income of the

veteran and spouse can be considered in

determining ability to meet mortgage

payments. Income can be considered

stable and reliable if it can be concluded

that it will continue during the

foreseeable future.

(1) Verification. Income of the

borrower and spouse which is derived

from employment and which is

considered in determining the family’s

ability to meet the mortgage payments,

payments on debts and other

obligations, and other expenses must be

verified. If the spouse is employed and

will be contractually obligated on the

loan, the combined income of both the

veteran and spouse is considered when

the income of the veteran alone is not

sufficient to qualify for the amount of

the loan sought. In other than

community property states, if the

spouse will not be contractually

obligated on the loan, Regulation B (12

CFR part 202), promulgated by the

Federal Reserve Board pursuant to the

Equal Credit Opportunity Act, prohibits

any request for, or consideration of,

information concerning the spouse

(including income, employment, assets,

or liabilities), except that if the

applicant is relying on alimony, child

support, or maintenance payments from

a spouse or former spouse as a basis for

repayment of the loan, information

concerning such spouse or former

spouse may be requested and

considered (see paragraph (f)(4) of this

section). In community property states,

information concerning a spouse may be

requested and considered in the same

manner as that for the applicant. The

standards applied to income of the

veteran are also applicable to that of the

spouse. There can be no discounting of

income on account of sex, marital

status, or any other basis prohibited by

the Equal Credit Opportunity Act.

Income claimed by an applicant that is

not or cannot be verified cannot be

considered when analyzing the loan. If

the veteran or spouse has been

employed by a present employer for less

than 2 years, a 2-year history covering

prior employment, schooling, or other

training must be secured. Any periods

of unemployment must be explained.

Employment verifications and pay stubs

must be no more than 120 days (180

days for new construction) old to be

considered valid. For loans closed

automatically, this requirement will be

considered satisfied if the date of the

employment verification is within 120

days (180 days for new construction) of

the date the note is signed. For prior

approval loans, this requirement will be

considered satisfied if the verification of

employment is dated within 120 days of

the date the application is received by

VA.

(2) Active-duty, Reserve, or National

Guard applicants. (i) In the case of an

active-duty applicant, a military Leave &

Earnings Statement is required and will

be used instead of an employment

verification. The statement must be no

more than 120 days old (180 days for

new construction) and must be the

original or a lender-certified copy of the

original. For loans closed automatically,

this requirement is satisfied if the date

of the Leave & Earnings Statement is

within 120 days (180 days for new

construction) of the date the note is

signed. For prior approval loans, this

requirement will be considered satisfied

if the verification of employment is

dated within 120 days of the date the

application is received by VA.

(ii) For servicemembers within 12

months of release from active duty, or

members of the Reserves or National

Guard within 12 months of release, one

of the following is also required:

(A) Documentation that the

servicemember has in fact already

reenlisted or extended his/her period of

active duty or Reserve or National

Guard service to a date beyond the 12-

month period following the projected

closing of the loan.

(B) Verification of a valid offer of local

civilian employment following release

from active duty. All data pertinent to

sound underwriting procedures (date

employment will begin, earnings, etc.)

must be included.

(C) A statement from the

servicemember that he/she intends to

reenlist or extend his/her period of

active duty or Reserve or National

Guard service to a date beyond the 12

month period following the projected

loan closing date, and a statement from

the servicemember’s commanding
Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations 53967

officer confirming that the

servicemember is eligible to reenlist or

extend his/her active duty or Reserve or

National Guard service as indicated and

that the commanding officer has no

reason to believe that such reenlistment

or extension will not be granted.

(D) Other unusually strong positive

underwriting factors, such as a

downpayment of at least 10 percent,

significant cash reserves, or clear

evidence of strong ties to the

community coupled with a nonmilitary

spouse’s income so high that only

minimal income from the active duty

servicemember or member of the

Reserves or National Guard is needed to

qualify.

(iii) Each active-duty member who

applies for a loan must be counseled

through the use of VA Form 26–0592,

Counseling Checklist for Military

Homebuyers. Lenders must submit a

signed and dated VA Form 26–0592

with each prior approval loan

application or automatic loan report

involving a borrower on active duty.

(3) Income reliability. Income

received by the borrower and spouse is

to be used only if it can be concluded

that the income will continue during the

foreseeable future and, thus, should be

properly considered in determining

ability to meet the mortgage payments.

If an employer puts N/A or otherwise

declines to complete a verification of

employment statement regarding the

probability of continued employment,

no further action is required of the

lender. Reliability will be determined

based on the duration of the borrower’s

current employment together with his or

her overall documented employment

history. There can be no discounting of

income solely because it is derived from

an annuity, pension or other retirement

benefit, or from part-time employment.

However, unless income from overtime

work and part-time or second jobs can

be accorded a reasonable likelihood that

it is continuous and will continue in the

foreseeable future, such income should

not be used. Generally, the reliability of

such income cannot be demonstrated

unless the income has continued for 2

years. The hours of duty and other work

conditions of the applicant’s primary

job, and the period of time in which the

applicant was employed under such

arrangement, must be such as to permit

a clear conclusion as to a good

probability that overtime or part-time or

secondary employment can and will

continue. Income from overtime work

and part-time jobs not eligible for

inclusion as primary income may, if

properly verified for at least 12 months,

be used to offset the payments due on

debts and obligations of an intermediate

term, i.e., 6 to 24 months. Such income

must be described in the loan file. The

amount of any pension or compensation

and other income, such as dividends

from stocks, interest from bonds,

savings accounts, or other deposits,

rents, royalties, etc., will be used as

primary income if it is reasonable to

conclude that such income will

continue in the foreseeable future.

Otherwise, it may be used only to offset

intermediate-term debts, as described in

this paragraph. Also, the likely duration

of certain military allowances cannot be

determined and, therefore, will be used

only to offset intermediate-term debts,

as described in this paragraph. Such

allowances are: Pro-pay, flight or hazard

pay, and overseas or combat pay, all of

which are subject to periodic review

and/or testing of the recipient to

ascertain whether eligibility for such

pay will continue. Only if it can be

shown that such pay has continued for

a prolonged period and can be expected

to continue because of the nature of the

recipient’s assigned duties, will such

income be considered as primary

income. For instance, flight pay verified

for a pilot can be regarded as probably

continuous and, thus, should be added

to the base pay. Income derived from

service in the Reserves or National

Guard may be used if the applicant has

served in such capacity for a period of

time sufficient to evidence good

probability that such income will

continue beyond 12 months. The total

period of active and reserve service may

be helpful in this regard. Otherwise,

such income may be used to offset

intermediate-term debts. There are a

number of additional income sources

whose contingent nature precludes their

being considered as available for

repayment of a long-term mortgage

obligation. Temporary income items

such as VA educational allowances and

unemployment compensation do not

represent stable and reliable income and

will not be taken into consideration in

determining the ability of the veteran to

meet the income requirement of the

governing law. As required by the Equal

Opportunity Act Amendments of 1976,

Public Law 94–239, income from public

assistance programs is used to qualify

for a loan if it can be determined that

the income will probably continue for 3

years or more.

(4) Tax-exempt income. Special

consideration can be given to verified

nontaxable income once it has been

established that such income is likely to

continue (and remain untaxed) into the

foreseeable future. Such income

includes certain military allowances,

child support payments, workers’

compensation benefits, disability

retirement payments and certain types

of public assistance payments. In such

cases, current income tax tables may be

used to determine an amount which can

be prudently employed to adjust the

borrower’s actual income. This adjusted

or ‘‘grossed up’’ income may be used to

calculate the monthly debt-to-income

ratio, provided the analysis is

documented. Only the borrower’s actual

income may be used to calculate the

residual income. Care should be

exercised to ensure that the income is in

fact tax-exempt.

(5) Alimony, child support,

maintenance, workers’ compensation,

foster care payments. (i) If an applicant

chooses to reveal income from alimony,

child support or maintenance payments

(after first having been informed that

any such disclosure is voluntary

pursuant to the Federal Reserve Board’s

Regulation B), such payments are

considered as income to the extent that

the payments are likely to be

consistently made. Factors to be

considered in determining the

likelihood of consistent payments

include, but are not limited to: Whether

the payments are received pursuant to a

written agreement or court decree; the

length of time the payments have been

received; the regularity of receipt; the

availability of procedures to compel

payment; and the creditworthiness of

the payor, including the credit history of

the payor when available under the Fair

Credit Reporting Act or other applicable

laws. However, the Fair Credit

Reporting Act (15 U.S.C. 1681(b)) limits

the permissible purposes for which

credit reports may be ordered, in the

absence of written instructions of the

consumer to whom the report relates, to

business transactions involving the

subject of the credit report or extensions

of credit to the subject of the credit

report.

(ii) If the applicant chooses to reveal

income related to workers’

compensation, it will be considered as

income to the extent it can be

determined such income will continue.

(iii) Income received specifically for

the care of any foster child(ren) may be

counted as income if documented.

Generally, however, such foster care

income is to be used only to balance the

expenses of caring for the foster

child(ren) against any increased residual

income requirements.

(6) Military quarters allowance. With

respect to off-base housing (quarters)

allowances for service personnel on

active duty, it is the policy of the

Department of Defense to utilize

available on-base housing when

possible. In order for a quarters
53968 Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations

allowance to be considered as

continuing income, it is necessary that

the applicant furnish written

authorization from his or her

commanding officer for off-base

housing. This authorization should

verify that quarters will not be made

available and that the individual should

make permanent arrangements for

nonmilitary housing. A Department of

Defense form, DD Form 1747, Status of

Housing Availability, is used by the

Family Housing Office to advise

personnel regarding family housing. The

applicant’s quarters allowance cannot

be considered unless item b (Permanent)

or d is completed on DD Form 1747,

dated October 1990. Of course, if the

applicant’s income less quarters

allowance is sufficient, there is no need

for assurance that the applicant has

permission to occupy nonmilitary

housing provided that a determination

can be made that the occupancy

requirements of the law will be met.

Also, authorization to obtain off-base

housing will not be required when

certain duty assignments would clearly

qualify service personnel with families

for quarters allowance. For instance, offbase housing authorizations need not be

obtained for service personnel stationed

overseas who are not accompanied by

their families, recruiters on detached

duty, or military personnel stationed in

areas where no on-base housing exists.

In any case in which no off-base

housing authorization is obtained, an

explanation of the circumstances

justifying its omission must be included

with the loan application except when

it has been established by the VA

facility of jurisdiction that the waiting

lists for on-base housing are so long that

it is improbable that individuals

desiring to purchase off-base housing

would be precluded from doing so in

the foreseeable future. If stations make

such a determination, a release shall be

issued to inform lenders.

(7) Automobile (or similar) allowance.

Generally, automobile allowances are

paid to cover specific expenses related

to an applicant’s employment, and it is

appropriate to use such income to offset

a corresponding car payment. However,

in some instances, such an allowance

may exceed the car payment. With

proper documentation, income from a

car allowance which exceeds the car

payment can be counted as effective

income. Likewise, any other similar

type of allowance which exceeds the

specific expense involved may be added

to gross income to the extent it is

documented to exceed the actual

expense.

(8) Commissions. When all or a major

portion of the veteran’s income is

derived from commissions, it will be

necessary to establish the stability of

such income if it is to be considered in

the loan analysis for the repayment of

the mortgage debt and/or short-term

obligations. In order to assess the value

of such income, lenders should obtain

written verification of the actual amount

of commissions paid to date, the basis

for the payment of such commissions

and when commissions are paid; i.e.,

monthly, quarterly, semiannually, or

annually. Lenders should also obtain

signed and dated individual income tax

returns, plus applicable schedules, for

the previous 2 years, or for whatever

additional period is deemed necessary

to properly demonstrate a satisfactory

earnings record. The length of the

veteran’s employment in the type of

occupation for which commissions are

paid is also an important factor in the

assessment of the stability of the

income. If the veteran has been

employed for a relatively short time, the

income should not normally be

considered stable unless the product or

service was the same or closely related

to the product or service sold in an

immediate prior position. Generally,

income from commissions is considered

stable when the applicant has been

receiving such income for at least 2

years. Less than 2 years of income from

commissions cannot usually be

considered stable. When an applicant

has received income from commissions

for less than 1 year, it will rarely be

possible to demonstrate that the income

is stable for qualifying purposes; such

cases would require in-depth

development.

(9) Self-employment. Generally,

income from self-employment is

considered stable when the applicant

has been in business for at least 2 years.

Less than 2 years of income from selfemployment cannot usually be

considered stable unless the applicant

has had previous related employment

and/or extensive specialized training.

When an applicant has been selfemployed less than 1 year, it will rarely

be possible to demonstrate that the

income is stable for qualifying purposes;

such cases would require in-depth

development. The following

documentation is required for all selfemployed borrowers:

(i) A profit-and-loss statement for the

prior fiscal year (12-month accounting

cycle), plus the period year to date since

the end of the last fiscal year (or for

whatever shorter period records may be

available), and balance sheet based on

the financial records. The financial

statement must be sufficient for a loan

underwriter to determine the necessary

information for loan approval and an

independent audit (on the veteran and/

or the business) by a Certified Public

Accountant will be required if necessary

for such determination; and

(ii) Copies of signed individual

income tax returns, plus all applicable

schedules for the previous 2 years, or for

whatever additional period is deemed

necessary to properly demonstrate a

satisfactory earnings record, must be

obtained. If the business is a corporation

or partnership, copies of signed Federal

business income tax returns for the

previous two years plus all applicable

schedules for the corporation or

partnership must be obtained; and

(iii) If the business is a corporation or

partnership, a list of all stockholders or

partners showing the interest each holds

in the business will be required. Some

cases may justify a written credit report

on the business as well as the applicant.

When the business is of an unusual type

and it is difficult to determine the

probability of its continued operation,

explanation as to the function and

purpose of the business may be needed

from the applicant and/or any other

qualified party with the acknowledged

expertise to express a valid opinion.

(10) Recently discharged veterans.

Loan applications received from

recently discharged veterans who have

little or no employment experience

other than their military occupation and

from veterans seeking VA-guaranteed

loans who have retired after 20 years of

active military duty require special

attention. The retirement income of the

latter veterans in many cases may not be

sufficient to meet the statutory income

requirements for the loan amount

sought. Many have obtained full-time

employment and have been employed

in their new jobs for a very short time.

(i) It is essential in determining

whether veterans in these categories

qualify from the income standpoint for

the amount of the loan sought, that the

facts in respect to their present

employment and retirement income be

fully developed, and that each case be

considered on its individual merits.

(ii) In most cases the veteran’s current

income or current income plus his or

her retirement income is sufficient. The

problem lies in determining whether it

can be properly concluded that such

income level will continue for the

foreseeable future. If the veteran’s

employment status is that of a trainee or

an apprentice, this will, of course, be a

factor. In cases of the self-employed, the

question to be resolved is whether there

are reasonable prospects that the

business enterprise will be successful

and produce the required income.

Unless a favorable conclusion can be

made, the income from such source
Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations 53969

should not be considered in the loan

analysis.

(iii) If a recently discharged veteran

has no prior employment history and

the veteran’s verification of employment

shows he or she has not been on the job

a sufficient time in which to become

established, consideration should be

given to the duties the veteran

performed in the military service. When

it can be determined that the duties a

veteran performed in the service are

similar or are in direct relation to the

duties of the applicant’s present

position, such duties may be construed

as adding weight to his or her present

employment experience and the income

from the veteran’s present employment

thus may be considered available for

qualifying the loan, notwithstanding the

fact that the applicant has been on the

present job only a short time. This same

principle may be applied to veterans

recently retired from the service. In

addition, when the veteran’s income

from retirement, in relation to the total

of the estimated shelter expense, longterm debts and amount available for

family support, is such that only

minimal income from employment is

necessary to qualify from the income

standpoint, it would be proper to

resolve the doubt in favor of the veteran.

It would be erroneous, however, to give

consideration to a veteran’s income

from employment for a short duration in

a job requiring skills for which the

applicant has had no training or

experience.

(iv) To illustrate the provisions of

paragraph (f)(10), it would be proper to

use short-term employment income in

qualifying a veteran who had experience

as an airplane mechanic in the military

service and the individual’s

employment after discharge or

retirement from the service is in the

same or allied fields; e.g., auto mechanic

or machinist. This presumes, however,

that the verification of employment

included a statement that the veteran

was performing the duties of the job

satisfactorily, the possibility of

continued employment was favorable

and that the loan application is eligible

in all other respects. An example of

nonqualifying experience is that of a

veteran who was an Air Force pilot and

has been employed in insurance sales

on commission for a short time. Most

cases, of course, fall somewhere

between those extremes. It is for this

reason that the facts of each case must

be fully developed prior to closing the

loan automatically or submitting the

case to VA for prior approval.

(11) Employment of short duration.

The provisions of paragraph (f)(7) of this

section are similarly applicable to

applicants whose employment is of

short duration. Such cases will entail

careful consideration of the employer’s

confirmation of employment,

probability of permanency, past

employment record, the applicant’s

qualifications for the position, and

previous training, including that

received in the military service. In the

event that such considerations do not

enable a determination that the income

from the veteran’s current position has

a reasonable likelihood of continuance,

such income should not be considered

in the analysis. Applications received

from persons employed in the building

trades, or in other occupations affected

by climatic conditions, should be

supported by documentation evidencing

the applicant’s total earnings to date and

covering a period of not less than 1 year

as well as signed and dated copies of

complete income tax returns, including

all schedules for the past 2 years or for

whatever additional period is deemed

necessary to properly demonstrate a

satisfactory earnings record. If the

applicant works out of a union,

evidence of the previous year’s earnings

should be obtained together with a

verification of employment from the

current employer.

(12) Rental income—(i) Multi-unit

subject property. When the loan pertains

to a structure with more than a onefamily dwelling unit, the prospective

rental income will not be considered

unless the veteran can demonstrate a

reasonable likelihood of success as a

landlord, and sufficient cash reserves

are verified to enable the veteran to

carry the mortgage loan payments

(principal, interest, taxes, and

insurance) without assistance from the

rental income for a period of at least 6

months. The determination of the

veteran’s likelihood of success as a

landlord will be based on

documentation of any prior experience

in managing rental units or other

collection activities. The amount of

rental income to be used in the loan

analysis will be based on 75 percent of

the amount indicated on the lease or

rental agreement, unless a greater

percentage can be documented.

(ii) Rental of existing home. Proposed

rental of a veteran’s existing property

may be used to offset the mortgage

payment on that property, provided

there is no indication that the property

will be difficult to rent. If available, a

copy of the rental agreement should be

obtained. It is the responsibility of the

loan underwriter to be aware of the

condition of the local rental market. For

instance, in areas where the rental

market is very strong the absence of a

lease should not automatically prohibit

the offset of the mortgage by the

proposed rental income.

(iii) Other rental property. If income

from rental property will be used to

qualify for the new loan, the

documentation required of a selfemployed applicant should be obtained

together with evidence of cash reserves

equaling 3 months PITI on the rental

property. As for any self-employed

earnings (see paragraph (f)(7) of this

section), depreciation claimed may be

added back in as income. In the case of

a veteran who has no experience as a

landlord, it is unlikely that the income

from a rental property may be used to

qualify for the new loan.

(13) Taxes and other deductions.

Deductions to be applied for Federal

income taxes and Social Security may

be obtained from the Employer’s Tax

Guide (Circular E) issued by the Internal

Revenue Service (IRS). (For veterans

receiving a mortgage credit certificate

(MCC), see paragraph (f)(14) of this

section.) Any State or local taxes should

be estimated or obtained from charts

similar to those provided by IRS which

may be available in those states with

withholding taxes. A determination of

the amount paid or withheld for

retirement purposes should be made

and used when calculating deductions

from gross income. In determining

whether a veteran-applicant meets the

income criteria for a loan, some

consideration may be given to the

potential tax benefits the veteran will

realize if the loan is approved. This can

be done by using the instructions and

worksheet portion of IRS Form W–4,

Employee’s Withholding Allowance

Certificate, to compute the total number

of permissible withholding allowances.

That number can then be used when

referring to IRS Circular E and any

appropriate similar State withholding

charts to arrive at the amount of Federal

and State income tax to be deducted

from gross income.

(14) Mortgage credit certificates. (i)

The Internal Revenue Code (26 U.S.C.)

as amended by the Tax Reform Act of

1984, allows states and other political

subdivisions to trade in all or part of

their authority to issue mortgage

revenue bonds for authority to issue

MCCs. Veterans who are recipients of

MCCs may realize a significant

reduction in their income tax liability

by receiving a Federal tax credit for a

percentage of their mortgage interest

payment on debt incurred on or after

January 1, 1985.

(ii) Lenders must provide a copy of

the MCC to VA with the home loan

application. The MCC will specify the

rate of credit allowed and the amount of

certified indebtedness; i.e., the
53970 Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations

indebtedness incurred by the veteran to

acquire a principal residence or as a

qualified home improvement or

rehabilitation loan.

(iii) For credit underwriting purposes,

the amount of tax credit allowed to a

veteran under an MCC will be treated as

a reduction in the monthly Federal

income tax. For example, a veteran

having a $600 monthly interest payment

and an MCC providing a 30-percent tax

credit would receive a $180 (30

percent×$600) tax credit each month.

However, because the annual tax credit,

which amounts to $2,160 (12×$180),

exceeds $2,000 and is based on a 30-

percent credit rate, the maximum tax

credit the veteran can receive is limited

to $2,000 per year (Pub. L. 98–369) or

$167 per month ($2,000/12). As a

consequence of the tax credit, the

interest on which a deduction can be

taken will be reduced by the amount of

the tax credit to $433 ($600¥$167).

This reduction should also be reflected

when calculating Federal income tax.

(iv) For underwriting purposes, the

amount of the tax credit is limited to the

amount of the veteran’s maximum tax

liability. If, in the example in paragraph

(f)(14)(iii) of this section, the veteran’s

tax liability for the year were only

$1,500, the monthly tax credit would be

limited to $125 ($1,500/12).

(g) Credit. The conclusion reached as

to whether or not the veteran and

spouse are satisfactory credit risks must

also be based on a careful analysis of the

available credit data. Regulation B (12

CFR part 202), promulgated by the

Federal Reserve Board pursuant to the

Equal Credit Opportunity Act, requires

that lenders, in evaluating

creditworthiness, shall consider, on the

applicant’s request, the credit history,

when available, of any account reported

in the name of the applicant’s spouse or

former spouse which the applicant can

demonstrate accurately reflects the

applicant’s creditworthiness. In other

than community property states, if the

spouse will not be contractually

obligated on the loan, Regulation B

prohibits any request for or

consideration of information about the

spouse concerning income,

employment, assets or liabilities. In

community property states, information

concerning a spouse may be requested

and considered in the same manner as

that for the applicant.

(1) Adverse data. If the analysis

develops any derogatory credit

information and, despite such facts, it is

determined that the veteran and spouse

are satisfactory credit risks, the basis for

the decision must be explained. If a

veteran and spouse have debts

outstanding which have not been paid

timely, or which they have refused to

pay, the fact that the outstanding debts

are paid after the acceptability of the

credit is questioned or in anticipation of

applying for new credit does not, of

course, alter the fact that the record for

paying debts has been unsatisfactory.

With respect to unpaid debts, lenders

may take into consideration a veteran’s

claim of bona fide or legal defenses.

Such defenses are not applicable when

the debt has been reduced to judgment.

Where a collection account has been

established, if it is determined that the

borrower is a satisfactory credit risk, it

is not mandatory that such an account

be paid off in order for a loan to be

approved. Court-ordered judgments,

however, must be paid off before a new

loan is approved.

(2) Bankruptcy. When the credit

information shows that the borrower or

spouse has been discharged in

bankruptcy under the ‘‘straight’’

liquidation and discharge provisions of

the bankruptcy law, this would not in

itself disqualify the loan. However, in

such cases it is necessary to develop

complete information as to the facts and

circumstances concerning the

bankruptcy. Generally speaking, when

the borrower or spouse, as the case may

be, has been regularly employed (not

self-employed) and has been discharged

in bankruptcy within the last one to two

years, it probably would not be possible

to determine that the borrower or

spouse is a satisfactory credit risk unless

both of the following requirements are

satisfied:

(i) The borrower or spouse has

obtained credit subsequent to the

bankruptcy and has met the credit

payments in a satisfactory manner over

a continued period; and

(ii) The bankruptcy was caused by

circumstances beyond the control of the

borrower or spouse, e.g.,

unemployment, prolonged strikes,

medical bills not covered by insurance.

Divorce is not generally viewed as

beyond the control of the borrower and/

or spouse. The circumstances alleged

must be verified. If a borrower or spouse

is self-employed, has been adjudicated

bankrupt, and subsequently obtains a

permanent position, a finding as to

satisfactory credit risk may be made

provided there is no derogatory credit

information prior to self-employment,

there is no derogatory credit information

subsequent to the bankruptcy, and the

failure of the business was not due to

misconduct. If a borrower or spouse has

been discharged in bankruptcy within

the past 12 months, it will not generally

be possible to determine that the

borrower or spouse is a satisfactory

credit risk.

(3) Petition under Chapter 13 of

Bankruptcy Code. A petition under

chapter 13 of the Bankruptcy Code (11

U.S.C.) filed by the borrower or spouse

is indicative of an effort to pay their

creditors. Some plans may provide for

full payment of debts while others

arrange for payment of scaled-down

debts. Regular payments are made to a

court-appointed trustee over a 2- to 3-

year period (or up to 5 years in some

cases). When the borrowers have made

all payments in a satisfactory manner,

they may be considered as having

reestablished satisfactory credit. When

they apply for a home loan before

completion of the payout period,

favorable consideration may

nevertheless be given if at least 12

months’ worth of payments have been

made satisfactorily and the Trustee or

Bankruptcy Judge approves of the new

credit.

(4) Foreclosures. (i) When the credit

information shows that the veteran or

spouse has had a foreclosure on a prior

mortgage; e.g., a VA-guaranteed or HUDinsured mortgage, this will not in itself

disqualify the borrower from obtaining

the loan. Lenders and field station

personnel should refer to the preceding

guidelines on bankruptcies for cases

involving foreclosures. As with a

borrower who has been adjudicated

bankrupt, it is necessary to develop

complete information as to the facts and

circumstances of the foreclosure.

(ii) When VA pays a claim on a VAguaranteed loan as a result of a

foreclosure, the original veteran may be

required to repay any loss to the

Government. In some instances VA may

waive the veteran’s debt, in part or

totally, based on the facts and

circumstances of the case. However,

guaranty entitlement cannot be restored

unless the Government’s loss has been

repaid in full, regardless of whether or

not the debt has been waived,

compromised, or discharged in

bankruptcy. Therefore, a veteran who is

seeking a new VA loan after having

experienced a foreclosure on a prior VA

loan will in most cases have only

remaining entitlement to apply to the

new loan. The lender should assure that

the veteran has sufficient entitlement for

its secondary marketing purposes.

(5) Federal debts. An applicant for a

Federally-assisted loan will not be

considered a satisfactory credit risk for

such loan if the applicant is presently

delinquent or in default on any debt to

the Federal Government, e.g., a Small

Business Administration loan, a U.S.

Guaranteed Student loan, a debt to the

Public Health Service, or where there is

a judgment lien against the applicant’s

property for a debt owed to the
Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations 53971

Government. The applicant may not be

approved for the loan until the

delinquent account has been brought

current or satisfactory arrangements

have been made between the borrower

and the Federal agency owed, or the

judgment is paid or otherwise satisfied.

Of course, the applicant must also be

able to otherwise qualify for the loan

from an income and remaining credit

standpoint. Refinancing under VA’s

interest rate reduction refinancing

provisions, however, is allowed even if

the borrower is delinquent on the VA

guaranteed mortgage being refinanced.

Prior approval processing is required in

such cases.

(6) Absence of credit history. The fact

that recently discharged veterans may

have had no opportunity to develop a

credit history will not preclude a

determination of satisfactory credit.

Similarly, other loan applicants may not

have established credit histories as a

result of a preference for purchasing

consumer items with cash rather than

credit. There are also cases in which

individuals may be genuinely wary of

acquiring new obligations following

bankruptcy, consumer credit counseling

(debt proration), or other disruptive

credit occurrence. The absence of the

credit history in these cases will not

generally be viewed as an adverse factor

in credit underwriting. However, before

a favorable decision is made for cases

involving bankruptcies or other

derogatory credit factors, efforts should

be made to develop evidence of timely

payment of non-installment debts such

as rent and utilities. It is anticipated that

this special consideration in the absence

of a credit history following bankruptcy

would be the rare case and generally

confined to bankruptcies that occurred

over 3 years ago.

(7) Consumer credit counseling plan.

If a veteran, or veteran and spouse, have

prior adverse credit and are

participating in a Consumer Credit

Counseling plan, they may be

determined to be a satisfactory credit

risk if they demonstrate 12 months’

satisfactory payments and the

counseling agency approves the new

credit. If a veteran, or veteran and

spouse, have good prior credit and are

participating in a Consumer Credit

Counseling plan, such participation is to

be considered a neutral factor, or even

a positive factor, in determining

creditworthiness.

(8) Re-establishment of satisfactory

credit. In circumstances not involving

bankruptcy, satisfactory credit is

generally considered to be reestablished

after the veteran, or veteran and spouse,

have made satisfactory payments for 12

months after the date of the last

derogatory credit item.

(9) Long-term v. short-term debts. All

known debts and obligations including

any alimony and/or child support

payments of the borrower and spouse

must be documented. Significant

liabilities, to be deducted from the total

income in determining ability to meet

the mortgage payments are accounts

that, generally, are of a relatively long

term, i.e., 10 months or over. Other

accounts for terms of less than 10

months must, of course, be considered

in determining ability to meet family

expenses. Certainly, any severe impact

on the family’s resources for any period

of time must be considered in the loan

analysis. For example, monthly

payments of $300 on an auto loan with

a remaining balance of $1,500 would be

included in those obligations to be

deducted from the total income

regardless of the fact that the account

can be expected to pay out in 5 months.

It is clear that the applicant will, in this

case, continue to carry the burden of

those $300 payments for the first, most

critical months of the home loan.

(10) Requirements for verification. If

the credit investigation reveals debts or

obligations of a material nature which

were not divulged by the applicant,

lenders must be certain to obtain

clarification as to the status of such

debts from the borrower. A proper

analysis is obviously not possible unless

there is total correlation between the

obligations claimed by the borrower and

those revealed by a credit report or

deposit verification. Conversely,

significant debts and obligations

reported by the borrower must be dated.

If the credit report fails to provide

necessary information on such accounts,

lenders will be expected to obtain their

own verifications of those debts directly

from the creditors. Credit reports and

verifications must be no more than 120

days old (180 days for new

construction) to be considered valid. For

loans closed automatically, this

requirement will be considered satisfied

if the date of the credit report or

verification is within 120 days (180 days

for new construction) of the date the

note is signed. For prior approval loans,

this requirement will be considered

satisfied if the date of the credit report

or verification is within 120 days of the

date of the application is received by

VA. Of major significance are the

applicant’s rental history and

outstanding or recently retired

mortgages, if any, particularly prior VA

loans. Lenders should be sure ratings on

such accounts are obtained; a written

explanation is required when ratings are

not available. A determination is

necessary as to whether alimony and/or

child support payments are required.

Verification of the amount of such

obligations should be obtained,

although documentation concerning an

applicant’s divorce should not be

obtained automatically unless it is

necessary to verify the amount of any

alimony or child support liability

indicated by the applicant. If in the

routine course of processing the loan

application, however, direct evidence is

received (e.g., from the credit report)

that an obligation to pay alimony or

child support exists (as opposed to mere

evidence that the veteran was

previously divorced), the discrepancy

between the loan application and credit

report can and should be fully resolved

in the same manner as any other such

discrepancy would be handled. When a

pay stub or leave-and-earnings

statement indicates an allotment, the

lender must investigate the nature of the

allotment(s) to determine whether the

allotment is related to a debt. Debts

assigned to an ex-spouse by a divorce

decree will not generally be charged

against a veteran-borrower.

(11) Job-related expenses. Known jobrelated expenses should be documented.

This will include costs for any

dependent care, significant commuting

costs, etc. When a family’s

circumstances are such that dependent

care arrangements would probably be

necessary, it is important to determine

the cost of such services in order to

arrive at an accurate total of deductions.

(12) Credit reports. Credit reports

obtained by lenders on VA-guaranteed

loan applications must be either a threefile Merged Credit Report (MCR) or a

Residential Mortgage Credit Report

(RMCR). If used, the RMCR must meet

the standards formulated jointly by the

Department of Veterans Affairs, Federal

National Mortgage Association, Federal

Home Loan Mortgage Corporation,

Federal Housing Administration,

Farmers Home Administration, credit

repositories, repository affiliated

consumer reporting agencies and

independent consumer reporting

agencies. All credit reports obtained by

the lender must be submitted to VA.

(h) Borrower’s personal and financial

status. The number and ages of

dependents have an important bearing

on whether income after deduction of

fixed charges is sufficient to support the

family. Type and duration of

employment of both the borrower and

spouse are important as an indication of

stability of their employment. The

amount of liquid assets owned by the

borrower or spouse, or both, is an

important factor in determining that

they have sufficient funds to close the
53972 Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations

loan, as well as being significant in

analyzing the overall qualifications for

the loan. (It is imperative that adequate

cash assets from the veteran’s own

resources are verified to allow the

payment (see § 36.4336(a)(3)) of any

difference between the sales price of the

property and the loan amount, in

addition to that necessary to cover

closing costs, if the sales price exceeds

the reasonable value established by VA.)

Verifications must be no more than 120

days old (180 days for new

construction) to be considered valid. For

loans closed on the automatic basis, this

requirement will be considered satisfied

if the date of the deposit verification is

within 120 days (180 days for new

construction) of the date of the veteran’s

application to the lender. For prior

approval loans, this requirement will be

considered satisfied if the verification of

employment is dated within 120 days of

the date the application is received by

VA. Current monthly rental or other

housing expense is an important

consideration when compared to that to

be undertaken in connection with the

contemplated housing purchase.

* * * * *

(j) Lender responsibility. (1) Lenders

are fully responsible for developing all

credit information; i.e., for obtaining

verifications of employment and

deposit, credit reports, and for the

accuracy of the information contained

in the loan application.

(2) Verifications of employment and

deposits, and requests for credit reports

and/or credit information must be

initiated and received by the lender.

(3) In cases where the real estate

broker/agent or any other party requests

any of this information, the report(s)

must be returned directly to the lender.

This fact must be disclosed by

appropriately completing the required

certification on the loan application or

report and the parties must be identified

as agents of the lender.

(4) Where the lender relies on other

parties to secure any of the credit or

employment information or otherwise

accepts such information obtained by

any other party, such parties shall be

construed for purposes of the

submission of the loan documents to VA

to be authorized agents of the lender,

regardless of the actual relationship

between such parties and the lender,

even if disclosure is not provided to VA

under paragraph (j)(3) of this section.

Any negligent or willful

misrepresentation by such parties shall

be imputed to the lender as if the lender

had processed those documents and the

lender shall remain responsible for the

quality and accuracy of the information

provided to VA.

(5) All credit reports secured by the

lender or other parties as identified in

paragraphs (j)(3) and (j)(4) of this section

shall be provided to VA. If updated

credit reports reflect materially different

information than that in other reports,

such discrepancies must be explained

by the lender and the ultimate decision

as to the effects of the discrepancy upon

the loan application fully addressed by

the underwriter.

(k) Lender certification. Lenders

originating loans are responsible for

determining and certifying to VA on the

appropriate application or closing form

that the loan meets all statutory and

regulatory requirements. Lenders will

affirmatively certify that loans were

made in full compliance with the law

and loan guaranty regulations as

prescribed in this section.

(1) Definitions. The definitions

contained in part 42 of this title and the

following definitions are applicable in

this section.

(i) Another appropriate amount. In

determining the appropriate amount of

a lender’s civil penalty in cases where

the Secretary has not sustained a loss or

where two times the amount of the

Secretary’s loss on the loan involved

does not exceed $10,000, the Secretary

shall consider:

(A) The materiality and importance of

the false certification to the

determination to issue the guaranty or to

approve the assumption;

(B) The frequency and past pattern of

such false certifications by the lender;

and

(C) Any exculpatory or mitigating

circumstances.

(ii) Complaint includes the

assessment of liability served pursuant

to this section.

(iii) Defendant means a lender named

in the complaint.

(iv) Lender includes the holder

approving loan assumptions pursuant to

38 U.S.C. 3714.

(2) Procedures for certification. (i) As

a condition to VA issuance of a loan

guaranty on all loans closed on or after

October 27, 1994, and as a prerequisite

to an effective loan assumption on all

loans assumed pursuant to 38 U.S.C.

3714 on or after November 17, 1997, the

following certification shall accompany

each loan closing or assumption

package:

The undersigned lender certifies that the

(loan) (assumption) application, all

verifications of employment, deposit, and

other income and credit verification

documents have been processed in

compliance with 38 CFR part 36; that all

credit reports obtained or generated in

connection with the processing of this

borrower’s (loan) (assumption) application

have been provided to VA; that, to the best

of the undersigned lender’s knowledge and

belief the (loan) (assumption) meets the

underwriting standards recited in chapter 37

of title 38 United States Code and 38 CFR

part 36; and that all information provided in

support of this (loan) (assumption) is true,

complete and accurate to the best of the

undersigned lender’s knowledge and belief.

(ii) The certification shall be executed

by an officer of the lender authorized to

execute documents and act on behalf of

the lender.

(3) Any lender who knowingly and

willfully makes a false certification

required pursuant to § 36.4337(k)(2)

shall be liable to the United States

Government for a civil penalty equal to

two times the amount of the Secretary’s

loss on the loan involved or to another

appropriate amount, not to exceed

$10,000, whichever is greater.

(l) Assessment of liability. (1) Upon an

assessment confirmed by the Under

Secretary for Benefits, in consultation

with the Investigating Official, that a

certification, as required in this section,

is false, a report of findings of the Under

Secretary for Benefits shall be submitted

to the Reviewing Official setting forth:

(i) The evidence that supports the

allegations of a false certification and of

liability;

(ii) A description of the claims or

statements upon which the allegations

of liability are based;

(iii) The amount of the VA demand to

be made; and

(iv) Any exculpatory or mitigating

circumstances that may relate to the

certification.

(2) The Reviewing Official shall

review all of the information provided

and will either inform the Under

Secretary for Benefits and the

Investigating Official that there is not

adequate evidence, that the lender is

liable, or serve a complaint on the

lender stating:

(i) The allegations of a false

certification and of liability;

(ii) The amount being assessed by the

Secretary and the basis for the amount

assessed;

(iii) Instructions on how to satisfy the

assessment and how to file an answer to

request a hearing, including a specific

statement of the lender’s right to request

a hearing by filing an answer and to be

represented by counsel; and

(iv) That failure to file an answer

within 30 days of the complaint will

result in the imposition of the

assessment without right to appeal the

assessment to the Secretary.

* * * * *

(n) Additional remedies. Any

assessment under this section may be in
Federal Register / Vol. 62, No. 201 / Friday, October 17, 1997 / Rules and Regulations 53973

addition to other remedies available to

VA, such as debarment and suspension

pursuant to 38 U.S.C. 3704 and part 44

of this title or loss of automatic

processing authority pursuant to 38

U.S.C. 3702, or other actions by the

Government under any other law

including but not limited to title 18

U.S.C. and 31 U.S.C. 3732.

(The information collection requirements in

this section have been approved by the Office

of Management and Budget under control

numbers 2900–0521)

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

[FR Doc. 97–27564 Filed 10–16–97; 8:45 am]

BILLING CODE 8320–01–P

FEDERAL COMMUNICATIONS

COMMISSION

47 CFR Part 73

[MM Docket No. 97–154; RM–9116]

Radio Broadcasting Services;

Newaygo, MI

AGENCY: Federal Communications

Commission.

ACTION: Final rule.

SUMMARY: This document allots Channel

223A to Newaygo, Michigan, as that

community’s first local FM broadcast

service in response to a petition filed by

Robert R. Moore, Jr. See 62 FR 38246,

July 17, 1997. The coordinates for

Channel 223A at Newaygo are 43–22–12

and 85–51–49. There is a site restriction

7.6 kilometers (4.7 miles) southwest of

the communtiy. Since Newaygo is

located within 320 kilometers (200

miles) of the U.S.-Canadian border,

concurrence of the Canadian

government has been obtained for this

allotment. With this action, this

proceeding is terminated.

DATES: Effective November 17, 1997.

The window period for filing

applications for Channel 223A at

Newaygo, Michigan, will open on

November 17, 1997, and close on

December 18, 1997.

FOR FURTHER INFORMATION CONTACT:

Kathleen Scheuerle, Mass Media

Bureau, (202) 418–2180.

SUPPLEMENTARY INFORMATION: This is a

summary of the Commission’s Report

and Order, MM Docket No. 97–154,

adopted September 24, 1997, and

released October 3, 1997. The full text

of this Commission decision is available

for inspection and copying during

normal business hours in the

Commission’s Reference Center (Room

239), 1919 M Street, NW., Washington,

DC. The complete text of this decision

may also be purchased from the

Commission’s copy contractors,

International Transcription Services,

Inc., 1231 20th Street, NW.,

Washington, DC. 20036, (202) 857–3800,

facsimile (202) 857–3805.

List of Subjects in 47 CFR Part 73

Radio broadcasting.

Part 73 of title 47 of the Code of

Federal Regulations is amended as

follows:

PART 73—[AMENDED]

1. The authority citation for Part 73

continues to read as follows:

Authority: 47 U.S.C. 154, 303, 334, 336.

§ 73.202 [Amended]

2. Section 73.202(b), the Table of FM

Allotments under Michigan, is amended

by adding Newaygo, Channel 223A.

Federal Communications Commission.

John A. Karousos,

Chief, Allocations Branch, Policy and Rules

Division, Mass Media Bureau.

[FR Doc. 97–27514 Filed 10–16–97; 8:45 am]

BILLING CODE 6712–01–F

DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric

Administration

50 CFR Part 679

[Docket No. 961126334–7025–02;

I.D.100997A]

Fisheries of the Exclusive Economic

Zone Off Alaska; Pacific cod in Central

Regulatory Area of the Gulf of Alaska

AGENCY: National Marine Fisheries

Service (NMFS), National Oceanic and

Atmospheric Administration (NOAA),

Commerce.

ACTION: Reallocation.

SUMMARY: NMFS is reallocating the

projected unused amount of Pacific cod

from vessels catching Pacific cod for

processing by the offshore component to

vessels catching Pacific cod for

processing by the inshore component in

the Central Regulatory Area of the Gulf

of Alaska (GOA). This action is

necessary to allow the 1997 total

allowable catch (TAC) of Pacific cod to

be harvested.

DATES: Effective 1200 hrs, Alaska local

time (A.l.t.), October 10, 1997, until

2400 hrs, A.l.t., December 31, 1997.

FOR FURTHER INFORMATION CONTACT:

Andrew N. Smoker, 907–586-7228.

SUPPLEMENTARY INFORMATION: The

groundfish fishery in the GOA exclusive

economic zone is managed by NMFS

according to the Fishery Management

Plan for Groundfish of the Gulf of

Alaska (FMP) prepared by the North

Pacific Fishery Management Council

under authority of the MagnusonStevens Fishery Conservation and

Management Act. Fishing by U.S.

vessels is governed by regulations

implementing the FMP at subpart H of

50 CFR part 600 and 50 CFR part 679.

The Administrator, Alaska Region,

NMFS, has determined that vessels

catching Pacific cod for processing by

the offshore component will not be able

to harvest 3,000 metric tons (mt) of

Pacific cod allocated to those vessels

under § 679.20(a)(6)(iii). As of October

4, 1997, NMFS estimates 4,091 mt

remain in the offshore component’s

allocation of the 1997 Central GOA

Pacific cod TAC and projects that

vessels catching Pacific cod for

processing by the offshore component

will take 1,091 mt during the remainder

of 1997.

Therefore, in accordance with

§ 679.20(a)(6)(v)(C), NMFS is

apportioning the projected unused

amount, 3,000 mt of Pacific cod, from

vessels catching Pacific cod for

processing by the offshore component to

vessels catching Pacific cod for

processing by the inshore component.

Classification

This action is taken under 50 CFR

679.20, and is exempt from OMB review

under E.O. 12866.

All other closures remain in full force

and effect. This action responds to the

best available information recently

obtained from the fishery. It must be

implemented immediately in order to

allow full utilization of the Pacific cod

TAC. Providing prior notice and an

opportunity for public comment is

impracticable and contrary to the public

interest. Further delay would only

disrupt the FMP’s objective of providing

a portion of the Pacific cod TAC for

vessels catching Pacific cod for

processing by the inshore component in

the GOA. Without this action, the

Pacific cod allocation for vessels

catching Pacific cod for processing by

the offshore component in the GOA

would be underharvested. NMFS finds

for good cause that the implementation

of this action cannot be delayed for 30

days. Accordingly, under 5 U.S.C.

553(d), a delay in the effective date is

hereby waived.

Authority: 16 U.S.C. 1801 et seq.