[Federal Register Volume 63, Number 106 (Wednesday, June 3, 1998)]
[Proposed Rules]
[Pages 30162-30166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14644]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AI92


Loan Guaranty: Requirements for Interest Rate Reduction 
Refinancing Loans

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: This document proposes to amend the Department of Veterans 
Affairs (VA) loan guaranty regulations concerning the requirements for 
Interest Rate Reduction Refinancing Loans (IRRRLs) by generally 
limiting these loans to instances where the veteran's monthly mortgage 
payment will decrease, and by requiring that the loans being refinanced 
either be current in their payments or meet certain credit standard 
provisions. This appears to be necessary to ensure that these loans are 
made only when they provide a real benefit to the veteran, and to 
protect the financial interest of the Government.

DATES: Comments must be received on or before August 3, 1998.

ADDRESSES: Mail or hand deliver written comments to: Director, Office 
of Regulations Management (02D), Department of Veterans Affairs, 810 
Vermont Avenue, NW, Room 1154, Washington, DC 20420. Comments should 
indicate that they are submitted in response to ``RIN 2900-AI92.'' All 
written comments received will be available for public inspection at 
the above address, Room 1158, between the hours of 8 a.m. and 4:30 
p.m., Monday through Friday (except holidays).

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: Under the authority of 38 U.S.C. chapter 37, 
VA guarantees loans made by lenders to eligible veterans to purchase, 
construct, improve, or refinance their homes (the term veteran as used 
in this document includes any individual defined as a veteran under 38 
U.S.C. 101 and 3701 for the purpose of housing loans). This document 
proposes to amend VA's loan guaranty regulations by revising the 
requirements for VA-guaranteed Interest Rate Reduction Refinancing 
Loans (IRRRLs).
    This proposed rule addresses the same issues that were addressed in 
an interim final rule which was established in a document published in 
the Federal Register on October 8, 1997 (62 FR 52503) and rescinded in 
a document published in the Federal Register on December 1, 1997 (62 FR 
63454). The interim final rule requested comments. The comments 
submitted in response to the interim final rule, in addition to those 
comments received in response to this proposed rule, will be considered 
and will be discussed in the final rule document. Also, we note that 
every lender that participates in the VA home loan guarantee program 
was sent a copy of the provisions of the interim final

[[Page 30163]]

rule and information about the rescission. Further, information about 
this proposed rule is also included on the VA Home Loan Guaranty Home 
Page on the Internet (http://www.va.gov/vas/loan/lenders.htm).

Background

    IRRRLs are designed to assist veterans by allowing them to 
refinance an outstanding VA-guaranteed loan with a new loan at a lower 
rate. The provisions of 38 U.S.C. 3703(c)(3) and 3710(e)(1)(C) allow 
the veteran to do so without having to pay any out-of-pocket expenses. 
The veteran may include in the new loan the outstanding balance of the 
old loan plus reasonable closing costs, including up to two discount 
points. Over the years, IRRRLs have provided nearly one million 
veterans an opportunity to reduce the interest rates and, thus, the 
monthly payments on their home mortgages.
    We have recently learned that a small number of lenders have been 
urging veterans to apply for loans under conditions that increase the 
risk of loss to both the veteran and the Government, and do not provide 
the benefit that IRRRLs were enacted to give. In some cases, these 
loans involve exorbitant costs in relation to the small reduction in 
the interest rate. Thus, veterans actually experience an increase in 
their monthly payment notwithstanding the lower rate. In other cases, 
lenders are urging veterans to default on their current loan, then 
refinance the delinquent loan with a new loan including the past due 
interest and late charges.
    In one case, a veteran obtained a 30-year loan for a new home in 
Georgia in August of 1994. The fixed-rate mortgage was for $90,270 
(including funding fee) at an interest rate of 9.00 percent with a 
principal and interest payment of $726.33. In May of 1997 he obtained 
an IRRRL with an interest rate of 8.50 percent. This loan was for 
$97,800 and has a principal and interest payment amount of $752.00. The 
loan included $3676.41 in allowable closing costs, 2.0 discount points 
totaling $1956.00 and the VA funding fee of $486.00. The remaining 
amount of the new loan, $91,681.59, exceeds the original loan amount by 
$1411.59 and means that at least that amount in delinquent payments and 
late charges were also rolled in, further increasing both the new loan 
and the new loan payment. Thus, 2 years and 9 months after buying the 
house the veteran again has a full 30 years to pay, has a home loan 
that has increased by $7530.00, and has a monthly payment approximately 
$26.00 greater than the original payment.
    In order to assist veterans who were delinquent on their original 
loan to refinance to a lower rate, VA permitted them to include their 
past due payments in the new loan. Because loan instruments normally 
provide that any past due interest and late charges are capitalized and 
added to the loan balance, VA considered such past due charges to be 
part of ``the balance of the loan being refinanced'' and, therefore, 
eligible to be refinanced under the provisions of 38 U.S.C. 3710(e)(1). 
Some lenders have abused this interpretation by actually encouraging 
veterans to skip a few payments on the old loan. VA has become aware of 
a number of lenders publishing advertisements telling veterans to skip 
two or three house payments. Ads VA has viewed contain statements such 
as: ``Need Holiday Cash? Skip two mortgage payments on VA loans when 
you refinance.'' ``[I]f you simply wish to skip making one or two 
payments to utilize the cash for other purposes.'' ``SKIP TWO HOUSE 
PAYMENTS!!'' ``SKIP UP TO THREE PAYMENTS * * * on all applications 
received prior to May 31, 1997 * * * your next payment will not be due 
until July, freeing up cash for the upcoming summer vacations.'' 
``Furthermore, you can skip up to three months payments * * *. This 
will represent a substantial amount of money you can put in your 
pocket.''
    In order to insure that IRRRLs continue to provide a true benefit 
to the veteran, and to protect the financial interest of the 
Government, we are proposing to make the changes discussed below to the 
IRRRL program by revising the provisions of 38 CFR 36.4306a and 
36.4337(a).

Monthly Payment Reduction

    Under the proposal, we generally would require that the monthly 
payment (principal and interest) on the new loan be lower than the 
monthly payment on the loan being refinanced. This would prevent cases 
in which the veteran's monthly payment actually increases because of 
extensive costs added to the loan (including closing costs), even 
though the interest rate is lowered slightly. However, this proposed 
requirement would not apply to four situations where VA believes that 
other factors offset the risk of loss from an increase in monthly 
payment. These four situations are cases in which an ARM is being 
refinanced with a fixed-rate loan; cases in which the term of the new 
loan is shorter than the term of the loan being refinanced; cases in 
which the increase in monthly payment is attributable to the inclusion 
of energy efficient improvements, as provided in Sec. 36.4336(a)(4); 
and cases in which the Secretary approves the new loan, on a case-by-
case basis, in order to prevent an imminent foreclosure. With regard to 
ARMs, there is already a possibility that the monthly payment will 
increase in future years. The certainty that the payment on the new 
loan will not increase in future years offsets the increased risk 
associated with the immediate increase over the veteran's current 
payment. VA may establish limits on the amount of such increase in 
future rulemaking. Although the monthly payments on shorter term loans 
are higher, they amortize faster, thus reducing the risk of loss to 
both the veteran and the Government. In future rulemaking, VA may 
address minimum term reduction. Current law allows veterans to include 
additional costs of energy efficient improvements in IRRRLs; thus, this 
exception would merely continue current law. Finally, with regard to 
imminent foreclosure, the risk of loss to the Government and veteran 
from such foreclosure could be greater than permitting a new loan at a 
higher monthly payment. VA would have to approve each such loan on a 
case-by-case basis under existing credit underwriting standards set 
forth at 38 CFR 36.4337 to ensure that it is in the best interest of 
the Government and that the veteran is able to afford the new payment.

Delinquent Loans

    We are proposing, with respect to delinquent loans, that in any 
case where the loan being refinanced is delinquent, the new loan will 
be guaranteed only if it is approved by the Secretary in advance after 
determining that the veteran has provided reasons for the loan 
deficiency, has provided information to establish that the cause of the 
delinquency has been corrected, and qualifies for the loan under the 
credit standards contained in 38 CFR 36.4337. We are also proposing, 
consistent with industry standards, to state that a loan is delinquent 
if the scheduled monthly payment of principal and interest is more than 
30 days past due.
    Regardless of other factors affecting loan-to-value ratio, any 
addition of missed payments and delinquent interest and late charges to 
a loan would increase the loan-to-value ratio and, consequently, would 
raise the Government's potential liability on a VA-guaranteed loan. 
Further, missed payments raise questions regarding the ability of the 
borrower to make future payments. Under these circumstances, the 
proposed process appears to be

[[Page 30164]]

necessary to protect the interest of the Government.
    Also, the proposed rule would clarify the regulations to make clear 
the existing VA interpretation that delinquent interest and late 
charges are considered part of the balance of the loan being 
refinanced.

Credit Underwriting Standards

    In addition, we propose to make a conforming amendment to 38 CFR 
36.4337. That section contains the current credit underwriting 
standards. Currently, paragraph (a) of that section provides that the 
standards do not apply to IRRRLs. We are proposing to amend this to 
state the standards do not apply to IRRRLs unless under 38 CFR 36.4306a 
the loan must be submitted to VA for prior approval. As discussed 
above, under the proposal, loans to prevent imminent foreclosure where 
the monthly payment on the new loan exceeds the payments on the loan 
being refinanced, and cases where the loan being refinanced is 
delinquent, would be required to be approved in advance.

Executive Order 12866

    This proposed rule has been reviewed by OMB under Executive Order 
12866.

Initial Regulatory Flexibility Analysis

    This initial regulatory flexibility analysis is provided to meet 
the requirements of the Regulatory Flexibility Act. (5 U.S.C. 601 et. 
seq.)
    a. A description of the reasons why action by VA is being 
considered.
    Response: These reasons are set forth and discussed above.
    b. A succinct statement of the objectives of, and legal basis for, 
the proposed rule.
    Response: The objectives of this proposed rule are to insure that 
IRRRLs continue to provide a real benefit to veterans and to protect 
the financial interest of the Government.
    The legal basis of the proposed rule is contained in 38 U.S.C. 
3703(c)(1), which provides that ``Loans guaranteed (by VA) * * * shall 
be payable upon such terms and conditions as may be agreed upon by the 
parties thereto, subject to the provisions of this chapter and 
regulations of the Secretary issued pursuant to this chapter * * *.'' 
The provisions of 38 U.S.C. 3710(a)(8) authorize VA to guarantee loans 
to veterans to refinance existing guaranteed mortgage loans which are 
secured by a dwelling or farm residence and still owned by the veteran. 
Furthermore, 38 U.S.C. 3710(e)(1)(C) provides, with respect to IRRRLs, 
that the loan balance may include such closing costs (including 
discounts) ``as may be authorized by the Secretary (under regulations 
which the Secretary shall prescribe).''
    The intent of Congress in amending 38 U.S.C. chapter 37 to permit 
veterans to refinance outstanding loans previously guaranteed by VA is 
spelled out in a House Veterans Affairs Committee Report (Report 96-
1165 which accompanied H.R. 7458). This Report at page 3 stated that 
the IRRRL program is ``solely intended to assist veterans by allowing 
their monthly payments to be reduced'' and that ``a veteran would not 
be permitted under th[is legislation] to obtain cash from the proceeds 
of the refinancing loan for other purposes.''
    c. A description of and, where feasible, an estimate of the number 
of small entities to which the proposed rule will apply.
    Response: The proposed rule would apply to all lenders who make VA 
IRRRLs. In Fiscal Year 1997, 1476 lenders made at least one IRRRL. We 
believe a number of these lenders are small entities; however, we are 
unable to make an informed estimate of the number because we do not 
know how much of the total business each of the lenders would be 
affected by the adoption of this proposed rule.
    d. A description of the projected reporting, recordkeeping, and 
other compliance requirements of the proposed rule, including an 
estimate of the classes of small entities which would be subject to the 
requirement and the type of professional skills necessary for 
preparation of the report or record.
    Response: Any reporting or recordkeeping requirements are discussed 
in the Paperwork Reduction Act portion of this document. The 
requirements of the proposed rule are set forth above. As noted above, 
we are unable to make an informed estimate of the number of small 
entities that would be affected by the adoption of the proposed rule. 
To comply with the provisions of the proposed rule, employees of 
lenders would not need any professional skills that would be additional 
to those skills already needed to process IRRRLs.
    e. An identification, to the extent practicable, of all relevant 
Federal rules which may duplicate, overlap or conflict with the 
proposed rule.
    Response: We are unaware of any Federal rules which may duplicate, 
overlap or conflict with the proposed rule.
    f. A description of any significant alternatives to the proposed 
rule which accomplish the stated objectives of applicable statutes and 
which minimize any significant economic impact of the proposed rule on 
small entities.
    Response: Generally, limiting IRRRLs to instances where the 
veteran's monthly mortgage payment will decrease and requiring that the 
loans being refinanced either be current in their payments or meet 
certain credit standard provisions is intended to ensure that IRRRLs 
are made only when they provide a real benefit to the veteran and to 
protect the financial interest of the Government. One alternative would 
be to allow IRRRLs to be made only when the veteran's monthly mortgage 
payment would decrease. However, as explained above, this document 
proposes to establish exceptions in those cases when it appears that 
the objectives could still be met. Another alternative would be to 
require that all IRRRLs meet the credit standard provisions. However, 
as explained above, we believe this is necessary only when the loan is 
delinquent. We are aware of no alternatives which could be considered 
that would allow the objectives to be met and provide less stringent 
rules for small businesses.
    The adoption of the proposed rule would not have a significant 
impact on the resources available to small entities. The type of 
actions that would be required are the same or similar to types of 
actions already being handled by employees of small entities.
    We are unaware of any alternatives that would accomplish the 
intended purposes. Further, we are unaware of any changes we could 
consider regarding clarification, consolidation, or simplification that 
could be made for small entities and still protect veterans and the 
interests of the Government. The proposed rule does not include 
performance standards because we believe there is no means to ensure 
compliance without design standards. Further, we believe there is no 
good reason for any lender to act contrary to the proposed rule.

Paperwork Reduction Act of 1995

    Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), a 
collection of information is set forth in the provisions of the 
proposed Sec. 36.4306a(a)(3) and (a)(5). In this regard, these 
provisions require the submission of information concerning IRRRLs to 
refinance delinquent loans and require the submission of information to 
establish that they meet credit standards set forth in 38 CFR 36.4337. 
The credit standards in Sec. 36.4337 prescribe the information to be 
submitted for approval of a VA loan guaranty and contains material 
which further explains the quality of the

[[Page 30165]]

information needed for approval. As required under section 3507(d) of 
the Act, VA has submitted a copy of this proposed rulemaking action to 
the Office of Management and Budget (OMB) for its review of the 
collection of information.
    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.
    Comments on the collections of information 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, with copies to the Director, Office of 
Regulations Management (02D), Department of Veterans Affairs, 810 
Vermont Avenue, NW, Washington, DC 20420. Comments should indicate that 
they are submitted in response to ``RIN 2900-AI92.''
    Title: Requirements for Certain Interest Rate Reduction Refinancing 
Loans.
    Summary of collection of information: Pursuant to 38 U.S.C. 3710, 
VA may guarantee loans to veterans to refinance existing mortgage loans 
previously guaranteed by VA provided the veteran still owns the 
property used as security for the loan. Lenders must collect certain 
information concerning the veteran and the veteran's credit history 
(and spouse or other co-borrower, as applicable), in order to properly 
underwrite the IRRRL. Collection of this type of information is normal 
business practice for mortgage lenders.
    Description of need for information and proposed use of 
information: VA requires the lender to provide the Department with the 
credit information to assure itself that IRRRLs to refinance loans that 
are delinquent are underwritten in a reasonable and prudent manner.
    Description of likely respondents: Mortgage lenders who make 
IRRRLs.
    Estimated number of respondents: 350 in FY 1998; 350 in FY 1999.
    Estimated frequency of responses: This is a ``one-time'' request 
for each application for an IRRRL.
    Estimated average burden per collection: 30 minutes.
    Estimated total annual reporting and recordkeeping burden: 175 
hours in FY 1998 and 175 hours in FY 1999.
    The Department considers comments by the public on proposed 
collections of information in--
    <bullet> 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;
    <bullet> 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;
    <bullet> Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
    <bullet> 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.
    OMB is required to make a decision concerning the proposed 
collection of information contained in this proposed 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. This does not affect 
the deadline for the public to comment on the proposed regulations.
    The Catalog of Federal Domestic Assistance Program number is 
64.114.

List of Subjects in 38 CFR Part 36

    Condominiums, Handicapped, Housing, Indians, Individuals with 
disabilities, Loan programs-housing and community development, Loan 
programs-Indians, Loan programs-veterans, Manufactured homes, Mortgage 
insurance, Reporting and recordkeeping requirements, Veterans.

    Approved: May 19, 1998.
Togo D. West, Jr.,
Secretary.
    For the reasons set out in the preamble, 38 CFR part 36 is proposed 
to be amended 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, 3701-3704, 3707, 3710-3714, 3719, 
3720, 3729, 3762, unless otherwise noted.

    2. In Sec. 36.4306a, paragraphs (a)(3) through (a)(5) are revised 
and paragraphs (a)(6) and (a)(7) are added, to read as follows:


Sec. 36.4306a  Interest rate reduction refinancing loan.

    (a) * * *
    (3) The monthly principal and interest payment on the new loan must 
be lower than the payment on the loan being refinanced, except when the 
term of the new loan is shorter than the term of the loan being 
refinanced; or the new loan is a fixed-rate loan that refinances a VA-
guaranteed adjustable rate mortgage; or the increase in the monthly 
payments on the loan results from the inclusion of energy efficient 
improvements, as provided by Sec. 36.4336(a)(4); or the loan is 
approved by the Secretary in advance after determining that the new 
loan is necessary to prevent imminent foreclosure and the veteran 
qualifies for the new loan under the credit standards contained in 
Sec. 36.4337.
    (4) The amount of the refinancing loan may not exceed:
    (i) An amount equal to the balance of the loan being refinanced, 
which must not be delinquent, except in cases described in paragraph 
(a)(5) of this section, and such closing costs as authorized by 
Sec. 36.4312(d) and a discount not to exceed 2 percent of the loan 
amount; or
    (ii) In the case of a loan to refinance an existing VA-guaranteed 
or direct loan and to improve the dwelling securing such loan through 
energy efficient improvements, the amount referred to with respect to 
the loan under paragraph (a)(4)(i) of this section, plus the amount 
authorized by Sec. 36.4336(a)(4).

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

    (5) In any case where the loan being refinanced is delinquent 
(delinquent means that the scheduled monthly payment of principal and 
interest is more than 30 days past due), the new loan will be 
guaranteed only if it is approved by the Secretary in advance after 
determining that the borrower, through the lender, has provided reasons 
for the loan deficiency, has provided information to establish that the 
cause of the delinquency has been corrected, and qualifies for the loan 
under the credit standards contained in Sec. 36.4337. In such cases, 
the term ``balance of the loan being refinanced'' shall include any 
past due installments, plus allowable late charges.
    (6) The dollar amount of guaranty on the 38 U.S.C. 3710(a)(8) or 
(a)(9)(B)(i) loan may not exceed the original dollar amount of guaranty 
applicable to the loan being refinanced, less any dollar amount of 
guaranty previously paid as a claim on the loan being refinanced; and
    (7) The term of the refinancing loan (38 U.S.C. 3710(a)(8)) may not 
exceed the original term of the loan being refinanced plus ten years, 
or the maximum loan term allowed under 38 U.S.C. 3703(d)(1), whichever 
is less. For manufactured home loans that were

[[Page 30166]]

previously guaranteed under 38 U.S.C. 3712, the loan term, if being 
refinanced under 38 U.S.C. 3710(a)(9)(B)(i), may exceed the original 
term of the loan but may not exceed the maximum loan term allowed under 
38 U.S.C. 3703(d)(1).

(Authority: 38 U.S.C. 3703(c)(1), 3710(e)(1))
* * * * *
    3. In Sec. 36.4337, paragraph (a) is revised to read as follows:


Sec. 36.4337  Underwriting standards, processing procedures, lender 
responsibility and lender certification.

    (a) Use of standards. The standards contained in paragraphs (c) 
through (j) of this section will be used to determine that the 
veteran's present and anticipated income and expenses, and credit 
history are satisfactory. These standards do not apply to loans 
guaranteed pursuant to 38 U.S.C. 3710(a)(8) except for cases where the 
Secretary is required to approve the loan in advance under 
Sec. 36.4306a.

(Authority: 38 U.S.C. 3703, 3710)
* * * * *
[FR Doc. 98-14644 Filed 6-2-98; 8:45 am]
BILLING CODE 8320-01-P